Audit Exam 1

Which of the following best describes the relationship between attestation services and audit services?

• Attestation is a subset of auditing that provides more assurance than does an audit engagement.

• Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.

• Attestation is a subset of auditing that improves the quality of information for decision makers.

• Auditing is a subset of attestation and focuses on providing companies with advisory services and decision support.

Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.

The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor’s decision when reporting on the financial statements as a whole relates most closely to which major audit concept?

• Audit risk.

• Materiality.

• Reasonable assurance.

• Management assertions.

Materiality

Audit evidence:

• May only be gathered from parties external to the auditee to be reliable.

• May only be gathered from the auditee to be reliable since they are the most knowledgeable source of information.

• May only be gathered from computerized sources to avoid human error.

• Can be gathered from many sources and is not limited to the underlying accounting data.

Can be gathered from many sources and is not limited to the underlying accounting data.

Which of the following audit phases would generally be conducted before all of the others listed below?

• Evaluation of audit evidence.

• Gaining an understanding of the auditee’s industry.

• Consideration of internal control systems.

• Auditing business processes and related accounts.

Gaining an understanding of the auditee’s industry

Which of the following best describes the primary reason an independent auditor reports on financial statements?

• To give stockholders some assurance that any fraudulent activities will be detected.

• To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.

• To provide expertise to management, which may not be totally knowledgeable of prevailing GAAP.

• To identify a poorly designed internal control structure that may produce unreliable financial statements.

To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.

Information asymmetry:

• Refers to an imbalance of information between the auditor and the stockholders of the company.

• Refers to an imbalance of information among stockholders in a company.

• Refers to an imbalance of information between stockholders and the management of the company.

• Refers to an imbalance of information between the auditor and the management of the company.

Refers to an imbalance of information between stockholders and the management of the company.

The examination of all of an entity’s transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample?

• A decrease in the materiality level.

• An increase in the desired level of assurance.

• An assessment that the account being audited is high risk.

• A decrease in the desired level of assurance.

A decrease in the desired level of assurance.

Gaining an understanding of the auditee and its environment includes all of the following areas except

• The entity’s internal controls.

• The audit fee and timeline for completion of the work.

• Regulatory issues unique to the industry.

• How the entity’s application of accounting policies measures performance.

The audit fee and timeline for completion of the work.

The most favorable type of audit opinion for an entity to receive is

• Full assurance.

• Unqualified.

• Qualified.

• Exceptional.

Unqualified.

Independent auditing can best be described as

• A branch of accounting.

• A regulatory function that prevents the issuance of improper financial information.

• A professional activity that measures and communicates financial and business information.

• A discipline that provides assurance regarding the results of accounting and other functional operations and information.

A discipline that provides assurance regarding the results of accounting and other functional operations and information.

Financial statement users’ demand for assurance is similar to that of a potential home buyer who hires a home inspector in that

• The cost of obtaining information is not relevant.

• Independence is not relevant in either situation.

• The buyer [or user] pays directly for this assurance in both situations.

• There may be information asymmetry and conflicts of interest.

There may be information asymmetry and conflicts of interest.

An auditor’s evaluation of the reasonableness of a company’s loan loss reserve would normally be made during which phase of the audit?

• Client acceptance.

• Consideration of internal control systems.

• Gaining an understanding of the auditee’s industry.

• Auditing business processes and related accounts.

Auditing business processes and related accounts.

Audit risk

• Can be completely eliminated through appropriate sampling of transactions.

• Is what creates the demand for an audit.

• Is the risk that an inappropriate opinion will be issued on financial statements that are materially misstated.

• Is the risk that a company may hire an incompetent auditor.

Is the risk that an inappropriate opinion will be issued on financial statements that are materially misstated.

The study and practice of auditing is unlike other areas in accounting because it

• Requires the knowledge of GAAP.

• Requires logic, imagination, and innovation.

• Requires the memorization of formulas and patterns.

• Is required by law for all companies in the United States.

Requires logic, imagination, and innovation.

Assurance services differ from auditing services in that

• Assurance services are limited to economic events or actions, and audit services are not similarly limited.

• Assurance services are more narrow in scope than audit services.

• Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.

• Audit services do not improve the quality of information as do assurance services.

Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information

An "integrated audit" includes

• A financial statement audit and a special audit related to management fraud.

• A special audit related to management fraud.

• A special audit related to management fraud and an audit of internal control over financial reporting.

• A financial statement audit and an audit of internal control over financial reporting.

