D215 Practice Questions

Identify a service that falls under audit services.

a) Examination of historical financial statements

b) Review of financial forecast

c) Compilation of historical financial statements

d) Inspection of website security

a) Examination of historical financial statements

Examination of internal controls is a service that comes under services, which fall under services.

a) acceptable; assurance

b) assurance; attestation

c) attestation; audit

d) attestation; assurance

d) attestation; assurance

Within a U.S. context, the applicable financial reporting framework is typically :

a) Generally Accepted Accounting Principles (GAAP)

b) Financial Accounting Standards Board (FASB)

c) International Auditing and Assurance Standards Board (IAASB)

d) American Accounting Association (AAA)

a) Generally Accepted Accounting Principles (GAAP)

Which two audits does an integrated audit combine?

a) A performance audit and an environmental audit

b) A compliance audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR)

c) A financial statement audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR)

d) A financial statement audit and a compliance audit

c) A financial statement audit and an audit of the effectiveness of Internal Control Over Financial Reporting (ICFR)

Who among the following users of the financial statement of a company may be particularly interested in evaluating whether the

company is paying a fair amount of taxes given its reported earnings, and to gain a better understanding of the company's activities?

a) customers

b) employees

c) general pubic

d) government

d) government

Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on

the information contained in the financial statements. What term captures this problem?

a) competing incentives

b) reliability

c) complexity

d) remoteness

b) reliability

Which of the following falls within the purview of a financial statement preparer?

a) Independent audit

b) Mergers and acquisitions

c) Changes in equity

d) Business valuation

c) Changes in equity

Management is responsible for which of the following?

a) Preparing financial statements which will please the board of directors and investors.

b) Issuing an opinion on whether the financial statements are presented fairly in accordance with the appropriate financial reporting framework.

c) Preparing financial statements in accordance with the appropriate auditing standards.

d) Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.

d) Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.

Which of the following comes under the purview of the Public Company Accounting Oversight Board?

a) Statements on Auditing Standards (SAS)

b) Auditing Standards (AS)

c) Statements on Standards for Attestation Engagement (SSAE)

d) Statements on Quality Control Standards (SQCS)

b) Auditing Standards (AS)

Which of the following is a private professional membership organization of CPAs representing the accounting profession?

a) AICPA

b) ASB

c) PCAOB

d) IAASB

a) AICPA

Which statement is correct as to financial statement audit reports for public versus private companies?

a) There is a standard report for the audit of private company financial statements but none for auditing public company financial statements

b) There is no distinction between standard reports for the audit of financial statements, regardless of whether the company is private or public.

c) There is a standard report for the audit of public company financial statements but none for auditing private company financial statements.

d) There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements.

d) There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements.

With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is

a) subjective and not absolute

b) high, but not absolute

c) 100%, but not objective

d) guaranteed and absolute

b) high, but not absolute

If auditors conclude the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit, it would mean the auditors discovered a/an...............in the client's ICFR.

a) Material weakness

b) Inherent risk

c) Reasonable assurance

d) Audit risk

a) Material weakness

Which of the following is the discovery of material weakness?

a) Risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

b) Identification of accounts and related assertions most at risk of material misstatement is part of assurance services and not the discovery of a material weakness

c) Conclusion that the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit

d) High, but not absolute, level of assurance in a judgment about matters that are subjective

c) Conclusion that the company did not maintain effective Internal Control Over Financial Reporting (ICFR) over the period under audit

Which of the following beliefs will narrow the audit expectation gap?

a) The auditor is guaranteeing the future viability of the entity.

b) The auditor is providing complete assurance.

c) An unmodified audit opinion is an indicator of complete accuracy of the financial statements.

d) There is no guarantee the auditor will find all material fraud, should fraud have occurred.

d) There is no guarantee the auditor will find all material fraud, should fraud have occurred.

