ACCT 407 - Exam 1: Garza

An auditor's independence would not be considered impaired if she or he had - Owned common stock of the audit client but sold it before the company became a client. - Sold short the common stock of an audit client while working on the audit engagement. - Served as the company's treasurer for six months during the year covered by the audit but resigned before the company became a client. - Performed the bookkeeping and financial statement preparation for the company, which had no accounting personnel and for which the president had no understanding of accounting principles.

a. .A direct financial interest disposed before the auditor-client relationship arises does not impair independence.

Which of the following ownership situations is permissible for a public accounting firm? - A partner of the firm is responsible for fraud issues related to audits and audit clients. He owns 20 percent of the firm and is not a CPA. - Because the firm now specializes in fraud auditing and fraud investigation, the managing partner of the firm has a background in law enforcement and fraud investigation but is not a CPA. - A partner of the firm who owns 50 shares of stock in an audit client of the firm is responsible for fraud issues related to audits and audit clients. - A partner of the firm who has 20 years of experience in law enforcement and fraud investigation is responsible for fraud issues related to audits and audit clients. The partner's career began as a police officer after receiving a law enforcement degree from a local community college.

a. A non-CPA who does not have a majority interest and does not have an ultimate responsibility for the firm's services can be a partner

According to the AICPA, the purpose of an audit of financial statements is to - Enhance the degree of confidence that intended users can place in the financial statements. - Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board. - Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission. - Obtain systematic and objective evidence about financial assertions and report the results to interested users.

a. According to the AICPA definition found in AU 200 (paragraph 11) and in your book, "the purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. As a result, this is the correct response.

Which of the following best describes the relationship between auditing and attestation engagements? - Auditing is a subset of attestation engagements that focuses on the certification of financial statements. - Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement. - Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support. - Attestation is a subset of auditing that improves the quality of information or its context for decision makers

a. Auditing is a subset of attestation engagements that focuses on the certification of financial statements. The subject matter is the set of financial statements

The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is - To determine the nature, timing, and extent of substantive procedures to be performed. - To make consulting suggestions to the entity's management. - To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. - To determine whether the entity has changed any accounting principles.

a. Auditors study internal control to determine the nature, timing, and extent of further audit procedures.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? - Schedules and analyses to be prepared by the client's employees. - Methods of statistical sampling the auditor will use. - Specification of litigation in progress against the client. - Client representations about availability of all minutes of meetings of the board of directors.

a. Client cooperation should be specified in the engagement letter. This is a key purpose of the letter

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would - Be considered as exercising proper due care. - Be considered a failure to follow generally accepted auditing standards because Kramer should have known how to value fine art before accepting the engagement. - Not be considered a violation of generally accepted auditing standards because generally accepted auditing standards does not apply to not-for-profit entities. - None of the above.

a. Consultation with an appraiser demonstrates due care if auditors do not have expertise in the area in question.

Which of the following categories of principles is most closely related to gathering audit evidence? - Performance. - Reasonable assurance. - Reporting. - Responsibilities.

a. Gathering audit evidence is a component of the performance principle.

Phil Greb has a thriving practice in which he assists attorneys in preparing litigation dealing with accounting and auditing matters. He is "practicing public accounting" if he - Uses his CPA designation on his letterhead and business card. - Is in partnership with another CPA. - Practices in a professional corporation with other CPAs. - Never lets his clients know that he is a CPA.

a. He is "holding out" as a CPA and does work that other CPAs perform.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may - Allow the internal auditor to perform certain tests of internal controls. - Allow the internal auditor to audit a major subsidiary of the company. - Not assign any task to the internal auditor because of the internal auditor's lack of independence. - Allow the internal auditor to perform analytical procedures but not be involved with any tests of details.

a. If the internal auditor is evaluated as both competent and objective; the professional auditing standards allow the independent auditor to perform relatively low risk tests, like certain tests of internal control

If a public accounting firm says it always follows the rule that requires adherence to FASB pronouncements in order to give a standard unmodified auditors' report, it is following a philosophy characterized by - The imperative principle. - The utilitarian principle. - Virtue ethics. - Reliance on members' collective conscience.

a. Imperative means that a rule is always followed.

When auditing the accounts receivable account on the balance sheet, an auditor's procedures most likely would focus primarily on management's assertion of - Existence. - Completeness. - Presentation and disclosure. - Rights and obligations.

a. Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of accounts receivable and the fact that valuation is not an option, the existence assertion is clearly the most important assertion.

