Auditing Exam 1

Dr. Steve (Astate)

G.

A.

A.

S.

General

Accepted

Auditing

Standards

Which book should a private company use for auditing?

a. Auditing Standards Board (ASB)

b. Public Company Accounting Oversight Board (PCAOB)

a. Auditing Standards Board (ASB)

Which book should a public company use for auditing?

a. Auditing Standards Board (ASB)

b. Public Company Accounting Oversight Board (PCAOB)

b. Public Company Accounting Oversight Board (PCAOB)

List the 5 assertions of PCAOB.

P.

E.

R.

C.

V.

Presentation and disclosure

Existence or occurrence

Rights and obligations

Completeness

Valuation or allocation

List the 7 assertions of ASB.

C.

O.

V.

E.

R.

U.

P.

Completeness

CutOff

Valuation, allocation, and accuracy

Existence and occurrence

Rights and obligations

Understandability of Presentation and classification

What are the two types of auditing?

Historical financial statements and Internal controls

How many types of auditing do non-issuers need?

a. 1 type of audit: financial statements

b. 1 type of audit: internal controls

c. 2 types of audit: financial statements and internal controls

a. 1 type of audit: financial statements

How many types of auditing do issuers need?

a. 1 type of audit: financial statements

b. 1 type of audit: internal controls

c. 2 types of audit: financial statements and internal controls

c. 2 types of audit: financial statements and internal controls

Which of the following is not a characteristic of an assurance service?

a. The engagement is conducted by an independent professional

b. The service lends credibility to information

c. The subject matter is limited to financial information

d. The service is useful for decision makers

c. The subject matter is limited to financial information

An assurance service that determines whether the entity has conformed with regulations, rules, or processes is a (an):

a. compliance audit

b. financial statement audit

c. internal audit

d. operational audit

a. compliance audit

Operational (performance) audits are useful because they:

a. include a comprehensive audit

b. are concerned with the economy, efficiency, and effectiveness of an organization’s activities

c. involve gathering evidence to determine whether the entity under review has followed the rules, policies, procedures, laws, or regulations with which they must conform

d. ensure companies pay appropriate taxes

b. are concerned with the economy, efficiency, and effectiveness of an organization’s activities

The function of internal audit is determined by:

a. the external auditor

b. the IIA

c. those charge with governance and management

d. the government

c. those charge with governance and management

All of the following are reasons why users would demand an audit of financial statements except:

a. complexity

b. remoteness

c. cost

d. reliability

c. cost

Management is responsible for which of the following?

a. Preparing financial statements in accordance with the appropriate auditing standards

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

c. Using professional skepticism in the preparation of the financial statements

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

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

Which of the following organizations issues auditing standards for the audits of public companies?

a. PCAOB

b. SEC

c. ASB

d. COSO

a. PCAOB

What is the appropriate date for an audit report?

a. The date the auditors were hired

b. The date of the balance sheet

c. The conclusion of the gathering of evidence for the audit

d. The date required by regulators

c. The conclusion of the gathering of evidence for the audit

Auditors of publicly traded companies are required to perform a (an) _______ for their clients.

a. Compliance audit

b. Integrated audit

c. Internal audit

d. Operational audit

b. Integrated audit

The audit expectation gap occurs when:

a. Auditors perform their duties appropriately and satisfy users’ demands

b. User beliefs do not align with what professional standards and regulations expect of auditors

c. Inspections of audits ensure that audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfy users’ demands

d. The public is well educated about auditing

b. User beliefs do not align with what professional standards and regulations expect of auditors

In determining which types of services an independent accounting firm provides, which of the following falls under audit services?

a. Audit of historical financial statements

b. Examination of financial forecasts

c. Audit of internal controls over financial reporting

d. Review of historical financial statements

a. Audit of historical financial statements

c. Audit of internal controls over financial reporting

A key aspect of the “concern for the public interest” definition of a professional is:

a. The level of a professional expertise of the professional

b. The fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or the own well-being

c. The incorporation of this definition into the Sarbanes-Oxley Act of 2002

d. The unique ability of CPAs to sign attest reports

b. The fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or the own well-being

