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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
15) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board
(PCAOB). What are the PCAOB’s primary functions? Who performed these functions prior to
the PCAOB?
16) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors
of publically traded and private companies.
A) True B) False
17) All CPA firms registered with the PCAOB are required to undergo a peer review annually.
A) True B) False
18) 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.
19) 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.
20) 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
B)
Company Controller Shareholders Board of Directors
No No Yes
C)
Company Controller Shareholders Board of Directors
Yes Yes No
D)
Company Controller Shareholders Board of Directors
Yes No No
4) The scope paragraph of the standard unqualified audit report states that the audit is designed
to:
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.
5) The audit report date on a standard unqualified report indicates:
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and Exchange
Commission.
C) the last date on which users may institute a lawsuit against either client or auditor.
D) the last day of the auditor’s responsibility for the review of significant events that occurred
subsequent to the date of the financial statements.
6) The standard audit report refers to GAAS and GAAP in which paragraphs?
A)
GAAS GAAP
Scope only Opinion only
B)
GAAS GAAP
Intro only Scope and Opinion
C)
GAAS GAAP
Intro and Scope Opinion only
D)
GAAS GAAP
Intro only All paragraphs
7) Which of the following is not explicitly stated in the standard unqualified audit report?
A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting principles.
C) The auditors believe that the audit provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.
8) If an auditor performs an audit of a public company, the scope paragraph should make
reference to which standards?
A) GAAP.
B) GAAS.
C) Standards issued by the PCAOB (U.S.).
D) International Audit Standards.
9) The introductory paragraph of the standard audit report states that the financial statements are:
A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.
10) The introductory paragraph of the standard audit report performs which functions?
I. State the CPA has performed an audit.
II. Lists the financials being audited.
III. States the financials are the responsibility of the auditor.
A) I and II B) I and III C) II and III D) I, II and III
11) Which of the following statements are true?
I. The introductory paragraph states that management is responsible for the preparation and
content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of those accounting
principles, estimates, and financial statement disclosures.
A) I only B) II only C) I and II D) Neither I nor II
12) The introductory paragraph of the standard audit report states that the auditor is:
A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) responsible for the opinion on the financial statements.
D) jointly responsible for the financial statements with management.
13) If the balance sheet of a company is dated December 31, 2011, the audit report is dated
February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has
searched for subsequent events that occurred up to:
A) December 31, 2011. B) January 1, 2012. C) February 8, 2012. D) February 15, 2012.
14) Which of the following is true concerning financial statements issued by a U.S. entity to the
Securities and Exchange Commission?
A) Financial statements can be prepared using International Financial Reporting Standards.
B) The United States now allows an auditor to perform an audit of financial statements of a U.S.
entity in accordance with both GAAS and International Audit Standards.
C) The United States only allows an auditor to perform an audit of financial statement of an
entity in accordance with GAAS if they are using International Financial Reporting Standards.
D) An audit that uses both the GAAS and International Audit standards must modify the scope
paragraph to include both sets of standards.
15) Most auditors believe that financial statements are “presented fairly” when the statements are
in accordance with GAAP, and that it is also necessary to:
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.
16) In which of the following situations would the auditor most likely issue an unqualified
report?
A) The client valued ending inventory by using the replacement cost method.
B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method.
C) The client valued ending inventory at selling price rather than historical cost.
D) The client valued ending inventory by using the First-In-First-Out (FIFO) method, but
showed the replacement cost of inventory in the Notes to the Financial Statements.
17) Brown Co.’s financial statements adequately disclose uncertainties that concern future
events, the outcome of which are not reasonably estimable. The auditor’s report should be a(n):
A) unqualified opinion. B) disclaimer. C) qualified opinion. D) adverse opinion.
18) An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the
year ended December 31, 2012 was completed on March 1, 2013, and the report was issued to
Javlin Corporation, a private company, on March 13, 2013. List any deficiencies in this report.
Do not rewrite the report.
We have examined the accompanying financial statements of Dalton Corporation as of
December 31, 2012. These financial statements are the responsibility of the company’s
management. Our responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted accounting principles. Those
principles require that we plan and perform the audit to provide reasonable assurance about
whether the financial statements are free of misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, except for the effects of not capitalizing certain lease obligations that should be
capitalized in order to conform with generally accepted accounting principles, the financial
statements referred to above present accurately the financial position of Jacob Corporation as of
December 31, 2012, in conformity with accounting principles generally accepted in the United
States of America.
19) Describe the standard unqualified report to be issued for an audit of a private company.
Begin by specifying the seven parts of the report, and then discuss the contents of each part.
