AUDIT EXAM 3
C
A principle that may reduce or eliminated auditors' liability to clients is: A. client's constructive negligence B. auditors' ordinary negligence C. client's contributory negligence D. auditors' gross negligence
A
According to Sarbanes-Oxley, accountants performing an audit or review must maintain all engagement documentation for a period of: A. 7 years B. 3 years C. 5 years D. 2 years
C
All of the following procedures are common uses of audit data analytics in risk assessment procedures except: A. calculating accounts receivable collection trends by state B. assessing the number of days inventory is in stock on an item-by-item basis C. comparing cash payments made to vendor invoices and discounts in the purchases cycle D. analyzing trends in salary costs
A
An audit failure occurs when: A. auditors fail to conduct the examination in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements B. auditors are sued by a third party C. a client goes bankrupt or has serious financial difficulty D. auditors cannot collect audit fees owed to them by the client
D
An erroneous decision to assess control risk at excessively high levels can have an adverse effect on: A. the effectiveness of an audit engagement B. the type of report the auditor decides to render C. the validity of an audit D. the efficiency of an audit engagement
B
As part of assessing the risk of material misstatement, the audit team must assess the control risk in the computerized processing system. Initially, the audit team must identify the overall processing scope of the system(s), which would include each of the following considerations except: A. the type of output that is created as a result of processing transactions through the system B. the specific control procedures that have been implemented by the client to prevent or detect misstatements that could occur based on the audit team's analysis C. the types of transactions that are processed through the system D. the programs and files that are accessed by the system in processing transactions
C
Audit teams would least likely use computer-assisted audit techniques to: A. access client data files B. prepare spreadsheets C. assess control risk related to computerized processing systems D. construct and perform parallel simulations
A
Auditors should not be liable to any party if they perform services that met the standards of: A. due care B. ordinary negligence C. regulatory negligence D. good faith
D
Data from which of the following sources is most likely to be unreliable? A. data obtained through direct personal observation of the auditor B. data obtained directly from the client with strong internal controls C. data obtained from a third-party sent directly to the auditor D. data obtained directly from the client with weak internal controls
C
Documentation of an ADA should be sufficient enough such that: A. both "an investor looking into the company could understand the conclusions reached and significant judgements made" and "An experienced auditor, with no prior connection to the engagement could understand the conclusions reached and significant judgements made" are correct B. an experienced auditor, who is familiar with the engagement could understand the conclusions reached and significant judgements made C. an experienced auditor, with no prior connection to the engagement could understand the conclusions reached and significant judgements made D. an investor looking into the company could understand the conclusions reached and significant judgements made
D
Elliot Corp. is interested in purchasing Roger Corp. Prior to the purchase, Elliot hired Adam & Co. to audit the financial statements of Roger. During the audit, Adam & Co. failed to discover a fraud that resulted in material misstatements in Roger's financial statements. After the acquisition, the fraud was discovered and Elliot Corp. suffered substantial losses. If Elliot sues Adam & Co., Elliot must prove that Adam & Co: A. acted recklessly or with lack of reasonable grounds for belief B. demonstrated gross negligence C. knew of the instances of fraud D. failed to exercise the appropriate level of professional care
C
Failure to provide any level care in fulfilling a duty owed to another party, including reckless disregard for the truth, is called: A. privity B. breach of contract C. constructive fraud D. ordinary negligence
B
For which of the following audit tests would an auditor most likely use attributes sampling? A. selecting accounts receivable for confirmation of account balances B. inspecting employee time cards for proper approval by supervisors C. examining invoices in support of the valuation of fixed asset additions D. making an independent estimate of the amount of a LIFO inventory
A
How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law? A. privity with purchasers is not a necessary element of proof B. purchasers only have to prove loss caused by reliance on audited financial statements C. purchasers have to prove either fraud or gross negligence as a basis for recovery D. auditors are held to a standard of care described as professional skepticism
A
If an audit is performed for the benefit of a specific person or organization, that person or organization is known as a(n): A. primary beneficiary B. party to the contract C. prime benefactor D. foreseeable third party
A
In a common law action against auditors, lack of privity is a viable defense if the plaintiff: A. is the client's creditor who sues auditors for ordinary negligence B. bases the action upon fraud C. can prove gross negligence by auditors that amounts to a reckless disregard for the truth D. is the auditors' client
A
