Auditing- Text questions 1
An auditor of an entity subject to the rules of the SEC must conduct the financial statement audit in accordance with A. PCAOB standards. B Statements on Standards for Accounting and Review Services. C International Auditing Standards. D Generally Accepted Government Auditing Standards.
A
An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n) A unmodified opinion. B qualified opinion. C unmodified opinion with explanatory paragraph. D qualified opinion with explanatory paragraph regarding consistency.
A
An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards? A Misappropriation of an asset or groups of assets B Clerical mistakes in the accounting data underlying the financial statements C Mistakes in the application of accounting principles D Misinterpretation of facts that existed when the financial statements were prepared
A
Because of the risk of material misstatement, an audit should be planned and performed with an attitude of A professional skepticism. B independent integrity. C objective judgment. D impartial conservatism.
A
Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and A adherence to specific rules or procedures. B accuracy. C evaluation. D internal control.
A
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff is A the client's creditor who sues the accountant for negligence. B can prove the presence of gross negligence that amounts to a reckless disregard for the truth. C is the accountant's client. D bases the action upon fraud.
A
In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the audit fee? A A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan. B A fee based on the outcome of a bankruptcy proceeding. C A fee based on the nature of the service rendered and the CPA's expertise instead of the actual time spent on the engagement. D A fee based on the fee charged by the prior auditor.
A
The date of the CPA's opinion on the financial statements of the client should be A the date of the completion of all important audit procedures. B closing of the client's books. C finalization of the terms of the audit engagement. D submission of the report to the client.
A
The following questions concern the reasons auditors do audits. Choose the best response. The major reason an independent auditor gathers audit evidence is to A form an opinion on the financial statements. B detect fraud. C evaluate management. D assess control risk.
A
Which of the following attributes is likely to be unique to the audit work of CPAs as compared to the work performed by practitioners of other professions? A. Independence B Competence C Due professional care D Complex body of knowledge
A
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? a. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. b. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. c. It is difficult to prepare financial statements that fairly present a company's financial position, operations, and cash flows without the expertise of an independent auditor. d. It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship of the affairs of the business.
A
Which of the following would not have a direct impact in determining the sufficiency of evidence gathered during an audit? A The cost-benefit relationship of obtaining the audit evidence B The quality of audit evidence obtained C The auditor's professional judgment D The risk of material misstatement
A
For each situation, state the applicable rule of conduct and whether it is a violation. A Stefan, CPA, provides tax services, management advisory services, and bookkeeping services and also conducts audits for the same nonpublic client. Because the firm is small, the same person often provides all the services. B Roberta Marteens is a CPA, but not a partner, with three years of professional experience with Johnson and Batchelor, CPAs. She owns 25 shares of stock in an audit client of the firm, but she does not take part in the audit of the client, and the amount of stock is not material in relation to her total wealth. C A nonaudit client requests assistance of Taylor Bordeaux, CPA, in the installation of a local area network. Bordeaux has no experience in this type of work and no knowledge of the client's computer system, so she obtains assistance from a computer consultant. The consultant is not in the practice of public accounting, but Bordeaux is confident of her professional skills. Because of the highly technical nature of the work, Bordeaux is not able to review the consultant's work. D In preparing the personal tax returns for a client, Sarah Milsaps, CPA, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the deductions, she was told, "Ask me no questions, and I will tell you no lies." Milsaps completed the return on the basis of the information acquired from the client. E Silvia Panster, CPA, set up a casualty and fire insurance agency to complement her auditing and tax services. She does not use her own name on anything pertaining to the insurance agency and has a highly competent manager, Meg Emrich, who runs it. Panster often requests Emrich to review the adequacy of a client's insurance with management if it seems underinsured. She believes that she provides a valuable service to clients by informing them when they are underinsured. F Seven small Austin, Texas, CPA firms have become involved in an information project by taking part in an interfirm working paper review program. Under the program, each firm designates two partners to review the audit files, including the tax returns and the financial statements, of another CPA firm taking part in the program. At the end of each review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain authorization from the audit client before the review takes place. H Francisco Hernandez, CPA, serves as controller of a U.S.-based company that has a significant portion of its operations in several South American countries. Certain government provisions in selected countries require the company to file financial statements based on international standards. Francisco oversees the issuance of the company's financial statements and asserts that the statements are based on international financial accounting standards; however, the standards he uses are not those issued by the International Accounting Standards Board.