Which of the following statements is true about interpretations of AICPA Code of Professional Conduct?

a. Interpretations are not enforceable by the AICPA in a disciplinary matter

b. Interpretations are strictly enforceable by the AICPA in a disciplinary matter

c. Interpretations are strictly enforceable by the AICPA and all state boards of accountancy in a disciplinary matter

d. An AICPA member who departs from an interpretation has the burden of justifying a departure in any disciplinary hearing

d. An AICPA member who departs from an interpretation has the burden of justifying a departure in any disciplinary hearing

In the conceptual framework of the AICPA Code of Professional Conduct, a self-interest threat is:

a. The threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client

b. The threat that a CPA will not act with objectivity because the CPA’s interests are opposed to the client’s interests

c. The threat that a CPA will take on the role of client management or otherwise assume management responsibilities

d. The threat that a CPA will promote a client’s interests or position to the point that the CPA’s objectivity or independence is compromised

a. The threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client

A CPA would violate the AICPA rule on integrity and objectivity if:

a. A CPA in industry knowingly misrepresented the earnings of the company he or she worked for

b. A CPA in public practice represented both the buyer and seller in helping the parties negotiate the sale (purchase) of a business

c. A CPA who was an audit staff member subordinated his or her judgement to that of the audit partner

d. All of the answers are violations of the AICPA rule on integrity and objectivity

d. All of the answers are violations of the AICPA rule on integrity and objectivity

According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?

a. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client

b. The auditor is also an attorney who advises the client as its general counsel

c. An employee of the auditor donates service as treasurer of a charitable organization that is a client

d. The client owes the auditor fees for two consecutive annual audits

a. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client

A CPA who is a “covered person” purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities were not material to the CPA but were material to the child’s personal net worth. Would the independence of the CPA be considered impaired with respect to the client?

a. Yes, because the stock would be considered an indirect financial interest that is material to the CPA’s child

b. No, because the CPA would not be considered to have a direct financial interest in the client

c. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor

d. No, because the CPA would not be considered to have a material indirect financial interest in the client

c. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor

Under the AICPA ethics rules on independence, which of the following individuals would not be a covered member?

a. A consulting manager in another office who provides 100 hours of non-audit services to the audit client

b. A partner in the same office as the lead partner who provides no services to the audit client

c. A partner in another office who evaluates partner performance and compensation, but provides no services to the audit client

d. A tax partner in another office who provides 9 hours of tax services to the audit client

d. A tax partner in another office who provides 9 hours of tax services to the audit client

Which of the following best describes the independence requirements for a close relative of a covered member?

a. A close relative cannot have an immaterial, direct investment in an audit client

b. A close relative cannot have a loan from an audit client

c. A close relative cannot hold a key position with an audit client

d. A close relative cannot have a immaterial, indirect investment in an audit client

c. A close relative cannot hold a key position with an audit client

The essence of the due care standard is that the auditor should not be guilty of:

a. Bias

b. Errors in judgement

c. Fraud

d. Negligence

d. Negligence

Without of the consent of the client, a CPA should not disclose confidential client information contained in working papers to a:

a. Voluntary quality control review board

b. CPA firm that is a likely successor auditor

c. Federal court that has issued a valid subpoena

d. Disciplinary body created under state statute

b. CPA firm that is a likely successor auditor

Which of the following best describes what is meant by the term generally accepted auditing standards?

a. Rules acknowledged by the accounting profession because of their universal application

b. Pronouncements issued by the Auditing Standards Board

c. Measures of the quality of the auditor’s performance

d. Procedures to be used to gather evidence to support financial statements

c. Measures of the quality of the auditor’s performance

An auditor of a nonissuer must conduct the audit in accordance with:

I. ASB standards

II. PCAOB standards

a. I

b. Both I and II

c. Either I or II, but not both

d. II

a. I

Which of the following accurately depicts the auditor’s responsibility with respect to Statements of Auditing Standards?

a. The auditor is required to follow the guidance provided by the Standards, without exception

b. The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware

c. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective

d. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.

d. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.