Economic conditions impact........

a) both financial statement user's expectations and auditor performance

b) financial statement user's expectations

c) auditor performance

d) neither financial statement user's expectations not auditor performance

b) financial statement user's expectations

What is the role of a financial statement auditor?

a) To predict the future success of a company

b) To offer an opinion on a company's financial statements

c) To design and implement internal controls

d) To prepare a company's financial statements

b) To offer an opinion on a company's financial statements

Which organization is responsible for creating and grading the Uniform Certified Public Accountant (CPA) Examination?

a) Governmental Accounting Standards Board (GASB)

b) Public Company Accounting Oversight Board (PCAOB)

c) American Institute of Certified Public Accountants (AICPA)

d) Securities and Exchange Commission (SEC)

c) American Institute of Certified Public Accountants (AICPA)

Which level of certainty must be achieved regarding the accuracy of a company's financial statements when issuing an unqualified opinion?

a) Reasonable assurance

b) Measurable accuracy

c) Absolute assurance

d) Material accuracy

a) Reasonable assurance

Which statement made by an auditor reduces the expectations gap?

a) "Our audit proves the company's future success."

b) "We conduct tests to provide reasonable assurance that we have uncovered fraud."

c) "Our unmodified audit opinion indicates complete accuracy of the financial statements."

d) "We check all company transactions."

b) "We conduct tests to provide reasonable assurance that we have uncovered fraud."

Which description accurately illustrates the nature of an auditor's responsibilities?

a) Journal entries should be completed over time and adjusted for year-end financial statements.

b) Professional skepticism and professional judgment should be maintained during the review of the financial statements.

c) Financial statements should be prepared so they comply with generally accepted accounting principles (GAAPs).

d) Internal controls should be designed and reviewed so they are relevant to the preparation of the financial statements.

b) Professional skepticism and professional judgment should be maintained during the review of the financial statements.

The Public Company Accounting Oversight Board (PCAOB) oversees the regulation of and standard setting for specific audits. Which type of entity is being overseen?

a) Not-for-profit

b) Public

c) Private

d) Governmental

b) Public

Which statement by an auditor reduces a client's expectation gap?

a) "We will conduct tests to uncover fraud but cannot guarantee that fraud will be detected."

b) "An unmodified audit opinion indicates complete accuracy of the financial statements."

c) "While conducting our audit of your firm, we will check each transaction for accuracy."

d) "We guarantee the future viability of your business for six months from the conclusion of the audit."

a) "We will conduct tests to uncover fraud but cannot guarantee that fraud will be detected."

Which reason leads to a demand for audit and assurance services due to the user's lack of accounting knowledge?

a) Accuracy

b) Reliability

c) Completeness

d) Complexity

d) Complexity

In defining a profession or professional, one common characteristic is.....

a) self-promotion

b) effective marketing skills

c) concern for the public interest

d) effective communication skills

c) concern for the public interest

Which group licenses CPAs?

a) The American Institute of Certified Public Accountants (AICPA)

b) The Securities and Exchange Commission (SEC)

c) The Financial Accounting Standards Board (FASB)

d) The state boards of accountancy

d) The state boards of accountancy

What must CPAs complete to obtain licensure?

a) Required education, pass the CPA exam, and requisite experience requirement.

b) An application, fingerprints, and pass the CPA exam.

c) An application, required education, and pass the CPA exam.

d) A background check, drug test, and pass the CPA exam.

a) Required education, pass the CPA exam, and requisite experience requirement.

Susan, a college student, is preparing an essay. Which of the following principles should she use to explain why a Certified Public Accountant (CPA) is defined as a Concern for Public Interest (CPI) professional?

a) High level of skill

b) Expert in her field

c) Code of Ethics

d) High level of compensation

c) Code of Ethics

Interpretations in the AICPA code provide additional guidance regarding the scope and applicability of the........

a) standards

b) conceptual framework

c) rules of conduct

d) principles

c) rules of conduct

Which of the following components of the AICPA are enforceable?

a) Principles and interpretations

b) Rules of conduct

c) Interpretations

d) Principles and rules of conduct

b) Rules of conduct

The structure of the AICPA.............includes four major sections: preface, rules for members in public practice, rules for members in business, and rules for other members.

a) Rules of Conduct

b) Independence Rules

c) Code of Professional Conduct

d) Conceptual Framework

c) Code of Professional Conduct

Which of the following provides guidance to all members of the AICPA with respect to performance of their professional responsibilities?

a) Rules of Conduct

b) Principles

c) Code of Professional Conduct

d) Interpretations

c) Code of Professional Conduct

Which of the following is the threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client's interests or too accepting of the client's work or product?

a) Self-review threat

b) Adverse interest threat

c) Familiarity threat

d) Advocacy threat

c) Familiarity threat

If a CPA is unable to implement effective safeguards, what should the CPA do?

a) Document the identified threats.

b) Decline the engagement.

c) Proceed with the professional service.

d) Evaluate the significance of the threat.

b) Decline the engagement.

