Exam 1
Which of the following statements are true? a. Unless an independent audit can provide reasonable assurance that financial information has not been materially misstated because of fraud, it has little, if any, value to society. b. Repeated revelations of accounting scandals and audit failures related to undetected frauds have seriously damaged public confidence in external auditors. c. A strong ethical tone at the top of an organization that permeates corporate culture is essential in mitigating the risk of fraud. d. All of the above. e. None of the above
All of the above
Which of the following are affected by the quality of an organization's internal controls? a. Reliability of financial data. b. Ability of management to make informed business decisions. c. Ability of the organization to remain in business. d. All of the above. e. Only a and c.
All of the above.
Which of the following statements is true regarding the PCAOB? a. The PCAOB is a nonprofit corporation, not an agency of the U.S. government. b. The PCAOB will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to the interests of investors and the public. c. The PCAOB has authority to set standards related to public company audit reports and to conduct inspections of registered external audit firms. d. All of the above. e. None of the above.
All of the above.
Which of the following types of transactions did WorldCom management engage in as part of that company's fraudulent financial reporting scheme? a. Recorded barter transactions as sales. b. Used restructuring reserves from prior acquisitions to decrease expenses. c. Capitalizing line costs rather than expensing them. d. All of the above. e. None of the above.
All of the above.
All CPA firms registered with the PCAOB are required to undergo a peer review annually. A) True B) False
B) False
The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publicly traded and private companies. A) True B) False
B) False
The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the: A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q.
B) Form 8-K.
Which of the following statements is true regarding the deterrence and detection of fraud in financial reporting? a. Preventing and detecting fraud is the job of the external auditor alone. b. An effective fraud risk management program can be expected to prevent virtually all frauds, especially those perpetrated by top management. c. Communication among those involved in the financial reporting process is critical. d. All of the above. e. None of the above.
Communication among those involved in the financial reporting process is critical.
Which of the following principles would not be considered a principle of an organization's control environment? a. Independence and competence of the board. b. Competence of accounting personnel. c. Structures, reporting lines, and authorities and responsibilities. d. Commitment to integrity and ethical values. e. They would all be considered principles of the control environment.
Competence of accounting personnel.
What are the components of internal control per COSO's Internal Control-Integrated Framework? a. Organizational structure, management philosophy, planning, risk assessment, and control activities. b. Control environment, risk assessment, control activities, information and communication, and monitoring. c. Risk assessment, control structure, backup facilities, responsibility accounting, and natural laws. d. Legal environment of the firm, management philosophy, organizational structure, control activities, and control assessment.
Control environment, risk assessment, control activities, information and communication, and monitoring.
Which one of the following components of internal control over financial reporting sets the tone for the organization? a. Risk assessment. b. Control environment. c. Information and communication. d. Monitoring Risk Assessment Organizations face risks of material misstatement in their financial reports.
Control environment.
Which of the following statements is false? a. An auditor in public practice shall be independent in the performance of professional services. b. In performing audit services, the auditor shall maintain objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate his or her judgment to others. c. In performing audit services, the auditor may accept only contingent fees for publicly traded audit clients. d. An auditor in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive.
In performing audit services, the auditor may accept only contingent fees for publicly traded audit clients.
Which of the following statements regarding internal control is false? a. Internal control is a process consisting of ongoing tasks and activities. b. Internal control is primarily about policy manuals, forms, and procedures. c. Internal control is geared toward the achievement of multiple objectives. d. A limitation of internal control is faulty human judgment. e. All of the above statements are true.
Internal control is primarily about policy manuals, forms, and procedures.
Which of the following are the responsibilities of the external auditor in auditing financial statements? a. Maintaining internal controls and preparing financial reports. b. Providing internal assurance on internal control and financial reports. c. Providing internal oversight of the reporting process. d. Providing independent assurance on the financial statements.
Providing independent assurance on the financial statements.
Which of the following is not a threat to auditor independence? a. Self-review threat. b. Advocacy threat. c. Adverse interest threat. d. Regulatory interest threat.
Regulatory interest threat.
Which of the following factors does not create a demand for external audit services? a. Potential bias by management in providing information. b. Requirements of the state boards of accountancy. c. Complexity of the accounting processing systems. d. Remoteness between a user and the organization.
Requirements of the state boards of accountancy.
Audit committee activities and responsibilities include which of the following? a. Selecting the external audit firm. b. Approving corporate strategy. c. Reviewing management performance and determining compensation. d. All of the above. e. None of the above.
Selecting the external audit firm.