A- independence rule no violation b- independence rule no violation c- violation of general standards d- integrity/objectivity violation e- independence, integrity/objectivity violation f- CCI violation g- Acct prin violation
A CPA audited the financial statements included in a registration statement for an issuance of securities to the public. If the financial statements contained an omission that caused a purchaser of the securities to sustain damages, the A Securities and Exchange Act of 1934 applies. B purchaser must prove that (s)he was damaged by the omission, but not negligence, privity or reliance. C CPA will be liable only for gross negligence. D due diligence defense is not available to the CPA.
B
An adverse opinion and a disclaimer of opinion A may be used interchangeably. B both require modification of the opinion section. C result in the auditor's withdrawal from the engagement. D indicate situations in which there are material GAAP departures.
B
Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities, Inc., to the SEC. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. The customers have instituted legal action against Donalds based on Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934. Which of the following is likely to be Donalds' best defense? A Section 10b does not apply to them. B They did not intentionally certify false financial statements. C They were not in privity of contract with the creditors. D Their engagement letter specifically disclaimed any liability to any party that resulted from Markum's fraudulent conduct.
B
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on A negligence. B gross negligence. C strict liability. D criminal deceit
B
In the audit of accounts payable, an auditor's procedures will most likely focus primarily on management's assertion about account balances of A existence. B completeness. C accuracy, valuation, and allocation. D classification.
B
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this objective is provided through A continuing professional education. B a system of quality control. C a system of peer review. D compliance with generally accepted reporting standards.
B
The auditor's report contains the following: "We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences A assume responsibility for the other auditor. B indicate a division of responsibility. C require a departure from an unmodified opinion. D are an improper form of reporting.
B
The concept of materiality would be least important to an auditor A. when considering the adequacy of disclosure of a client's illegal act. B effects of a direct financial interest in the client on the CPA's independence. C discovery of weaknesses in a client's internal control structure. D types of evidence to use in testing accounts receivable.
B
Under the Ultramares rule, an accountant that negligently prepares a client's financial report will be liable A to clients and any person or limited foreseeable class of persons who the CPA knows will be relying on the CPA's work. B persons in privity of contract with the CPA and intended third parties. C clients and any third party that foreseeably relied on the accountant's report. D the client only
B
Which of the following best describes the reason why an independent auditor reports on financial statements? A A misappropriation of assets may exist, and it is more likely to be detected by independent auditors. B Different interests may exist between the company preparing the statements and the persons using the statements. C A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work. D Poorly designed internal controls may be in existence.
B
Which of the following best describes what is meant by U.S. auditing standards? A Acts to be performed by the auditor B Measures of the quality of the auditor's performance C Procedures to be used to gather evidence to support financial statements D Audit objectives generally determined on audit engagements
B
Which of the following is not a provision of the Sarbanes-Oxley Act of 2002? A The auditor of an issuer may not provide internal audit outsourcing services for the issuer. B Audit documentation must be maintained for five years. C The lead and reviewing partners must rotate off the audit after five years. D Tax services must be preapproved by the audit committee.
B
Which of the following services can be offered to public company audit clients under SEC requirements and the Sarbanes-Oxley Act? A Tax services for executives involved in financial reporting B Tax planning not involving tax shelters C Internal audit outsourcing D Bookkeeping and other accounting services
B
Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud? A The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole. B Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion. C An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud. D The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements.
B
________________ is generally only available as a defense in suits brought by clients.
Contributory negligence
A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is A not addressed by the AICPA Code of Professional Conduct. B acceptable if sanctioned by the state laws. C prohibited under the AICPA rules of conduct. D a violation of generally accepted auditing standards.
C
An auditor reviews aged accounts receivable to assess likelihood of collection to support management's assertion about account balances of A existence. B completeness. C accuracy, valuation, and allocation. D rights and obligations.
C
An auditor strives to achieve independence in appearance A to comply with auditing standards related to audit performance. B become independent in fact. C maintain public confidence in the profession. D maintain an unbiased mental attitude.
C
In a financial statement audit, the auditor obtains a reasonable level of assurance about whether the financial statements are free of material misstatement in order to express an opinion. In order to obtain reasonable assurance, the auditor must have A prior experience in the industry in which the audit client operates. B examine all documents available that support the financial statements. C obtain sufficient audit evidence. D test controls around significant transaction cycles.