A/an............threat exists if a CPA performs bookkeeping services for a private company client and that work needs to be evaluated by the same firm in the course of an attest engagement.

a) adverse interest

b) undue influence

c) advocacy

d) self-review

d) self-review

According to the integrity and objectivity rule, in the performance of any professional service, a member shall not knowingly

a) decentralize work to subordinates

b) give a client a bad report

c) hide activities that could be a conflict of interest

c) hide activities that could be a conflict of interest

How does a small firm resolve the conflict of interest issue in a divorce case?

a) They do not need to resolve the conflict of interest in the case of a divorce.

b) Provide tax services to only one of the two parties.

c) Resign from the engagement.

d) Using separate engagement teams in providing tax services to both parties.

b) Provide tax services to only one of the two parties.

A CPA, who is a staff member on an audit engagement team, has a difference of opinion from her supervisor regarding the application of an auditing standard. She concludes that the difference may result in a material misrepresentation. She discussed her concerns with her supervisor, but the difference of opinion is not resolved. Which action should the staff member do next?

a) Bring her concerns to the manager on the engagement.

b) Discuss her concerns with the company's management.

c) Resign from the engagement.

d) Ignore the situation as the supervisor has more seniority.

a) Bring her concerns to the manager on the engagement.

A CPA works as a staff on an attest engagement. The CPA's stepbrother is employed on the board of directors of the attest client.

What action, if any should be taken as a result of this situation?

a) No action is required as a staff member on an attest engagement is not a covered member.

b) The CPA must notify his manager of the relationship, but he should not be removed from the engagement as a stepbrother is not a close relative under the independence rules.

c) The CPA must be removed from the engagement as he is a covered member and his stepbrother is in a key position.

d) No action is required since a member of the board of directors is not a key position of the attest client.

c) The CPA must be removed from the engagement as he is a covered member and his stepbrother is in a key position

Interpretation 1.295 indicates that before performing nonattest services, the CPA should establish and document in writing an understanding with the client regarding........

a) the objectives of the engagement and the services to be performed, only

b) any limitations of the engagement, only

c) the services to be performed, only

d) the objectives of the engagement, the services to be performed, and any limitations of the engagement

d) the objectives of the engagement, the services to be performed, and any limitations of the engagement

As a general rule, professional employees in a CPA firm who are not covered members and their immediate family members cannot.......

a) have a direct investment of more than 1% in an attest client

b) be a trustee, director, or officer of an attest client or of the client's pension or profit-sharing trust

c) hold a non-key position with an attest client

d) have an indirect investment of more than 5% in an attest client

b) be a trustee, director, or officer of an attest client or of the client's pension or profit-sharing trust

Which of the following standards refers to undertaking professional services that can be completed with the appropriate level of professional skill?

a) Professional Competence

b) Sufficient Relevant Data

c) Due Professional Care

d) Planning and Supervision

a) Professional Competence

According to the due professional care standard, CPAs should exercise professional care expected of.........in the performance of professional services.

a) company management

b) CPAs involved in consulting services

c) other CPAs performing similar work

d) covered members

c) other CPAs performing similar work

Which of the following general standards refers to adequately preparing for the engagement and providing the appropriate management oversight to the performance of professional services?

a) Audit Planning

b) Due Care

c) Sufficient Relevant Data

d) Planning and Supervision

d) Planning and Supervision

Which of the following standards is used for preparing financial statements with other accounting principles?

a) Generally Accepted Auditing Standards (GAAS)

b) Rule 1.320 on Accounting Principles

c) Principles of the Code of Professional Conduct

d) Generally Accepted Accounting Principles (GAAP)

d) Generally Accepted Accounting Principles (GAAP)

Thom is a new member of the audit team. In working on his first audit engagement, he and his supervisor disagree, materially, on the amount that the client should report for warranty liability. The auditing firm has a policy for this situation in which both auditors document their opinions and the rationale behind them. This is an example of following which of the aspects of the integrity and objectivity rule?

a) familiarity

b) subordinating judgment

c) undue influence

d) self interest

b) subordinating judgment

What should CPAs clarify while preparing financial statements for small businesses?

