Audit I Midterm

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Which of the following attributes most clearly differentiates a CPA who audits management's financial statements from management? A) Independence B) Competence C) Staying informed about current professional developments D) Integrity

A. Independence

An auditor's independence will be impaired in each of the following circumstances except... A) The auditor has a savings account with a client bank. B) The auditor owns one share of the client's stock. C) The auditor interviews applicants for accounting positions on behalf of her client. D) The auditor's son is the Director of Internal Audit

A. The auditor has a savings account with a client bank

In the context of a public company's reported financial performance, all the below factors increase information risk except: A) All options describe factors that increase information risk.. B) Managers are self-interested. C) Managers have an information advantage over shareholders. D) The use of incentive compensation (e.g., stock options).

A. all options describe factors that increase information risk

A company has inventory presented as a current asset in the balance sheet. Which option is not a misstatement? A) Inventory that is not selling has been written down to its market price. B) Inventory had been stolen, and the theft was discovered after the financial statements were issued. C) Products that had been sold were included in the ending inventory balance. D) Repairs and maintenance costs on equipment used in manufacturing inventory have been included in the inventory balance.

A. inventory that is not selling has been written down to its market price

Each of the following statements regarding materiality is accurate, except... A) Auditors must consider quantitative materiality for accounts individually and for the F/S taken as a whole. B) Auditors may use average industry revenue as a basis for the calculation of quantitative materiality for the F/S as a whole. C) Qualitative materiality is considered at the end of the engagement when the auditor evaluates misstatements that have been detected. D) Quantitative materiality guides audit planning.

B. Auditors may use average industry revenue as a basis for the calculation of quantitative materiality for the F/S as a whole. Average industry revenue is not an appropriate benchmark to use to determine quantitative materiality.

The most important reason an auditor of a public company strives to be independent in appearance is to... A) Remain unbiased. B) Maintain public confidence. C) Comply with GAAP. D) Be independent in mind.

B. Maintain public confidence

Which of the following types of audit firm employees would be considered "covered members" with respect to complying with the Independence Rule of the Code of Professional Conduct? A) Audit managers who work in an office that does not participate in the engagement. B) Staff auditors assigned to the engagement. C) Senior auditors who work in the same office as the audit engagement team. D) All firm professionals, regardless of whether they participate in the engagement.

B. Staff auditors assigned to the engagement

A CPA prepared a corporation's tax return for a fee of $1,000 and amended tax returns for two prior years for 10% of the anticipated refund amount. Which Rule of Conduct (if any is violated)? A) Confidential Client Information B) Contingent Fees C) Independence D) Confidential Client Information

B. contingent fee rule

A CPA, who is not in public practice, is obligated to follow which of the following rules of conduct? A) Contingent Fee Rule B) Integrity and Objectivity Rule C) Confidential Client Information Rule D) Independence Rule

B. integrity and objectivity rule

Which of the following is indicative of high FFR Risk? A) The Audit Committee of the Board of Directors is heavily involved in the financial reporting process. B) Many transactions are routine, and there are very few nonroutine transactions. C) The company often receives payment (before revenue is earned) for the provision of services over time. Thus, management must estimate the amount of revenue to defer in each accounting period. D) The company has a debt covenant that restricts purchases of additional equipment without the bank's approval.

C) The company often receives payment (before revenue is earned) for the provision of services over time. Thus, management must estimate the amount of revenue to defer in each accounting period. (estimates are high FFR risk)

The risks of material misstatement (MM) are: A) The risks that there will be MMs before considering internal controls B) The risks that internal control will fail to prevent or detect and correct MMs. C) The risks that MM will occur. D) The risks that the auditor's substantive procedures fail to find MMs.

C) The risks that MM will occur.

Which of the following considerations is unrelated to assessing inherent/FFR risk? A) Loss of market share due to increased product defect rates. B) Management is compensated with salaries alone. C) The client's customers have been having difficulty repaying their outstanding balances on time and in full. D) All options are related to assessing inherent/FFR risk.

D) All options are related to assessing inherent/FFR risk.

A CPA firm's largest client accounts for the vast majority (i.e., 75 percent) of the firm'srevenue. The CPA firm is unlikely to be viewed by outside parties as independent in appearance from this client. True or False?

True

Estimates are opportunities for fraudulent financial reporting (FFR). True or False?

True

Independent financial statement audits increase the credibility of the information presented, which reduces the audited company's cost of capital. True or False?

True

Management is responsible for correcting misstatements identified by the auditor. True or False?

True

The audit risk model is the foundation for audit practice. True or False?

True

The primary reason for the difference in levels of assurance between audits and reviews is the extent of the CPA's testing and evidence gathering. True or False?

True

When inventory is stolen (i.e., misappropriation of assets), and the theft is not discovered, the balance of inventory in the financial statements is overstated. True or False?

True

The failure to record an allowance for doubtful accounts (ADA) would most likely result in a misstatement associated with management's assertion that "A/R are valued i/c/w GAAP" (i.e., Valuation). True or False?

True, GAAP requires A/R to be recorded at net realizable value (i.e., an ADA must be recorded to recognize the possibility of non-payment). If no ADA is recorded, A/R is most likely misstated because it is not valued i/c/w GAAP.

Auditor independence in appearance is used to infer independence in fact (i.e., mind). True or False?