Which of the following factors is not a driver of audit quality as discussed by the FRC? a. Audit firm culture. b. Skills and personal qualities of client management. c. Reliability and usefulness of audit reporting. d. Factors outside the control of auditors
Skills and personal qualities of client management.
According to the AICPA, the purpose of an audit is to enhance the degree of confidence that users can place in the financial statement.
TRUE
An audit must be performed by persons who can make sound judgments relating to complex accounting issues.
TRUE
An auditor must be independent in fact and in appearance.
TRUE
Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred
TRUE
Audit firms use close supervision and review of audit work to ensure that audits are conducted with due professional care.
TRUE
Audit procedures can be classified as risk assessment procedures, test of controls or substantive tests.
TRUE
Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit.
TRUE
Developing an understanding of the client's business and industry is essential to proficiency as discussed in the PCAOB's general standards.
TRUE
Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for audit conclusions.
TRUE
Part of the understanding the client process of an audit is identifying factors that may require extension or modification of the audit tests, such as potential related-party transactions or the possibility of material misstatements.
TRUE
Scanning is a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance.
TRUE
The AICPA's fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results.
TRUE
The Generally Accepted Auditing Standards represent the minimum standards for performing an audit.
TRUE
The PCAOB requires the audit be conducted with due professional care, which is a standard of care that would be expected of a reasonably prudent auditor.
TRUE
The PCAOB's fieldwork standards include planning and supervision, understanding the entity and its internal control structure, and obtaining sufficient appropriate audit evidence.
TRUE
The PCAOB's general standards provide guidance to audit firms in selecting and training their professionals.
TRUE
The PCAOB's second fieldwork standard requires auditors develop an understanding of the client's controls as an important prerequisite to developing specific audit tests.
TRUE
The process of understanding the client includes the preparation of the audit program.
TRUE
The standards of the PCAOB encompass three broad categories including: general standards, fieldwork standards and reporting standards.
TRUE
Without independence, the value of the auditor's attestation function would be nil.
TRUE
With regard to client acceptance/continuance decisions, which of the following is false? a. Client acceptance/continuance decisions are one part of the audit firm's overall portfolio management activities. b. The primary driver of the client acceptance/continuance decision is the level of audit fees that the audit firm can charge the client. c. One can view an individual audit client as analogous to an individual stock in an investment portfolio. d. Audit firms are not required to provide audit services for all organizations requesting an audit.
The primary driver of the client acceptance/continuance decision is the level of audit fees that the audit firm can charge the client.
A key responsibility of the internal audit function is to provide assurance on the reliability of financial reporting to extrernal stakeholders of a company.
False
Auditing is the process of verifying the accuracy of the financial statements
False
Auditors generally need quantitative and mathematical skill sets more than they need communication and leadership skills.
False
Audits of publicly traded companies must be performed by multinational accounting firms
False
If the auditor has no reservations about management's financial statements then the auditor will issue a qualified opinion
False
In all states, a CPA must have completed at least 150 hours of college semester hours to receive their license
False
In an audit, management is considered the "client"
False
The PCAOB is a public board, appointed by congress, to provide oversight of the firms that audit public companies registered with the sec
False
The center for audit quality has the primary authority to set auditing standards
False
The center for audit quality was stated by the international federation of accountants
False
The overall objective of an audit is to obtain assurance whether the financial statements are free of misstatements
False
The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement.
FALSE
The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the: A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q.
A) Form S-1.
If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter, the auditor should generally seek guidance from which of the following sources? A) Statements on Auditing Standards B) Statements on Standards for Accounting and Review Services C) Regulations issued by the Securities and Exchange Commission D) The AICPA Code of Professional Conduct
A) Statements on Auditing Standards
The Public Company Accounting Oversight Board: A) performs inspections of the quality controls of audit firms that audit public companies. B) establishes auditing standards that must be followed by CPAs on all audits. C) oversees auditors of private companies. D) performs any of the above functions.
A) performs inspections of the quality controls of audit firms that audit public companies.
Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation. A. True B. False
A. True
Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. A) True B) False
A. True
Which of the following factors is not an example of a risk relevant to the client continuance decision? a. Client entity characteristics. b. Independence risk factors. c. Third-party/due diligence risk factors. d. Advocacy threat.
Advocacy threat.
The reporting standard of the PCAOB includes consistency, disclosure, and due professional care.
FALSE
The standards of the PCAOB consist of seven principles.