a) Their part in an engagement

b) The conceptual framework

c) The financial reporting framework

d) Their role in nonattest services

c) The financial reporting framework

An accountant spends time reviewing documents established by the Financial Accounting Standards Board (FASB) that explain rules and clarifications on how accounting should be done in the United States. Which characteristic of professionalism is presented in these documents?

a) Concern for the public interest

b) Level of expertise

c) Advanced certification

d) Professional standards

d) Professional standards

A CPA is working as a CFO and is reviewing the section of the AICPA Code of Professional Conduct that must be met because of that CFO role. Which section of the AICPA Code of Professional Conduct must this CPA meet?

a) Members in business

b) Other members

c) Members in public practice

d) Members who are CPAs

a) Members in business

A staff auditor is having a difference of opinion with the auditing firm's supervisor regarding the application of certain revenue recognition standards in the audit of a company. The matter is not resolved, and the staff auditor chooses to remain silent even though the problem may result in a material misstatement in the client's financial statements. Which rule of the AICPA Code of Professional Conduct is this staff auditor violating?

a) Acts Discreditable

b) General Standards

c) Compliance with Standards

d) Integrity and Objectivity

d) Integrity and Objectivity

A CPA has been preparing financial statements for a small private automotive company for the last 10 years. The client wishes to go public. In preparation, the client asks the CPA to perform an audit of the company and provide an audit opinion on the company's financial statements for the last two years. Which conclusion should be drawn about this auditor's independence?

a) The auditor is independent since the client has not yet gone public.

b) The auditor is not independent since there is a threat of self-review.

c) The auditor is independent if no expression of opinion is offered on the financial statements.

d) The auditor is not independent because an advocacy threat exists.

b) The auditor is not independent since there is a threat of self-review.

A CPA firm has the following circumstances:

-An individual on the audit has a close relative who is a receptionist for the client.

-The spouse of a staff member on the audit has acommon stock investment in the audit client.

-The father of the audit senior holds an insignificant financial interest in the client. and the senior is unaware of this arrangement.

-The partner in charge of the office's compensation is affected by office profitability, a portion of which arises from this audit.

Which person's circumstance impairs this CPA firm's independence?

a) The father

b) The partner

c) The spouse

d) The receptionist

c) The spouse

An auditor issues an unmodified (clean) audit opinion regarding a client's financial statements even though the balance sheet does not reflect an allowance for uncollectible accounts receivable, which is material to the balance sheet.

Which statement accurately characterizes the implications regarding rules of conduct for AICPA members in public practice in this scenario?

a) This violates the Accounting Principles Rule unless compliance would be misleading due to unusual circumstances.

b) This is a violation of Statements on Standards for Accounting and Review Services.

c) This is a violation of the Financial Reporting Framework for Small- and Medium-Sized Entities.

d) This is not a violation of the rules of conduct.

a) This violates the Accounting Principles Rule unless compliance would be misleading due to unusual circumstances.

A CPA provides tax services for a large public company. Through many years of working together, the CPA and the CFO have become close friends. While preparing the company's current year tax return, the CPA and the CFO plan a family vacation together. Which type of threat to ethical decision-making is present?

a) Familiarity

b) Advocacy

c) Adverse interest

d) Management participation

a) Familiarity

The Sarbanes-Oxley Act of 2002 was passed by Congress to regulate the auditors of public companies. Which organization was created to implement this law?

a) American Institute of Certified Public Accountants (AICPA)

b) Financial Accounting Standards Board (FASB)

c) U.S. Securities and Exchange Commission (SEC)

d) Public Company Accounting Oversight Board (PCAOB)

d) Public Company Accounting Oversight Board (PCAOB)

Which part of the AICPA Code of Professional Conduct provides guidance on maintaining professional independence?

a) Other members

b) Members in business

c) Applicable to all members

d) Members in public practice

d) Members in public practice

An auditor has worked for a CPA firm for years without incident and has never been accused of misconduct in the past. Recently, however, the CPA was accused of violating the Integrity and Objectivity Rule. Which action by the auditor caused this problem?