20) Presented below is an independent auditor’s report for a private company prepared by the
firm of Harrington and Perry, LLP.
Auditor’s Report
To the president and management of EPM, Inc.
We have examined the accompanying balance sheets and statements of income, retained
earnings, and cash flows of EPM, Inc., as of December 31, 2012 and 2011. We performed our
examination in accordance with auditing standards generally accepted in the United States of
America and examined, on a test basis, evidence supporting the accounting principles used and
estimates made by management.
In our opinion, the financial statements referred to above accurately present the financial position
of EPM, Inc., in conformity with generally accepted accounting principles.
Harrington and Perry, LLP December 31, 2012
Other information:
EPM, Inc., is a for-profit corporation and publishes comparative financial statements for
distribution to shareholders, potential investors, and the general public. The client has a calendar
year-end. For the most recent audit, the auditor completed all significant fieldwork on March 5,
2013 and issued the audit report on March 16, 2013. During 2012, EPM changed its method of
depreciating long-term assets and properly reflected the effect of the change in the current year’s
financial statements, restated the prior year’s financial statements, and properly discussed the
change in a footnote (Note 4) to those statements. The auditors are satisfied that the change was
preferable.
Required:
Consider all the facts given and rewrite the complete auditor’s report, including report title,
address, body of report, name of firm, and audit report date.
6) One of the AICPA’s Ethical Pr inciples deals w ith the public inter est. It states that member s
should accept the obligation to act in a w ay that w ill:
A)
C)
Honor the pub lic tr ust Ser ve the client’s inter est
Yes No
D)
7) Accor ding to the Pr inciples section of the Code of Pr ofessional Conduct, all member s:
A) should be ind ependent in fact and in appear ance at all times.
B) in public pr actice should be independent in fact and in appear ance at all times.
C) in public pr actice should be independent in fact and in appearance w hen pr oviding auditing
and other attestations ser vices.
D) in public pr actice should be independent in fact and in appear ance when pr oviding auditing,
tax, and other attestation services.
8) W hich of the follow ing statements best descr ibes the enfor ceability of the Inter pr etations
of the Rules of Conduct?
A) The Inter pr etations ar e not enfor ceable.
B) The Inter pr etations ar e enfor ceable.
C) Th e Inter pr etations may be enfor ceable if they have been r eview ed and appr oved by the
AICPA’s Division of Pr ofessional Ethics.
D) The Inter pr etations ar e not enfor ceable, but a pr a ctitioner must j ustify depar tur e fr om
them.
9) Of the four par ts of the AICPA’s Co de of Pr ofessional Conduct , w hich par t is enfor
ceable?
A) Ethical Rulings
B) Rules o f Conduct
C) Pr inciples
D) Inter pr etations
10) Ethical Rulings ar e:
I. Explanations r elating to br oad hypothetical cir cumstances. II. Not enfor ceable, but one must
j ustify depar tur e. III. Explanations r elating to specific factual cir cumstances.
A) I and II B) I and III C) II and III D) I, II, and III
11) The A ICP A’s Co de of Pr ofessional Conduct r equir es independence for all:
A) attestation engagements.
B) ser vices per for med by accountants in public pr actice.
C) accounting and auditing ser vices per formed.
D) pr ofessional w or k per for med by CPAs.
12) A member fir m of the A ICP A is not only r esponsible for its complianc e w ith the Rules of
Conduct, but it is also r esponsible for compliance by its:
A)
B)
C)
D)
13) Four of the six Ethical Pr inciples in the AICP A’s Code of P rofess ional Conduct ar e
equally applicable to all members of the A ICPA . W hich of the follow ing pr inciples applies
only to members in public pr actice?
A) Scop e and Natur e of S er vices
B) Integr ity
C) Due Car e
D) The Public Inter est
14) The Code of Pr ofessional Conduct is established by the membership of the AICPA, and the
Inter pr etations of the Rules of Conduct ar e pr epar ed by the:
A) Financial Accounting Standar ds Boar d.
B) Secur it ies and Exchange Commission.
C) CPA lic ensing agencies w ithin each state.
D) Pr ofessional Ethics Executive Committee of the AICPA .
15) Identify and descr ibe each of the four par ts to the AICP A’s Code of P rofess ional Conduct
. Also discuss w hich parts ar e officially enfor ceable and w hich ar e not.
16) Br iefly descr ibe the advantages and disadvantages of a cod e o f conduct based on gener al
statements of ideal c onduct as opposed to specific r ules that define unacceptable behavior .
17) W hat ar e the six Ethical Pr inciples stated in the Code of P rofess ional Conduct ? Br iefly
discuss each pr inciple. Ar e these pr inciples enfor ceable?