C
Major, Major & Sharpe, CPAs, are the auditors of MacLain Technologies. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements were revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement that included the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if A the misstatements were caused primarily by MacLain. B it can be shown that at least some of the investors did not actually read the audited financial statements. C it can prove due diligence in the audit of the financial statements of MacLain. D MacLain had expressly assumed any liability in connection with the public offering.
C
One of the elements that a plaintiff must prove to hold a CPA who signs off on financial statements in a registration statement liable for misstatements in the financial statements under Section 11 of the 1933 Act is that the A plaintiff relied on the misrepresentation. B CPA intended to deceive. C plaintiff suffered a loss. D CPA was negligent
C
Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is A to provide a means of assurance that internal accounting controls are functioning as planned. B the results of internal examinations of financial and accounting matters to a company's top-level management. C a measure of management performance in meeting organizational goals. D aid to the independent auditor who is conducting the audit of the financial statements.
C
The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the Code? A Disclosing confidential information in compliance with a subpoena issued by a court. B Disclosing confidential information in order to properly discharge the CPA's responsibilities in accordance with the profession's standards. C Disclosing confidential information to another accountant interested in purchasing the CPA's practice. D Disclosing confidential information during an AICPA-authorized peer review.
C
The Public Company Accounting Oversight Board (PCAOB) has the duty to A select the public accounting firm for the issuer's annual audit. B establish rules related to the preparation of audit reports for nonissuers. C conduct investigations concerning registered public accounting firms. D conduct disciplinary proceedings for nonpublic accounting firms
C
The Responsibilities principle underlying AICPA auditing standards includes a requirement that the audit be A adequately planned and supervised. B the auditor's report state whether or not the financial statements conform to generally accepted accounting principles. C professional judgment be exercised by the auditor. D informative disclosures in the financial statements be reasonably adequate.
C
The auditor's responsibility regarding material misstatements caused by fraud is A less than the auditor's responsibility regarding material misstatements caused by error. B greater than the auditor's responsibility regarding material misstatements caused by error. C the same as the auditor's responsibility regarding material misstatements caused by error. D either less than or greater than the auditor's responsibility regarding material misstatements caused by error, depending on the circumstances.
C
Which of the following engagements is most likely to be considered an operational audit? A The auditor determines whether the organization is following provisions of laws and regulations. B The auditor examines information presented in an entity's financial statements to determine whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. C The auditor evaluates the organization's efficiency in processing payments. D The auditor assists the client in preparation of financial statements.
C
Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures? A Complying with laws and regulations B Using statistical sampling techniques C Managing human resources D Considering audit risk and materiality
C
Who establishes auditing standards applicable to private companies and other nonpublic entities in the U.S.? A The Private Company Audit Standards Board B The Financial Accounting Standards Board C The Auditing Standards Board of the AICPA D The Public Company Accounting Oversight Board
C
An auditor will most likely review an entity's periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management's assertion about classes of transactions of A occurrence. B classification. C accuracy. D completeness
D
As compared to an unmodified opinion, an opinion qualified due to a material departure from generally accepted accounting principles would A include an extra paragraph in the opinion section. B include a slight modification to the auditor's responsibility section. C include a slight modification to the introductory paragraph in the opinion section. D indicate that, except for the problem noted, the financial statements are presented fairly
D
If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to A disclose the name of the other auditor. B nature of the inquiry into the other auditor's professional standing and extent of the review of the other auditor's work. C reasons for being unwilling to assume responsibility for the other auditor's work. D portion of the financial statements audited by the other auditor.
D
The 1136 Tenants case was important chiefly because of its emphasis on the legal liability of the CPA when associated with A an SEC engagement. B an audit resulting in a disclaimer of opinion. C letters for underwriters. D unaudited financial statements.
D
What is the meaning of the rule that requires the auditor be independent? A The auditor must adopt a critical attitude during the audit. B The auditor's sole obligation is to third parties. C The auditor may have a direct ownership interest in the client's business if it is not material. D The auditor must be without bias with respect to the client under audit.
D
When determining the auditor's or management's responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect? A The auditor is not responsible for preventing noncompliance with laws and regulations. B Management and those charged with governance are responsible for ensuring that the company's operations are conducted in accordance with all applicable laws and regulations. C The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations. D The auditor is expected to detect the client's noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself.