Which of the following terms used within standards indicates a presumptively mandatory requirement?

a. Must

b. Should

c. May

d. Might

b. Should

When a PCAOB auditing standard indicates that an auditor “could” perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

a. By comparing the PCAOB standard with related AICPA auditing standards

b. By exercising professional judgment in the circumstances

c. By soliciting input from the issuer’s audit committee

d. by evaluating whether the audit is likely to be subject to inspection by the PCAOB

b. By exercising professional judgment in the circumstances

Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?

a. An auditor may not draft an entity’s financial statements based on information from management’s accounting system

b. The adoption of sound accounting policies is an implicit part of an auditor’s responsibilities

c. An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion

d. Making suggestions that are adopted about an entity’s internal control environment impairs an auditor’s independence

c. An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion

Which of the following terms identifies a requirement for audit evidence?

a. Appropriate

b. Adequate

c. Reasonable

d. Disconfirming

a. Appropriate

According to the standards of the profession, which of the following circumstances will prevent a CPA who is performing audit engagements from being independent?

a. Obtaining a collateralized automobile loan form a financial institution client

b. Litigation with a client relating to billing for consulting services for which the amount is immaterial

c. Employment of the CPA’s spouse as a client’s internal auditor

d. Acting as an honorary trustee for a not-for-profit organization client

c. Employment of the CPA’s spouse as a client’s internal auditor

Which of the following actions by a CPA most likely violates the profession’s ethical standards?

a. Using a records-retention agency to store confidential client records

b. Retaining client records after the client has demanded their return

c. Arranging with a financial institution to collect notes issued by a client in payment of feed due

d. Compiling the financial statements of a client that employed the CPA’s spouse as a bookkeeper

b. Retaining client records after the client has demanded their return

According to the ethical standards of the profession, which of the following acts by a CPA is generally prohibited?

a. Purchasing a product form a third party and reselling it to a client

b. Writing a financial management newsletter promoted and sold by a publishing company

c. Accepting a commission for recommending a product to an audit client

d. Accepting engagements obtained through the efforts of third parties

c. Accepting a commission for recommending a product to an audit client

Which of the following areas of professional responsibility should be observed by a CPA not in public practice?

	Objectivity	Independence
A.	Yes	Yes
B.	Yes	No
C.	No	Yes
D.	No	No

b. Yes, No

Which of the following items must an auditor return to the client even if the client is in arrears on fees related to the audit engagement?

a. confirmation received during the audit

b. Audit working papers prepared by the auditor during the audit

c. Client records prepared by the auditor during the audit

d. Client-prepared records used during the audit

d. Client-prepared records used during the audit

The principle of due care in the AICPA Code of Professional Conduct relates to which of the following professional requirements?

a. Providing services with an unbiased, open mind

b. Providing services without conflicts

c. Providing services with a sense of integrity

d. Providing services with competence and diligence

d. Providing services with competence and diligence

According to the AICPA Code of Professional conduct, which of the following is an individual or entity that is not considered to be a covered member?

a. A partner who works in the same office as the lead attest engagement partner

b. The managing partner of the firm, who is located in a different office

c. A former senior auditor on the engagement, who currently works for a company that provides consulting services to the client

d. The firm, including the firm’s employee benefit plan

c. A former senior auditor on the engagement, who currently works for a company that provides consulting services to the client

Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor’s family is most likely to impair the auditor’s independence?

a. A parent’s immaterial investment in a client

b. A first cousin’s loan form a client

c. A spouse’s employment with a client

d. A sibling’s loan to a director of a client

c. A spouse’s employment with a client

Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances impairs Kar’s independence?

a. During the period of the professional engagement, Fort gives Kar tickets to a football game worth $75

b. Kar owns stock in a corporation that Fort’s 401(k) plan also invests in

c. Kar’s friend, an employee of another local accounting firm, prepares Fort’s tax returns

d. Kar’s sibling is an internal auditor employed part-time by Fort

d. Kar’s sibling is an internal auditor employed part-time by Fort

Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith’s independence would be impaired under which of the following circumstances?

a. Smith is a director of Hometown Bank

b. Smith has a collateralized automobile loan with Hometown Bank

c. Smith had an account with Hometown Bank two years ago

d. Smith and a Hometown Bank board member belong to the same church

a. Smith is a director of Hometown Bank

A CPA who is not in public practice is obligated to follow which of the following rules of conduct?

