403 Exam 1

Transactions and events have been recorded in the proper accounts

Classification

Financial information is appropriately presented and described, and disclosures are clearly expressed

Classification and understandability

All assets, liabilities, and equity interests that should have been recorded have been recorded

Completeness

All disclosures that should have been included in the financial statements have been included

Completeness

All transactions and events that should have been recorded have been recorded

Completeness

Transactions and events have been recorded in the correct accounting period

Cutoff

Ultimate responsibility for audit decisions, supervision of the team members, and the issuance of the final audit report rests with _______. the audit partner the audit committee management the audit manager

the audit partner

The "Reperformance" audit procedure relates to which stage(s) of the audit

Test of controls

Assertions About Classes of Transactions and Events for the Period Under Audit

(1) Occurrence (2) Completeness (3) Accuracy (4) Cutoff (5) Classification

Assertions about Presentation and Disclosure

(10) Occurrence and rights and obligations (11) Completeness (12) Classification and understandability (13) Accuracy and valuation

Assertions about Account Balances at the Period-End

(6) Existence (7) Rights and Obligations (8) Completeness (9) Valuation and allocation

Which section of the AICPA Code of Professional Conduct includes ethical rules for members in public practice? A. Part I B. Part II C. Part III D. Some other section

A. Part I

Lower inherent risk traits are found where _______. A. technological developments are a minimal factor in the valuation of the client's assets B. the client's location is at risk of facing natural disasters, such as hurricanes and flooding C. the client has insufficient working capital and is at risk of violating loan contracts D. the client's industry is experiencing a period of decline

A. technological developments are a minimal factor in the valuation of the client's assets

Substantive procedures are also known as _______. A. tests of details B. tests of complex transactions C. risk assessment D. tests of controls

A. tests of details

In addition to income before income taxes, another acceptable benchmark(s) for private company audits is(are) _______. A. total assets and total revenues B. net income C. income tax rate D. net liabilities

A. total assets and total revenues

An example of fraudulent financial reporting is _______. A. theft of inventory by employees B. timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses C. writing checks to fictitious vendors D. using company cars for personal use

B. timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses

Higher inherent risk traits are found where _______. . transactions or account balances are easily confirmed with reliable sources B. transactions or account balances are derived from significant estimates C. the client's location has minimal risk of being affected by a natural disaster D. the client's industry is thriving

B. transactions or account balances are derived from significant estimates

A comparison of account balances over time constitutes _______ analysis. A. time series B. trend C. common-size D. ratio

B. trend

The audit expectation gap occurs when: A. auditors perform their duties appropriately and satisfy users' demands. B. user beliefs do not align with what professional standards and regulations expect of auditors. C. the public is well educated about auditing. D. inspections of audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfy users' demands.

B. user beliefs do not align with what professional standards and regulations expect of auditors.

Receivable confirmations provide very little evidence regarding the _______ assertion. A. accuracy B. valuation and allocation. C. rights and obligation D. occurrence

B. valuation and allocation.

Prevention of fraud refers to _______. A. the use of controls and procedures aimed at uncovering a fraud should one occur B. incentives to commit fraud C. auditors who assess fraud risk factors D. the use of controls and procedures aimed at avoiding a fraud

D. the use of controls and procedures aimed at avoiding a fraud

Auditors are willing to accept a higher risk that their audit procedures may not detect a material misstatement ________. A. when detection risk is low B. when detection risk is high C. when control risk is high D. when control risk is low

B. when detection risk is high

An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable? A. A decrease in retained earnings. B. A decrease in accounts payable. C. A decrease in notes payable. D. A decrease in costs of goods sold as a percentage of sales.

A. A decrease in retained earnings.

In a period of recession in a particular industry, the auditor would typically spend more time on which of the following accounts? A. Allowance for doubtful accounts B. Purchase discounts C. Equity method investment account with a noncontrolling interest in a subsidiary D. Preferred stock

A. Allowance for doubtful accounts

Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information? A. Releasing financial information to a local bank with the approval of the client's mail clerk. B. Faxing a tax return to a loan officer at the request of the client. C. Allowing a review of professional practice without client authorization. D. Responding to an enforceable subpoena.

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

What happens if an independence threat appears to be insurmountable? A. An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client. B. The audit firm should make certain that safeguards are put in place to limit or remove those threats. C. The audit firm should take the engagement and continue to make certain that safeguards are put in place to limit or remove those threats. D. The audit firm should contact the State Board of Accountancy so they can make a press release to discourage other accountants from taking the engagement.

A. An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client.

Which factors would likely increase an auditor's concern pertaining to risk of fraudulent financial reporting? A. An extremely confusing and overly complex institutional structure, with blurred lines of authority. B. Low profitability/growth with respect to competitors in the same industry. C. Management participation in selection of accounting methods and principles. D. Excessive amount of liquid assets that could easily be converted to cash.

A. An extremely confusing and overly complex institutional structure, with blurred lines of authority.

What are tests of controls? A. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. B. Audit timelines of when audit activities occur for the audit of a client that uses a calendar year-end. C. Audit procedures designed for the determining the amount of time spent testing the client's internal controls and conducting detailed testing of transactions and account balances. D. Audit controls for developing an audit plan that details the nature, extent, and timing of audit procedures to be performed.

A. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Without the consent of the client, a CPA should not disclose confidential client information contained in working papers to a: A. CPA firm that is a likely successor auditor. B. federal court that has issued a valid subpoena. C. disciplinary body created under state statute. D. voluntary quality control review board.

A. CPA firm that is a likely successor auditor.

Who are the only licensed accounting professionals in the United States? A. Certified Public Accountants (CPA) B. Chief financial and operating officer (CFOO) C. Chartered Accounts (CA) D. Financial Accountants (FA)

A. Certified Public Accountants (CPA)

Which of the following issues arises when taxes are not properly distributed to the parties involved in a divorce case? A. Conflict of interest B. Gross negligence C. Misrepresentation of fact D. Legal liability

A. Conflict of interest

Which of the following outcomes is a likely benefit of information technology used for internal control? A. Enhanced timeliness of information. B. Processing of unusual or nonrecurring transactions. C. Recording of unauthorized transactions. D. Potential loss of data.

A. Enhanced timeliness of information.

Considering the risk of overstatement of receivables due to premature revenue recognition that inflates revenues and receivables, which assertion for the accounts receivable balance is typically relevant? A. Existence B. Rights and obligations C. Accuracy D. Completeness

A. Existence

Which of the following refers to measurements, agreed to beforehand, that can be quantified and reflect the success factors of an organization? A. Key Performance Indicators B. Acid-test ratio C. Current ratio D. Price-earnings ratio

A. Key Performance Indicators

If a public practice CPA firm is concerned about the ethical nature of the firm's advertising, which section of the AICPA's Code of Professional Ethics would provide guidance? A. Part I B. Part II C. Part III D. Some other section

A. Part I

The AICPA Code of Professional Conduct can be found online and is organized in four sections. Which section is first? A. Preface applicable to all members. B. Part I on ethical rules. C. Foreword about AICPA membership. D. Introduction to the History of the Code of Conduct.

A. Preface applicable to all members.

The independent auditor's plan for an examination in accordance with generally accepted auditing standards is influenced by the possibility of material misstatements. The auditor will therefore conduct the examination with an attitude of A. Professional skepticism. B. Objective indifference. C. Professional responsiveness. D. Subjective mistrust.

A. Professional skepticism.

Which of the following acts directs that the audit committee members should be independent members of the board of directors, not executive directors or otherwise affiliated with the issuer? A. Sarbanes Oxley Act of 2002 B. Foreign Corrupt Practices Act of 1977 C. Securities Act of 1933 D. Securities Exchange Act of 1934

A. Sarbanes Oxley Act of 2002

Simmie was on ABC Accounting Firm's audit team for client Bildilly Corporation, a small, privately held company. Bildilly offered Simmie a responsible job in the CFO's office, and she accepted. Which of the following conditions is not one that must be met to ensure that independence is not impaired because of this move? A. Simmie waits one entire audit cycle before going to work at Bildilly (though she can be paid during the interim). B. Simmie does not appear to participate in ABC's business. C. Simmie retains no influence over ABC's operations or financial policies. D. ABC considers modifying audit procedures to adjust for the risk posed by the possibility that Simmie would tell Bildilly how to evade ABC's current audit procedures.

A. Simmie waits one entire audit cycle before going to work at Bildilly (though she can be paid during the interim).

Of the following scenarios, which would most likely result in an audit firm not accepting an engagement? A. The client has advised that the auditor will be unable to confirm certain inventories with no valid reason given. B. IT systems and architecture are antiquated and not capable of current processing and recording requirements. C. Significant related party transactions, of which the auditor has been advised, are a routine part of business. D. Some internal controls related to credit granting procedures are not operating effectively.

A. The client has advised that the auditor will be unable to confirm certain inventories with no valid reason given.

Which of the following underlies the application of generally accepted auditing standards, particularly the standards for obtaining sufficient appropriate audit evidence? A. The elements of materiality and audit risk. B. The element of absolute assurance. C. The element of "cooperative evidence." D. The element of internal control over compliance with laws and regulations.