During an audit of a company's cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion? - Existence - Rights and obligations - Valuation or allocation - Occurrence

a. Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of cash and the fact that is no foreign currency translation calculation, the existence assertion is clearly the most important assertion.

In testing inventory at an audit client in the retail industry, you note that some of the inventory is contracted to be held on consignment. As a result, which financial statement assertion is now relevant? - Rights and obligations - Completeness - Existence or occurrence - Valuation or allocation

a. Rights and obligations is the correct answer. By definition, consignment inventory is a business model where a product is sold by a retail store but the title/ownership of the product is retained by a third party until the product is actually sold by the retailer. As a result, when auditing the inventory account of an audit client that sells consigned inventory, the rights and obligations assertion is the most relevant assertion to be audited since ownership of the inventory is in question

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the - Current file audit documentation. - Permanent file audit documentation. - Administrative audit documentation in the current file.

a. Since this is evidence that relates directly on the year under audit, the current file is appropriate.

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that - A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. - In audits of financial statements, the auditor acts exclusively in the capacity of an auditor. - The professional status of the independent auditor imposes commensurate professional obligations. - Financial statements and financial data are verifiable.

a. The management team is generally trying to put its "best foot forward" when reporting their financial statement information. The auditor must make sure that the management team does not violate the accounting rules when doing so. IN essence, this statement characterizes why professional skepticism is required to be exercised by auditors.

An accountant recommends a local computer company to a client that is trying to upgrade its computerized sales records. The client purchases $25,000 worth of equipment and sends a check to the accountant for 5 percent of the total sales. This is an example of a - Commission. - Contingent fee. - Referral fee. - Nonaudit fee.

a. This is a commission—a percentage paid in connection with a business activity.

When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion? - Cutoff - Existence - Valuation and allocation - Rights and obligations - Occurrence

a. This is clearly a test of the completeness as the assertion always includes any issues of transaction cutoff, which means that the recording of all revenue, expense, and other transactions must be included in the proper period in accordance with GAAP.

Which of the following statements is not true with respect to the performance principle? - Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits. - Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements. - In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements. - Auditors are required to consider both the relevance and the reliability of evidence in evaluating whether the evidence they have gathered is appropriate.

a. Written audit plans are required in both initial and continuing audits

AICPA members who work in industry and government must always uphold which two of the following AICPA rules of conduct? - The Independence Rule. - The Integrity and Objectivity Rule. - The Confidential Client Information Rule. - The Acts Discreditable Rule

b. & d.

Performance audits usually include [two answers] - Financial audits - Economy and efficiency audits - Compliance audits - Program audits

b. (&d) The two categories of performance audits are economy and efficiency audits and program audits

Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management's assertion of - Presentation and disclosure. - Completeness. - Rights and obligations. - Existence.

b. A cutoff test is clearly a test of the completeness assertion as the test is designed to insure that all transactions that should have been included in accordance with GAAP have been recorded.

Independent auditors of financial statements perform audits that reduce - Business risks faced by investors. - Information risk faced by investors. - Complexity of financial statements. - Timeliness of financial statements.

b. After completing a financial statement audit, information risk has been reduced for investors.

Which of the following topics is not addressed in the auditors' report for an issuer? - Responsibilities of the auditor and management in the financial reporting process. - Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP. - A description of an audit engagement. - A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.

b. Auditors provide reasonable (but not absolute) assurance in an audit engagement (this is noted in the second paragraph of the Basis for Opinion section of the auditors' report).

The risk to investors that a company's financial statements may be materially misleading is called - Client acceptance risk. - Information risk. - Moral hazard. - Business risk.

b. By definition, information risk is the probability that the information circulated by a company will be false or misleading

Which of the following is an advantage of computer-assisted audit techniques (CAATs)? - All the CAATs programs are written in one computer language. - The software can be used for audits of clients that use differing computer equipment and file formats. - The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures. - The use of CAATs can be substituted for a relatively large part of the required testing.

b. CAATs can be transported and used on different types of clients that utilize different types of computing systems.

Which of the following audit procedures probably would provide the most reliable evidence related to the entity's assertion of rights and obligations for the inventory account? - Trace test counts noted during physical count to the summarization of quantities. - Inspect agreements for evidence of inventory held on consignment. - Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. - Inspect the open purchase order file for significant commitments to consider for disclosure.

b. Correct This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that the inventory reported as assets really is owned by the company. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

Which of the following is true with respect to PCAOB inspections of accounting firms? - All firms performing audits of issuers are required to have annual inspections conducted by the PCAOB. - PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. - All results of PCAOB inspections are made available to the public following the inspection. - Firms performing audits of 100 or fewer issuers may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection

b. In a PCAOB inspection, a sample of audits as well as the firm's system of quality control are reviewed by the inspection team.

