Audit 1-3
An exception to the "percentage of coverage" rule in the OMB's Uniform Guidance rules allows an auditor to reduce the scope of the audit when the entity is determined to be low risk. For an entity that meets the criteria for a low-risk entity, the percentage of federal expenditures covered by the audit can be reduced as low as:
20%.
The OMB's Uniform Guidance rules contain a "percentage of coverage" rule that requires the auditor of entities receiving federal financial support who do not meet the criteria for low risk to test major programs that, in the aggregate, encompass at least:
40% of federal expenditures.
Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission?
A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?
A CPA in public practice providing auditing and other attestation services
Which of the following statements is correct regarding the liability of a CPA for services performed?
A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.
A compilation report is always required when financial statements prepared by the accountant are expected to be used by which of the following?
A compilation report is only required whenever the accountant is engaged to subject the financial statements to compilation procedures.
Which of the following statements correctly defines the term "reasonable assurance"?
A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement
Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?
A policy-making position in the client's finance division
Which of the following is true?
A review is an assurance engagement, as well as an attest engagement.
Which of the following statements is correct regarding a review engagement of a nonpublic company's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?
A review provides an accountant with a basis for expressing limited assurance on the financial statements.
AICPA members who perform compilation and review engagements are governed by all of the following except:
ARSCs.
The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:
Accounting and Review Services Committee.
Which of the following situations would not impair objectivity, integrity, or independence with respect to an audit client?
An out-of-town client takes the audit engagement team out to dinner at a renowned local restaurant.
Which of the following procedures most likely would not be included in a review engagement of a nonpublic entity?
Assessing control risk
Which of the following is the authoritative body designated to promulgate attestation standards?
Auditing Standards Board
Which of the following services may a CPA perform in carrying out a consulting service engagement for a client? I Review of the client-prepared business plan II Preparation of information for obtaining financing
Both I and II
Which of the following services provides the least assurance regarding the fairness of financial statements?
Compilation
A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming that any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?
Compilations
According to the standards of the profession, which of the following activities may be required in exercising due care?
Consulting with experts
Which of the following activities is an accountant not responsible for in review engagements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?
Developing an understanding of internal control
According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent?
Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider
In accordance with Office of Management and Budget audit requirements for audits of nonfederal entities expending federal awards, which of the following statements is accurate regarding federal awards expended?
Free rents received as part of an award to carry out a federal program are treated as federal funds expended.
A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a single audit for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?
Generally accepted auditing standards and generally accepted government auditing standards
Which of the following best characterizes an auditor's exercise of professional skepticism?
Having an attitude that includes a questioning mind
In which of the following situations would a CPA's independence be considered to be impaired? I The CPA maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. II The CPA has a direct financial interest in an audit client, but the interest is maintained in a blind trust. III The CPA owns a commercial building and leases it to an audit client. The lease qualifies as a capital lease.
II and III
According to the standards of the profession, which of the following would be considered a part of a consulting services agreement? I Expressing a conclusion about the reliability of a client's financial statements II Reviewing and commenting on a client-prepared business plan
II only
A CPA is permitted to disclose confidential client information without the consent of the client to: I. another CPA who has purchased the CPA's tax practice. II another CPA firm if the information concerns suspected tax return irregularities. III a state CPA society voluntary quality control review board.
III only
Which of the following statements is true with regard to review services performed under the Statements on Standards for Accounting and Review Services?
In a review, an accountant will express limited assurance as to the applicable financial reporting framework on the financial statements.
A CPA who is not in public practice is obligated to follow which of the following rules of conduct?
Integrity and objectivity
Which of the following rules of the AICPA Code of Professional Conduct must be observed even by a member who is not in public practice?
Integrity and objectivity
According to the profession's standards, which of the following is not required of a CPA performing a consulting engagement?
Maintaining independence from the client
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when: I processing financial data for clients of other CPA firms. II consulting on accounting matters.
Neither I nor II
According to the standards of the profession, which of the following events would require a CPA performing a consulting services engagement for a nonaudit client to withdraw from the engagement? I) The CPA has a conflict of interest that is disclosed to the client and the client consents to the CPA continuing the engagement. II) The CPA fails to obtain a written understanding from the client concerning the scope of the engagement.
Neither I nor II
Which of the following areas of professional responsibility should be observed by a CPA not in public practice?
Objectivity
Which of the following should be the first step in reviewing the financial statements of a nonpublic entity?
Obtaining a general understanding of the entity's organization, its operating characteristics, and its assets, liabilities, revenues, and expenses
According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence?
Only direct and material indirect financial interests
According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?
Participating in the hiring or termination of a client's employees
The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?
Performing inquiries and analytical procedures
An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services (SSARS) when performing which of the following tasks?
Preparing financial statements of a nonissuer
Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or provide a special explanation for not doing so?
