ANS: D

10 Auditing Standards Which standard requires that the auditor evaluate whether the financial
statements are presented in accordance with GAAP?
Audit standards require auditors to.....

A. Perform procedures designed to detect all instances of fraud that might Answers:
affect the financial statements A. The first general standard
B. Provide reasonable assurance that the financial statements are not B. The first standard of fieldwork
materially misstated because of fraud C. The second standard of fieldwork
C. Issue an unqualified opinion only when the auditor is satisfied that no D. The second standard of reporting
instances of fraud have occurred E. The first standard of reporting

ANS: B. ANS: E.
The objective of one of the reporting standards is to prevent The first general standard recognizes that regardless of how capable an
misinterpretations regarding the degree of responsibility the auditor is individual may be in other fields, the individual can not meet the
assuming with regards to his opinion. The standard is requirements of the auditing standards without the proper
Answers: Answers:
A. the third reporting standard
B. the second reporting standard A. Supervision and review skills
C. The first reporting standard B. Quality control and peer review
D. The fourth reporting standard C. Business and finance courses
D. Education and experience in auditing
ANS: D.
ANS: D.
One of the auditing standards requires that the auditor have an
understanding of the entity's internal controls. The standard is ... The third general standard states that due professional care is to be
Answers: exercised in the planning and performance of the audit and the preparation
A. The second standard of fieldwork of the report. This standard requires
B. the third general standard
C. the third standard of fieldwork Answers:
D. the first reporting standard
A. Supervision of assistants by the auditor with final responsibility for the
ANS: A audit.
B. Thorough review of the existing safeguards over access to assets and
The first standard of fieldwork, which states that the work is to be records.
adequately planned and assistants, if any, are to be properly supervised, C. Objective review of the adequacy of the technical training and proficiency
recognizes that of firm personnel.
D. Limited review of the indications of employee fraud and illegal acts.
Answers:
A. Early appointment of the auditor is advantageous to the auditor and the ANS: A
client
B. Appointment of the auditor subsequent to the physical count of The first general standard requires that the examination of financial
inventories is not permissible. statements is to be performed by a person or persons having adequate
C. Acceptance of an audit engagement after the close of the client's fiscal technical training and
year is generally not permissible
Answers:
ANS: A. A. Proficiency as an auditor which likely has been acquired from previous
experience
Which of the standards addresses the auditor's independence? B. Exercising professional care as judged by peer reviewers
C. Independence with respect to the financial statements and supplementary
Answers: disclosures
D. Objectivity as an auditor as verified by proper supervision
A. the third general standard
B. The second general standard ANS: A
C. the fourth general standard
D. the first general standard

ANS: B.

What is the general character of the three generally accepted auditing

standards classified as standards of fieldwork?

Answers:
A. The need to maintain independence in mental attitude in all matters
relating to the audit
B. Criteria for the content of the auditor's report on financial statements and audit1asdf
related footnote disclosures T/F: Independent audits of today place more emphasis on sampling than did
C. The competence, independence and professional care of persons the audits of the 19th century.
performing the audit
D. The criteria of audit planning and evidence-gathering True
T/F: The American Institute of Certified Public Accountants issues CPA Professional standards for CPAs.
certificates and permits CPAs to practice.
The organization charged with protecting investors and the public by
False requiring full disclosure of financial information by companies offering
securities to the public is the:
T/F: A company is either audited by the GAO or internal auditors, but not A) Auditing Standards Board.
both. B) Financial Accounting Standards Board.
C) Government Accounting Standards Boards.
False D) Securities and Exchange Commission.
T/F: The SEC does not pass on the merits of the securities that are registered Securities and Exchange Commission.
with the agency.
An engagement in which a CPA firm arranges for a critical review of its
True practices by another CPA firm is referred to as a(n):
A) Peer Review Engagement.
T/F: The American Institute of Certified Public Accountants has the primary
B) Quality Control Engagement.
authority to establish accounting standards.
C) Quality Assurance Engagement.
False D) Attestation Engagement.

T/F: An annual peer review is a requirement of the AICPA. Peer Review Engagement.