a. Independence

b. Integrity and objectivity

c. Contingent fees

d. Commissions

b. Integrity and objectivity

An independent auditor must have which of the following?

a. A pre-existing and well-informed point of view with respect to the audit

b. Technical training that is adequate to meet the requirements of a professional

c. A background in many different disciplines

d. Experience in taxation that is sufficient to comply with generally accepted auditing standards

b. Technical training that is adequate to meet the requirements of a professional

Burrow & Co., CPAs, have provided annual audit and tax compliance services to Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin fieldwork for the current year’s audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the fieldwork on Mare’s audit?

a. Mare sets up a two-year payment plant with Burrow to settle the unpaid fee balance

b. Mare commits to pay the past due fee in full before the audit report is issued

c. Mare gives Burrow an 18-month note payable for the full amount of the past due fees before Burrow begins the audit

d. Mare engages another firm to perform the fieldwork, and Burrow is limited to reviewing the workpapers and issuing the audit report

b. Mare commits to pay the past due fee in full before the audit report is issued

A violation of the profession’s ethical standards most likely would have occurred when a CPA:

a. Issued an unqualified opinion on the Year 2 financial statements when feed for the Year 1 audit were unpaid

b. Recommended a controller’s position description with candidate specifications to an audit client

c. Purchased a CPA firm’s practice of monthly write-ups for a percentage of fees to be received over a three-year period

d. Made arrangements with a financial institution to collect notes issued by a client in payment of fees due for the current year’s audit

a. Issued an unqualified opinion on the Year 2 financial statements when feed for the Year 1 audit were unpaid

Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?

a. For an examination of prospective financial statements

b. For an audit or a review if agreed upon by both the CPA and the client

c. For a compilation if a third party will use the financial statement and disclosure is not made in the report

d. If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings

d. If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings

Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence?

a. The contingent fee arrangement does not impair independence if it is consistent with the registered public accounting firm’s quality control policies

b. The contingent fee arrangement impairs independence

c. The contingent fee arrangement does not impair independence unless more than half of the fee is subject to contingencies

d. The contingent fee arrangement impairs independence unless approved by the client’s audit committee

b. The contingent fee arrangement impairs independence

Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation?

a. All forms of advertising and solicitation are prohibited

b. There are no prohibitions regarding the manner in which CPAs may solicit new business

c. A CPA may advertise in any manner that is not false, misleading, or deceptive

d. A CPA may only solicit new clients through mass mailings

c. A CPA may advertise in any manner that is not false, misleading, or deceptive

According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested?

a. Client-provided records, even if fees are due to the CPA for the engagement and are unpaid

b. Client-provided records requested for a second time because the client misplaced the first set of records

c. Supporting records prepared by the CPA consisting of adjusting, closing, combining, or consolidating entries prior to the completion of the engagement

d. The CPA’s working papers consisting of analyses and schedules prepared by the client at the CPA’s request

a. Client-provided records, even if fees are due to the CPA for the engagement and are unpaid

According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?

a. Refusing to provide the client with copies of the CPA’s workpapers

b. Auditing financial statements according to governmental standards despite the client’s preferences

c. Accepting a commission from a nonattest function client

d. Retaining client records after the client demands their return

d. Retaining client records after the client demands their return

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession?

a. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA

b. A CPA signs a document containing immaterial false and misleading information, or permits or directs another CPA to do so

c. A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it

d. A CPA fails to give a client copies of the CPA’s workpapers related to a completed and issued work product upon the client’s request because the client has not paid fees payable to the CPA for the work product

a. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA

Banister, a CPA, is approached by Wagner, a client. Wagner requests the Banister return the records provided to Banister by Wagner during an audit. Wagner still owes Banister the fees associated with the audit. According to the AICPA Code of Professional Conduct, what should Banister do?

a. Banister should return the records to Wagner

b. Banister should return the records to Wagner only after the fee has been paid

c. Banister should not return the records to Wagner because the records now belong to Banister

d. Banister should not return the records to Wagner without a court order

a. Banister should return the records to Wagner

State if even is a violation or not a violation and which rule violation it could be:

Continuation of the use of the name Jones & Associates, CPAs

a. Violation, General Standards Rules

b. No violation, General Standards Rules

c. Violation, Form of Organization and Name Rule

d. No violation, Form of Organization and Name Rule

d. No violation, Form of Organization and Name Rule

State if even is a violation or not a violation and which rule violation it could be:

HMC gift to audit supervisor

a. Violation, Independence Rule

b. No violation, Independence Rule

c. Violation, General Standards Rule

d. No violation, General Standards Rule

b. No violation, Independence Rule

State if even is a violation or not a violation and which rule violation it could be:

Failure to return HMC’s receiving reports

a. Violation, Acts Discreditable Rule

b. No violation, Acts Discreditable Rule

c. Violation, Confidential Client Information Rule

d. No violation, Confidential Client Information Rule

a. Violation, Acts Discreditable Rule

State if even is a violation or not a violation and which rule violation it could be:

Non-GAAP depreciation method

a. Violation, General Standards Rule

b. No violation, General Standards Rule

c. Violation, Accounting Principles Rule

d. No violation, Accounting Principles Rules

d. No violation, Accounting Principles Rules

State if even is a violation or not a violation and which rule violation it could be:

Audit senior’s lack of review of post-planning workpapers

a. Violation, Accounting Principles Rule

b. No violation, Accounting Principles Rule

c. Violation, General Standards Rule

d. No violation, General Standards Rule

c. Violation, General Standards Rule

State if even is a violation or not a violation and which rule violation it could be:

Confidential information provided by in-charge partner

a. Violation, Acts Discreditable Rule

b. No violation, Acts Discreditable Rule

c. Violation, Confidential Client Information Rule

d. No violation, Confidential Client Information Rule

d. No violation, Confidential Client Information Rule

Select the most appropriate response to the situation:

A partner is a member of a country club that is a potential new audit client of the CPA firm. The partner has financial decision-making powers at the club but would not serve as the primary engagement partner.

a. The firm can accept the country club as a new client because of the scope and nature of the services being provided

b. The firm can accept the country club as a new client because the firm is independent and objective

c. The firm can accept the country club as a new client because the partner will not be involved with the engagement

d. The firm cannot accept the country club as a new client because the client lacks integrity

e. The firm cannot accept the country club as a new client due to a lack of independence and objectivity

f. The firm cannot accept the country club as a new client unless it includes a disclosure of the relationship in the notes to the financial statements

e. The firm cannot accept the country club as a new client due to a lack of independence and objectivity

Select the most appropriate response to the situation:

A CPA firm just retained a new audit client. The new client’s CFO has offered the engagement manager four tickets for personal use to a national, televised, sporting event, along with the use of the client’s corporate jet to travel to the event.

a. The engagement manager can accept the tickets provided that this is disclosed in the client representation letter

b. The engagement manager can accept the tickets provided that this is disclosed in the notes to the financial statements

c. The engagement manager can accept the tickets with no effect on due care

d. The engagement manager can accept the tickets with no effect on independence and objectivity

e. The engagement manager cannot accept the tickets in order to exercise due care

f. The engagement manager cannot accept the tickets in order to maintain the appearance of independence and objectivity

f. The engagement manger cannot accept the tickets in order to maintain the appearance of independence and objectivity

Select the most appropriate response to the situation:

In order to meet the deadline of a client’s annual report, the engagement partner issues the final audit report prior to completion of the fieldwork. The company is the CPA firm’s largest client.

a. Because the company is the CPA firm’s largest client, there is a conflict of interest and a lack of independence

b. The firm’s lack of internal quality control procedures suggests that the firm is not exercising due care

c. The firm’s lack of internal quality control procedures suggests that the firm is not exercising objectivity

d. The issuance of the audit report is acceptable, as long as the situation is disclosed in the client representation letter

e. The issuance of the audit report is in accordance with the firm’s internal professional code of conduct

b. The firm’s lack of internal quality control procedures suggests that the firm is not exercising due care

Select the most appropriate response to the situation:

A new administrative staff member at a CPA firm sits on the board of trustees at a nonissuer audit client. The staff member performs routine clerical functions related to the engagement.