Presumptively mandatory requirement
Able, CPA, was engaged by Wedge Corp. to audit Wedge's financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Bank. Able and Wedge's president agreed that Able would give an unmodified opinion on Wedge's financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able's agreement with Wedge's president was revealed. As a result, Wedge stock lost half its value and Ranch sued Able for fraud. What will be the result of Ranch's suit?
Ranch will win because Able intentionally gave an unmodified opinion on Wedge's materially misstated financial statements.
Which of the following procedures is an accountant required to perform before issuing a compilation report under Statements on Standards for Accounting and Review Services (SSARS)?
Read the financial statements and consider whether such financial statements appear to be free from obvious material errors.
Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?
Releasing financial information to a local bank with the approval of the client's mail clerk
According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services?
Representing a client in an IRS examination of the client's federal income tax return
Which of the following actions by a CPA most likely violates the profession's ethical standards?
Retaining client records after the client has demanded their return
Nile, CPA, on completing an audit, was asked by the client to provide technical assistance in integrating a new IT system. The set of pronouncements designed to guide Nile in this engagement is the Statement(s) on:
Standards for Consulting Services.
North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to review and generate North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:
Statements on Standards for Accounting and Review Services.
A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?
Statements on Standards for Attestation Engagements
A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:
Statements on Standards for Attestation Engagements (SSAE).
A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?
The CPA authorizes client transactions and reports them to management.
Which of the following is correct regarding a compilation of financial statements engagement in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?
The accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client.
Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under the Statements on Standards for Accounting and Review Services (SSARS)?
The accountant was not able to come to an understanding with representatives of the organization for services to be performed.
Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?
The auditor determines whether the federal financial assistance has been administered in accordance with applicable laws and regulations.
According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?
The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.
The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?
The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations.
According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?
The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution.
The standard compilation report includes which statement or phrase?
The objective of a compilation is to assist management in presenting financial information in the form of financial statements.
Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?
The requirement that the CPA be independent in mental attitude is included in both sets of standards.
A company engages a practitioner to assist the audit committee by performing specific procedures that were agreed to by the audit committee. Which of the following statements is correct regarding the procedures to be performed?
The specific procedures performed should be listed in the practitioner's report to the audit committee.
Spinner, CPA, had audited Lasco Corp.'s financial statements for the past several years. Prior to the current year's engagement, a disagreement arose that caused Lasco to change auditing firms. Lasco has demanded that Spinner provide Lasco with Spinner's working papers so that Lasco may show them to prospective auditors to help them prepare their bids for Lasco's audit engagement. Spinner refused and Lasco commenced litigation. Under the ethical standards of the profession, will Spinner be successful in refusing to turn over the working papers?
Yes, because Spinner is the owner of the working papers
A CPA 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 are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client?
Yes, because the stock would be a direct financial interest and materiality is not a factor
Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co., but not on the statements of income, retained earnings, or cash flows. Harris will have access to all information underlying the basic financial statements. Under these circumstances, Harris may:
accept the engagement because such engagements merely involve limited reporting objectives.
The profession's ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the:
actual fee would be substantially higher.
In order for a firm to designate itself as "Members of the AICPA":
all CPA owners must be members of the AICPA.
A pervasive characteristic of a CPA's role in a consulting services engagement is that of being:
an objective advisor.
According to the ethical standards of the profession, a CPA's independence would most likely be impaired if the CPA:
contracted with a client to supervise the client's office personnel.
In an audit of a nonprofit organization under the Uniform Guidance rules, an auditor must comply with all of the following, except:
correspond with all individuals or entities that have received or made use of the federal award funds and determine the appropriateness of such distributions.
The concept of materiality would be least important to an auditor when considering the:
effects of a direct financial interest in the client on the CPA's independence.
The phrase "generally accepted accounting principles" is an accounting term that:
encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
In performing an attestation engagement, a CPA typically:
expresses a conclusion about an assertion.
Under the Statements on Standards for Consulting Services, which of the following statements best reflects a CPA's responsibility when undertaking a consulting services engagement? The CPA must:
inform the client of significant reservations concerning the benefits of the engagement.
The standard report issued by a CPA after reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA:
is not aware of any material modifications that should be made to the financial statements.
A CPA in public practice is required to comply with the provisions of the Statements on Standards for Accounting and Review Services (SSARS) when:
neither advising a client regarding the selection of computer software nor advocating a client's position before the IRS.
In an accountant's review of interim financial information, the accountant typically performs each of the following except:
obtaining corroborating external evidence.
The AICPA's Code of Professional Conduct permits CPA firms to organize as:
proprietorships, general partnerships, general corporations, professional corporations, limited liability companies, and limited liability partnerships if permitted by state law.
When performing a review of interim financial information, an accountant would typically do each of the following except:
test controls related to the preparation of annual financial information.
The "responsible party" with respect to prospective financial statements is usually:
the entity's management.
A member of a group engagement team will not be subject to discipline if a foreign component auditor departed from the ethics requirement as long as:
the foreign component auditor is in accord with the ethics and independence requirements set forth in the IESBA's Code of Ethics for Professional Accountants.