A. The elements of materiality and audit risk.

Which of the following is a management assertion regarding account balances at the period end? A. The entity holds or controls the rights to assets, and liabilities are obligations of the entity. B. Amounts and other data related to transactions and events have been recorded appropriately. C. Transactions and events that have been recorded have occurred and pertain to the entity. D. Transactions and events have been recorded in the proper accounts.

A. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations? A. The recipients are likely to sign the confirmations without devoting proper attention to them. B. The combined assessed level of inherent risk and control risk is low. C. Subsequent cash receipts are unusually difficult to verify. D. Analytical procedures indicate that few exceptions are expected.

A. The recipients are likely to sign the confirmations without devoting proper attention to them.

MNE and Associates used the benchmark of 5% of income (earnings) before income tax and came up with $9.5 million as their planning materiality for Garden, Inc. MNE also determined that planning materiality using a benchmark of 1% total assets resulted in $23 million. How should MNE decide which planning materiality amount to use? A. Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment. B. The auditors would average the two amounts because the use of two benchmarks provides greater precision. C. The auditors would use the largest amount in order to detect larger material misstatements. D. The auditors would use the smaller amount in order to keep with the principle of conservatism.

A. Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment.

When would auditors increase the amount of detailed audit procedures used to test the year-end account balances and transactions from throughout the year? A. When the detection risk is low B. When the inherent risk is low C. When the control risk is low D. When the inherent risk in high

A. When the detection risk is low

To be meaningful, a code of ethics must strike a balance between being _______. A. above the law but below the ideal B. below the law but above practical C. below the law but above the ideal D. above the law but below practical

A. above the law but below the idea

The completeness assertion relates to ________. A. all transactions and events that should have been recorded have been recorded B. all accounts are valued at their correct amounts C. all payroll accounting records are complete and accounted for D. all entries are recorded in the correct period

A. all transactions and events that should have been recorded have been recorded

With respect to Key Performance Indicators, auditors should ________. A. ask management to provide a detailed explanation of which KPIs are of the most importance to them so that related audit procedures can be planned B. disregard them as they would be unrelated to the audit C. assign new KPIs to the client as a result of the audit process D. assign the task of investigation to the internal audit function

A. ask management to provide a detailed explanation of which KPIs are of the most importance to them so that related audit procedures can be planned

In the substantive approach, if there is no internal control in place, the auditors _______. A. assess RMM as high since both inherent and control risk are high B. assess inherent and detective risk as high C. assess control and detective risk as high D. issue a qualified opinion

A. assess RMM as high since both inherent and control risk are high

Examination of internal controls is a service that comes under _______ services, which fall under _______ services. A. attestation; assurance B. assurance; attestation C. attestation; audit D. acceptable; assurance

A. attestation; assurance

A document containing details of the period under audit, and the initials of preparers and reviewers is referred to as ________. A. audit working paper B. management representation letter C. audit plan D. positive confirmation

A. audit working paper

An auditor's request for information from a client's financial institution about the amount of cash held in the bank and details of any loans is referred to as a ________. A. bank confirmation B. financial confirmation C. audit confirmation D. negative confirmation

A. bank confirmation

When the auditor is considering the risk of material misstatement, they will attempt to identify major risks, determine how these risks could relate to fraud or error, consider the importance of the risks, and ______. A. determine the probability that the identified risks might result in material misstatements B. determine who is responsible for each identified risk C. notify management of these risks D. attempt to immediately resolve any identified risks

A. determine the probability that the identified risks might result in material misstatements

An example of misappropriation of assets is _______. A. employees remaining on the payroll after ceasing employment B. unrecorded liabilities C. fictitious sales D. improper asset valuation

A. employees remaining on the payroll after ceasing employment

The primary assertion being tested when using receivable confirmations is ________. A. existence B. valuation and accuracy C. occurrence D. rights and obligations

A. existence

Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr, at a minimum, must prove that Cox: A. failed to exercise due care. B. was a party to the fraud. C. was grossly negligent. D. acted recklessly or with a lack of reasonable grounds for belief.

A. failed to exercise due care.

The general type of fraud that involves intentionally misstating items or omitting important facts from the financial statements is typically known as _______. A. fraudulent financial reporting B. using company cars for personal use C. writing checks to fictitious vendors D. theft of inventory by employees

A. fraudulent financial reporting

Timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses is an example of _______. A. fraudulent financial reporting B. performance materiality C. planning materiality D. balance sheet benchmarks

A. fraudulent financial reporting

The new auditor should communicate with the previous auditor in order to _______. A. gain an understanding about the reasons for the change of auditors B. get all the passwords and logins to the client software C. serve them with an official change of auditor notice D. get the previous auditor's work papers

A. gain an understanding about the reasons for the change of auditors

An audit plan details the nature, extent, and timing of audit procedures to be performed. The "extent" of audit procedures is best defined as _______. A. how much testing will be done B. what type of procedure will be used C. the reliability and relevance of evidence obtained in the audit D. when the procedure will be performed

A. how much testing will be done

Analytical procedures are conducted during the risk assessment phase of the audit to ________. A. identify accounts at risk of material misstatement B. complete the audit work C. highlight normal fluctuations in accounts D. aid in the elimination of risk

A. identify accounts at risk of material misstatement

Letters to management that detail weaknesses in internal controls identified by the auditors in previous years should be ________. A. included in the permanent file B. sent directly to the management's attorney for review C. included in the current file D. destroyed if management corrects the weaknesses

A. included in the permanent file

Audit evidence will typically consist of ________. A. information that supports and corroborates management's assertions and any information that contradicts the assertions B. the financial statements being audited C. information that supports the auditor's initial assessment of audit risk D. all records prepared by the auditor, not including records received from external entities

A. information that supports and corroborates management's assertions and any information that contradicts the assertions

In an audit strategy, the first step is to identify ________ risks during the ________ phase. A. inherent; risk assessment B. detection; risk response C. significant; reporting D. control; risk response

A. inherent; risk assessment

A detailed record of work completed and evidence gathered in forming the audit opinion ________. A. is contained in the working papers B. should be submitted by the auditor to management for approval C. is referred to as the audit plan D. is confidential and should not be shared with client personnel

A. is contained in the working papers

Total equity may be more reliable of a benchmark for determining planning materiality when a company is experiencing a _______. A. loss or very poor operating results B. large amount of property, plant, and equipment purchases C. significant volume of sales. D. high number of operating lease contracts

A. loss or very poor operating results

When preparing the financial statements, _______. A. management makes assertions about each account and related disclosures in the notes B. management makes their best judgment on the account balances contained therein C. management relies on the auditor to determine the account balances D. management shops around auditors to ensure they will receive the opinion they want

A. management makes assertions about each account and related disclosures in the notes

The general type of fraud that involves some form of theft is typically known as _______. A. misappropriation of assets B. improper asset valuation C. fictitious sales D. unrecorded liabilities

A. misappropriation of assets

Private companies, or non-issuers, in the U.S. are ________. A. not required by the federal government to have financial statement audits B. required by the federal government to have annual financial statement audits C. required by the federal government to have semi-annual financial statement audits D. required by the federal government to have quarterly financial statement audits

A. not required by the federal government to have financial statement audits

The auditor may spend more time testing the existence assertion of recorded inventory in all of the following EXCEPT _______. A. office supply stores B. the Apple store that sell iPhones and iPads C. jewelry stores D. exclusive sunglass stores (e.g., selling Oakley and Ray Ban sunglasses)

A. office supply stores

With regard to management assertions, it is true to say that ________. A. only some assertions apply to accounts and their balances B. all assertions apply to all accounts and balances C. none of the assertions apply to accounts and their balances D. management should be consulted to determine which assertions apply to which accounts.

A. only some assertions apply to accounts and their balances

In the United States, what entities are required by the federal government to have an annual financial statement audit? A. public companies or issuers B. private companies or issuers C. private companies or non-issuers D. public companies or non-issuers

A. public companies or issuers

The term _______ refers to an affiliate, principal owner, manager, or other party that is not independent of the entity. A. related party B. primary beneficiary C. third party D. other beneficiary

A. related party

Martin Inc. is being audited by the firm MNE and Associates. MNE's auditors decide that $100 million is the planning materiality and $50 million is the appropriate performance materiality at the account level. If all of Martin's account balances are below $50 million, the auditors will: A. still perform detailed some audit procedures on the account because the immaterial misstatements can be material in aggregate. B. check the auditing standard guidelines for the determination of performance materiality. C. end audit procedures, both detailed and on controls, because performance materiality has reduced the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole. D. to perform detailed audit procedures on the accounts because the sum of Martin's accounts is greater than $50 million.

A. still perform detailed some audit procedures on the account because the immaterial misstatements can be material in aggregate

With respect to an auditor's working papers, a lead schedule ________. A. summarizes the detail included in a certain account B. should be prepared by the partner in charge of the audit C. details who will be responsible for what parts of the audit D. should be sent to the client before acceptance of the audit

A. summarizes the detail included in a certain account

When gaining an understanding of the client, the auditor will identify the geographic location of the client because: A. the auditor may plan to use staff from affiliated offices to visit overseas locations. B. more decentralized clients are easier to control. C. the auditor will only visit one location to assess processes and procedures. D. more centralized clients are harder to control.