a) Recommended that a client make an investment in a business in the community that the auditor recently heard about

b) Misrepresented facts unknowingly while providing consulting services to a client

c) Provided testimony for a plaintiff in a court case where the defendant is also one of the auditor's clients

d) Had financial interest in a company being sued by one of the auditor's clients

c) Provided testimony for a plaintiff in a court case where the defendant is also one of the auditor's clients

An individual has been a staff senior on an audit engagement team for the last three years. The client is a financial institution that routinely makes vehicle loans. While working on the engagement, the auditor purchases a new luxury car requiring a new loan. The loan application is processed and approved by the client during the audit engagement. Is there a violation of independence related to this situation?

a) Yes, this would create a threat to independence since the staff senior is now in an advocacy role with the client.

b) Yes, this would create a threat to independence as the member is on the engagement team.

c) No, this would not create a threat to independence as the staff senior is not a partner in the audit firm.

d) No, this would not create a threat to independence since the loan is immaterial.

b) Yes, this would create a threat to independence as the member is on the engagement team.

ACPA firm audits its client's financial statements and prepares the client's corporate income tax returns. The CPA firm received a referral bonus for referring the client to a professional firm that specializes in the maximization of research and development tax credits. Which statement summarizes the permissibility of this arrangement?

a) The CPA firm is permitted to receive the referral bonus as long as the dollar amount is less than 5% of the audit fee.

b) The CPA is not permitted to receive a referral bonus unless the assurance client specifically consents to the arrangement in writing.

c) The CPA firm is permitted to receive the referral bonus as long as the arrangement is disclosed to the client.

d) The CPA is not permitted to receive a referral bonus when the CPA firm provides assurance services for the associated client.

d) The CPA is not permitted to receive a referral bonus when the CPA firm provides assurance services for the associated client.

A CPA firm has provided services to a client for the last two years, and the revenue received equals 50 percent of the total revenue for the CPA firm.

During the current year, the client asks the CPA to serve as an expert witness in a court case for which a customer is suing over the quality of their products. The CPA agrees to testify while continuing to provide professional services to the client. Which type of threat to ethical decision-making is being demonstrated by this practice?

a) Management participation

b) Familiarity

c) Advocacy

d) Adverse interest

c) Advocacy

A new CPA firm has recently received a request to perform audit services for a public hospital that has locations all over the world. The engagement will require the CPA to issue several audit reports in order to comply with the various regulations in each country where the hospital operates. Due to the complexity of the engagement, the audit fees associated with the hospital will account for almost 70% of the CPA firm's revenue. Which type of threat to ethical decision-making is present?

a) Advocacy

b) Adverse interest

c) Self-review

d) Self-interest

d) Self-interest

The risk assessment phase of an audit includes:

a) audit execution.

b) gaining an understanding of the client.

c) preparation of the auditor's report.

d) writing the report on internal controls.

b) gaining an understanding of the client.

Which phase of an audit involves an evaluation of the results of the detailed testing in light of the auditor's understanding of the client and forming an opinion on the fair presentation of the client's financial statements?

a) Reporting phase

b) Inherent risk phase

c) Risk response phase

d) Detection risk phase

a) Reporting phase

When auditors remain independent of the entity, its management, and its staff when completing the audit work, and works with an alert and questioning mind, the auditor is....

a) exhibiting professional skepticism.

b) developing an audit strategy.

c) gathering relevant data.

d) looking for significant risk.

a) exhibiting professional skepticism.

Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence. Which condition would require the auditor to apply professional skepticism?

a) New information confirms earlier responses to auditor inquiries.

b) Audit evidence recently gathered is contradictory to other evidence previously gathered.

c) No situations were noted that would indicate the need for additional audit procedures beyond what is required by GAAS.

d) No conditions were noted that provided evidence of possible fraud.

b) Audit evidence recently gathered is contradictory to other evidence previously gathered.

Obtaining positive results from testing controls means that:

a) materiality will be set at a low dollar amount.

b) the auditor can completely rely on a client's system of internal controls and further evaluation of internal controls is unnecessary.

c) no substantive testing is required.

d) the auditor can plan to reduce the reliance on detailed substantive testing of transactions and account balances.

d) the auditor can plan to reduce the reliance on detailed substantive testing of transactions and account balances.