18) An advantage of specific r ules in the Code of P rofess ional Conduct is the enfor ceability of
minimum behavior and per for mance standar ds.
A) Tr ue B) False
19) The Sar banes-Oxley Act per mits the auditor to per for m a w ide var iety of non -audit ser
vices for audit clients.
A) Tr ue B) False
20) An advantage of the pr inciples of pr ofessional conduct in the Code of P rofess ional
Conduct is that they ar e mor e easily enfor ced than ar e the specific r ules of conduct.
A) Tr ue B) False
B)
Punitive damages Compensatory damages
No No
C)
D)
9) Under the law s of agency, par tner s of a CPA fir m may be liable for the w or k of other s on
w hom they r ely. This w ould not include:
A) employees of the CPA fir m.
B) employees of the audit client.
C) other CPA fir ms engaged to do par t of the audit w or k.
D) specialists employed by the CPA fir m to pr ovide technical advice on the audit.
10) “Absence of r easonable car e that can be expected o f a p er son in a set of cir cumstances”
defines:
A) p ecuniar y negligence.
B) gr oss negligence.
C) extr eme negligence.
D) or dinar y negligence.
11) An example of a br each of contr act w ould likely include:
A) an auditor ‘s r efusal to r etur n the client’s gener al ledger book until the client paid last year
‘s audit fees.
B) a bank’s claim that an auditor had a duty to uncover mater ial er r or s in financial statements
that had been r elied on in making a loan.
C) a CPA fir m’s failur e to complete an audit on the agr eed -upon date because the fir m ha d a
backlog of other w or k w hich was mor e lucrative.
D) an auditor ‘s claim that the client staff is unqualified.
12) Pr ivity of contract exists betw een:
A) auditor and the feder al gover nment.
B) auditor and thir d parties.
C) auditor and client.
D) auditor and client attor ney.
13) An individual w ho is n ot party to the contr act betw een a CPA and the client, but w ho is
known by both and is intended to r eceive cer tain benefits fr om the contr act is known as:
A) a thir d party.
B) a common law inher itor .
C) a tor t.
D) a thir d-party beneficiary.
14) Law s that have been passed by the U.S. Con gr ess and other gover nmental units ar e:
A) statut or y laws. B) j udicial law s. C) fed er al law s. D) common law s.
15) The assessment against a defendant of the full loss suffer ed by a plaintiff regar dless of the
extent to w hich other parties shar ed in the wr ongdoing is called:
A) separ ate and pr oportionate liability.
B) shared liability.
C) unitary liability.
D) joint and sever al liability.
16) The assessment against a defendant of that por tion of the damage caused by the defendant’s
negligence is called:
A) separ ate and pr oportionate liability.
B) j oint and several liability.
C) shar ed liability.
D) unitar y liability.
17) Audit fr aud occur s when:
A) a misstatement is made and ther e is both know ledge of its falsity and the intent to deceive.
B) a misstatement is made and ther e is know ledge o f its falsity but no intent to deceive.
C) the auditor lacks even slight car e in the per for mance in per for ming the audit.
D) the auditor has an absence of r easonable car e in the per for mance of the audit.
18) W hich of the follow ing most accurately descr ibes c onstr uctive fr aud?
A) Absence of r easonable car e
B) Lack of slight car e
C) Know ledge and intent to deceive
D) Extr eme or unusual negligence w ithout the intent to deceive
19) W hich of the follow ing most accurately descr ibes fr aud?
A) Absence of r easonable car e
B) Lack of slight car e
C) Know ledge and intent to deceive
D) Extr eme or unusual negligence w ithout the intent to deceive
20) A thir d-party beneficiary is one w hich:
A) has failed to establish legal standing befor e the cour t.
B) do es not have pr ivity of contract and is unknow n to th e contr acting parties.
C) d oes not have pr ivity of contract, but is know n to the contr acting parties and intended to
benefit under the contr act.
D) may establish legal standing befor e the cour t after a contr act has been consummated.
B)
C)
D)
6) In cer tifying their annual financial statements, the CEO and CFO of a public company cer tify
that the financial statements comply w ith the r equir ements of:
A) G AAP.
B) the Sar banes-Oxley Act.
C) the Secur ities Exchange Act of 1934.
D) G AAS.
7) W hich of the follow ing statements is tr ue of a public company’s financial statements?
A) Sar banes-Oxley r equir es the CEO only to cer tify the financial statements.
B) Sar banes-Oxley r equir es the CFO only to cer tify the financial statements.
C) Sar banes-Oxley r equir es the CEO and CFO to c er tify the financial statements.