D
When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n) A adverse opinion. B qualified opinion only. C unmodified opinion. D unmodified opinion with explanatory paragraph
D
Which of the following elements is required to be proven by the plaintiff to hold an accountant liable for gross negligence but not for actual fraud? A Misrepresentation of a material fact B Intention to deceive C Intention to induce client's reliance on the misrepresentation D Reckless action
D
Which of the following is considered an assurance engagement? A Bookkeeping B Preparation C Compilation D Audit
D
Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards? A A title that emphasizes the report is from an independent auditor B The city and state of the audit firm issuing the report C A statement explaining management's responsibilities for the financial statements D The name of the engagement partner
D
Which of the following professional services is an attestation engagement? A. A consulting service engagement to provide computer-processing advice to a client B. The preparation of financial statements from a client's financial records C. An income tax engagement to prepare federal and state tax returns D.An engagement to report on compliance with statutory requirements
D
Which of the following provides authoritative guidance for the auditor of a nonpublic company? A An article in the Journal of Accountancy that discusses new audit requirements B Information obtained from continuing professional education programs C Publication from state CPA societies that provides questions and answers on frequently asked audit questions D Statements on Auditing Standards
D
What assurance does the auditor provide that errors and fraud that are material to the financial statements will be detected?
Error- reasonable fraud- reasonable
Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management refuses to write off the products or to increase the reserve for obsolescence.
FS issue- qualified
According to the profession's ethical standards, which of the following events may justify a departure from GAAP?
New legislation AND Evolution of a new form of business transaction
The nature and extent of a CPA firm's quality control policies and procedures depend on
The cpa's firm size and the nature of the CPA firm practice
Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries' financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end.
Unmodified
In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes.
Unmodified
Your client, Harrison Automotive, has changed from straight-line to sum-of-the-years' digits depreciation. The effect on this year's income is immaterial, but the effect in future years may be highly material. The change is not disclosed in the footnotes.
Unmodified
A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand's ability to continue as a going concern.
Unmodified with emphasis of matter
Approximately 20 percent of the audit of Lumberton Farms, Inc., was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work.
Unmodified- but need to specify differentiation of work
For each engagement described below, indicate whether the engagement is likely to be conducted under international auditing standards, AICPA auditing standards, or PCAOB auditing standards. A. An audit of a public company headquartered in the U.S. listed only on U.S. exchanges. B An audit of a not-for-profit organization with operations in Pennsylvania. C An audit of a private company in the U.S. with public debt traded on a U.S. exchange. D An audit of a U.S. private company to be used for a loan from a publicly traded bank. E An audit of a German private company with public debt in Germany. F An audit of an international nonprofit relief agency headquartered in Switzerland. G An audit of a U.S. broker-dealer registered with the SEC. H An audit of a Mexico-based company whose stock is listed on stock exchanges in the U.S. and whose financial statements will be filed with the SEC. I An audit of a U.S. public company that is a subsidiary of a Japanese company that will be used for reporting by the parent company in Japan.
a. PCAOB auditing standards b. AICPA auditing standards c. PCAOB auditing standards d. AICPA auditing standards e. International auditing standards f. International auditing standards g. PCAOB auditing standards h. PCAOB auditing standards (reporting in Mexico will be under international auditing standards) i. International auditing standards
Which of the following best describes the operational audit? A It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company. B It concentrates on implementing financial and accounting control in a newly organized company. C It focuses on verifying the fair presentation of a company's results of operations. D It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of internal controls
d
The auditor will use a defense of ___________________ in a suit brought under the 1933 Securities Act.
due diligence
The broadest class of third parties under common law is known as _______________.
foreseen users
A third party lacking privity will often be successful in bringing a claim against the auditor if they can demonstrate ___________________ or ___________________.
fraud gross negligence
An auditor who qualified an opinion because of an insufficiency of audit evidence should refer to the scope limitation in the
in the opinion section
Based on the ruling in Hochfelder v. Ernst & Ernst, an auditor generally must have knowledge and ___________ to be found guilty of a violation of Rule 10b-5 of the 1934 Act.
intent to deceive
Under the Ultramares doctrine, an auditor is generally not liable for ___________________ to third parties lacking ___________________.
ordinary negligence privity of contract
Under the 1933 Act, plaintiffs do not have to demonstrate ___________________, but need merely demonstrate the existence of a(n) ___________________.
reliance on the FS material error or omission
After passage of the Private Securities Litigation Reform Act, auditors generally have ___________________ liability in federal securities cases.
separate and proportionate