A financial statement audit and an audit of internal control over financial reporting.

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the

• Shareholders.

• External auditors.

• Senior management.

• Internal audit department.

Senior management.

The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except

• The auditor should maintain professional skepticism and exercise professional judgment throughout the planning and performance of the audit.

• The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.

• The auditor should obtain sufficient appropriate audit evidence about whether material misstatements exist in the financial statements.

• The auditor should have appropriate competence and capability to perform the audit.

The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.

Identify which of the Principles Underlying an Audit Conducted in Accordance with GAAS is most closely related to the item below:

Item:

The auditors’ consideration of the effectiveness of the entity’s internal control on the nature, timing, and extent of substantive procedures.

• Purpose

• Reporting

• Performance

• Responsibilities

Performance

Which of the following best describes the relationship between management and the board of directors?

• The board of directors reports to management.

• Management reports to the board of directors.

• Neither group is accountable to the other.

• Both groups report directly to the shareholders.

Management reports to the board of directors.

Which of the following primarily shapes the context in which auditing takes place?

• The Securities and Exchange Commission [SEC].

• The entity's business environment.

• Legislation passed by Congress.

• The American Institute of Certified Public Accountants [AICPA].

The entity's business environment.

What is the essential meaning of the auditor being independent in fact?

• The auditor's sole obligation is to third parties.

• The auditor must be objective.

• The auditor may have a direct ownership interest in his auditee's business if it is not material.

• The auditor must adopt a critical attitude during the audit.

The auditor must be objective.

Identify which of the Principles Underlying an Audit Conducted in Accordance with GAAS is most closely related to the item below:

Item: 

An auditor has raised some questions with respect to management’s response to various inquiries concerning pending litigation facing the client.

• Responsibilities

• Performance

• Purpose

• Reporting

Responsibilities

Identify which of the Principles Underlying an Audit Conducted in Accordance with GAAS is most closely related to the item below:

Item:

Auditors’ requests to obtain bank statements directly from financial institutions with whom the client does business.

• Performance

• Purpose

• Reporting

• Responsibilities

Performance

Identify which of the Principles Underlying an Audit Conducted in Accordance with GAAS is most closely related to the item below:

Item:

Auditors’ assessment of the risk of material misstatement.

• Purpose

• Responsibilities

• Performance

• Reporting

Performance

Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards?

• The AICPA sets auditing standards for use in audits of nonpublic entities.

• All of the above.

• The PCAOB sets auditing standards for use in audits of publicly held companies.

• Standards issued by the PCAOB are called “Auditing Standards” and standards issued by the AICPA Auditing Standards Board are called “Statements on Auditing Standards”.

All of the above

Which of the following organizations affects the environment in which CPAs work?

• The Securities and Exchange Commission [SEC].

• All of the above.

• The Public Company Accounting Oversight Board [PCAOB].

• The American Institute of Certified Public Accountants [AICPA].

All of the above

Identify which of the Principles Underlying an Audit Conducted in Accordance with GAAS is most closely related to the item below:

Item:

Determining and applying an appropriate materiality level.

• Performance

• Purpose

• Responsibilities

• Reporting

Performance

Which of the following is generally not considered one of the five business processes or cycles?

• Revenue [or sales].

• Financing.

• Inventory management.

• Information technology.

Information technology.

To exercise due professional care, an auditor should

• Design the audit to detect all instances of illegal acts.

• Exercise professional skepticism.

• Examine all available corroborating evidence supporting management's assertions.

• Attain the proper balance of professional experience and formal education.

Exercise professional skepticism.

Identify which of the Principles Underlying an Audit Conducted in Accordance with GAAS is most closely related to the item below:

 Item:

An auditor’s overall conclusion of the fairness of the client’s financial statements.

• Reporting

• Performance

• Purpose

• Responsibilities

Reporting

In order to maintain independence from a public company audit client, the partner on the engagement must rotate off from the client

• There is no requirement for the partner to be reassigned from any public company audit client after any specified period of time.

• Every 7 years.

• Every year.

• Every 5 years.

Every 5 years.

For which of the following services is a practitioner not required to be independent?

• Any attest service.

• Financial statement reviews.

• A compilation of financial statements.

• Financial statement audits.

A compilation of financial statements.

Which of the following agencies/organizations govern the independence rules for audits of public companies?

• American Institute of Certified Public Accountants (AICPA).

• Auditing Standards Board (ASB).

• Financial Accounting Standards Board (FASB).