D) Sar banes-Oxley neither r equir es the CEO nor the CFO to cer tify the financial statements.
8) The r esponsibility for the pr epar ation of the financial statements and the accompanying
footnotes belongs to:
A) the auditor .
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.
9) Responsibility for the fair pr esentation of financial statements r ests equally w ith
management and the auditor .
A) Tr ue B) False
10) The auditor ‘s best defense w hen mater ial misstatements ar e not uncover ed is to have
conducted the audit:
A) in accor dance w ith gener ally accepted auditing standar ds.
B) as effectively as r easonably possible.
C) in a timely manner .
D) only after an adequate investigation of the management team.
11) In or der to pr ovide r easonable assurance the audit must be per for med w ith an attitude of
pr ofessional skepticism. W hich of the follow ing is most cor r ect r egar ding the “attitude” of
pr ofessional skepticism?
A) auditor s should assume that management is dishonest
B) auditor s should assume that management is neither dishonest nor honest
C) auditor s should assume that management is honest and mistakes ar e unintentional
D) auditor s should assume that management is incumbent in pr epar ing financial statements
12) W hich of the follow ing is not one of the r easons that auditors pr ovide only reasonable
assur ance on the financial statements?
A) The auditor commonly examines a sample, r ather than the entir e population of tr ansactions.
B) Accounting pr esentations contain complex estimates w hich involve uncer tainty.
C) Fr audulently pr epar ed financial statements ar e often difficult to detect.
D) A uditor s believe that r easonable assur ance is sufficient in the vast maj or ity of cases.
13) W hich of the follow ing statements is most corr ect r egar ding er r or s and fr aud?
A) An er r or is unintentional, w her eas fr aud is intentional.
B) Fr auds occur mor e often than er r or s in financial statements.
C) Er r or s ar e always fraud and fr auds ar e always er r or s.
D) A uditor s have mor e r esponsibility for finding fr aud than err or s.
14) W hen an auditor believes that an illegal act may have occurr ed, the auditor should first:
A) inquir e o f management at a level above those likely to be involved.
B) consult w ith legal counsel of other s know ledgeable about t he illegal acts.
C) accumulate additional evidence.
D) w ithdraw fr om the engagement.
15) The auditor has no r esponsibility to plan and per for m the audit to obtain r easonable assur
ance that misstatements, w hether caused by err or s or fr aud, that ar e not _ __ _ are detected.
A) impor tant to the financial statements
B) statistically significant to the financial statements
C) mater ial to the financial statements
D) id entified by the client
16) Fr audulent financial r epor ting is most likely to be committed by w hom?
A) line employees o f the company
B) outside member s of the company’s boar d of dir ector s
C) company management
D) the company’s auditor s
17) W hich of the follow ing w ould most likely be deemed a dir ect -effect illegal act?
A) violation of feder al employment laws
B) violation of feder al envir onmental r egulations
C) violation of fed er al income tax law s
D) violation of civil r ights laws
18) The concept o f r easonable assur ance indicates that the auditor is:
A) not a guar antor of the cor r ectness of the financial statements.
B) not r esponsible for the fair ness of the financial statements.
C) r esponsible only for issuing an opinion on the financial statements.
D) r esponsible for finding all misstatements.
19) W hich of the follow ing is the auditor least likely to do w hen aw ar e of an illegal act?
A) Discuss the matter w ith the client’s legal counsel.
B) Obtain evidence about th e potential effect of the illegal act on the financial statements.
C) Contact the local law enfor cement officials r egar ding potential cr iminal wr ongdoing.
D) Consider the impact of the illegal act on the r elationship w ith the company’s management.
20) Auditing standar ds r equir e that an audit be designed to pr ovide r easonable assurance of
detecting:
A) mater ial err or s in the financial statements.
B) fr aud in the financial statements.
C) mater ial err or s and fr aud in the financial statements.
D) inadequate disclosur e in the notes to the financial statements.
B)
C)
Sample size Timing of audit pr ocedur es
Yes No
D)
2) Audit pr ocedur es ar e concer ned w ith the natur e, extent, and timing in gathering audit
evidence. W hich, of the follow ing, is tr ue as to the timing of audit pr ocedur es?
A)
B)
C)
D)
3) Audit evidence has tw o pr imary qualities for the auditor ; r elevance and r eliability. Gi ven
the choices below which pr ovides the auditor w ith the most r eliable audit evidence?
A) gener al ledger account balances
B) confir mation of accounts r eceivable balance r eceived fr om a customer
C) inter nal memo explaining the issuance of a cr edit memo
D) copy o f month-end adj usting entr ies
4) W hich of the follow ing is not a char acter istic of the r eliability of evidence?
