A424 Exam 1

D

Which audit team member is responsible for signing the audit report?

A. Senior

B. Associate

C. Manager

D. Partner

B

The Sarbanes-Oxley Act of 2002 created which organization?

A. SEC

B. PCAOB

C. FASB

D. AICPA

C

Which service is prohibited for auditors under SOX independence rules?

A. Tax

B. Audit

C. Bookkeeping for audit clients

D. Attestation Services

B

How often must the lead audit partner rotate off a public company audit?

A. 3 years

B. 5 years

C. 7 years

D. 10 years

C

Which group must certify the accuracy of the financial statements under SOX?

A. Audit Committee

B. External Auditors

C. CEO and CFO

D. PCAOB inspectors

B

Which of the following is a primary responsibility of the audit committee?

A. Preparing the financial statements

B. Overseeing the external auditor

C. Managing daily operations

D. Designing Accounting Systems

B

Which characteristic is generally required of all audit committee members?

A. They must be company employees

B. They must be independent directors

C. They must be CPA licensed

D. They must be internal auditors

B

The purpose of an audit is to express an opinion on whether financial statements are:

A. Free from all errors

B. Presented fairly in all material respects in accordance with GAAP

C. Prepared by management

D. Approved by the PCAOB

principal

Auditors act on behalf of the ______ (agent/principal)

Assurance

independent professional services that improve the quality of information for users

Attest

A type of assurance service where you issue a report on a subject matter that is the responsibility of another party

A, B, D

What are the 3 types of attest services (choose all that apply)

A. Audits

B. Compilations

C. Assessments

D. Reviews

E. Benchmarking

Audit

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

A, C, D, G, H

What are the 5 necessary components of an audit?

A. Systematic Process

B. Reviewing all financial transactions of the company

C. Obtaining and evaluating evidence

D. About assertions about economic actions/events

E. Make definitive claims about the truthfulness of the financial statements

F. Report information directly to management

G. Ascertain correspondence with established criteria

H. Communicating the results to users

Management Assertions

expressed or implied claims about information reflected in the financial statements

independent

The auditor has to be _________

D

Who hires the auditor?

A. CEO

B. Management

C. Stockholders

D. Audit Committee

risk

Auditors make _____ assessments about complex transactions, weak controls, and issues in the industry in order to plan the audit.

reasonable, material

Auditors collect evidence to support their opinion with _______ assurance whether the financial statements as a whole are free of ______ misstatement due to error or fraud.

opinion

The audit _____ is included with the company’s annual report to the public and filed with the SEC

management’s

Auditors collect and evaluate evidence about ______ financial statement assertions

E

Which of the following is NOT one of the 7 types of management assertions about classes of transactions and events.

A. Occurrence - Transactions and events that have been recorded or disclosed have occurred.

B. Completeness - All transaction and events that should have been recorded have been recorded.

C. Authorization - All transactions and events have been properly authorized.

D. Accuracy - Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and desired.

E. Materiality - The significance of an item or misstatement in influencing users’ decisions

F. Cutoff - Transaction and events have been recorded in the correct accounting period.

G. Classification: Transactions and events have been recorded in the proper accounts

H. Presentation - Transaction and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

B

Which of the following is NOT one of the 5 management assertions about account balances, and related disclosures at the period end?

A. Existence - assets, liabilities, and equity interests exist.

B. Timeliness - All account balances and disclosures have been recorded within the appropriate reporting period

C. Rights and obligations - the entity holds or controls the rights to assets, liabilities are the obligations of the entity.

D. Completeness - All assets, liabilities, and equity interests that should have been recorded have been recorded.

E. Accuracy, valuation, and allocation - Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

F. Classification - Assets, liabilities, and equity interests have been recorded in the proper accounts.

G. Presentation: Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework

materiality

the magnitude of an omission or misstatement of accounting information that in the light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

T

T or F: There is no assurance for immaterial misstatements and only reasonable assurance that material misstatements will be detected.

audit

____ risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

false

T or F: Audit risk can be zero

Audit Risk

Inherent risk x Control Risk x Detection Risk =

F

T or F: Auditors examine every transaction included on the financial statements

T

T or F: Auditors use a sampling approach to examine a subset of the transactions based on previous audits, an understanding of the company’s internal control system, or knowledge of the company’s industry.

larger, larger

Low materiality threshold = ________ (larger/smaller) sample size

More assurance = __________ (larger/smaller) sample size

C

Which of the following are NOT one of the two things needed to assess the appropriateness of audit evidence.