Ordinarily, what source of evidence should least affect audit conclusions? - External documentary evidence. - Inquiry of management. - Documentation prepared by the audit team. - Inquiry of entity legal counsel.

b. Inquiry of management is a form of internal evidence, which is the least reliable form of evidence.

In auditing the accrued liabilities account on the balance sheet, an auditor's procedures most likely would focus primarily on management's assertion of - Existence or occurrence. - Completeness. - Presentation and disclosure. - Valuation or allocation.

b. Management is more likely to understate liabilities. As a result, when auditing the accrued liabilities account, the most relevant assertion is likely to be completeness.

An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of - Rights and obligations. - Completeness. - Existence. - Valuation.

b. Most importantly, the auditor did not select items for testing from any financial statement records. Rather, the auditor selected items to be tested from the warehouse, without considering the financial statement records.

Which of the following would be considered an analytical procedure? - Testing purchasing, shipping, and receiving cutoff activities. - Comparing inventory balances to recent sales activities. - Projecting the deviation rate of a statistical sample to the population. - Reconciling physical counts to perpetual records and general ledger balances.

b. One example of an analytical procedure is when auditors evaluate financial statement accounts by developing expectations about what an account balance should be based on an analysis of relevant financial and nonfinancial data. When examining the inventory balance, the auditor would expect a lower balance if there was significant sales activity. Thus, this is an example of an analytical procedure

The audit committee's responsibility for auditor independence concerns - Ensuring that partners of the public accounting firm are not stockholders in the company. - Ensuring that nonaudit services provided by the auditor do not impair independence. - Reporting on auditor independence to the PCAOB. - Ensuring that all nonaudit services are provided by auditors who do not perform the financial statement audit.

b. Sarbanes-Oxley and the PCAOB have placed the responsibility for auditors' independence on the audit committee. Primary in this responsibility is the monitoring of all engagements contracted with the external auditors to ensure that the auditors are not performing any assignments that are prohibited by PCAOB standards or otherwise impair the auditors' independence.

Auditors are interested in having independence in appearance because - They want to impress the public with their independence in fact. - They want the public at large to have confidence in the profession. - They need to comply with the fundamental principles of GAAS. - Audits should be planned and properly supervised.

b. Since appearances influence the public, this is important.

One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following - Generally accepted auditing standards. - Standards within a system of quality control. - Generally accepted accounting principles. - International auditing standards.

b. Standards within a system of quality control are firm- (rather than auditor-) related.

When a client's financial statements contain a material departure from an FASB Statement on Accounting Standards and the public accounting firm believes the departure is necessary to ensure that the statements are not misleading, - The public accounting firm must qualify the auditors' report for a departure from GAAP. - The public accounting firm can explain why the departure is necessary and then give an unmodified opinion paragraph in the auditors' report. - The public accounting firm must give an adverse auditors' report. - The public accounting firm can give the standard unmodified auditors' report with an unmodified opinion paragraph.

b. The Accounting Principles Rule permits the explanation and the unqualified opinion.

Which of the following "bodies designated by Council" have been authorized to promulgate accounting principles enforceable under the Accounting Principles Rule of the AICPA Code of Professional Conduct? - Auditing Standards Board. - Federal Accounting Standards Advisory Board. - Consulting Services Executive Committee. - Accounting and Review Services Committee.

b. The Federal Accounting Standards Advisory Board has been so authorized.

When a CPA knows that a tax client has skimmed cash receipts and not reported the income in the federal income tax return but signs the return as a CPA who prepared the return, the CPA has violated which of the following AICPA rules of conduct? - The Confidential Client Information Rule. - The Integrity and Objectivity Rule. - The Independence Rule. - The Accounting Principles Rule.

b. The Integrity and Objectivity Rule -- The CPA knowingly misrepresented facts.

Which of the following is most closely related to the relevance of audit evidence? - Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. - In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. - In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year. - Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.

b. The aging of accounts receivable will evaluate valuation, which is not directly evaluated through confirmation. Therefore, aging provides relevant evidence with respect to the valuation assertion.