A) effectiveness of client inter nal contr ols
B) ed ucation of auditor
C) indep endence of infor mation pr ovider
D) timeliness
5) The auditor must gather sufficient and appr opr iate evidence dur ing the cour se of the audit.
Sufficient evidence must:
A) be w ell documented and cr oss -r efer enced in the audit documents.
B) be based on sour ces that ar e exter nal to company.
C) pr ovide evidenc e that pr ove or dispr ove an audit obj ective/assertion.
D) be p er suasive enough to enable the auditor to issue an audit r eport.
6) Audit evidence obtained dir ectly by the auditor w ill not be r eliable if:
A) the auditor lacks the competence to evaluate the evidence.
B) it is pr ovided by the client’s attor ney.
C) the client denies its ver acity.
D) it is impossible for the auditor to obtain additional corr obor atory evi dence.
7) Appr opr iateness of evidence is a measur e of the:
A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning o f evidence.
8) W hich of the follow ing statements r egar ding the r elevance of evidence is cor r ect?
A) T o be r elevant, evidence must per tain to the audit obj ective of the evidence.
B) To be r elevant, evidence must be per suasive.
C) T o be r elevant, evidence must r elate to multiple audit obj ectives.
D) T o be r elevant, evidence must be der ived fr om a system including effective i nter nal
controls.
9) Tw o deter minants of the per suasiveness of evidence ar e:
A) comp etence and sufficiency.
B) r elevance and r eliability.
C) appr opr iateness and sufficiency.
D) indep endence and effectiveness.
10) The tw o character istics of the appr opriateness of evidence ar e:
A) r elevance and timeliness.
B) r elevance and accur acy.
C) r elevance and r eliability.
D) r eliability and accur acy.
11) W hich of the follow ing for ms of evidence w ould be least per suasive in for ming the
auditor ‘s opinion about mar ketable secur ities and other investments held by the company?
A) Responses to auditor ‘s questions by the pr esident and contr oller r egar ding the investments
account.
B) Cor r espondence w ith a stockbr oker r egar ding the quantity of client’s investments held in
str eet name by the br oker .
C) Minutes of the boar d of dir ector s author izing the pur chase of stock as an investment.
D) The auditor ‘s count of mar ketable secur ities.
12) W hich of the follow ing statements is not corr ect?
A) It is possible to var y the sample size fr om one unit to 100% of the items in th e population.
B) The decision o f how many items to test should not be influenced by the incr eased costs of
per for ming the additional tests.
C) Th e decision o f how many items to test must be made by the auditor for each audit pr ocedur
e.
D) The sample size for any given pr ocedur e is likely to vary fr om audit to audit.
13) For audit evidence to be compelling to the auditor it must be sufficien t and appr opr iate. W
hich statement below is not corr ect r egar ding the appr opr iateness of audit evidence?
A) The mor e effective the inter nal contr ol system, the mor e assur ance it pr ovides the auditor
about the r eliability of financial r eporting by the clien t.
B) An auditor ‘s opinion, to be economically useful and pr ofitable to the auditing fir m needs to
be for med w ithin a r easonable time and based on evidence obtained that assur es pr ofits for the
auditing fir m.
C) Evidence obtained fr om independent sour ces outside the entity is gener ally mor e r eliable
than evidence secur ed solely w ithin the entity.
D) The independ ent auditor ‘s dir ect per sonal know ledge, obtained thr ough inquir y, obser
vation and inspection, is gener ally mor e per suasive than infor mation obtained indir ectly.
14) W hich one of the follow ing is not one of the pr imar y pur poses of audit documentation pr
epar ed by the audit team?
A) A basis for planning the audit.
B) A r ecor d of the evidence accumulated and the r esults of the tests.
C) A basis for r eview by super visor s and partners.
D) A basis for deter mining w or k deficiencies by peer r eview teams.
15) W hich of the follow ing is the most obj ective type of evidence?
A) A letter wr itten by the client’s attor ney discussing the likely outcome of outstanding law
suits.
B) The physical count of secur ities and cash.
C) Inquir ies of the cr edit manager about the collectability of noncur r ent accounts r eceivable.
D) Obser vation of cobw ebs on some inventory bins.
16) Due professional car e, the third general standard, is concerned with what is done by the
independent auditor and how w ell it is done. For example, due car e in the matter of audit
documentation requires that audit documentation of the evidence gather ed by the auditor meets
which of the following criteria?
A) W or kpaper s be indexed to the gen er al ledger accounts and include both a permanent file
and a gener al file.
B) The content be sufficient to pr ov ide support for the auditor’s opinion, including the auditor’s
repr esentation as to compliance w ith auditing standar ds.