a. The firm is independent of the client and issue an unmodified opinion, assuming that no additional issues are identified

b. The firm is independent of the client but must issue a modified opinion disclosing the nature of the relationship

c. The firm is not independent of the client and must disclaim an opinion of the financial statements

d. The firm is not independent of the client and must disclose the relationship in the financial statements

e. The firm is not independent of the client and must withdraw from the engagement

a. The firm is independent of the client and can issue an unmodified opinion, assuming that no additional issues are identified

Select the most appropriate response to the situation:

A client informed the engagement partner that $190,000 of its inventory is deemed obsolete and is unwilling to adjust the financial statements. Accordingly, the financial statements have not been adjusted. The engagement partner, who has substantial experience in this industry, is aware of the client’s position, but has agreed to issue an unmodified opinion on the financial statements. The materiality on the audit is $100,000.

a. The financial statements are materially misstated, and the engagement partner has exercised due care

b. The financial statements are materially misstated, and the engagement partner has not exercised objectivity and integrity

c. The financial statements are materially misstated, and the engagement partner is not independent

d. The financial statements are not materially misstated, and the engagement partner has exercised due care

e. The financial statements are not materially misstated, and the engagement partner has exercised objectivity and integrity

f. The financial statements are not materially misstated, and the engagement partner is not independent

b. The financial statements are materially misstated, and the engagement partner has not exercised objectivity and integrity

Select the most appropriate response to the situation:

A CPA firm submitted a proposal to perform agreed-upon procedures for Birch Co. The engagement partner’s wife is the administrative assistant to the sales team of Birch Co.

a. The firm can accept Birch co. as a new client because the firm is independent and objective

b. The firm can accept Birch co. as a new client with a disclosure of the relationship in the attestation report

c. The firm cannot accept Birch co. as a new client due to a lack of independence an objectivity

d. The firm cannot accept Birch co. as a new client due to a lack of integrity

e. The firm cannot accept Birch co. as a new client due to the nature and scope of the services being provided

a. The firm can accept Birch co. as a new client because the firm is independent and objective

Under the ethical standards of the profession in the United States, which of the following circumstances would impair independence in the audit of an issuer but would not impair independence in the audit of a nonissuer?

a. The firm performing the financial statement audit also designed and implemented the client’s financial information system

b. The audit firm provided a loan to the client during the prior year

c. the lead partner has worked on the audit engagement of a client for 10 years

d. The audit firm has an immaterial direct financial interest in the client

c. the lead partner has worked on the audit engagement of a client for 10 years

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted?

a. One

b. Two

c. Three

d. Five

a. One

Under the provisions of the Sarbanes-Oxley Act of 2002, the lead audit or coordinating partner and the reviewing partner must rotate off the audit:

a. Each year

b. Every three years

c. Every five years

d. Every seven years

c. Every five years

A CPA in charge of the external audit of a nonissuer received an unexpected inheritance that includes 100 shares of the audit client's common stock. Which of the following actions should the CPA take to avoid violating independence rules?

a. Decline to accept the inheritance

b. Petition the AICPA for an independence exception from unforeseen circumstances

c. Resign from the audit firm

d. Sell or donate the stock within 30 days after receipt of ownership rights

d. Sell or donate the stock within 30 days after receipt of ownership rights

The spouse of a covered member of an accounting firm is in a permitted employment situation at an attest client and participates in the client's employee stock ownership plan. According to the AICPA Code of Professional Conduct, which of the following actions is required of the spouse when beneficial financial interests are distributed?

a. The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained

b. The spouse must hold the shares for a minimum of 30 days after the right to dispose is obtained

c. The spouse must served as a trustee for the share-based compensation arrangement to receive put options are part of the compensation arrangement

d. The spouse must not exercise any put option to require the employer to repurchase the beneficial financial interests until after 30 days from receipt

a. The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained

An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?

a. Controller

b. CFO

c. CEO

d. Staff accountant

d. Staff accountant

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

a. The auditor should contact the existing auditor anyway because it is the auditor’s duty

b. The auditor should consider that a negative factor concerning the integrity of client management

c. The existing auditor should contact the new auditor to tell the new auditor all about the client

d. The auditor should respect the prospective client’s right to privacy

b. The auditor should consider that a negative factor concerning the integrity of client management