• Public Company Accounting Oversight Board (PCAOB).

Public Company Accounting Oversight Board (PCAOB).

Without first receiving consent from the client, a CPA firm should not disclose confidential client information contained in its working papers to (a)

• Disciplinary body created under state statute.

• PCAOB inspection team.

• Another entity looking for benchmarking information.

• Federal court that has issued a subpoena.

Another entity looking for benchmarking information.

A CPA, while performing an audit, strives to achieve independence in appearance in order to

• Become independent in fact.

• Maintain public confidence in the profession.

• Comply with the generally accepted accounting principles.

• Reduce risk and liability.

Maintain public confidence in the profession.

Which of the following statements is false concerning PCAOB and AICPA inspections of public accounting firms?

• These inspections focus on the system of quality management put in place by the CPA firms.

• The AICPA peer review program is mandatory for participating firms.

• The AICPA peer review process is conducted more frequently and in more depth in comparison with the PCAOB peer review process.

• The "Big 4" CPA firms are a good example of a "registered" firm with the PCAOB.

The AICPA peer review process is conducted more frequently and in more depth in comparison with the PCAOB peer review process.

A CPA is aware that a sole proprietor client has "skimmed" unrecorded cash receipts and thus not reported them to the Internal Revenue Service. If the CPA signs the entity's tax return as a CPA after preparing the return, he/she would be violating which AICPA Rule of Conduct?

• Rule 1.700—Confidential Information

• Rule 1.200—Independence

• Rule 1.100—Integrity and Objectivity

• Rule 1.320—Accounting Principles

Rule 1.100—Integrity and Objectivity

Which of the following is not a component of an effective system of quality management as defined by the AICPA's Statement on Quality Management Standards Number 1?

• Governance and leadership.

• Acceptance and continuance of client relationships and specific engagements.

• Reliability.

• Resources.

Reliability.

A CPA firm should establish monitoring and remediation processes to provide reasonable assurance that the policies and procedures over each of the other components of quality management are suitably designed and are being applied effectively. To achieve this goal, the firm would most likely establish procedures for each of the following except:

• Evaluating prospective and continuing client relationships.

• Reviewing engagement audit documentation and reports.

• Ensuring the firm does not engage with clients for which they have to issue adverse opinions.

• Requiring personnel to adhere to the applicable independence rules.

Ensuring the firm does not engage with clients for which they have to issue adverse opinions.

Which of the following is not part of the AICPA’s auditor objectivity and independence principle?

• A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities.

• A member should not enter into contingent fee arrangements.

• A member in public practice should be independent in fact when providing auditing and other attestation services.

• A member in public practice should be independent in appearance when providing auditing and other attestation services.

A member should not enter into contingent fee arrangements.

A violation of the profession's ethical standards is most likely to occur when a CPA

• Compiles the financial statements of an entity that employs the CPA's spouse as a bookkeeper.

• Arranges with a financial institution to collect notes issued by a client in payment of fees due.

• Serves as an honorary member of the board of directors of a charitable organization for which he or she also audits the entity's financial statements.

• Issues an unqualified opinion on an entity's financial statements when fees for the prior year audit are significant to the CPA’s practice and have not been paid.

Issues an unqualified opinion on an entity's financial statements when fees for the prior year audit are significant to the CPA’s practice and have not been paid.

The SEC and the Sarbanes-Oxley Act of 2002 prohibit public accounting firms from providing certain services to audit clients that are public companies. Which of the following services is not prohibited?

• Business valuation and appraisal services.

• Information system design services.

• Internal audit outsourcing services.

• Tax preparation services.

Tax preparation services.

Which of the following is not a covered member according to Section 0.400.14 of the Code of Professional Conduct?

• The firm, including the firm's employee benefits plans.

• A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit.

• An individual on the attest engagement team.

• An individual in a position to influence the attest engagement.

A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit.

Each of the following pairings includes a category of rules and a specific rule which may or may not pertain to that category. Choose the pairing which is correctly matched.

• Independence; Confidential client information.

• General standards; Contingent fees.

• General standards; Due professional care.

• Responsibilities to clients; Acts discreditable.

General standards; Due professional care.

Which of the following is not considered an act discreditable to the profession?

• Discrimination or harassment of employees.

• Billing an audit client an amount in excess of the originally quoted fee.

• Failure to file a personal tax return on a timely basis.

• Solicitation of CPA exam questions.

Billing an audit client an amount in excess of the originally quoted fee.