When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? - Yes, the auditors' report should mention the fact that an audit specialist was used. - The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions. - The use of an audit specialist need not be mentioned if the auditors decide not to take responsibility for the audit specialist's findings. - The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings.

b. The auditors' report should only mention the use of the specialist when the specialist's findings affect the auditors' conclusions

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? - They often replace the tests of controls that are performed to assess control risk. - They typically use financial and nonfinancial data aggregated at a high level. - They usually involve the comparison of assertions developed by management to ratios calculated by an auditor. - They are often used to develop an auditor's preliminary judgment about materiality.

b. The use of financial and nonfinancial data aggregated at a high level is commonly used during preliminary analytical procedures

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? - Staff will need to be rescheduled to cover this new client. - There will be a client-imposed scope limitation. - The firm will have to hire a specialist in one audit area. - The client's financial reporting system has been in place for 10 years.

b. This is a major risk factor and is likely to be enough for an auditor to not accept an audit engagement. Why is there a scope limitation required? Is the potential client trying to hide a material fact (or a material misstatement) from the auditor? Given that there is a scope limitation, the auditor would have to think long and hard about whether to accept the engagement

When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management's assertion regarding - Completeness. - Existence. - Valuation and allocation. - Rights and obligations. - Occurrence.

b. This is a test of existence. This test is completed by auditors to answer the question as to whether the transactions recorded as an asset really represent assets that exist and did add value to the company's equipment as compared to routine repair and maintenance expenses under GAAP. Management's existence assertion states that the reported assets actually exist. If an addition to the equipment account cannot be located or identified as adding value to the equipment balance, it is possible that the amount should have been classified as repair and maintenance expenses under GAAP

An audit plan contains - Specifications of audit standards relevant to the financial statements being audited. - Specifications of procedures the auditors believe appropriate for the financial statements under audit. - Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. - Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger.

b. This is exactly what an audit plan consists of - that is, an audit plan contains specifications of procedures the auditors believe appropriate for the financial statements under audit

In an attestation engagement, a CPA practitioner is engaged to - Compile a company's financial forecast based on management's assumptions without expressing any form of assurance. - Prepare a written report containing a conclusion about the reliability of a management assertion. - Prepare a tax return using information the CPA has not audited or reviewed. - Give expert testimony in court on particular facts in a corporate income tax controversy.

b. This is the basic definition of an attestation service, as articulated in the book and the professional standards.

The primary difference between operational auditing and financial auditing is that in operational auditing - The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards. - The operational auditor is seeking to help management use resources in the most effective manner possible. - The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them. - The operational auditor can use analytical skills and tools that are not necessary in financial auditing.

b. This statement exactly characterizes the goal of an operational audit. In addition, the statement is part of the basic definition of operational auditing.

Audit independence in fact is most clearly lost when - A public accounting firm audits competitor companies in the same industry (e.g., Coca-Cola and Pepsi). - An auditor agrees to the argument made by the client's financial vice president that deferring losses on debt refinancing is in accordance with generally accepted accounting principles. - An audit team fails to discover the client's misleading omission of disclosure about permanent impairment of asset values. - A public accounting firm issues a standard unmodified report, but the reviewing partner fails to notice that the assistant's observation of inventory was woefully incomplete.

b. This statement implies that the auditor subordinated judgment to the client's officer.

An auditor seeks to test the accuracy of the amount recorded as revenue on a contract with a customer under ASC 606. Which PCAOB assertion is most likely being tested? - Rights and obligations - Valuation and allocation - Presentation and disclosure - Completeness

b. Valuation and allocation is the PCAOB assertion that is most likely to be tested. In general, management is more likely to overstate revenue to improve profitability. As a result, when auditing the revenue account, the most relevant assertions are likely to be either existence/occurrence or valuation. In this situation, because of the nature of revenue and the fact that accuracy is more closely related to valuation, the valuation assertion is clearly the most important assertion. In addition, the existence/occurrence option is not an available option

Under Sarbanes-Oxley and PCAOB rules, ensuring that the auditor is independent in appearance is the responsibility of - The public accounting firm. - Senior management. - The audit committee. - The PCAOB.

c.

Which of the following is considered a close relative (but not an immediate family member) as defined by the AICPA? - Spouse - Spousal equivalent - Parent - Uncle

c. A parent is defined as a close relative but not an immediate family member

The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about - Completeness. - Existence. - Valuation and allocation. - Rights and obligations. - Occurrence.

c. A review of credit ratings of customers' gives indirect evidence of the collectability of accounts receivable.