A. the auditor may plan to use staff from affiliated offices to visit overseas locations.

One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed pursuant to the Securities Act of 1933 is that: A. there was a material false or misleading statement in the financial statements. B. issuer and plaintiff were in privity of contract with each other. C. the plaintiff knew the auditor. D. issuer failed to exercise due care in connection with the sale of the securities.

A. there was a material false or misleading statement in the financial statements.

Auditors of private companies that do not have an audit committee or even a board of directors should communicate with _________. A. those charged with governance B. executive directors C. non-executive directors D. none of these answer choices are correct

A. those charged with governance

The management assertion of classification deals with ________. A. transactions and events have been recorded in the proper accounts. B. ensuring vacancies are posted to appropriated classified ads C. classifying between the appropriate financial statements D. current versus non-current only

A. transactions and events have been recorded in the proper accounts.

When an auditor selects transactions from the sales journal or ledger and then examines the underlying source documents, such as a shipping document and an invoice to the customer, this is known as ________. A. vouching B. examination C. inspection of records D. tracing

A. vouching

Amounts and other data relating to recorded transactions and events have been recorded appropriately

Accuracy

Financial and other information are disclosed fairly and in appropriate amounts

Accuracy and valuation

In general, reliance on an information technology (IT) specialist is appropriate when the financial statement auditor complies with the conditions of AU-C ________. A. 610 B. 620 C. 600 D. 500

B. 620

What type of audit provides an opinion by the auditor about whether the financial statements are presented fairly in accordance with an applicable financial reporting framework? A. A compliance audit B. A financial statement audit C. An audit on the effectiveness of ICFR D. An operational audit

B. A financial statement audit

According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? A. The auditor is also an attorney who advises the client as its general counsel. B. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client. C. The client owes the auditor fees for two consecutive annual audits. D. An employee of the auditor donates service as treasurer of a charitable organization that is a client.

B. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client.

In the online version of the AICPA Code of Professional Conduct, what are used to make it easy to find related topics? A. Summaries B. A series of hyperlinks C. Outlines D. Interpretations

B. A series of hyperlinks

Lynn is on the attest engagement team for Whillikers Manufacturing Corporation (WMC). Which of the following financial arrangements would not create an independence problem for Lynn? A. Lynn borrows $5,000 from WMC. B. Lynn considers asking WMC's CEO for a loan, but decides not to. C. Lynn loans $2,000 to Gonzo, an investor who owns 22% of WMC's outstanding shares. D. Lynn borrows $1,000 from Sam, an officer of WMC.

B. Lynn considers asking WMC's CEO for a loan, but decides not to.

Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor's independence? A. Client's general counsel. B. Advisor to a client's board of trustees. C. Member of a client's board of directors. D. Promoter of a client's securities.

B. Advisor to a client's board of trustees.

When a threat to independence arises that is not specifically considered in the Code of Professional Conduct an auditor should consider A. Required lack of independence approaches. B. Available safeguards to independence. C. Global independence rules. D. Alternative threats to a lack of independence.

B. Available safeguards to independence.

Anchorage Alltime Dairy (AAD) is an audit client of Thorn Granton's Juneau office. Al is on the audit team. Betsy evaluates Al's work and determines his pay. Carol is a tax professional in the Juneau office, who provided 20 hours of tax advice to AAD during the last audit cycle. Dave is a tax partner in the Juneau office, who has never provided any services to AAD. Which of the following situations would create an independence problem under the new AICPA rules? A. Al's brother Sam is in charge of manure disposal for AAD. B. Betsy's live-in lover owns enough AAD stock that it is material to him, but it does not allow him to exert significant influence over AAD. C. None of the choices provided. D. Carol's mother is a receptionist for AAD and, via its pension plan, indirectly owns a small amount of AAD stock.

B. Betsy's live-in lover owns enough AAD stock that it is material to him, but it does not allow him to exert significant influence over AAD.

What are the primary procedures auditors use in the fraud risk assessment process? A. Documentation B. Brainstorming C. Flowcharting D. Accuracy checking

B. Brainstorming

Most financial accounting and disclosure choices being made by the company are complicated and often require significant technical knowledge and experience in order to understand. What term captures this problem? A. Reliability B. Complexity C. Remoteness D. Competing incentives

B. Complexity

How are components of the audit risk model rearranged to solve for detection risk? A. DR = AR + RMM B. DR = AR ÷ RMM C. DR = AR - RMM D. DR = AR x RMM

B. DR = AR ÷ RMM

Management is responsible for which of the following? A. Issuing an opinion on whether the financial statements are presented fairly in accordance with the appropriate financial reporting framework. B. Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements. C. Using professional skepticism in the preparation of the financial statements. D. Preparing financial statements in accordance with the appropriate auditing standards.

B. Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.

Throughout all phases of the audit, auditors should keep questions in mind when gathering audit evidence. Which is of the following is an example? A. Should we assume that any information from management and those charged with governance is correct? B. Do we need to perform more audit procedures? C. Should we assume that client management is dishonest until proven otherwise? D. If management offers to take us to eat lunch during the audit, should we assume this is breakdown in controls?

B. Do we need to perform more audit procedures?

Which is generally the most reliable form of evidence? A. Internally generated evidence from the client's IT system. B. Externally generated evidence sent directly to the auditor. C. Internally generated evidence based on discussions with upper management. D. Externally generated evidence held by the client.

B. Externally generated evidence sent directly to the auditor.

Which of the following statements is true? A. To evaluate the significance of a threat, CPAs should evaluate identified threats in aggregate. B. If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the professional service. C. There are five basic safeguards to assist CPAs with threats to compliance with the accounting profession's ethical rules. D. It is possible for a CPA firm to rely solely on safeguards implemented by the client to eliminate or reduce significant threats to an acceptable level.

B. If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the professional service.

Which of the following factors indicate higher inherent risks? A. Industry has low chance of technological obsolescence B. Industry subject to changing trends C. Demand is not seasonal D. Steady profitability

B. Industry subject to changing trends

When scrutinizing a statement of cash flows in an attempt to gain a better understanding of the client, which would be most surprising to an auditor? A. Negative investing cash flows B. Negative operating cash flows C. A decrease in payables D. An increase in accounts receivable

B. Negative operating cash flows

Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for: A. Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity's financial statements. B. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework. C. Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations. D. Ensuring that the entity's operations are conducted in accordance with the provisions of laws and regulations relevant to the entity's financial statements.

B. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.

If a CFO of a company is dealing with an ethical situation, which section of the AICPA's Code of Professional Ethics might he/she refer? A. Part I B. Part II C. Part III D. Some other section

B. Part II

Which section of the AICPA Code of Professional Conduct includes ethical rules for members in business? A. Part I B. Part II C. Part III D. Some other section

B. Part II

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee? A. The firm should address all independence impairment issues on the date of the audit opinion. B. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. C. Communications related to independence may occur in any form prior to issuance for the financial statements. D. Prior to accepting the engagement, the firm should orally affirm its independence to the audit committee with all members present.

B. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Which of the following describes the board of directors of a company? A. Do not include the chief executive officer. B. Represent the shareholders of the company. C. Ensure the company is run to benefit the employees. D. Are all full-time employees of the company.

B. Represent the shareholders of the company.

In a small CPA firm, if the firm provides tax services to both parties who subsequently begin divorce proceedings, it is customary to do what? A. Use separate engagement teams in providing tax services to the husband and to the wife, who are provided clear policies and procedures on maintaining confidentiality. B. Resign providing tax services to one of the two parties in a divorce to remain free of any conflict of interest. C. Provide only consulting services to both parties. D. Engage in a background check on both parties.

B. Resign providing tax services to one of the two parties in a divorce to remain free of any conflict of interest.

Which of the following auditing procedures would be most likely to assist an auditor in identifying related party transactions? A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. B. Reviewing confirmations of loans receivable and payable for indications of guarantees. C. Vouching accounting records for recurring transactions recorded just after the balance sheet date. D. Performing analytical procedures to seek indications of possible financial difficulties.

B. Reviewing confirmations of loans receivable and payable for indications of guarantees.

The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: A. Government Accounting Standards Board. B. Securities and Exchange Commission. C. Auditing Standards Board. D. Financial Accounting Standards Board.

B. Securities and Exchange Commission.

In which of the following situations would member Taka not be in a conflict of interest? A. Taka is giving financial advice to both the husband and the wife in a messy divorce proceeding. B. Taka's firm is bidding to buy a tract of real estate that is owned by a company that was a tax client of the firm more than 10 years before. C. Taka is providing financial advice to ABC Co. as it readies a bid to buy a large office building knowing that Taka's own firm is simultaneously planning to submit a bid itself. D. Taka is giving financial advice to both the buyer and the seller in a commercial real estate deal.

B. Taka's firm is bidding to buy a tract of real estate that is owned by a company that was a tax client of the firm more than 10 years before.

An auditor has determined that a client's 'days in receivables' ratio has slowly increased over the last three years. Which of the following could be a possible reason for this? A. The accounts receivable department has implemented a new IT system, making collections much quicker and more efficient. B. The accounts receivable turnover ratio has decreased due to poor internal controls related to credit granting procedures. C. The receivables have been secured as collateral for a recent capital asset purchase. D. The client has hired a collection agency which is extremely efficient at collecting.