FALSE
Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm. The PCAOB: A) can enforce disciplinary action against the accounting firm / report the matter to the Securities and Exchange Commission / suspend the license to practice of the CPA guilty of the violation Yes Yes Yes B) can enforce disciplinary action against the accounting firm / report the matter to the Securities and Exchange Commission / suspend the license to practice of the CPA guilty of the violation Yes Yes No C) can enforce disciplinary action against the accounting firm / report the matter to the Securities and Exchange Commission / suspend the license to practice of the CPA guilty of the violation Yes No No D) can enforce disciplinary action against the accounting firm / report the matter to the Securities and Exchange Commission / suspend the license to practice of the CPA guilty of the violation No No No
B) can enforce disciplinary action against the accounting firm / report the matter to the Securities and Exchange Commission / suspend the license to practice of the CPA guilty of the violation Yes Yes No
Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit: A) both private and public companies. B) public companies only. C) private companies, public companies, and nonprofit entities. D) private companies only.
B) public companies only.
Which of the following is a common rationalization for fraudulent financial reporting? a. This is a one-time transaction and it will allow the company to get through the current financial crisis, but I'll never do it again. b. I am only borrowing the money; I will pay it back next year. c. Executives at other companies are getting paid more than I am, so I deserve the money. d. The accounting rules don't make sense for our company, and they make our financial results look weaker than is necessary. Therefore, we have good reason to record revenue using a non-GAAP method. e. Both (a) and (d).
Both (a) and (d)
For privately held companies who is responsible for establishing auditing standards? A) Securities and Exchange Commission B) Public Company Accounting Oversight Board C) Auditing Standards Board D) National Association of Accounting
C) Auditing Standards Board
Which of the following are audit standards used in professional practice by audit firms? A) International Standards on Auditing / U.S. Generally Accepted Auditing Standards / PCAOB Auditing Standards Yes No No B) International Standards on Auditing / U.S. Generally Accepted Auditing Standards / PCAOB Auditing Standards Yes Yes No C) International Standards on Auditing / U.S. Generally Accepted Auditing Standards / PCAOB Auditing Standards Yes Yes Yes D) International Standards on Auditing / U.S. Generally Accepted Auditing Standards / PCAOB Auditing Standards No Yes Yes
C) International Standards on Auditing / U.S. Generally Accepted Auditing Standards / PCAOB Auditing Standards Yes Yes Yes
The International Standards on Auditing (ISAs): A) are issued by the AICPA. B) override a country's regulations governing the audit of a company. C) has many of the same standards as the Auditing Standards Board (ASB). D) must be followed by companies whose stock is traded in the U.S.
C) has many of the same standards as the Auditing Standards Board (ASB).
A free market can only exist if there is sharing of perfectly reliable information
False
The AICPA has authority to establish standards and rules in all but which of the following areas? A) Auditing standards applicable to financial statements of private companies B) Compilation and review standards C) Professional conduct D) Auditing standards applicable to financial statements of private and public companies
D) Auditing standards applicable to financial statements of private and public companies
The organization that is responsible for providing oversight for auditors of public companies is called the ________. A) Auditing Standards Board B) American Institute of Certified Public Accountants C) Public Oversight Board D) Public Company Accounting Oversight Board
D) Public Company Accounting Oversight Board
Which of the following is a true statement regarding auditing standards? A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies. B) PCAOB auditing standards are applicable to entities outside the U.S. C) There are no similarities between PCAOB standards and International Standards on Auditing. D) The Auditing Standards Board has revised most of its standards to converge with the international standards.
D) The Auditing Standards Board has revised most of its standards to converge with the international standards.
Members of the Public Company Accounting Oversight Board are appointed and overseen by: A) the U.S. Congress. B) the American Institute of Certified Public Accountants. C) the Auditing Standards Board. D) the Securities and Exchange Commission.
D) the Securities and Exchange Commission.
Which of the following audit committee responsibilities has the NYSE mandated? a. Obtaining a report each year by the internal auditor that addresses the company's internal control procedures, any quality-control or regulatory problems, and any relationships that might threaten the independence of the internal auditor. b. Discussing in its meetings the company's earnings press releases as well as financial information and earnings guidance provided to analysts. c. Reviewing with the internal auditor any audit problems or difficulties that they have had with management. d. All of the above. e. None of the above.
Discussing in its meetings the company's earnings press releases as well as financial information and earnings guidance provided to analysts.
Which of the following statements is false regarding the risk assessment component of internal control? a. Risk assessment includes assessing fraud risk. b. Risk assessment includes assessing internal and external sources of risk. c. Risk assessment includes the identification and analysis of significant changes. d. Economic changes would not be considered a risk that needs to be analyzed as part of the risk assessment process.