C) Audit evidence is pr incipally gather ed to deter mine if the client’s financial statements, as pr
epar ed by management, can be r elied upon to make manager ial decisions about the fir m.
D) A udit evidence as displayed in the w or kpaper s is pr imar ily per for med to pr otect the
auditing fir m in the case of a law suit by investor s.
17) W hich items affect the sufficiency of evidence w hen choosing a sample?
A)
Selecting items w ith a high
likelihood o f misstatement The r andomness of the items
selected
Yes Yes
B)
C)
D)
18) Deter mine w hich of the follow ing is most cor r ect r egar ding the r eliability of audit
evidence.
A) Infor mation that is indir ectly obtained fr om exter nal sources is the most r eliable audit
evidence.
B) Reliability of audit evidence is dep endent upon the evidence being convincing.
C) R eliability of evidence r efer s to the amount of evidence obtained.
D) An effective inter nal contr ol system pr ovides mor e r eliable audit evidence.
19) Evidence is gener ally consider ed appr opr iate w hen:
A) it has been obtained by random selection.
B) ther e is enough of it to affor d a r easonable basis for an opinion on financial statements.
C) it has the qualities of being r elevant, obj ective, and fr ee fr om know n bias.
D) it consists of w r itten statements made by managers of the enter pr ise under audit.
20) Given the economic and time constr aints in w hich auditors can collect evidence about
management assertions about the financial statements, the auditor nor mally gather s evidence
that is:
A) ir r efutable.
B) conclusive.
C) p er suasive.
D) completely convincing.
Chapter 8: Audit Planning and Analytical Procedures
1) A measur e of how w illing the auditor is to accept that the financial statements may be mater
ially misstated after the audit is com pleted and an unqualified opinion has been issued is the:
A) inher ent r isk.
B) acceptable audit risk.
C) statistical r isk.
D) financial risk.
2) A measur e of the auditor ‘s assessment of the likelihood that ther e ar e mater ial
misstatements in an account befor e consider ing the effectiveness of the cl ient’s inter nal contr
ol is called:
A) contr ol r isk.
B) acceptable audit risk.
C) statistical r isk.
D) inher ent r isk.
3) W hen inher ent r isk is high, ther e will need to be:
A)
A low er assessment of audit r isk Mor e evidence accumulated by the auditor
Yes Yes
B)
C)
D)
B)
C)
D)
12) The auditor is likely to accumulate mor e evidence w hen the audit is for a company:
A)
W hich has lar ge amounts of debt W hich is to be sold in the near futur e
Yes Yes
B)
W hich has lar ge amounts of debt W hich is to be sold in the near futur e
No No
C)
W hich has lar ge amounts of debt W hich is to be sold in the near futur e
Yes No
D)
W hich has lar ge amounts of debt W hich is to be sold in the near futur e
No Yes
13) Initial audit planning involves four matter s. W hich of the follow ing is not one o f these?
A) Develop an over all audit str ategy.
B) Request that bank balances be confir med.
C) Sched ule engagement staff and audit specialists.
D) Identify the client’s r eason for the audit.
14) Rodger s CPA has r equested per mission to communicate w ith pr edecessor auditor in or
der to r eview cer tain w or kpaper s for high r isk accounts for a new audit client. The new audit
clients r efusal to allow this communication to occur w ould impact Rodger s decision
concerning:
A) the auditor ‘s ability to design audit tests.
B) possible scope exc eption due to lack of access.
C) int egr ity of management concer ning possible accounting misstatements.
D) violation of the GA AP r ules concer ning consistency and comparability of financial infor
mation.
15) A successor auditor may per for m w hich of the follow ing for a new audit client?
A)
Speak to local attorneys, banks and other
businesses r egar ding the company’s r eput ation Speak to the pr edecessor auditor s about
disagr eements they had w ith management
Yes Yes
B)
C)
D)
16) W hich of the follow ing is not cor r ect r egar ding an auditor ‘s decision that a low er
acceptable audit r isk is appr opr iate?
A) Mor e evidence is accumulated.
B) Less evidenc e is accumulated.
C) Sp ecial car e is r equir ed in assigning exper ienced staff.
D) Review of audit documentation is per formed by per sonnel not assigned to the engagement.
17) A w r itten under standing detailing w hat the auditors w ill do in deter mining if the financial
statements ar e fair r epr esentations of the company’s financial statements and w hat the auditor
expects fr om the client in per for ming an audit w ill nor mally be expr essed in the:
A) management letter r equested by the auditor .
B) enga gement letter .
C) Audit Plan.
D) A udit Str ategy for the client.