Generally accepted auditing standards require that auditors always prepare and use - A written planning memorandum explaining the auditors' understanding of the client's business. - A written client consent to discuss audit matters with prospective auditors. - A written audit plan. - The written time budgets and schedules for performing each audit.

c. A written audit plan is required to be documented by U.S. GAAS (AU-C 300.14).

When auditing the existence assertion for an asset, auditors proceed from the - Financial statement amounts back to the potentially unrecorded items. - Potentially unrecorded items forward to the financial statement amounts. - General ledger back to the supporting original transaction documents. - Supporting original transaction documents to the general ledger.

c. By starting with the amounts recorded in the general ledger, you can find evidence of existence of recorded amounts by selecting items that have actually been recorded (in the general ledger) and then examining supporting original transaction documents for the amounts recorded

Which of the following procedures would a CPA most likely perform in planning a financial statement audit? - Make inquiries of the client's lawyer concerning pending litigation. - Perform cutoff tests of cash receipts and disbursements. - Compare financial information with nonfinancial operating data. - Recalculate the prior-years' accruals and deferrals.

c. Comparing the financial information with nonfinancial operating data is a step that may be completed during preliminary analytical procedures. This is done during the planning phase of the audit.

Confirmations of accounts receivable provide evidence primarily about which two assertions? - Completeness and valuation. - Valuation and rights and obligations. - Existence and rights and obligations. - Existence and completeness.

c. Confirmation of accounts receivable does produce evidence of existence because the customer is admitting that it owes the client money and some evidence of rights to the accounts receivable amount is also supported because the customer is admitting that it owes the client the money (thus, they own the receivable)

Breaux & Co. CPAs require that all audit documentation indicates the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? - Independence. - Adequate competence and capabilities. - Adequate planning and supervision. - Sufficient appropriate evidence gathered.

c. Initials of the preparer and reviewer provide evidence that the documentation was reviewed, which relates to planning and supervision.

Which of the following best demonstrates the concept of professional skepticism? - Relying more extensively on external evidence rather than internal evidence. - Focusing on items that have a more significant quantitative effect on the entity's financial statements. - Critically assessing verbal evidence received from the entity's management. - Evaluating potential financial interests held by auditors in the client.

c. Professional skepticism is characterized by appropriate questioning and a critical assessment of audit evidence

The AICPA removed its general prohibition of CPAs taking commissions and contingent fees because - CPAs prefer more price competition to less. - Commissions and contingent fees enhance audit independence. - Nothing is inherently wrong about the form of fees charged to nonaudit clients. - Objectivity is not always necessary in accounting and auditing services.

c. The FTC dragged the AICPA kicking and screaming into the agreement.

According to the AICPA Code of Professional Conduct, which of the following acts is generally forbidden to CPAs in public practice? - Purchasing bookkeeping software from a high-tech development company and reselling it to tax clients. - Being the author of a "TaxAid" newsletter promoted and sold by a publishing company. - Having a commission arrangement with an accounting software developer to receive 4 percent of the price of programs recommended and sold to audit clients. - Engaging a marketing firm to obtain new financial planning clients for a fixed fee of $1,000 for each successful contact.

c. The Fees and Other Types of Remuneration Rule prohibits commission compensation for referring products or services to clients for which the CPA performs attest services.

Which of the following agencies issues independence rules for the auditors of public companies? - Financial Accounting Standards Board (FASB). - Government Accountability Office (GAO). - Public Company Accounting Oversight Board (PCAOB) - AICPA Accounting and Review Services Committee (ARSC).

c. The PCAOB (in cooperation with SEC) makes independence rules for auditors of public companies.

Which of the following is most closely related to the responsibilities principle? - The auditors' responsibility to issue a report as a result of their examination. - The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements. - The auditors' compliance with relevant ethical requirements of independence and due care. - The auditors' responsibility to plan the audit and properly supervise assistants.

c. The auditors' compliance with independence and due care is related to the responsibilities principle

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? - Being able to fine-tune the audit work for effectiveness and efficiency. - Avoiding the problem of doing more work than necessary (overauditing). - Being able to decide early what type of audit opinion to issue. - Avoiding the problem of doing too little work (underauditing).

c. The kind of opinion to issue cannot be determined until all the evidence is obtained and evaluated.

An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about - Rights and obligations. - Existence. - Presentation and disclosure. - Valuation.

c. The question specifically relates to testing the information contained in the pension footnote. When testing the footnote disclosures, the presentation and disclosure is likely to be the most important assertion being tested.