The audit strategy known as the predominantly "substantive approach':

a) is appropriate when internal controls are very strong and fraud risk is high.

b) means the auditor will conduct some interim testing and minimal year-end account-balance testing.

c) means the auditor will spend minimum effort testing the client's system of internal controls.

d) requires the auditor to conduct extensive control testing because of weak internal controls.

c) means the auditor will spend minimum effort testing the client's system of internal controls.

John West, President of Alliah Company, has just engaged a CPA firm to perform an audit of their financial statements. Because Alliah Company is a new client, the CPA firm must gain an understanding of the client, identify risk factors, develop an audit strategy, and set planning materiality. Which of the following best describes this phase of the audit planning?

a) Test of controls

b) Reporting phase

c) Risk assessment phase

d) Risk response phase

c) Risk assessment phase

In an audit strategy, the first step is to identify...........risks during the.........phase.

a) significant; reporting

b) control; risk response

c) inherent; risk assessment

d) detection; risk response

c) inherent; risk assessment

An example of an incentive or pressure that increases the risk of fraud is:

a) a low percentage of management pay is tied to earnings.

b) The client emphasizes ethical behavior.

c) the client has no history of reporting losses.

d) the client operates in a highly competitive industry.

d) the client operates in a highly competitive industry.

In the context of identifying fraud, which of the following describes theft of inventory by employees or others?

a) Misappropriation of assets

b) Omission of material facts

c) A loss that is not the result of fraud

d) Fraudulent financial reporting

a) Misappropriation of assets

If a prospective new audit client does not allow the auditor to contact its existing auditor:

a) the new auditor should consider that a negative factor on the integrity of client management.

b) the existing auditor should contact the new auditor to tell them all about the client.

c) the new auditor should contact the existing auditor anyway because it is their duty.

d) the new auditor should respect the prospective client's right to privacy.

a) the new auditor should consider that a negative factor on the integrity of client management.

An auditing firm is considering the acceptance of a new client. Before accepting the client, the firm communicates with the client's previous auditor, personnel, and industry peers. The firm is

a) assessing the integrity of the proposed client's management.

b) determining the client's profitability.

c) analyzing the client's internal controls.

d) investigating the client's ability to pay for the audit.

a) assessing the integrity of the proposed client's management.

In January 2020, Chestnut Accountants, LLC interviewed John Wales, President of Bullzai, Inc., who requested an audit of his financial statements in order to obtain a bank loan. During the interview, Mr. Wales stated that he, alone, performs the accounting functions of the company. Because he dislikes technology, Mr. Wales performs the accounting functions on notepads and admits to have misplaced

one or two of the notepads. Which acceptance and retention factor should influence Chestnut's decision to accept Bullzai as a new audit client?

a) Special circumstances and unusual risks

b) Integrity of management

c) Competence issues

d) Independence issues

a) Special circumstances and unusual risks

A CPA, who is a partner in an accounting firm, is reviewing his audit engagement clients for continuation decisions for the upcoming audit season. One of the clients is in the restaurant industry and has been impacted by their state's mandatory 5-month shutdown for restaurants due to COVID 19. The client failed to meet two of the last two quarter's debt covenants, and their negotiations to renew

the line failed. Which factor would negatively influence retention of the client?

a) Management is preoccupied with meeting specific accounting numbers.

b) The entity has a strong system of internal controls.

c) There are minimal regulatory reporting requirements.

d) The line-of-credit may not be renewed by their current bank.

a) Management is preoccupied with meeting specific accounting numbers.

Subre & Co. have decided that an insurmountable conflict of interest exists regarding a potential new client that they were considering accepting. What should they do?

a) Subre should take the engagement, but include the lack of independence in their final report.

b) Subre should take the engagement and continue to make certain that safeguards are put in place to limit or remove those threats.

c) Subre should contact the State Board of Accountancy so they can make a press release to discourage other accountants from taking the engagement.

d) Subre should decline the offer to be the auditor of the prospective client or resign from the audit of the existing client.

d) Subre should decline the offer to be the auditor of the prospective client or resign from the audit of the existing client.