18) If an auditor is r equested to per for m nonaudit ser vices for a public company audit client, w
ho is r esponsible for agr eeing to those ser vices w ith the audit fir m?
A) the client’s management
B) the client’s chief executive officer
C) the client’s chief financial officer
D) the client’s audit committee
19) W hich of the follow ing statements is tr ue r egar ding communications betw een pr
edecessor and successor auditors?
A) The bur den of initiating the communication r ests w ith the pr edecessor .
B) The pr edecessor ‘s r esponse can be limited to stating that no infor mation w ill be pr ovided.
C) Th e pr edecessor should communicate w ith the successor only if the client is public.
D) Ther e must be communication betw een the pr edecessor and successor if the successor is to
accept the engagement.
20) The pur pose o f an engagement letter is to:
A) d ocument the CPA fir m’s r esponsibility to external users of the audited financial
statements.
B) document the ter ms of the engagement.
C) notify the audit staff of an upcoming engagement so that per sonnel scheduling can be
facilitated.
D) emphasize management’s r esponsibility for appr oving the audit pr ogr am.
4) The FASB definition of mater iality focuses on potential users of financial statements.
A) Tr ue
B) False
5) Audit standar ds r equir e the auditor to consider mater iality ear ly in the audit. W hich
statement(s) r egar ding pr eliminar y materia lity ar e tr ue?
I. Pr eliminary mater iality may change dur ing the engagement.
II. Pr eliminary mater iality is the maximum amount the auditor by which the auditor believes the
financials could be misstated and still not affect the decisions of r easonable users .
A) I only
B) II only
C) both I and II
D) neither ar e tr ue
6) W hy do auditors establish a pr eliminar y j udgment about mater iality?
A) T o deter mine the appr opr iate level of staff to assign to the audit.
B) So that the client can know w hat r ecor ds to make available to the auditor .
C) T o plan the appr opr iate audit evidence to accumulate and develop an over all audit strategy.
D) T o finalize t he contr ol r isk assessment.
7) If an auditor establishes a r elatively high level for mater iality, then the aud itor w ill:
A) accumulate mor e evidence than if a low er level had been set.
B) accumulate less evidence than if a low er level had been set.
C) accumulate appr oximately the same evidence as w ould be the case w er e mater iality lower .
D) accumulate an undeter m ined amount of evidence.
8) The pr eliminary j udgment about materiality and the amount of audit evidence accumulated
ar e
___ _ r elated.
A) dir ectly
B) indir ectly
C) not
D) inver sely
9) W hich of the follow ing is the pr imar y basis used to decide mater iality for a for -pr ofit
entity?
A) net sales
B) net assets
C) net income befor e tax
D) all o f the above
10) Auditing standar ds _ _ __ that the basis used to deter mine the pr eliminary j udgment about
mater iality be documented in the audit files.
A) p er mit
B) do not allow
C) r equir e
D) str ongly encour age
11) Amounts involving fr aud ar e usually consider ed ___ _ important than unintentional err or s
of equal dollar amounts.
A) less B) no l ess C) no mor e D) mor e
12) Qualitative factor s can affect an auditor’s assessment of mater iality. W hich of the follow
ing qualitative factor s could influence the assessment of mater iality?
I. Misstatements that ar e otherw ise immaterial may be mater ial if they affect ear nings tr ends.
II. Minor misstatements r esulting fr om the consequences o f contr actual obligations.
A) I only
B) II only
C) I and II
D) neither I nor II
13) The five steps in applying mater iality ar e listed below in r andom or der .
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set pr eliminary j udgment about materiality.
4. Allocate pr eliminary j udgment about materiality to segments.
5. Compar e combined estimate w ith pr eliminar y j udgment about mater iality. The fir st thr ee
steps in corr ect sequence w ould be:
A) 1, 2, 5
B) 3, 4, 2
C) 2, 1, 5
D) 3, 2, 4
14) W hich of the follow ing statements is not corr ect?
A) Mater iality is a r elative rather than an absolute concept.
B) The most impor tant base used as the cr iter ion for deciding mater iality is total assets.
C) Qualitative factors as w ell as quantitative factor s affect mater iality.
D) Given equal dollar amounts, fr auds ar e usually consider ed mor e impor tant than er r or s.
15) Cer tain types of misstatements ar e likely to be mor e impor tant than other types to user s,
even if the dollar amounts ar e the same. W hich of the follow ing demonstr ates this?
A)
B)
C)
D)
Chapter 10: Section 404 Audits of Internal Control and Control Risk
1) Which of the following is not one of the three primary objectives of effective internal control?