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are needed for a filing with a regulatory body. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves a loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: A. it was a foreseeable party B. it was a foreseen party C. it was a primary beneficiary D. it was in privity of the contract
B
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming: A. gross negligence B. breach of contract C. ordinary negligence D. constructive fraud
A
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan. Humphrey completes that audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: A. it was a primary beneficiary B. it was a foreseen party C. it was a foreseeable party D. it was in privity of the contract
A
Lauren hires Humphrey, a CPA, to provide an audit of her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to financial institutions for a loan, but does not name any financial institutions. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: A. it was a foreseen party B. it was in privity of the contract C. it was a foreseeable party D. it was a primary beneficiary
D
Paula performed the audit of the financial statements of Abdul Company (a nonpublic entity currently not subject to filing requirements under the Securities Act of 1933 or Securities Exchange Act of 1934). Abdul Company is currently considering several alternatives for raising capital, including seeking financing from area banks or an initial public offering of its securities. Which of the following parties would have the lowest likelihood of successfully bringing suit for ordinary negligence against Paula? A. First State Bank, a bank with whom Abdul Company has not previously done business B. purchasers of Abdul Company's securities in an initial public offering C. Abdul Company D. Simon Whitaker, a private investor who is considering acquiring Abdul Company
A
Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whether: A. the control procedures are operating effectively B. the risk of incorrect acceptance is too high C. the financial statements are materially misstated D. overall materiality for planning purposes is at a sufficiently low level
D
Tests of controls in an advanced computerized processing system: A. is impractical because many procedures within the computerized processing system leave no visible evidence of having been performed B. is inadvisable because it may distort the evidence in real-time systems C. can be performed using only actual transactions because testing simulated transactions does not provide relevant evidence D. can be performed using actual transactions or simulated transactions
C
The SEC Rule 10b-5 deals with: A. the use of the "due diligence" defense to avoid liability B. penalties for willfully and knowingly violating the Securities Exchange Act of 1934 C. fraud in the purchase or sale of securities D. integrated disclosure system for annual reports
C
The Securities Act of 1933: A. regulates trading in securities B. approves and guarantees investments C. regulates the initial issuance of securities D. regulates the accounting profession
D
The maximum rate of deviation that may exist in the operation of a control policy or procedure before the auditors would reduce reliance on internal control is referred to as: A. upper limit rate of deviation B. control risk C. acceptable rate of deviation D. tolerable rate of deviation
C
The purpose of test data is to determine whether: A. all possible combinations of valid data are correctly processed B. every possible error is prevented or detected by the client's computer controls C. controls operate as described in responses to internal control questionnaire items and programs D. the audit team's test data are consistent with the client's normal transactions
A
The restatement of torts is a general ledger doctrine that extends liability for ordinary negligence to: A. foreseen third parties B. foreseeable third parties C. primary beneficiaries D. all users of financial statements
C
The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value) of the population is: A. balance sampling B. attributes sampling C. variables sampling D. discovery sampling
A
The ultimate purpose of control risk assessment is to: A. decide the nature, timing, and extent of further audit procedures B. estimate the overall risk of failing to detect material misstatements C. determine the risk of incorrect acceptance D. determine the probability that errors entered the accounts
D
Through the evaluation of the results of an ADA, the auditor concludes that the original objectives of the ADA were not reached. What should the auditor do next? A. issue a disclaimer of opinion B. adjust the original objective C. issue an adverse opinion D. plan and perform alternative procedures
B
What is the primary objective of analytical procedures performed during the planning stages of an audit? A. to identify existing material misstatements B. to identify unusual or unexpected relationships C. to uncover management fraud D. all of the above
B
When accessing and preparing data to be analyzed using an ADA, it is important to: A. ensure that all subtotals are present B. cleanse the data C. ensure the data is stored in the required standardized format D. all of the above
B
When audit teams test a computerized processing system, which of the following is true of the test data approach? A. several transactions of each type must be tested B. test data are processed by the client's computer programs under the audit team's control C. test data must consist of all possible valid and invalid combinations D. the computer program used to process test data is different from the program used throughout the year by the client
D