B. The accounts receivable turnover ratio has decreased due to poor internal controls related to credit granting procedures.

What is the appropriate date for an audit report? A. The date required by regulators. B. The conclusion of the gathering of evidence for the audit. C. The date the auditors were hired. D. The date of the balance sheet.

B. The conclusion of the gathering of evidence for the audit.

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? A. The reporting status of the internal auditor within the organization. B. The educational level and professional experiences of the internal auditor. C. Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor. D. Whether policies prohibit the internal auditor from auditing areas where relatives are employed.

B. The educational level and professional experiences of the internal auditor.

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant? A. The sample size would be higher. B. The sample size would be lower. C. The sample size would be irrelevant. D. The sample size would be unaffected.

B. The sample size would be lower.

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

B. Timing of substantive tests from year end to an interim dat

Kate has a very unusual auditing situation. An unusual transaction has created a situation where following GAAP seems problematic. Kate needs advice. Which of the following is true as Kate considers how to handle the situation? A. Circumstances justifying departure from GAAP do not include new legislation or evolution of a new business form. B. To depart from GAAP, Kate need both demonstrate that following GAAP would mislead investors, and describe the departure, its approximate effects, and the reasons why compliance would mislead. C. To depart from GAAP, all Kate need to is describe the departure, its approximate effects, and the reasons why compliance with GAAP would mislead. D. To depart from GAAP, all Kate need do is demonstrate that following GAAP would mislead investors.

B. To depart from GAAP, Kate need both demonstrate that following GAAP would mislead investors, and describe the departure, its approximate effects, and the reasons why compliance would mislead.

When might self-interest, familiarity, and undue influence most likely threaten a CPA's compliance with integrity and objectivity? A. When a CPA takes concerns about an engagement to another partner B. When a CPA and his or her supervisor, or another person within the CPA firm, have a difference of opinion related to the application of accounting principles C. When a CPA mistakenly applies the wrong auditing standard D. When a CPA pads his or her expense account

B. When a CPA and his or her supervisor, or another person within the CPA firm, have a difference of opinion related to the application of accounting principles

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale? A. When the assessed level of control risk over the sale is low. B. When the combined assessed level of inherent and control risk over the sale is high. C. When the combined assessed level of inherent and control risk over the sale is moderate. D. When the assessed level of detection risk over the sale is high.

B. When the combined assessed level of inherent and control risk over the sale is high.

The Public Company Accounting Oversight Board (PCAOB) has authority to establish which of the following relating to public companies? Attestation standards Independence standards A. Yes No B. Yes Yes C. No No D. No Yes

B. Yes Yes

Information is considered qualitatively material if it _______. A. can be presented as a percentage of net income B. affects a user's decision-making process for a reason other than its magnitude C. includes liquidity ratios of interest to bond holders D. exceeds the dollar magnitude of an auditor's planning materiality assessment

B. affects a user's decision-making process for a reason other than its magnitud

Employees of the client who perform assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management, and internal control processes ________. A. are referred to as specialists B. are known as internal auditors C. will provide evidence to the auditor which should always be considered reliable D. should be expected to assist the auditor with the audit

B. are known as internal auditors

Client closing procedures: A. affect expense accounts only. B. are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period. C. are routine transactions that do not impact audit risk. D. affect balance sheet accounts only.

B. are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period.

A typical response with respect to staff assignment for an audit deemed to be riskier would be ________. A. to assign audit team members with generic skills where possible B. assignment of a senior individual with experience in the industry C. to assign newer audit members, under the direction of more seasoned members D. assign multiple partners to the engagement

B. assignment of a senior individual with experience in the industry

A comparison of account balances to a single line item, such as total assets, is termed ________. A. compliance audit B. common-size analysis C. substantive procedures D. trend analysis

B. common-size analysis

When an auditor inspects loan documentation and traces the details to recording in the client's records, the auditor is gathering evidence to support the: A. rights and obligations assertion. B. completeness assertion. C. existence assertion. D. valuation and allocation assertion.

B. completeness assertion.

Auditors develop an audit program and document details of tests undertaken ________. A. in the audit planning phase B. during the risk response phase C. during substantive testing D. once the audit is completed

B. during the risk response phase

Risks of material misstatement that are associated with a client's IT system include all of the following except: A. the installation of new software that still needs modifications to operate as needed. B. failure to accrue for a contingent liability. C. no schedule for backing up data. D. a terminated employee who is still able to log on to the client's IT system

B. failure to accrue for a contingent liability.

Auditors of publicly traded companies are required to perform a(an) ________ for their clients. A. compliance audit B. integrated audit C. internal audit D. operational audit

B. integrated audit

What type of audit is conducted to provide assurance about various aspects of an organization's activities rather than the reliability of financial statements? a(an) A. compliance audit B. internal audit C. operational audit D. financial statement audit

B. internal audit

ICFR stands for: A. internal controls for reporting. B. internal controls over financial reporting. C. internal controls over forecast reports. D. international controls over financial reporting.

B. internal controls over financial reporting.

Performing numerical accuracy tests for foreign currency translation, payroll taxes, interest on loans outstanding, and depreciation calculations ________. A. is unnecessary if the client is assessed as having low control risk B. is referred to as recalculation C. is the role of the internal audit function D. is the responsibility of management

B. is referred to as recalculation

A company's ability to meet its needs for cash in the short terms is called ________. A. due professional care B. liquidity C. materiality D. profitability

B. liquidity

The auditing procedure of observation ________. A. is less reliable than auditing associated ledger accounts B. only provides evidence of a process at the time auditors observe it being carried out C. should be conducted by the internal audit function to save time D. should be performed only once during the audit for each account

B. only provides evidence of a process at the time auditors observe it being carried out

An auditor has just prepared and sent a letter to management detailing weaknesses in internal control. A copy of this letter should be ________. A. sent to the client's attorney B. placed in the permanent file C. placed in the temporary file, and removed when the client corrects the deficiencies D. filed with the Securities and Exchange Commission

B. placed in the permanent file

Examples of evidence indicating the competency of the internal audit function could be ________. A. high turnover of internal audit employees B. professional certification in a relevant field C. low salaries compared to the industry average D. little or no training provided to new employees

B. professional certification in a relevant field

Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on the information contained in the financial statements. What term captures this problem? A. competing incentives B. reliability C. complexity D. remoteness

B. reliability

Management assertions are best defined as ________. A. management communications with an attorney B. representations by management, explicit and implicit, contained within the financial statements. C. optional items for the auditor to check D. sometimes being present in the financial statements, and sometimes not.

B. representations by management, explicit and implicit, contained within the financial statements.

Public companies, or issuers, in the U.S. are ________. A. not required by the federal government to have financial statement audits B. required by the federal government to have annual financial statement audits C. required by the federal government to have semi-annual financial statement audits D. required by the federal government to have quarterly financial statement audits

B. required by the federal government to have annual financial statement audits

If new information comes to light that would cause the auditor to establish a different level of planning materiality, then the auditor _______. A. have management of the company select the appropriate benchmark for planning materiality B. should examine the information and make adjustments to materiality as needed C. issue a qualified opinion as part of the audit report D. follow the auditing standards that recommend an appropriate percentage of total assets as a benchmark for planning materiality for all companies

B. should examine the information and make adjustments to materiality as needed

Common uses of analytical procedures include all of the following except: A. risk identification during the risk assessment stage. B. test of internal controls. C. testing account balances derived from estimates during the risk response stage. D. overall assessment of financial statements at the final review stage of the audit.

B. test of internal controls.

The responsibility of ensuring sufficient appropriate audit evidence is gathered to arrive at an opinion is ________. A. a joint responsibility between management and the auditor B. the responsibility of the auditor C. the responsibility of management D. a function of internal control

B. the responsibility of the auditor

Reliability of audit evidence refers to ________. A. the accuracy and reliability of the balances B. the source of the evidence and form or nature of the evidence C. the nature of the evidence only D. the specific source of the information

B. the source of the evidence and form or nature of the evidence

The function of internal audit is determined by: A. the government. B. those charged with governance and management. C. the IIA. D. the external auditor.

B. those charged with governance and management

Which of the following statements concerning evidential matter is correct? A. An effective internal control structure contributes little to the reliability of the evidence created within the entity. B. Competent evidence supporting management's assertions should be convincing rather than merely persuasive. C. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements. D. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.

C. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.

Which of the following best describes the independence requirements for a close relative of a covered member? A. A close relative cannot have an immaterial, direct investment in an audit client. B. A close relative cannot have an immaterial, indirect investment in an audit client. C. A close relative cannot hold a key position with an audit client. D. A close relative cannot have a loan from an audit client.

C. A close relative cannot hold a key position with an audit client.

Which act created the Public Company Accounting Oversight Board, which oversees the audits of public companies? A. The Companies Act 2006 B. The Securities Exchange Act of 1934 C. The SOX Act of 2002 D. The Securities Act of 1933

C. The SOX Act of 2002

Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession? A. A fee paid to the client's audit firm for recommending investment advisory services to the client. B.A contingent fee paid to the CPA for preparing the client's amended income tax return. C. A fee paid to the client's tax accountant for recommending a computer system to the client. D. A contingent fee paid to the CPA for reviewing the client's financial statements.