A) reliability of financial reporting
B) efficiency and effectiveness of operations
C) compliance with laws and regulations
D) assurance of elimination of business risk
2) The Public Company Accounting Oversight Board states that reasonable assurance allows a:
A) small likelihood of ineffective internal controls.
B) remote likelihood that material misstatements will not be prevented or detected by internal
control.
C) likelihood that material misstatements will not be prevented or detected by internal control.
D) high likelihood that material misstatements will not be prevented or detected by internal
control.
3) Which of the following is most correct regarding the requirements under Section 404 of the
Sarbanes
Oxley Act?
A) The audits of internal control and the financial statements provide reasonable assurance as to
misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute assurance as to
misstatements.
4) Which of management’s assertions with respect to implementing internal controls is the
auditor primarily concerned?
A) efficiency of operations
B) reliability of financial reporting
C) effectiveness of operations
D) compliance with applicable laws and regulations
5) To issue a report on internal control over financial reporting for a public company, an auditor
must:
A) evaluate management’s assessment process.
B) independently assess the design and operating effectiveness of internal control.
C) evaluate management’s assessment process and independently assess the design and operating
effectiveness of internal control.
D) test controls over significant account balances.
6) A company frequently sells products at a price below inventory cost. Essential controls in the
risk assessment process would include:
A) adequate controls that address the risk of overstating inventory.
B) adequate controls that address the risk of not including a purchased item in inventory.
C) adequate controls that address the risk of understatement of inventory.
D) adequate controls that address the risk of overstatement of cost of goods sold.
7) Internal controls are not designed to provide reasonable assurance that:
A) all frauds will be detected.
B) transactions are executed in accordance with management’s authorization.
C) access to assets is permitted only in accordance with management’s authorization.
D) company personnel comply with applicable rules and regulations.
8) Describe each of the three broad objectives management typically has for internal control.
With which of these objectives is the auditor primarily concerned?
9) The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal control
report.
A) True
B) False
10) The primary emphasis by auditors when evaluating and testing internal control is on controls
over classes of transactions rather than controls over account balances.
A) True B) False
11) Which of the following is responsible for establishing a private company’s internal control?
A) Senior Management
B) Internal Auditors
C) Senior Management and auditors
D) Audit committee
12) Two key concepts that underlie management’s design and implementation of internal control
are:
A) costs and materiality.
B) absolute assurance and costs.
C) inherent limitations and reasonable assurance.
D) collusion and materiality.
13) The PCAOB places responsibility for the reliability of internal controls over the financial
reporting process to:
A) the company’s board of directors.
B) the audit committee of the board of directors.
C) the CEO and the CFO.
D) the CFO and the Independent Auditors.
14) Which of the following parties provides an assessment of the effectiveness of internal control
over financial reporting for public companies?
A)
Management Financial statement auditors
Yes Yes
B)
Management Financial statement auditors
No No
C)
Management Financial statement auditors
Yes No
D)
Management Financial statement auditors
No Yes
15) An act of two or more employees to steal assets and cover their theft by misstating the
accounting records would be referred to as:
A) collusion.
B) a material weakness.
C) a control deficiency.
D) a significant deficiency.
16) Sarbanes-Oxley requires management to issue an internal control report that includes two
specific items. Which of the following is one of these two requirements?
A) A statement that management is responsible for establishing and maintaining an adequate
internal control structure and procedures for financial reporting.
B) A statement that management and the board of directors are jointly responsible for
establishing and maintaining an adequate internal control structure and procedures for financial
reporting.
C) A statement that management, the board of directors, and the external auditors are jointly
responsible for establishing and maintaining an adequate internal control structure and
procedures for financial reporting.
D) A statement that the external auditors are solely responsible.
17) When management is evaluating the design of internal control, management evaluates
whether the control can do which of the following?
A)
Detect material misstatements Correct material misstatements
Yes Yes
B)
Detect material misstatements Correct material misstatements
No No
C)
Detect material misstatements Correct material misstatements
Yes No
D)
Detect material misstatements Correct material misstatements
No Yes
18) When one material weakness is present at the end of the year, management of a public
company must conclude that internal control over financial reporting is:
A) insufficient. B) inadequate. C) ineffective. D) inefficient.
19) The auditors primary purpose in auditing the client’s system of internal control over financial
reporting is:
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company’s internal controls over all relevant assertions in
the financial statements.
C) to report to management that the internal controls are effective in preventing misstatements
from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.
20) Management must disclose material weaknesses in internal control in its audit report:
A) whenever the weakness is deemed significant to a single class of transactions.
B) whenever the weakness is significant to overall financial reporting objectives.
C) if the weakness exists at the end of the year.
D) only if the auditor identifies the weakness as significant.