True, bc independence in appearance is observable, it is used to infer what is not observable: independence in mind.

The effectiveness of internal control can vary over time. True or False?

True, can be effective at one point and over time not be effective any more.

Client management refused to provide detailed accounting information to a stockholder. So, the stockholder went to the CPA who provides professional services to the client and requested the information. If the CPA provides the information to the stockholder, he will be in violation of the Confidential Client Information Rule. True or False?

True, the CPA must have the specific consent of a client prior to providing client information to any external party

A CPA would be in violation of the Advertising Rule if she advertised that her employees have strong relationships with agents who work for the IRS. True or False?

True, the claim is misleading and deceptive

The auditor's determination of quantitative materiality for the financial statements as whole is a matter of professional judgment. True or False?

True, there are guidelines that the auditor can follow to calculate quantitative materiality for the F/S as a whole (e.g., a percentage of revenue, income or total assets) the determination of materiality is ultimately a matter of professional judgment.

Attestation engagements are performed by Certified Public Accountants (CPAs) only and not by professionals in other industries (e.g., legal services). True or False?

True, unique to CPA profession

Auditors consider the risks of material misstatement (MM), (i.e., Inherent Risk (I/R) and Control Risk (C/R)) because: A) Auditors want to lower the risks of MM. B) I/R and C/R arise from the same circumstances. C) Auditors design substantive procedures in response to those risks. D) When the risks of MM are high, detection risk is high.

C. Auditors design substantive procedures in response to those risks

Which of the following is not an example of an attestation service? A) Auditing financial statements to ensure they have been prepared in conformity with GAAP. B) Reviewing financial statements to ensure they have been prepared in conformity with GAAP. C) Determining a contest winner by counting votes as an impartial third party. D) Examining an investment schedule to ensure it was prepared in conformity with standards established by the Association for Investment Management and Research (AIMR).

C. Determining a contest winner by counting votes as an impartial third party. (This is assurance, not attestation)

Which of the following statements regarding independence is incorrect? A) An independent CPA exercises objectivity in judgment. B) The value of assurance services is derived from the CPA's independence. C) In a financial statement audit, the auditor must be independent of the shareholders but not of management. D) A CPA may perform a compilation regardless of whether the CPA is independent.

C. In a financial statement audit, the auditor must be independent of the shareholders but not of management.

A CPA performed a financial statement review for her employer because, as a small business, her employer could not afford a financial statement audit. Which Rule of Conduct (if any is violated)? A) Confidential Client Information Rule B) Acts Discreditable Rule C) Independence Rule D) Contingent Fee Rule

C. Independence rule

Which of the following does not differ between audits of U.S. publicly traded and privately held entities? A) The entity that evaluates audit engagements for compliance with applicable standards. B) The requirement for the audit firm to be registered. C) The expression of reasonable assurance regarding the financial statement's conformity with GAAP . D) The set of auditing standards used to perform the engagement.

C. The expression of reasonable assurance regarding the financial statement's conformity with GAAP. The expression of reasonable assurance regarding the F/S's conformity with GAAP does not differ between publicly traded and privately held entities. It is the purpose of every audit engagement.

Which of the following statements is true? A) Fraudulent financial reporting (FFR) is referred to as employee fraud. B) An estimate is an incentive to engage in FFR. C) Meeting analysts EPS forecasts is an incentive for FFR D) Complex accounting policies are opportunities for the misappropriation of assets (MA).

C. meeting analysts EPS forecast is an incentive for FFR

Independence is required of a CPA performing: A) All financial statement services. B) Attestation, but not other assurance services. C) All professional services, including tax services. D) All assurance services.

D. ALL assurance services

The scope of the substantive procedures chosen in an engagement affects: A. control risk B. inherent risk C. FFR risk D. Detection risk

D. Detection risk

Which of the following statements about the PCAOB and the AICPA is incorrect? A) The PCAOB has regulatory authority, whereas the AICPA does not. B) The PCAOB AS and GAAS require auditors to be independent. C) Reports from PCAOB Inspections are publicly available, whereas reports from AICPA peer reviews are not publicly available. D) PCAOB inspections and AICPA peer reviews can lead to monetary fines and other serious punishments.

D. PCAOB inspections and AICPA peer reviews can lead to monetary fines and other serious punishments. The PCAOB can fine and punish firms (e.g., disallowing them from auditing public companies). However, the AICPA's peer review process is designed to focus on professional development and improvement, not imposing penalties.

A company's financial performance has been steadily declining. This factor increases assessed inherent and control risks. True or False?

False

An auditor requested that management make several correcting journal entries so the financial statements would conform with GAAP. The journal entries significantly changed reported financial performance (i.e., converted a small amount of income to a loss). The auditor, not management, is now responsible for the financial statements. True or False?

False, management is responsible for the financial statements

All financial statement services performed by CPAs provide assurance that the financial statements are in conformity with GAAP. True or False?

False, n a financial statement audit, the auditor must be independent of the shareholders but not of management but compilations don't.

A company distributes its Code of Conduct to all new employees. This is an example of the I/C component of Control Activities. True or False?

False, this is an example of the Control Environment component of internal control.

Part of obtaining an understanding of the design and implementation of internal controls is testing them for effectiveness using transaction walkthroughs. True or False?

False, transaction walkthrough is only to observe the process not to test it.


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