When documenting an ADA, all the following must be included in the audit documentation except: A. the name of the specific auditor performing the work B. conclusions reached C. the date the work was finished D. the underlying data used to generate graphics or visualization as part of the ADA
D
Which aspect of data is NOT important for data used in ADA? A. reliability B. relevance C. completeness D. none of the above
A
Which of the following is NOT a step performed during the planning phase when conducting an ADA? A. cleansing the data B. determining the overall purpose of the ADA C. identifying significant accounts and assertions D. selecting techniques and tools
D
Which of the following is NOT important when considering the reliability of client data? A. the source reliability B. all of the above C. client controls over data preparation D. if the auditor's information system has been subject to reliability testing
A
Which of the following is NOT true with regard to the relationship among control risk, the risk of overreliance, and the tolerable rate of deviation? A. lower levels of control risk result in a higher level of the risk of overreliance B. lower levels of the risk of overreliance result in a lower tolerable rate of deviation C. lower levels of control risk result in a lower tolerable rate of deviation D. all of the above
C
Which of the following is a common use of ADA in performing tests of controls? A. the auditor performs an aging of accounts payable B. the auditor conducts trend analysis on inventory turnover C. the auditor performs exception for proper approval of purchase transactions D. all of the above
D
Which of the following is not a potential explanation of an outlier identified as a result of an ADA? A. the outlier is a missing item in the population B. the outlier is a duplicate item in the population C. the outlier is an item with elevated risk D. all of the above
A
Which of the following is true of audit data analytics? A. it is used to gain insights and improve audit quality B. it is most appropriate when used on unpredictable relationships C. it is typically performed on a small sample of the population D. all of the above
C
Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence? A. purchasers and sellers of securities under the Securities Exchange Act of 1934 B. third parties that auditors should have foreseen could rely on the client's financial statements C. the auditors' client D. third parties whose reliance on the client's financial statements was reasonably foreseeable
C
Which of the following statements concerning the Ultramares Corp. v. Touche case is NOT true? A. this case was brough under common law liability B. this case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud C. this case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence D. this case established the rights of third parties to bring suits against auditors under common law liability
C
Which of the following statements is true concerning auditors' responsibilities during the audit? A. auditors are strictly liable for failures to discover client fraud B. auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards C. auditors must exercise the level of care, skill, and judgement expected as a reasonably prudent auditor under the circumstances D. auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements
C
Which of the following statements is true regarding the use of ADA? A. the auditor must exercise professional judgement during the ADA, but does not need to act with professional skepticism B. the standard of documentation sufficiency for an ADA is less than that of other audit procedures C. the auditor does not need to document every professional judgement made D. all misstatements discovered, regardless of materiality, should be included in the audit documentation
A
Which of the following would not be considered when planning an ADA? A. determine the sample of the population to be analyzed B. determine the relevant financial statement assertions C. all of the above D. determine the overall purpose and specific objectives of the ADA
C
Why does the risk of overreliance have an inverse relationship with sample size? A. as the level of control risk increases, the audit team is placing less reliance on internal control and can appropriately examine fewer items B. as the audit team requires greater compliance with the control policy or procedure, the audit team must examine a greater number of items C. as the audit team is less concerned with making an incorrect conclusion with respect to reliance on the client's internal control, the audit team can appropriately examine fewer items D. as the audit team expects fewer deviations from the control policy or procedure, the audit team can appropriately examine fewer items
D
Why is the auditor more concerned with controlling the exposure to the risk of incorrect acceptance than with the risk of incorrect rejection? A. the risk of incorrect rejection can be controlled by performing substantive procedures during the interim period B. only the risk of incorrect acceptance results in an incorrect decision by the auditor C. the risk of incorrect rejection is not related to the auditor's substantive procedures D. the risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements
D
Why is the auditor more concerned with the risk of overreliance than the risk of underreliance? A. the risk of overreliance cannot be controlled by the auditor during the sampling process B. the risk of underreliance is not a type of sampling risk C. the risk of overreliance exposes the auditor to an efficiency loss D. the risk of overreliance may result in the auditor failing to perform sufficient substantive procedures