Luke's Fish Emporium is being audited by Dunn Hollow Firm. Luke's annual net income is $10,250,000. Dunn Hollow has determined that 10% of net income is the planning materiality for accounts found on the income statement. Which of the following accounts is material?

a) Bonuses to Contractors of $600,000

b) Extraordinary Loss of $150,000

c) Miscellaneous Expenses of $986,659

d) Other Income of $1,425,000

d) Other Income of $1,425,000

Figuly & Wiggins, Inc. is auditing a client that has $100,000 in net income. After determining the planning materiality as 10% of net income, the auditing team has discovered several issues. Which of the following represents qualitatively material information?

a) Other expenses of $2,462

b) Miscellaneous Expenses of $10,629

c) Suspected theft of cash by the controller of $1,250

d) Loss on Equipment destroyed in a fire caused by lightning of $9,500

c) Suspected theft of cash by the controller of $1,250

Jerdana Accounting Firm is auditing Endothon Company. Jerdana has determined that $5 million is the planning materiality and $1 million is the performance materiality for each account. When Jerdana starts the audit, they find that none of Endothon's accounts are above the $1 million performance materiality. What should Jerdana do?

a) Inform the client that they will not perform any audit procedures on the immaterial accounts.

b) Resign from the audit engagement because there are no audit procedures to be performed.

c) Only perform audit procedures on random accounts because they have to earn their fees.

d) Continue to perform the detailed audit procedures on every account because if any misstatements exists, they may still be material in aggregate.

d) Continue to perform the detailed audit procedures on every account because if any misstatements exists, they may still be material in aggregate.

DFG, PC is auditing Plairtrack, Inc., along-term audit client. Plairtrack has devoted substantial resources into it's new division as it enters the high-tech pharmaceutical industry. DFG has determined that the inherent risk, due to Plairtrack's new arrival to the industry is 80%, but it's control risk is a low 10% because they've been in business for 20 years. Due to DFGs familiarity with both the industry and Plairtrack, they have set the detection risk at 2%. What is Plairtrack's risk of material misstatement?

a) 8%

b) 2%

c) 16%

d) 1.60%

a) 8%

Spaglin, Inc. is auditing Synesthor. Spaglin has determined that the inherent risk is 20%, the control risk is 35%, and the detection risk is 1.8%. What is Synesthor's overall audit risk?

a) 100%

b) 7.000%

c) 0.126%

d) 0.63%

c) 0.126%

An audit client is upset about the auditors' overall audit risk assessment. The client states that they govern efficiently and that the audit risk should be set to zero. Therefore, the amount of testing that needs to be done should be minimal.

Which risk factors can be reduced to zero?

a) Control risk and detection risk, but not inherent risk

b) Inherent risk, control risk, and detection risk

c) Neither detection risk, inherent risk, nor control risk

d) Detection risk and inherent risk, but not control risk

c) Neither detection risk, inherent risk, nor control risk

Autojor is being audited by Dinnegel, Inc. Dinnegel has determined that the overall audit risk is 1.67%. During the course of the audit

however, Dinnegel finds that Autojor's internal controls have improved significantly since the previous audit. As a result, the risk of

material misstatement decreases, but Dinnegel has determined that the overall audit risk remains the same. Why has Dinnegel determined that the overall audit risk remains the same?

a) The inherent risk decreased.

b) The detection risk decreased.

c) The detection risk increased.

d) The inherent risk increased.

c) The detection risk increased.

During a brainstorming session all members of the audit team discussed thoughts and ideas about how fraud might be conducted and concealed. Which incentive or pressure might increase the risk of fraud?

a) Profits continue to rise at projected levels and are in line with industry projections.

b) The client's industry remained stable throughout the year.

c) The company plans on listing its stock.

d) Demand for the client's products remains strong.

c) The company plans on listing its stock.

Kathy is a member on the audit team from Bones Simon, LLC auditing Paddleboards, Inc. During their brainstorming session the team chose Kathy to investigate fraud associated with misappropriation of assets. Which potentially fraudulent activity will Kathy investigate?

a) The controller used the company credit card to purchase a home computer.

b) The CFO valued the assets of a subsidiary at 250% of the appraised value.

c) Recording of sales in December was contracted and services performed in the following January.

d) The financial statements do not show a probable legal settlement that was known before the financial statement date.

a) The controller used the company credit card to purchase a home computer.