Economic changes would not be considered a risk that needs to be analyzed as part of the risk assessment process.
Auditing standards requires technical knowledge in auditing but not in the client's business.
FALSE
Generally accepted auditing standards are the cornerstone for the interpretation of financial accounting.
FALSE
Recalculation involves independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation.
FALSE
Test of controls are a type of substantive procedure.
FALSE
The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies.
FALSE
The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA.
FALSE
Which of the following statements related to rights theory is false? a. The highest-order rights include the rights to life, autonomy, and human dignity. b. Second-order rights include rights granted by the government, such as civil rights and legal rights. c. Third-order rights include social rights, such as the right to higher education, to good health care, and to earning a living. d. Fourth-order rights include one's essential interests or personal tastes.
Fourth-order rights include one's essential interests or personal tastes.
Utilitarianism does not require which of the following actions when a person considers how to resolve an ethical dilemma? a. Identification of the potential problem and courses of action. b. Identification of the potential direct or indirect impact of actions on each affected party who has an interest in the outcome. c. Identification of the motivation of the person facing the ethical dilemma. d. Assessment of the desirability of each action for each affected party
Identification of the motivation of the person facing the ethical dilemma.
Audit quality involves which of the following? a. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. b. Performing an audit in accordance with GAAP to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAS and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. c. Performing an audit in accordance with GAAS to provide absolute assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud. d. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements contain no misstatements due to errors or fraud.
Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.
Which of the following creates an opportunity for committing fraudulent financial reporting in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules.
Poor internal control.
Which of the following factors creates an opportunity for fraud to be committed in an organization? a. Management demands financial success. b. Poor internal control. c. Commitments tied to debt covenants. d. Management is aggressive in its application of accounting rules.
Poor internal control.
The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB's primary functions? .
The PCAOB has responsibility for providing oversight to auditors of public companies, establishing auditing and quality control standards for public company audits and performing inspections of the quality controls at audit firms performing those audits.
The Sarbanes-Oxley Act enacted which of the following provisions relevant to auditors and the audit opinion formulation process? a. The PCAOB was established, and it has the power to conduct inspections of public company audits. b. The lead audit partner and reviewing partner must rotate off the audit of a publicly traded company at least every 10 years. c. In the annual report, management must acknowledge that they are required to have the company's internal audit function attest to the accuracy of the annual reports. d. All of the above. e. None of the above.
The PCAOB was established, and it has the power to conduct inspections of public company audits.
Which of the following is not part of management's fraud risk assessment process? a. The assessment considers ways the fraud could occur. b. The assessment considers the role of the external auditor in preventing fraud. c. Fraud risk assessments serve as an important basis for determining the control activities needed to mitigate fraud risks. d. The assessment considers pressures that might lead to fraud in the financial statements.
The assessment considers the role of the external auditor in preventing fraud.
Which of the following examples best represents an example of fraudulent financial reporting? a. The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors. b. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations. c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris. d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.
The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations.
What is the primary difference between fraud and error in financial statement reporting? a. The materiality of the misstatement. b. The intent to deceive. c. The level of management involved. d. The type of transaction effected.
The intent to deceive.
Which of the following is an implication resulting from the results of the COSO studies? a. The most common frauds involve outright theft of assets. b. The individuals most often responsible for fraud include low-level accounting personnel, such as accounts payable clerks. c. The majority of frauds take place at smaller companies listed on the OTC market rather than at larger companies listed on the NYSE. d. All of the above. e. None of the above.
The majority of frauds take place at smaller companies listed on the OTC market rather than at larger companies listed on the NYSE.
A bank using Milton companys financial statements to determine the credit worthiness of a potential loan to milton is a good exam of the need for unbiased reporting
True
An integrated audit requires the auditor to assess the effectiveness of internal controls
True
Auditing is the process of attesting to assertions about economic actions and events
True
Auditors should conduct their work with an attitude of professional skepticism
True
Bondholders are one of the users of financial statements
True
Independence is often referred to as the cornerstone of the auditing profession
True
Users rely on the auditors independent assessment of ifnancial statement presentation because few users have direct knowledge of the company's operations
True
auditing exists because users need unbiased information on which to assess management performance and make economic decisions.
True
A financial statement audit is a systematic process of objectively obtaining and evaluating evidence.
True.
The need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information
True.
Management may have incentive to bias financial information, but the various users of the statements are not likely to have conflicting interests in the financial information
false