The risk assessment phase of an audit does not include:

a. Gaining an understanding of the client

b. Audit execution and reporting

c. Identification of factors that may affect the risk of a material misstatement in the financial statements

d. Development of an audit strategy and a risk and materiality assessment

b. Audit execution and reporting

Which of the following is an example of a qualitative factor of materiality?

a. The client is experiencing a slowdown in sales and is struggling to pay vendors on time

b. Inventory represents 40% of current assets

c. The client installed a new security system to protect the building

d. Total salaries expense is greater than 5% of income before taxes

a. The client is experiencing a slowdown in sales and is struggling to pay vendors on time

An attitude of professional skepticism means:

a. The auditor can rely on past experience to determine current risk and fraud

b. Any indicator of fraud is properly investigated

c. The auditor can rely on management assertions

d. The auditor is independent of the client

b. Any indicator of fraud is properly investigated

An auditor will identify accounts and related assertions at risk of material misstatement:

a. After testing internal controls

b. After writing the audit report

c. To plan the audit to focus on those accounts

d. To eliminate audit risk

c. To plan the audit to focus on those accounts

Which component of audit risk can the auditor control?

a. Inherent risk

b. Control risk

c. Financial risk

d. Detection risk

d. Detection risk

Obtaining positive results from testing controls means that:

a. The auditor can completely rely on a client’s system of internal controls

b. No substantive testing is required

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

d. Materiality will be set at a low dollar amount

c. 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

b. Means that auditor will spend minimum effort testing the client’s system of internal controls and control risk is high

c. Requires the auditor to conduct extensive control testing

d. Means the auditor will conduct some interim testing and minimal year-end account-balance testing

b. Means that auditor will spend minimum effort testing the client’s system of internal controls and control risk is high

The audit strategy known as “reliance on controls approach”:

a. Is appropriate when internal controls are minimal

b. Means that auditor will spend minimum effort testing the client’s system of internal controls

c. Requires the auditor to conduct extensive control testing

d. Means the auditor will conduct extensive year-end account-balance testing

c. Requires the auditor to conduct extensive control testing

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

a. The client operates in a highly competitive industry

b. The client has a history of reporting losses

c. A significant percentage of management pay is tied to earnings

d. All of the answer choices are correct

d. All of the answer choices are correct

A client operates in the technology industry; therefore, inventory can become obsolete quickly.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

c. Inherent risk

Auditors decide to select a larger sample size when auditing a client’s accounts receivable balance.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

b. Detection risk

A common benchmark used when determining planning materiality is net income before taxes.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

d. Not applicable

A tremendous amount of cash flows through a casino and is handled by many employees.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

c. Inherent risk

A small client does not have enough employees to separate the duties of receiving inventory and recording inventory.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

a. Control risk

A senior auditor failed to closely supervise and review the work of a first-year auditor.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

b. Detection risk

A client that operates movie theaters is experiencing a period of declining revenue due to the popularity of streaming services.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

c. Inherent risk

An audit firm considers independence requirements before accepting a new client.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

d. Not applicable

A client has recently installed a state-of-the-art security system for its inventory warehouse.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

a. Control risk

A client is geographically located in an area with little threat from natural disaster.

a. Control risk

b. Detection risk

c. Inherent risk

d. Not applicable

c. Inherent risk

Choose a test of controls to determine whether a client’s monthly reconciliation process is being performed effectively.

a. Extent

b. Nature

c. Timing

b. Nature

Use a larger sample size of sales invoices for the current-year audit versus the prior-year audit.

a. Extent

b. Nature

c. Timing

a. Extent

Chooses a substantive procedure to determine whether a client’s accounts receivable balance is valued appropriately.

a. Extent

b. Nature

c. Timing

b. Nature

Decides to perform a substantive procedure at interim instead of year-end.

a. Extent

b. Nature

c. Timing

c. Timing

Uses a smaller sample size because detection risk is high.

a. Extent

b. Nature

c. Timing

a. Extent