A. Relevance - Is the evidence related to the specific assertion being tested.

B. Reliability - Can the evidence be relied upon to signal the true state of the specific assertion being tested?

C. Sufficiency - the quantity of evidence supports the management’s assertion

Sufficient, Appropriate

Audit evidence must be ________ and ________ regarding Management Assertions

Opinion on the Financial Statements

First section of an Audit report that includes an explanatory paragraph with the auditor’s conclusion on the financial statements or internal controls

A

Which of the following is not a section of the audit report

A. Assessment of Risk Controls

B. Opinion on the Financial Statements

C. Basis of Opinion

D. Critical Audit Matters

C

Which of the following is NOT one of the 4 components that the audit report must conclude with

A. Date that the audit process began

B. Signature of the CPA firm providing the audit

C. The year the auditor began serving as the company’s auditor

D. Signature of the CPA’s partner who conducted the audit

E. The city and state in which the report was issued

F. Date of the report

Unqualified

Which audit opinion means that the auditor believes the financial statements are free from material misstatements (at a reasonable assurance level)

Unqualified

What is the most common type of audit opinion

qualified opinion

Which audit opinion means that there are one or more issues in the financial statements that prevent the auditor from stating that the statements are being presented fairly in all material respects.

B

If an auditor finds a potential misstatement on the financials that is material but not pervasive and management refuses to correct it, the auditor would issue which audit opinion?

A. Qualified

B. Unqualified

C. Adverse

D. Disclaimer

adverse

Which audit opinion means that the financial statements contain a misstatement or other issue that the auditor considers so material that it pervasively affects the interpretation of the financial statements.

disclaimer

Which audit opinion is only issued if a scope limitation is so pervasive that it limits the ability of the auditor to conclude on the financial statements as a whole.

A

Who on an audit team is responsible for reaching an agreement with the auditee on the scope of the service to be provided, ensure that the audit is properly planned, assemble an audit team, supervise the audit team, and conclude the adequacy of audit evidence and sign the report.

A. Partner

B. Senior/In-charge

C. Audit Committee

D. Manager

E. Associate/Staff

D

Who on an audit team is responsible for ensuring the audit is properly planned, including scheduling of team members, supervises the preparation of and approve the audit program, reviews the working papers, financial statements, and audit report, recommends key audit judgments to partner, oversees work of seniors and staff, deals with invoicing and ensures collection of payment for services, and informs partner about any auditing or accounting problems encountered.

A. Partner

B. Senior/In-charge

C. Audit Committee

D. Manager

E. Associate/Staff

B

Who on an audit team is responsible for assisting in the development of the audit plan, prepare budgets, assign tasks to associates and direct the day-to-day performance of the audit, perform procedures, gather and evaluate evidence, supervise and review the work of associates, and inform the manager about any auditing or accounting problems encountered?

A. Partner

B. Senior/In-charge

C. Audit Committee

D. Manager

E. Associate/Staff

E

Who on an audit team is responsible for performing audit procedures assigned to them by the senior, prepare adequate and appropriate documentation of completed work, and inform the senior about any auditing or accounting problems encountered?

A. Partner

B. Senior/In-charge

C. Audit Committee

D. Manager

E. Associate/Staff

B

The Sarbanes-Oxley Act created which accounting board

A. GAAP (Generally Accepted Accounting Principles)

B. PCAOB (Public Company Auditing Oversight Board)

C. SEC (Security and Exchange Commission)

D. FASB (Financial Accounting Standards Board)

T

T or F: Accounting firms must register with PCAOB

D

The PCAOB conduct _____ audits of large accounting firms and ______ audits of small accounting firms.

A. monthly, annual

B. semi-annual, triennial

C. quarterly, semi-annual

D. annual, triennial

D

Which of the following is NOT one of the new auditing standards introduced by Sarbanes-Oxley Act of 2002?

A. Accounting firms cannot perform consulting or management functions for their audit clients.

B. A second partner is required to review and approve for all audits

C. Client’s CEO and CFO must certify the financial statements and disclosures

D. Audit firms are prohibited from auditing the same client for more than three consecutive years.

E. The client’s CEO, CFO, CAO, or controller cannot have been employed by the company’s audit firm with a one-year period proceeding their audit.