C. A fee paid to the client's tax accountant for recommending a computer system to the client.

Which of the following is a private professional membership organization of CPAs representing the accounting profession? A. PCAOB B. IAASB C. AICPA D. ASB

C. AICPA

Which of the following is a "self review" threat to member independence? A. An engagement team member has a spouse that serves as CFO of the attest client. B. A second partner review is required on all attest engagements. C. An engagement team member prepares invoices for the attest client. D. An engagement team member has a direct financial interest in the attest client.

C. An engagement team member prepares invoices for the attest client.

Which of the following are an evaluation of financial information by studying plausible relationships among both financial and non-financial data? A. Trend analyses B. Common-size analyses C. Analytical procedures D. Closing procedures

C. Analytical procedures

Analytical procedures used in planning an audit should focus on identifying A. The various assertions that are embodied in the financial statements. B. The predictability of financial data from individual transactions. C. Areas that may represent specific risks relevant to the audit. D. Material weaknesses in the internal control structure.

C. Areas that may represent specific risks relevant to the audit

Which of the following choices would indicate an appropriate change in the auditor's approach to the audit, when an increased level of risk is present in a certain area? A. Obtain management assurances in writing pertaining to the increased area of risk B. Assigning less audit staff to the engagement C. Assignment of personnel with specialized skills for the area of increased risk D. Withdraw from the audit

C. Assignment of personnel with specialized skills for the area of increased risk

If a company refuses permission to contact its previous audit firm, what should the new auditor do? A. Review newspaper and magazine articles about the client. B. Do a background check on the CEO of the company. C. Consider the implications of that refusal when deciding whether to accept the engagement. D. Contact potential third parties to gain information about the client firm.

C. Consider the implications of that refusal when deciding whether to accept the engagement.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should: A. Obtain written representations from management that all financial records and related data will be made available. B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. D. Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing.

C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations? A. Prior-year payroll expense to budgeted current-year payroll expense. B. Current-year warranty expense to current-year contingent liabilities. C. Current-year revenue to budgeted current-year revenue. D. Prior-year accounts payable to current-year accounts payable.

C. Current-year revenue to budgeted current-year revenue.

What should a CPA do if he/she concludes a difference of opinion with an audit supervisor regarding an on-going audit engagement may result in a material misrepresentation of fact or a violation of professional standards? A. Obtain more training. B. Search for a certification that focuses on material misrepresentations. C. Discuss his or her concerns with the supervisor. D. Quit the job.

C. Discuss his or her concerns with the supervisor.

During what stage of the engagement should auditors use management assertions as a guide to determine the different types of potential material misstatements that could occur? A. During the client acceptance stage B. During the audit planning stage C. During the risk assessment phase D. Upon completion of the audit

C. During the risk assessment phase

The phrase "generally accepted accounting principles" is an accounting term that A. Is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS). B. Includes broad guidelines of general application but not detailed practices and procedures. C. Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. D. Provides a measure of conventions, rules, and procedures governed by the AICPA.

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

What is the typical means by which an auditor outlines the details of the engagement, and communicates this to the client's management? A. An audit plan B. Audit working papers C. Engagement letter D. Risk assessment

C. Engagement letter

In general, which of the following is a guideline regarding the reliability of audit evidence provided in AU-C 500.A32 and AS 1105.08? A. Evidence obtained directly by the auditor is less reliable than evidence obtained indirectly by the auditor. B. With effective internal control over the duplication of documents, evidence provided by original documents is less reliable. C. Evidence that has been documented is more reliable than strictly oral evidence obtained by having a discussion with an individual. D. Evidence gathered from a source independent of the client is always less reliable than evidence gathered from internal client sources.

C. Evidence that has been documented is more reliable than strictly oral evidence obtained by having a discussion with an individual.

In the context of fraudulent financial reporting, which would most likely represent a risk factor? A. The structure of the company includes subsidiary companies B. Revenue expectations from management have increased slightly from the prior year C. High degree of competition in the particular industry D. Low employee turnover at senior management levels

C. High degree of competition in the particular industry

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? A. The entity has rights to the inventory. B. Inventory is properly valued. C. Inventory is complete. D. Inventory is properly presented in the financial statements.

C. Inventory is complete.

An attestation engagement is one in which a CPA is engaged to A. Assemble pro forma financial statements based on the representations of the entity's management without expressing any assurance. B. Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. C. Issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party. D. Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts.

C. Issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party.

Which of the following has the lowest authoritative status but may be useful in assisting the auditor in applying the SASs? A. Auditing Interpretations. B. Statements on Auditing Standards. C. Journal of Accountancy articles. D. Auditing Statements of Position.

C. Journal of Accountancy articles.

The Curry Audit Firm audits the Hartsell Corporation. Both firms are located in Seattle, though Curry also has a branch in Chicago. Among the following, who are "covered members" who must comply with AICPA independence rules? A. Babe, who is a tax partner in Curry's Chicago office B. Mick, who answers phones in Curry's Seattle office C. Lou, who is on Curry's audit team for Hartsell D. Joe, who is a tax manager in Curry's Seattle office who does no work for Hartsell

C. Lou, who is on Curry's audit team for Hartsell

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following? A. Representations from the company's external auditors that the company has effective internal control over operations. B. Management representations that the company's external auditors have examined its internal control over compliance with laws and regulations. C. Management's assessment of the effectiveness of internal control over financial reporting. D. Reasonable assurances that fraud will be identified before the issuance of the company's annual report.

C. Management's assessment of the effectiveness of internal control over financial reporting.

Which of the following statements is true? A. Public users are required to have an audit of internal financial forecast reports (IFFRs). B. For efficiency purposes, the three required audits for public companies are performed at the same time. C. Often interested users, like banks, ask private companies or non-users to provide audited financial statements. D. Public users are required to have three audits a year.

C. Often interested users, like banks, ask private companies or non-users to provide audited financial statements.

A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position? A. Two years. B. Four years. C. One year. D. Three years.

C. One year.

Which section of the AICPA Code of Professional Conduct includes ethical rules for other members, like non-CPA members of the AICPA? A. Part I B. Part II C. Part III D. Some other section

C. Part III

How does a small firm resolve the conflict of interest issue in a divorce case? A. They do not need to resolve the conflict of interest in the case of a divorce. B. Using separate engagement teams in providing tax services to both parties. C. Provide tax services to only one of the two parties. D. Resign from the engagement.

C. Provide tax services to only one of the two parties.

Which of the following services cannot be performed for a nonissuer attest client? A. Communicating with management about the appropriateness of accounting principles. B. Preparing adjusting journal entries for client management consideration. C. Signing payroll checks. D. Performing data processing services.

C. Signing payroll checks.

An independent auditor must have which of the following? A. A pre-existing and well-informed point of view with respect to the audit. B. Experience in taxation that is sufficient to comply with generally accepted auditing standards. C. Technical training that is adequate to meet the requirements of a professional. D. A background in many different disciplines.

C. Technical training that is adequate to meet the requirements of a professional.

In auditing related party transactions, an auditor ordinarily places primary emphasis on A. Verifying the valuation of the related party transactions. B. The probability that related party transactions will recur. C. The adequacy of the disclosure of the related party transactions. D. Confirming the existence of the related parties.

C. The adequacy of the disclosure of the related party transactions.

Which of these scenarios would cause the auditor to initiate special planning procedures? A. Not all assets belonging to the company have been properly asset tagged. B. Management are forthright in their dealings with the auditors. C. The client's inventory contains very specialized, hard to value items. D. The client recently repurchased outstanding stock.

C. The client's inventory contains very specialized, hard to value items.

Which of the following is true of the influence of significant accounts and classes of transactions on inherent risk? A. When the transactions are routine and relatively homogenous, the inherent risk is high. B. When the account has high volume of transactions, the inherent risk is low. C. When determination of account balance is objective, the inherent risk is low. D. When the determination of an account balance is subjective, the inherent risk is low.

C. When determination of account balance is objective, the inherent risk is low

When can a spouse that works for an attestation client still participate in an employee benefit plan that includes employee stock ownership plans or employee stock option plans? A. When the benefits are offered equitably to a majority of similar employees. B. As long as the CPA firm approves every stock-related plan. C. When the benefits are offered equitably to all similar employees. D. There are no restrictions.

C. When the benefits are offered equitably to all similar employees.

Which of the following is an impediment to the application of professional skepticism? A. A sole focus on the audit engagement and no other services B. A trend to keep audit costs high C. Workload of the auditors D. Lack of confidence in management

C. Workload of the auditors

A CPA who is a "covered person" purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered impaired with respect to the client? A. No, because the CPA would not be considered to have a material indirect financial interest in the client. B. No, because the CPA would not be considered to have a direct financial interest in the client. C. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. D. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child.