The revenue cycle of a company generally includes which accounts? - Inventory, accounts payable, and general expenses. - Inventory, general expenses, and payroll. - Cash, accounts receivable, and sales. - Cash, notes payable, and capital stock.

c. These accounts are part of the revenue cycle.

Which of the following would best be described as an attest engagement? - An engagement to implement an ERP system. - An engagement to develop a more efficient payroll process. - An engagement to assess the effectiveness of an internal control system. - An engagement to assist the client in an IRS audit.

c. This is an attestation service. In order to assess the effectiveness of an internal control system, the assurance provider would have to attest to management's assertion that the internal control was effective in accordance with the COSO framework, as this is the most common way of expressing the effectiveness of an internal control system. As a result, this is the definition of an attestation service, as articulated in the book and the professional standards

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? - The auditors' need to document compliance with generally accepted auditing standards. - The auditors' need to verify the existence of new sales contracts important for the client's business. - The auditors' judgment about their independence with regard to the client. - The auditors' judgments about materiality.

c. While independence is clearly an important consideration, it is not a factor that dictates the quantity, type and content of audit documentation.

The primary objective of compliance auditing is to - Give an opinion on financial statements. - Develop a basis for a report on internal control. - Perform a study of effective and efficient use of resources. - Determine whether client personnel are following laws, rules, regulations, and policies.

d. A compliance audit refers to procedures that are designed to ascertain that the company's personnel are following laws, rules, regulations, and policies

When initiating communications with predecessor auditors, prospective auditors should expect - To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. - To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement. - To obtain copies of some or all of the predecessor auditors' audit documentation. - All of the above

d. All of the above answers are correct. Thus, this is the correct answer

When auditing an investment in a publicly traded company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion? - Inspect the stock certificates evidencing the investment. - Examine the audited financial statements of the investee company. - Review the broker's advice or canceled check for the investment's acquisition. - Obtain market quotations from The Wall Street Journal or another independent source.

d. Always remember that management is more likely to overstate assets. As a result, when auditing an asset balance like investments, a relevant assertion is likely to be valuation. In this situation, to answer the question of what the investment should be valued at in the balance sheet, an auditor would first seek to obtain a market quotation from an independent source like the Wall Street Journal.

Which of the following communications is most likely to be written before the balance-sheet date? - A report to the audit committee on the results of testing of internal control over cash receipts. - Confirmation letters to vendors confirming the amounts they owe to the client. - An attorney's letter regarding contingent liabilities. - An engagement letter.

d. An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date.

The most reliable evidence regarding the existence of newly acquired computer equipment is - Inquiry of management. - Documentation prepared externally. - Evaluation of the client's procedures. - Physical observation.

d. Auditors' personal knowledge through physical observation provides the most reliable form of evidence; in addition, unlike evaluation of client procedures (choice c), this relates directly to verifying the existence of newly-acquired equipment.

Which of the following procedures would provide the most reliable audit evidence? - Inquiries of the client's internal audit staff. - Inspection of prenumbered client purchase orders filed in the vouchers payable department. - Inspection of vendor sales invoices received from client personnel. - Inspection of bank statements obtained directly from the client's financial institution.

d. Because the statements were received directly from outside parties, this is a more reliable form of evidence than internal forms of evidence (choices a and b) or external evidence received indirectly by the auditor (choice c)

Which of the following would not be considered confidential information obtained in the course of an engagement for which the client's consent would be needed for disclosure? - Information about whether a consulting client has paid the CPA's fees on time. - The actuarial assumptions used by a tax client in calculating pension expense. - Management's strategic plan for next year's labor negotiations. - Information about material contingent liabilities relevant for audited financial statements.

d. Client permission is not needed for information required by GAAP in audited financial statements

The evidence considered most appropriate by auditors is best described as - Internal documents such as sales invoice copies produced under conditions of strong internal control. - Written representations made by the president of the entity. - Documentary evidence obtained directly from independent external sources. - Direct personal knowledge obtained through physical observation and mathematical recalculation.

d. Direct, personal knowledge of auditors is the most appropriate form of evidence.

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following? - Key factors that are consistent with prior periods. - Assumptions that are similar to industry guidelines. - Measurements that are objective and not susceptible to bias. - Evidence of a conservative systematic bias

d. Evidence of a systematic bias, whether aggressive or conservative, would be of most concern to the audit team.