F. Management must assess and report on the effectiveness of internal controls over financial reporting

G. Required audit and audit opinion on effectiveness of internal controls over financial reporting

H. Audit committee must be independent with at least one financial expert

I. Lead audit partner and review partner must rotate off every 5 years

F

T or F: The context of the industry or business in which the client exists has no impact on the way in which an audit is performed

B

Which of the following is NOT one of the five basic business processes?

A. Financing Process

B. Internal Controls Process

C. Purchasing Process

D. Human Resource Management Process

E. Inventory Management Process

F. Revenue Process

T, T, F, F, T

Answer the following T or F about audit committee membership:

• Required for all publicly traded companies

• Must be independent outside directors

• Can be an affiliate of the company or any of its subsidiaries

• Can accept consulting, advisory, or other compensating fee from the company.

• Must contain at least 1 member with “Financial Expertise”; otherwise must be disclosed to the SEC

A

Who oversees the hiring, performance, and independence of the external auditors.

A. Audit Committee

B. Board of Directors

C. Financial Managers

D. CEO

A, B

The SEC oversees which accounting standards boards? (select all that apply)

A. PCAOB

B. FASB

C. Auditing Standards Board

C

The AICPA oversees which accounting standards boards? (select all that apply)

A. PCAOB

B. FASB

C. Auditing Standards Board

C, A, B

The ______ issues auditing standards for public companies, ______ issues accounting principles for use by preparers, and the _____ issues private sector audit standards for nonpublic companies.

A. FASB

B. ASB

C. PCAOB

C

PCAOB consists of ___ with no more than ____ CPAs.

A. 6, 3

B. 5, 0

C. 5, 2

D. 6, 1

Hello

Hello

C, F, I, H

What of the following are the four reporting standards of the 10 Generally Accepted Auditing Standards?

A. Training - Audit is to be performed by persons with adequate technical training and proficiency as an auditor.

B. Evidential - Sufficient appropriate evidential matter is to be obtained as a reasonable basis for the audit opinion

C. Accordance with GAAP - report shall state whether the financial statements are presented in accordance with GAAP
D. Independence - in mental attitude is to be maintained by auditors

E. Professional Care - is to be exercised in the performance of the audit and preparation of the report.

F. Consistently - Report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to preceding period.

G. Internal control - obtain a sufficient understanding of internal controls to plan the audit.

H. Opinion - the report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed.

I. Disclosures - Informative disclosures in the financial statements are regarded as reasonable adequate unless otherwise stated in the report.

J. Planned - work is to be adequately planned and assistants are to be properly supervised.

C

Which of the following is NOT a question Auditors should consider when assessing a new client or deciding to continue with a current client?

A. Is the firm capable of auditing the client

B. Does the firm comply with legal and ethical requirements? (independence)

C. Who are the members of the client’s management?

D. How is the client’s integrity?

G

Which of the following are good question for an audit firm to ask the client’s previous auditor?

A. Is there information that might bear on the integrity of management?

B. Is there information regarding identified or suspected fraud or noncompliance with laws/regulations

C. Were their disagreements with mgmt about acct policies, auditing procedures, or other similarly significant matters.

D. Were their communications to audit committee regarding fraud, noncompliance with laws, or internal control related matters?

E. What was the reason for the change of auditors

F. Were there any significant related parties or unusual transaction?

G. All of the Above.

Engagement Letters

a contract outlining the responsibilities of both parties and preventing misunderstandings between the two parties. Includes services to be performed and related reports, auditor’s responsibilities and limitations, management’s responsibilities, and timing and fees

C

Engagement letters are addressed to _____

A. CEO

B. Audit Partner

C. Chair of Audit Committee

D. Management

T

T or F: Auditors CAN work with the client’s internal audit team while performing an audit as long as the auditor assesses the competence, objectivity, and systematic and disciplined approach of the internal audit team. Additionally the auditors must supervise, review, evaluate, and test the internal audit teams work.

I

Which of the following are something an audit team must do to plan an audit?

A. Assess business risk

B. Establish materiality

C. Consider multi-locations or business units

D. Assess the need for specialists

E. Consider violations of laws and regulations

F. Identify related parties

G. Consider additional value-added services

H. Document the overall audit strategy, plan, and prepare audit programs.

I. all of the above

Risk Assessment Procedures

type of an audit test used to obtain an understanding of the entity and its environment, including its internal cotnrol.