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

An indicator that the auditor might need to adopt extended audit procedures would be best evidenced by __________. A. a new competitor has entered the client's industry B. the client's current ratio has decreased slightly C. an unusual fluctuation in gross profit margin last year D. net sales is increasing approximately 3% per year

C. an unusual fluctuation in gross profit margin last year

What services are defined as independent professional services that improve the quality of information, or its context, for decision makers? A. attestation services B. absolute assurance C. assurance services D. audit services

C. assurance services

An engagement letter is prepared by an auditor and acknowledged by a client _______. A. after the interim report is issued B. after the audit is completed C. before the audit begins D. before the client's year-end

C. before the audit begins

The procedure of auditors examining a client's unpaid invoices file and determining if payables have been properly created for any unpaid invoices would provide evidence in support of the _______ assertion. A. occurrence B. accuracy C. completeness D. cut-off

C. completeness

An assurance service that determines whether the entity has conformed with regulations, rules or processes is a (an): A. operational audit. B. internal audit. C. compliance audit. D. financial statement audit.

C. compliance audit.

When gaining an understanding of the client at the industry level, the auditor will: A. assess the amount of faulty goods the client returns to suppliers. B. determine if the client has a simple or complex capital structure. C. consider the level of demand for the goods provided by companies in the industry. D. determine if the client has centralized or decentralized operations.

C. consider the level of demand for the goods provided by companies in the industry.

Current year's working papers for an audit client should contain ________. A. a copy of the lead schedule B. a copy of the working papers C. copies of the lead schedule and working papers D. neither copies of the lead schedules nor working papers

C. copies of the lead schedule and working paper

All of the following are reasons why users would demand an audit of financial statements except: A. complexity. B. remoteness. C. cost. D. reliability.

C. cost.

Substantive procedures are designed to _______. A. evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level B. determine the quantity of audit procedures to be performed C. detect material misstatements at the assertion level D. determine when the audit procedures will be performed

C. detect material misstatements at the assertion level

When there is a low risk of material misstatement with an assertion and the client's system of internal controls is considered effective at reducing risk, ________. A. control risk is ignored B. inherent risk is set to medium C. detection risk is set at high D. detection risk is set at low

C. detection risk is set at high

When considering clients like Boeing, inventory will most likely be the largest current asset and prepaid expenses will be one of the smallest. As a result, the auditors should plan to _______. A. devote more audit time to prepaid expenses to the inventory account B. observe more material misstatements in prepaid expenses due to timing differences as compared to the inventory account C. devote more audit time to the inventory account than the prepaid expenses account D. use more complex audit tests for inventory and more simple audit tests for prepaid expenses

C. devote more audit time to the inventory account than the prepaid expenses account

Information is considered quantitatively material if it _______. A. indicates there is a change in client operations that affects the level of risk faced by the client B. affects a user's decision-making process for a reason other than its dollar magnitude C. exceeds the dollar magnitude of an auditor's planning materiality assessment D. indicates the audit client is in danger of breaching a debt covenant

C. exceeds the dollar magnitude of an auditor's planning materiality assessment

Auditors inspecting a sample of accounts payable balances from the ledger and verifying that they are true payables owed by the client gather evidence in support of the _______ assertion. A. accuracy B. occurrence C. existence D. completeness

C. existence

The accuracy and valuation assertion relates to ________. A. the auditor's charges for fees and services provided B. all disclosures having been properly made C. financial and other information is disclosed fairly and in appropriate amounts D. ensuring records of ownership of assets is accurate

C. financial and other information is disclosed fairly and in appropriate amounts

Generally speaking, client firms engaged in international trade would be considered to have ________. A. lower control risk B. lower inherent risk C. higher inherent risk D. less complicated operations

C. higher inherent risk

With respect to relying on the work of the internal audit function, external auditors should ____________. A. always assign junior members of the audit team to assist the internal audit function B. never be willing to accept work completed by the internal audit function C. impartially assess the objectivity, competence and processes of the internal audit function D. always be willing to accept work completed and documentation provided

C. impartially assess the objectivity, competence and processes of the internal audit function

Auditors communicating directly with a client's bank regarding the existence of the client's cash account balances at year-end would be an example of an: A. audit issue B. internal source C. independent source D. illegal communication

C. independent source

The risk of material misstatement is a function of _______. A. inherent risk and deterrent risk B. inherent risk and deterrent risk C. inherent risk and control risk D. control risk and deterrent risk

C. inherent risk and control risk

When an auditor asks questions verbally or in written form of knowledgeable individuals internal or external to the client, this is referred to as ________. A. confirmation B. attestation C. inquiry D. affirmation

C. inquiry

The extent of review of the component auditor's work depends on a number of factors. The group engagement partner will spend more time if the component auditor ________. A. has done audit work for the group engagement partner in the past B. is auditing statements that are at low risk of material misstatement C. is dealing with a component that is material D. has a good reputation

C. is dealing with a component that is material

When the economy is poor, a fall in profits can easily be explained to shareholders when most companies in the industry are also experiencing a decline in earnings; therefore, therefore when the economy is poor there is a tendency within an entity to _______. A. minimize revenues B. maximize profits C. maximize write-offs D. minimize profits

C. maximize write-offs

An audit committee of a publicly traded company should be composed of: A. the audit partner, the CFO, and a shareholder. B. executive and non-executive members of the board of directors. C. members of the board of directors who are independent directors. D. the CFO and two other board members who are also shareholders.

C. members of the board of directors who are independent directors.

Using CAATs and ADA software makes the audit _______. A. less comprehensive and less efficient. B. more comprehensive but less efficient. C. more comprehensive and more efficient. D. less comprehensive but more efficient.

C. more comprehensive and more efficient.

Analytical procedures: A. cannot be performed on interim data. B. are only useful if the client's variation from budget is low. C. must take into account seasonal variation in the client's business. D. are not affected by different accounting methods between the client and other members of the industry.

C. must take into account seasonal variation in the client's business.

Assertions that relate to presentation and disclosure include ________. A. existence B. cutoff C. occurrence and rights and obligations D. timeliness

C. occurrence and rights and obligations

A conflict of interest occurs when a CPA _______. A. represents a client in any legal dispute B. represents a client in a divorce tax matter C. performs a professional service related to a particular matter involving two or more clients whose interests, with respect to that matter, are in conflict D. performs both tax and bookkeeping services for the same client

C. performs a professional service related to a particular matter involving two or more clients whose interests, with respect to that matter, are in conflict

Although codes of ethics may be designed in part to encourage ideal behavior, they must also be _______. A. easy to remember and basic B. idealistic and above the law C. practical and enforceable D. balanced and confidential

C. practical and enforceable

Inherent risk related to closing procedures would generally be increased when _______. A. the closing process is relatively straightforward B. a client is found to have strong closing procedures, and sound internal control practices relating to closing C. staff assigned to deal with closing procedures are relatively inexperienced D. no errors and omissions are located when auditing the closing process

C. staff assigned to deal with closing procedures are relatively inexperienced

If a prospective new audit client does not allow the auditor to contact its existing auditor: A. the auditor should respect the prospective client's right to privacy. B. the existing auditor should contact the new auditor to tell them all about the client. C. the auditor should consider that a negative factor on the integrity of client management. D. the auditor should contact the existing auditor anyway because it is their duty.

C. the auditor should consider that a negative factor on the integrity of client management.

The rights and obligations assertion relates to ________. A. amounts being recorded in the correct periods B. management obligations to shareholders C. the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. D. management asserting rights to assets such as accounts receivable

C. the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Corporate governance may be best thought of as _________. A. a subsidiary entity that is controlled by a parent company B. Corporate donations to political parties and non-profit entities C. the people, systems, and processes within companies used to ensure that companies are well-managed D. the level of control exerted by senior management

C. the people, systems, and processes within companies used to ensure that companies are well-managed

The amount of evidence that an auditor must collect is a function of __________. A. the ability of the client to provide all documentation requested by the auditor B. prior years' audit risk C. the risk of material misstatement in a relevant assertion for an account balance or class of transactions D. a detailed assessment of the clients' system of internal control

C. the risk of material misstatement in a relevant assertion for an account balance or class of transactions

Detection of fraud refers to _______. A. auditors who assess fraud risk factors D. incentives to commit fraud C. the use of controls and procedures aimed at uncovering a fraud should one occur D. the use of controls and procedures aimed at avoiding a fraud

C. the use of controls and procedures aimed at uncovering a fraud should one occur

Selecting source documents and working forward to follow the transaction through to recording in the journal and ledger is called _______. A. vouching B. observing C. tracing D. enquiring

C. tracing

The cutoff assertion deals with ________. A. ensuring amounts are recorded in the correct accounts B. ensuring that assets, liabilities and equity interests exist. C. transactions and events have been recorded in the correct accounting period D. ensuring accounts are appropriately valued

C. transactions and events have been recorded in the correct accounting period

The concept of inherent risk is most closely tied to the idea of _________. A. audit risk B. currency risk C. underlying business risks D. global risk

C. underlying business risks

An audit plan details the nature, extent, and timing of audit procedures to be performed. The "nature" of audit procedures is best defined as _______. A. how much testing will be done B. when the procedure will be performed C. what type of procedure will be used D. the reliability and relevance of evidence obtained in the audit

C. what type of procedure will be used

Auditors would plan for audit procedures that may result in lower quality evidence and possibly a decreased quantity of evidence for that assertion ________. A. when control risk is low B. when audit risk is low C. when detection risk is high D. when control risk is high

C. when detection risk is high

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance? A. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. B. A requirement for a profession is to establish ethical standards that stress primary responsibility to clients and colleagues. C. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. D. A distinguishing mark of a profession is its acceptance of responsibility to the public.