An auditor's permanent file audit documentation most likely will contain - Internal control analysis for the current year. - The most recent engagement letter. - Memoranda of conference with management. - Excerpts of the corporate charter and bylaws.

d. Excerpts of the corporate charter and bylaws would not change often and would therefore likely be found in the permanent file

Which of the following procedures would most likely be performed during planning? - Surprise counting of the client's petty cash fund. - Reporting internal control deficiencies to the audit committee. - Performing a search for unrecorded liabilities. - Identifying related parties.

d. Identifying related parties is an important part of the audit planning process

Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? - Acceptance and continuance of client relationships and specific engagements. - Engagement performance. - Monitoring. - Relevant ethical requirements.

d. Independence confirmations would ensure that all firm personnel are independent with respect to that firm's clients, which is related to the "Relevant Ethical Requirements" element of a system of quality control. It would not relate to acceptance and continuance of client relationships and specific engagements (a), engagement performance (b), or monitoring (c)

A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of - Environmental auditing. - Financial auditing. - Compliance auditing. - Operational auditing.

d. Operational auditing refers to the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies.

Prior to accepting a new audit engagement, a public accounting firm should - Attempt to contact the predecessor auditors. - Evaluate the integrity of management. - Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement. - All of the above.

d. Prior to accepting a new audit engagement, an audit firm should (a) attempt to contact the predecessor auditor, (b) evaluate the integrity of management, and (c) assess the firm's resources. So, all of the above is the correct response

Which of the following concepts is least related to the standard of due care? - Independence in fact - Professional skepticism - Prudent auditor - Reasonable assurance

d. Reasonable assurance is related to the auditors' responsibility for detecting misstatements and procedures performed during the examination, not the concept of due care.

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of - Existence or occurrence. - Completeness. - Valuation or allocation. - Presentation and disclosure.

d. Restrictions on retained earnings from loans, agreements or state law would need to be disclosed in the footnotes to the financial statements. As a result, presentation and disclosure is clearly the most important assertion.

Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard - Is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses. - Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion. - Should be disregarded because it is not in writing. - Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

d. Rhonda's assertions are nice. However, to be considered as sufficient to conclude that all expenses have been recorded, they will need corroboration with documentary evidence. Thus, this is the correct response.

The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client? - Bookkeeping services - Internal auditing services - Valuation services - All of the above

d. Sarbanes-Oxley prohibits the provision of all of the services listed in answers a, b, and c; therefore, d (all of the above) is the best response.

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date? - Interviewing internal auditors about their reporting responsibilities. - Reviewing accounting records for recurring transactions occurring near year-end. - Inspecting communications with the client's legal counsel regarding recorded contingent liabilities. - Scanning the minutes for significant transactions with members of the board of directors.

d. Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.

Substantial equivalency refers to - An auditor's tendency not to believe management's assertions without sufficient corroboration. - Providing consulting work for another firm's audit client in exchange for the other firm's providing consulting services to one of your clients. - The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization. - Permitting a CPA to practice in another state without having to obtain a license in that state.

d. Substantial equivalency relates to the practice of public accountancy in states other than a CPA's state of licensure. Under the concept of substantial equivalency, as long as the licensing (home) state requires (1) 150 hours of education, (2) successful completion of the CPA exam, and (3) one year of experience, a CPA can practice (either in person or electronically) in another substantial equivalency state without having to obtain a license in that state.

According to the Acts Discreditable Rule for accountants in public practice, which of the following is not a "discreditable act"? - Withholding a client's sales records. - Failing to file or remit tax payments. - Failing to follow requirements of the PCAOB during the audit of an SEC client. - Advertising that indicated the firm can reduce IRS penalties.

d. Such advertising violates the Advertising and Other Forms of Solicitation Rule, but not the Acts Discreditable Rule.

Which of the following "bodies designated by Council" have been authorized to promulgate general standards enforceable under the General Standards Rule of the AICPA Code of Professional Conduct? - AICPA Division of Professional Ethics. - Financial Accounting Standards Board. - Government Accounting Standards Board. - Accounting and Review Services Committee.

d. The Accounting and Review Services Committee has been so authorized.