Tests of controls

Audit test that tests the operating effectiveness of controls in preventing or detecting & correcting material misstatements to the f/s

Substantive procedures

Audit test that tests to detect material misstatements in transactions, account balance, or disclosure in f/s. Includes tests of details and substantive analytical procedures

Dual pupose

Audit test that tests of controls and substantive tests simulataneously

T

T or F: Materiality is a matter of professional judgement

T

T or F: A qualitative misstatement does not have to be quantitative to be material

planning materiality

Maximum amount that the financial statements as a whole can be misstated and it would not affect the judgement of a reasonable user. Also known as financial statement materiality.

tolerable misstatement

maximum error for an individual account. also known as account level materiality

C, B, A

Place the steps of applying materiality on an audit in order.

A. Evaluate audit findings (aggregate misstatements for each account)

B. Determine tolerable misstatement

C. Determine planning materiality

A

The default basis for materiality is

A. Pre-tax income

B. Total Sales/Revenue

C. Total Equity

D. Total Assets

E. Net Assets

high, more, low, less

At low materiality threshold there is ______ risk and _____ work

At high materiality threshold there is ______ risk and _____ work

T

T or F: Tolerable misstatement is tuypically set to 50%-75% of overall materiality depending on risk

T

T or F: If aggregate misstatements at account level > tolerable misstatement = adjust f/s

T

T or F: If remaining total aggregate misstatements for all > planning materiality = adjust f/s

T

T or F: When evaluating aggregate misstatements, include the current year effect of misstatements not adjusted in the prior period that were immaterial

A

If an audit adjustment is material and known then you must

A. Book the entire amount

B. Don’t have to Book. If booked, book entire amount.

C. Book estimated amount subject to negotiation

B

If an audit adjustment is immaterial and known then you must

A. Book the entire amount

B. Don’t have to Book. If booked, book entire amount.

C. Book estimated amount subject to negotiation

C

If an audit adjustment is material and estimated then you must

A. Book the entire amount

B. Don’t have to Book. If booked, book entire amount.

C. Book estimated amount subject to negotiation

inherent, control, detection

The three components of audit risk model are ____ risk _____ risk and _____ risk

inherent risk

Type of risk that is the susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material, either individually or in combination with other misstatements, before consideration of any related controls

T

T or F: Inherent risk is influenced by the nature of the business, its transactions, and its industry/environment

control risk

The risk that a misstatement that could occur in an assertion about an account or disclosure and that could be material, either individually or in combination with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control

Detection

The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, individually or in combination with other misstatements

C

Which type of risk is the only one controllable by the auditor

A. Inherent

B. Control

C. Detection

risk of material misstatement * detection risk

planned audit risk =

B

Which of the following BEST explains why detection risk is considered controllable by the auditor?

a. It depends on management’s accounting estimates

b. It is influenced by the nature, timing, and extent of audit procedures

c. It reflects the effectiveness of internal controls

d. It depends on industry-level business risks

C

Control risk is primarily a function of:

a. The auditor’s choice of substantive procedures

b. The complexity of the client’s industry

c. The design and operating effectiveness of internal controls

d. The acceptable level of audit risk

A

Inherent risk is BEST described as the risk that:

a. An assertion is susceptible to a material misstatement before considering controls

b. Internal controls will fail to prevent or detect a misstatement

c. Audit procedures will not detect a material misstatement

d. Management will intentionally override controls

engagement risk

Consequences of an audit failure, or the exposure to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events

C

An auditor has determined that the maximum acceptable overall audit risk (AR) for an engagement is 4%. The auditor has assessed inherent risk (IR) at 80% and control risk (CR) at 25%. Based on these assessments, what level of detection risk (DR) is necessary to achieve the planned overall audit risk?

A 10%

B. 15%

C. 20%

D. 25%

B, C, A

For the following question Risk of Material Misstatement (RMM)

Fill in the blank for each question based on the answer choices given

A very low audit risk with a very high RMM, Detection risk needs to be _________

A low audit risk with a moderate RMM, Detection risk needs to be ________
A low audit risk with a very low RMM, Detection risk needs to be ________

A. High

B. Very Low

C. Moderate

increase

When detection risk decreases we need to ______ substantive testing.

A

Which of the following is NOT one of the 3 components of fraud

A. Internal Controls - A lack of internal controls within the organization

B. Rationalization - Justification of dishonest actions

C. Opportunity - Ability to carry out misappropriation of cash or organizational assets

D. Pressure - Motivation or incentive to commit fraud