D. A distinguishing mark of a profession is its acceptance of responsibility to the public.

Which two audits does an integrated audit combine? A. A performance audit and an environmental audit B. A compliance audit and an audit of the effectiveness of ICFR C. A financial statement audit and a compliance audit D. A financial statement audit and an audit of the effectiveness of ICFR

D. A financial statement audit and an audit of the effectiveness of ICFR

Which of the following procedures would yield the most reliable evidence? A. A scanning of trial balances. B. A comparison of beginning and ending retained earnings. C. An inquiry of client personnel. D. A recalculation of bad debt expense.

D. A recalculation of bad debt expense.

A significant risk is an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration. Which of the following would be classified as a significant risk? A. A risk related to a transaction that involves a recording error, but was not intentional, like a fraud. B. A risk that does not involve a related party transaction. C. A risk related to transactions for a simple operating lease, like you sign when you rent an apartment. D. A risk related to a significant economic or accounting development.

D. A risk related to a significant economic or accounting development.

AU-C 200.A22, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards states auditors should be skeptical if certain situations arise. Which situation is NOT included in those that AU-C 200.A22 presents? A. Audit evidence recently gathered is contradictory to other evidence previously gathered. B. Conditions are observed that indicate evidence of possible fraud. C. New information brings into question the reliability of client documents or responses to auditor inquiries. D. A situation indicates that there is the need for fewer audit procedures.

D. A situation indicates that there is the need for fewer audit procedures.

Under the AICPA ethics rules on independence, which of the following individuals would not be a covered member? A. A consulting manager in another office who provides 100 hours of non-audit services to the audit client. B. A partner in another office who evaluates partner performance and compensation, but provides no services to the audit client. C. A partner in the same office as the lead partner who provides no services to the audit client. D. A tax partner in another office who provides 9 hours of tax services to the audit client.

D. A tax partner in another office who provides 9 hours of tax services to the audit client.

A CPA works at a firm and also maintains a private practice as an expert witness for intellectual property cases. While at an audit client's office, he overhears a telephone conversation about a patent dispute and offers his services. When he takes the expert witness job, this position creates what type of threat to his professional ethics? A. Self-review threat B. Familiarity threat C. Self-interest threat D. Advocacy threat

D. Advocacy threat

A CPA would violate the AICPA rule on integrity and objectivity if: A. a CPA in industry knowingly misrepresented the earnings of the company he worked for. B. a CPA in public practice represented both the buyer and seller in helping the parties negotiate the sale (purchase) of a business. C. a CPA who was an audit staff member subordinated his or her judgment to that of the audit partner. D. All of the answers are violations of the AICPA rule on integrity and objectivity.

D. All of the answers are violations of the AICPA rule on integrity and objectivity.

An example of an incentive or pressure that increases the risk of fraud is: A. the client operates in a highly competitive industry. B. the client has a history of reporting losses. C. a significant percentage of management pay is tied to earnings. D. All of these answer choices are correct.

D. All of these answer choices are correct.

An external confirmation sent to a bank: A. requests information about the bank balances and loan amounts. B. requests information about interest rates paid on deposits and charged on loans. C. is relevant to the audit of interest revenue and expense. D. All of these answer choices are correct.

D. All of these answer choices are correct.

Auditors can only provide reasonable assurance that the financial statements are presented fairly because: A. sampling techniques are used to gather evidence. B. some items in the financial statements are subjective. C. an audit must be completed in a reasonable amount of time. D. All of these answer choices are correct.

D. All of these answer choices are correct.

When gaining an understanding of the client, the auditor will consider: A. related party identification. B. the appropriateness of the client's system of internal controls to mitigate identified business risks. C. controls over the technology used to process and store data electronically. D. All of these answer choices are correct.

D. All of these answer choices are correct.

Which of the following examples most likely is an attitude or rationalization used to justify a fraud? A. An excessive focus on unionization B. An excessive focus on application of ethical standards C. An excessive focus on vacation time D. An excessive focus on maximization of profits and/or stock price

D. An excessive focus on maximization of profits and/or stock price

Which of the following comes under the purview of the Public Company Accounting Oversight Board? A. Statements on Auditing Standards (SAS) B. Statements on Quality Control Standards (SQCS) C. Statements on Standards for Attestation Engagement (SSAE) D. Auditing Standards (AS)

D. Auditing Standards (AS)

If after discussing a potential subordination of judgment threat with a supervisor, a CPA does not feel that the matter is resolved, what should he or she do? A. Immediately ask HR to reassign him or her. B. Start looking for a new position at another firm. C. Contact the AICPA about the problem. D. Discuss his or her concerns with the appropriate higher level(s) of management within the CPA's firm.

D. Discuss his or her concerns with the appropriate higher level(s) of management within the CPA's firm.

Which of the following would be least likely to help you assess the integrity of management? A. Interviews with management about its attitude to risk exposure. B. Interviews with the prior auditor about the client's reasons for switching audit firms, if the company was previously audited. C. Interviews about the reputation of the client, its management, directors, and key stakeholders with the previous auditor. D. Interviews with human resources about its long-term disability provider.

D. Interviews with human resources about its long-term disability provider.

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

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

Which of the following is a direct financial interest? A. An interest where the individual is not the record owner but has a right to some or all of the underlying benefits of ownership B. An interest owned by others and not under one's control C. One beneficially owned by the covered member through an investment vehicle, estate, trust, or intermediary when the beneficiary neither controls the intermediary nor has authority to supervise or participate in its investment decisions D. One owned directly by the covered member (even if managed by others)

D. One owned directly by the covered member (even if managed by others)

Which of the following elements would normally be included in an auditor's engagement letter? A. Whether or not the auditor will attempt to obtain negative assurance with respect to management's compliance with laws and regulations. B. Initial judgments pertaining to materiality. C. Responsibility of management for any and all illegal acts perpetrated by its employees. D. Potential limitations of the audit engagement.

D. Potential limitations of the audit engagement.

In which section of the AICPA Code of Professional Conduct could you find the definitions to concepts mentioned in the Code? A. Part I B. Part II C. Part III D. Preface applicable to all members

D. Preface applicable to all members

Which of the following would not be considered an analytical procedure? A. Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget. B. Developing the current year's expected net sales based on the sales trend of similar entities within the same industry. C. Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. D. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

D. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

Generally accepted auditing standards are A. Required procedures to be used to gather evidence to support financial statements. B. Policies and procedures designed to provide reasonable assurance that the CPA firm and its personnel comply with professional standards. C. Rules acknowledged by the accounting profession because of their universal application. D. Pronouncements issued by the Auditing Standards Board.

D. Pronouncements issued by the Auditing Standards Board.

Which of the following is not a primary responsibility of an auditor: A. Provide creditors with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. B. Provide regulators with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. C. Provide investors with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. D. Provide management with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

D. Provide management with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework

Which of the following statements is false regarding related parties? A. The presence of related parties is considered a fraud risk factor. B. A subsidiary company is considered a related party. C. Management should have controls in place for identifying related parties. D. Related party transactions do not have to be disclosed if they are conducted at "arm's length."

D. Related party transactions do not have to be disclosed if they are conducted at "arm's length."

Which of the following is/are among the procedures used by auditors to identify related parties? A. Review financial statements of competitors. B. Trace inventory quantities from the floor to the ledger. C. Gain an understanding of the industry. D. Review correspondence from the client's advisors, such as attorneys or consultants.

D. Review correspondence from the client's advisors, such as attorneys or consultants.

What audit procedures are designed to detect material misstatements at the assertion level? A. Fraudulent financial reporting B. Misappropriation of assets C. Tests of control D. Substantive procedures

D. Substantive procedures

When a plaintiff is suing the auditor for damages under Rule 10(b)-5 of the 1934 Securities Act, which of the following is not part of the plaintiff's burden of proof? A. The plaintiff relied on the financial statements. B. Damages were suffered as a result of reliance on the financial statements. C. The financial statements contained a material, factual misrepresentation or omission. D. The auditor was negligent.

D. The auditor was negligent.

What two factors lead to the development of an overall strategy? A. The auditor's determination of performance materiality and fraud risk B. The auditor's determination of inherent risk and control risk C. The auditor's determination of the risk of material misstatement and professional skepticism D. The auditor's determination of materiality and audit risk

D. The auditor's determination of materiality and audit risk

Among the reasons why users demand an audit of financial statements, what is the problem of competing incentives? A. Financial statement users to not have access to the company under review and thus face difficulty in determining whether the statements are fair. B. Financial statement users need reliable information in order to make decisions that have real consequences. C. Financial statement users lack accounting and legal knowledge to understand accounting and disclosure choices. D. The company has a reason to disclose information in a way that presents it in favorable light.

D. The company has a reason to disclose information in a way that presents it in favorable light.

Which of the following information that comes to an auditor's attention would be most likely to raise a question about the occurrence of illegal acts? A. The failure to develop adequate procedures that detect unauthorized purchases. B. The presence of several difficult-to-audit transactions affecting expense accounts. C. The exchange of property for similar property in a nonmonetary transaction. D. The discovery of unexplained payments made to government employees.