The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the - Governmental Internal Audit Agency (GIAA). - Central Internal Auditors (CIA). - Securities and Exchange Commission (SEC). - Government Accountability Office (GAO).

d. The mission of the U.S. Government Accountability Office is to ensure that public officials are using public funds efficiently, effectively, and economically

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because - Financial statements are too complex for the bankers to analyze themselves. - They are too far away from company headquarters to perform accounting and auditing themselves. - The consequences of making a bad loan are very undesirable. - They generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements.

d. The potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. Consider for example a company that was desperate for cash in order to survive. Would it be possible that the management team would present unreliable financial statements to the bank in order to get a desperation loan? Because of this possibility, a financial statement audit is needed to add credibility to the financial statements

Auditors' understanding of the internal control in an entity provides information for - Determining whether members of the audit team have the required competence and capabilities to perform the audit. - Ascertaining the independence in mental attitude of members of the audit team. - Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. - Planning the nature, timing, and extent of substantive procedures on an audit.

d. The primary purpose of obtaining an understanding of a client's internal control is to plan the nature, timing, and extent of further audit procedures on an engagement.

Which of the following is true? - Members of an audit engagement team cannot speak with audit client officers about matters outside the scope of the audit while the audit engagement is in progress. - Audit team members who leave the public accounting firm for employment with audit clients can provide audit efficiencies (next year) because they are very familiar with the firm's audit plans. - Audit team partners who leave the public accounting firm for employment with audit clients can retain variable annuity retirement accounts established in the person's former firm retirement plan. - The public accounting firm must discuss with the audit client's board or its audit committee the independence implications of the client's having hired the audit engagement team manager as its financial vice president.

d. The public accounting firm must discuss with the audit client's board or its audit committee the independence implications of the client's hiring the audit engagement team manager as its financial vice president.

Which of the following is true if an auditor performs nonaudit services for a government entity? - The scope of the audit must be reduced so that the auditor does not audit the area for which the nonaudit work was performed. - The auditor is prohibited from providing nonaudit work in areas directly related to the production of accounting information. - The senior members of the government entity must document their review of the nonaudit service and indicate why it is appropriate for the auditors to perform this service. - The scope of the audit cannot be reduced because the nonaudit work was performed by the public accounting firm.

d. The scope of the audit work cannot be reduced because a public accounting firm performed it

A CPA's legal license to practice public accounting can be revoked by the - American Institute of Certified Public Accountants. - State society of CPAs. - Auditing Standard Board. - State board of accountancy.

d. The state board is the regulatory agency that grants a license to practice and can revoke one.

When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion? - Completeness - Existence - Valuation and allocation - Rights and obligations - Occurrence

d. This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that amounts reported as assets of the company represent true assets that it really does own and that the amounts reported as liabilities truly represent its obligations. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

CPA Kara Rambo is the auditor of Ajax Corporation. Her audit independence will not be considered impaired if she - Owns $1,000 worth of Ajax stock. - Has a husband who owns $1,000 worth of Ajax stock. - Has a sister who is the financial vice president of Ajax. - Owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax's ownership of 40 percent of Pericles' stock, and Pericles contributes 3 percent of its total assets and income in Ajax's financial statements.

d. This is the situation of having an immaterial financial interest in a nonclient investee that is immaterial to the client's financial statements.

In testing the goodwill at an audit client in the retail industry, an auditor may seek to determine whether the account balance had been impaired. Such impairment procedures would be designed to test which financial statement assertion? - Existence - Completeness - Presentation and disclosure - Valuation

d. Valuation is the correct answer. By definition, impairment of goodwill is an accounting charge that companies record when the goodwill account's carrying value on the balance sheet exceeds its fair value.

Which of the following is not related to ethical requirements of auditors? - Due care. - Independence in appearance. - Independence in fact. - Professional judgment.

d. While professional judgment is part of the responsibilities principle, it is not related to the ethical requirements of auditors.

Which of the following would be considered an assurance engagement? - Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past. - Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles. - Giving an opinion on the fair presentation of a newspaper's circulation data. - Giving assurance about the average drive length achieved by golfers with a client's golf balls. - All of the above.

e. Because attestation and audit engagements are subsets of assurance engagements, all of the responses are examples of assurance engagements.

A public accounting firm's independence is not impaired when members of the audit engagement team does which of the following for a public company audit client? - Prepares special purchase orders for active plutonium in secure national defense installations. - Completes operational internal audit assignments under the directions of the client's director of internal auditing. - Prepares outsourced internal audit work on the client's financial accounting control monitoring. - Prepares actuarial assumptions used by the client's actuaries for life insurance actuarial liability determination. - All of the above would impair the public accounting firm's independence

e. Independence is not impaired in (a) and is not impaired in (b). So, (c) is the correct answer