During the course of an audit, Cragson, LLC finds that employees of Lyenon Construction removed tools and supplies from the company warehouse but, in a hurry, forgot to record the use of the materials in the job. After the financial statements were prepared, the tools and supplies were billed to the client. What is this situation characterized as?

a) Fraud

b) Misappropriation of assets

c) Fraudulent financial reporting

d) Error

d) Error

While auditing Zegy, Inc, a computer component manufacturer, Kaper Independent Auditors (KIA) found that Zegy was made aware that approximately 75% of its most popular hard drives that were sold in the past 10 years could fail due to a catastrophic failure. Zegy's lifetime warranty requires a full replacement upon failure of a drive. Internal memos indicate that the CEO and CFO knew of

the risk prior to the date of the financial statements. No disclosure or estimate for the contingent liability was included in the financial statements or notes. In the context of identifying fraud, which of the following describes Zegy's misstatement or omission of the contingent liability?

a) Error

b) Fraudulent financial reporting

c) Misappropriation of assets

d) Falling Profits

b) Fraudulent financial reporting

When gaining an understanding of the client, the new auditor will not consider:

a) related party identification.

b) the appropriateness of the client's system of internal controls to mitigate identified business risks.

c) controls over the technology used to process and store data electronically.

d) the client's ability to pay for the audit.

d) the client's ability to pay for the audit.

When gaining an understanding of the client, the auditor will identify the geographic location of the client because:

a) the auditor may plan to use staff from affiliated offices to visit overseas locations.

b) more centralized clients are harder to control.

c) more decentralized clients are easier to control.

d) the auditor will only visit one location to assess processes and procedures.

a) the auditor may plan to use staff from affiliated offices to visit overseas locations.

When gaining an understanding of the client's sources of financing, the auditor:

a) determines if the client is writing off uncollectible accounts receivable.

b) ignores the relative reliance on debt versus equity funding because that is a management decision, not an audit issue.

c) is not interested in debt covenants because most debt contracts are the same.

d) determines if the client is meeting principal and interest payments when they are due.

d) determines if the client is meeting principal and interest payments when they are due.

When an auditor assesses how well-positioned the client is to cope with current and changing government policies, regulations, laws, and economic conditions, he or she is assessing the organization at the

a) employee-level.

b) industry-level.

c) transaction-level.

d) entity-level.

b) industry-level.

Part of risk assessment is searching for related parties and transactions. Which of the following is true of related parties?

a) The presence of related parties is not considered a fraud risk factor.

b) Related party transactions must be disclosed even if they seem to be conducted at independently.

c) Management does not need controls in place for identifying related parties.

d) A subsidiary company is not considered a related party.

b) Related party transactions must be disclosed even if they seem to be conducted at independently.

The term........refers to an affiliate, principal owner, manager, or other party that is not independent of the entity.

a) primary beneficiary

b) related party

c) third party

d) other beneficiary

b) related party

Generally speaking, the existence of related party transactions.....

a) decreases inherent risk and should be investigated further

b) is illegal and should be reported to the Securities and Exchange Commission

c) is not worth of further investigation

d) increases inherent risk and should be investigated further

d) increases inherent risk and should be investigated further

An audit committee of a publicly traded company should be composed of:

a) executive and non-executive members of the board of directors.

b) members of the board of directors who are independent directors.

c) the CFO and two other board members who are also shareholders.

d) the audit partner, the CFO, and a shareholder.

b) members of the board of directors who are independent directors.

Which group of a company's board of directors is an auditor likely to meet with throughout the audit?

a) Non-executive directors

b) Executive directors

c) Internal auditors

d) Shareholders

b) Executive directors

Which part of corporate governance is not part of the company's management team, and have involvement limited to preparing for and participating in board meetings and relevant board committee meetings?

a) Internal auditors

b) Executive directors

c) Non-executive directors

d) External auditors

c) Non-executive directors

Which of the following is a risk of material misstatement associated with something other than a client's IT system?

a) Failure to accrue for a contingent liability

b) A terminated employee who is still able to log on to the client's IT system

c) The installation of new software that still needs modifications to operate as needed

d) No schedule for backing up data

a) Failure to accrue for a contingent liability

The term that specifically refers to the use of computers to process, record, and store financial reporting data and other information is

a) trend analysis

b) analytical procedures

c) information technology

d) audit data analytics

c) information technology

In most companies, processes which include transaction initiation, recording, processing, correction as needed; transfer to the general ledger; and compilation of the financial statements take place through . which must be understood as part of a company's internal control system.

a) closing procedures

b) the audit committee

c) trend analysis

d) information technology

d) information technology