D. The discovery of unexplained payments made to government employees.

Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements? A. The chief financial officer will not sign the management representation letter until the last day of the auditor's fieldwork. B. Audit trails of computer-generated transactions exist only for a short time. C. Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters. D. The results of an analytical procedure disclose unexpected differences.

D. The results of an analytical procedure disclose unexpected differences.

Which of the following provides evidence for the occurrence assertion? A. Visualization B. Tests of controls C. Tracing D. Vouching

D. Vouching

Should the client have internal controls in place to ensure related parties are being identified? A. Yes, but the client in under no obligation to disclose them. B. No, not necessarily. C. None of these answer choices are correct. D. Yes, and the client is required to disclose them.

D. Yes, and the client is required to disclose them.

If an auditor has determined that inherent risk for accounts receivable is high and wishes to verify the balance as accurate, the best corroborating evidence would be ________. A. a negative confirmation sent to the entity in question B. a phone call to the client C. inspection of supporting documents relating to the receivables transactions D. a positive confirmation sent to the entity in question

D. a positive confirmation sent to the entity in question

Auditors inspecting purchase orders for proper authorization by a manager before a purchase is made would be an example of ________. A. client communication B. analytical procedures C. substantive procedures D. a test of controls

D. a test of controls

Common factors that influence inherent risk are ________. A. importers and exporters B. major suppliers C. discounts D. all of the above

D. all of the above

The audit committee is responsible for the ________ of the auditors. A. oversight and appointment B. appointment and compensation C. oversight and compensation D. all of the above

D. all of the above

Companies use profitability measures to assess performance and to: A. measure their ability to pay long term debts on time. B. maintain consistency in operations each month. C. measure their ability to pay short term debts on time. D. assess their ability to compete

D. assess their ability to compete

If an auditor is considering accepting a client in an industry that is unfamiliar to the auditor, the auditor should _________. A. issue a disclaimer of opinion B. not accept the engagement C. rely on the opinion of specialists the auditor hires D. attempt to learn all matters that would materially pertain to the entity's business

D. attempt to learn all matters that would materially pertain to the entity's business

Those charged with governance are the ________. A. auditors B. CEO, CFO, and COO C. stockholders D. board of directors and management of an entity

D. board of directors and management of an entity

An engagement letter is like a(an) _______. A. note payable B. job application C. audit report D. contract

D. contract

An audit working paper should include ________. A. communications with the predecessor auditor B. results of prior year audits C. the auditor's assessment of internal control D. current period under audit

D. current period under audit

If the CPA is unable to implement effective safeguard to a threat of compliance with the accounting profession's ethical rules, he/she should _______. A. limit the engagement to only Federal taxation B. proceed with the professional service C. limit the engagement to all non-audit areas D. decline or terminate the engagement

D. decline or terminate the engagement

When gaining an understanding of the client's sources of financing, the auditor: A. is not interested in debt covenants because most debt contracts are the same. B. ignores the relative reliance on debt versus equity funding because that is a management decision, not an audit issue. C. determines if the client is writing off uncollectible accounts receivable. D. determines if the client is meeting principal and interest payments when they are due.

D. determines if the client is meeting principal and interest payments when they are due.

If the management of an entity is close to breaching a debt covenant that requires maintaining a certain current ratio, management may have an incentive to ________. A. either understate current assets or overstate current liabilities B. overstate either current assets or current liabilities C. understate either current assets or current liabilities D. either overstate current assets or understate current liabilities

D. either overstate current assets or understate current liabilities

A financial statement audit is conducted to ________. A. determine whether financial documents were altered by those committing a fraud B. guarantee that the financial statements are free from error or fraud C. focus on finding all misstatements in the financial records D. enhance the reliability and credibility of the information included in the financial statements

D. enhance the reliability and credibility of the information included in the financial statements

When an auditor inspects a tangible asset to support a balance in the client's records, the auditor is gathering evidence to support the: A. rights and obligations assertion. B. completeness assertion. C. valuation and allocation assertion. D. existence assertion.

D. existence assertion.

The ultimate responsibility for the financial reporting process rests with the _______, but the efficiency of achieving this goal is improved by the _______. A. non-executive directors; audit committee B. audit committee; executive directors C. executive directors; full board D. full board; audit committee

D. full board; audit committee

Tests of controls are also known as _______. A. tests of details B. material misstatement testing C. substantive control testing D. internal controls testing

D. internal controls testing

Relevance of audit evidence refers to ________. A. its relevance to outside investors and creditors B. its importance to the audit C. its relevance to the balance sheet D. its relationship to the assertion being tested

D. its relationship to the assertion being tested

Compared to an audit of historical financial statements, a review engagement is _______. A. less extensive but more expensive B. more extensive and also more expensive C. more extensive but less expensive D. less extensive and also less expensive

D. less extensive and also less expensive

If results from the tests of controls show the internal control is effective at preventing and/or detecting material misstatements, auditors will conclude that control risk is ______ and overall risk of material misstatement (RMM) is ______. A. high; low B. high; high C. low; high D. low; low

D. low; low

The amount of evidence gathered when conducting substantive procedures is a ________. A. preference of management B. function of audit firm policy C. carefully calculated formula D. matter of professional judgment

D. matter of professional judgment

Non-executive directors should ideally be _________. A. employed by the client firm B. expected to have the same level of knowledge about the company as executive directors C. from an unrelated industry, to ensure maximum objectiveness D. objective and knowledgeable about the industry

D. objective and knowledgeable about the industry

Auditors can control detection risk by _______. A. planning to perform more or less audit procedures on controls B. designing the software processes that the client uses to process accounting information C. designing internal controls for the client D. planning to perform more or less detailed audit procedures

D. planning to perform more or less detailed audit procedures

The role of COSO is to: A. establish financial accounting and reporting standards. B. establish auditing standards for private companies. C. prepare and grade the CPA exam. D. provide guidance in the area of internal control and risk management.

D. provide guidance in the area of internal control and risk management.

The subordination of judgment threat is at an acceptable level when _______. A. the CPA safeguards the position by also providing tax services B. the CPA agrees to maintain confidentiality about the matter C. the CPA does not have a difference of opinion related to the application of accounting principles, auditing standards, or other relevant professional standards D. the CPA concludes the position taken by the firm does not result in a material misrepresentation of fact or a violation of applicable standards, laws, or regulations

D. the CPA concludes the position taken by the firm does not result in a material misrepresentation of fact or a violation of applicable standards, laws, or regulations

A key aspect of the "concern for the public interest" definition of a professional is: A. the incorporation of this definition into the Sarbanes-Oxley Act of 2002. B. the unique ability of CPAs to sign attest reports. C. the level of professional expertise of the professional. D. the fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or their own well-being.

D. the fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or their own well-being.

If an audit partner reviewing an engagement was attempting to locate details of long-term contracts and agreements, this information would be found in ________. A. the current file B. the representation letter C. communications with the client's attorney D. the permanent file

D. the permanent file

In the conceptual framework to the AICPA Code of Professional Conduct, a self-interest threat is: A. the threat that a CPA will not act with objectivity because the CPA's interests are opposed to the client's interests. B. the threat that a CPA will take on the role of client management or otherwise assume management responsibilities. C. the threat that a CPA will promote a client's interests or position to the point that the CPA's objectivity or independence is compromised. D. the threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client.

D. the threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client.

An audit plan details the nature, extent, and timing of audit procedures to be performed. The "timing" of audit procedures is best defined as _______. A. what type of procedure will be used B. the reliability and relevance of evidence obtained in the audit C. how much testing will be done D. when the procedure will be performed

D. when the procedure will be performed

Assets, liabilities, and equity interests exist

Existence

Transactions and events that have been recorded have occurred and pertain to the entity

Occurrence

Disclosed events, transactions, and other matters have occurred and pertain to the entity

Occurrence and rights and obligations

The entity holds or controls the rights to assets, and liabilities are the obligations of the entity

Rights and obligations

The "Inquiry" audit procedure relates to which stage(s) of the audit

Risk Assessment Procedure, Test of Controls, Substantive Procedures

The "Inspection of Documents" audit procedure relates to which stage(s) of the audit

Risk Assessment Procedure, Test of Controls, Substantive Procedures

The "Observation" audit procedure relates to which stage(s) of the audit

Risk Assessment Procedure, Test of Controls, Substantive Procedures

The "Analytical Procedures" audit procedure relates to which stage(s) of the audit

Risk Assessment Procedure; Substantive procedures

The "Scanning" audit procedure relates to which stage(s) of the audit

Risk Assessment Procedure; Substantive procedures

The "External Confirmations" audit procedure relates to which stage(s) of the audit

Substantive procedures

The "Inspection of Assets" audit procedure relates to which stage(s) of the audit

Substantive procedures

The "Recalculation" audit procedure relates to which stage(s) of the audit

Substantive procedures

Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded

Valuation and allocation

Documentation contained in the working papers for a client ________. A. will vary by client B. will contain a few minor variations between different clients C. will be the same for each client within a particular industry D. should be shared with the client and appropriate changes made

working papers for a client ________. A. will vary by client