False The serially-numbered pronouncements issued by the Auditing Standards

Board over a period of years are known as:
T/F: Many small companies elect to have their financial statements reviewed A) Auditing Statements of Position (ASPs).
by a CPA firm, rather than incur the cost of an audit. B) Accounting Series Releases (ASRs).
C) Statements on Auditing Standards (SASs).
True D) Statements on Auditing Principles (SAPs).

T/F: Staff assistants in CPA firms generally are responsible for planning and Statements on Auditing Standards (SASs).
coordinating audit engagements.
The Government Accountability Office (GAO):
False A) Is primarily concerned with rapid processing of all accounts payable
incurred by the federal government.
T/F: The Sarbanes-Oxley Act requires that auditors of certain publicly traded B) Conducts operational audits and reports the results to Congress.
companies in the United States perform an integrated audit that includes C) Is a multinational organization of professional accountants.
providing assurance on both the financial statements and on compliance D) Is primarily concerned with budgets and forecasts approved by the SEC.
with laws and regulations.
Conducts operational audits and reports the results to Congress.
False
The risk that information is misstated is referred to as:
T/F: Auditing is frequently only a small part of the practice of local CPA firms. A) Information risk.
B) Inherent risk.
False
C) Relative risk.
A summary of findings rather than assurance is most likely to be included in D) Business risk.
a(n):
Information risk.
A) Agreed-upon procedures report.
B) Compilation report. The risk that a company will not be able to meet its obligations when they
C) Examination report. become due is an aspect of:
D) Review report. A) Information risk.
B) Inherent risk.
Agreed-upon procedures report.
C) Relative risk.
The Statements on Auditing Standards have been issued by the: D) Business risk.
A) Auditing Standards Board.
Business risk.
B) Financial Accounting Standards Board.
C) Securities and Exchange Commission. Which of the following attributes most clearly differentiates a CPA who
D) Federal Bureau of Investigation. audits management's financial statements as contrasted to management?
A) Integrity.
Auditing Standards Board.
B) Competence.
The risk associated with a company's survival and profitability is referred to C) Independence.
as: D) Keeping informed on current professional developments.
A) Business Risk.
Independence.
B) Information Risk.
C) Detection Risk. The attest function:
D) Control Risk. A) Is an essential part of every engagement by the CPA, whether performing
auditing, tax work, or other services.
Business Risk.
B) Includes the preparation of a report of the CPA's findings.
Historically, which of the following has the AICPA been most concerned with C) Requires a consideration of internal control.
providing? D) Requires a complete review of all transactions during the period under
A) Professional standards for CPAs. examination.
B) Professional guidance for regulating financial markets.
Includes the preparation of a report of the CPA's findings.
C) Standards guiding the conduct of internal auditors.
D) Staff support to Congress.
Attestation risk is limited to a low level in which of the following A) Compliance with laws and regulations.
engagement(s)? B) Financial reporting.
A) Both examinations and reviews. C) Effectiveness of operations.
B) Examinations, but not reviews. D) Efficiency of operations.
C) Reviews, but not examinations.
D) Neither examinations nor reviews. Financial reporting.

B) Examinations, but not reviews. Passage of the Sarbanes-Oxley Act led to the establishment of the:
A) Auditing Standards Board.
When compared to an audit performed prior to 1900, an audit today: B) Accounting Enforcement Releases Board.
A) Is more likely to include tests of compliance with laws and regulations. C) Public Company Accounting Oversight Board.
B) Is less likely to include consideration of the effectiveness of internal D) Securities and Exchange Commission.
control.
C) Has bank loan officers as the primary financial statement user group. Public Company Accounting Oversight Board.
D) Includes a more detailed examination of all individual transactions.
Which of the following professionals has primary responsibility for the
Is more likely to include tests of compliance with laws and regulations. performance of an audit?
A) The managing partner of the firm.
Which of the following are issued by the Securities and Exchange B) The senior assigned to the engagement.
Commission? C) The manager assigned to the engagement.
A) Accounting Research Studies. D) The partner in charge of the engagement.
B) Accounting Trends and Techniques.
C) Industry Audit Guides. The partner in charge of the engagement.
D) Financial Reporting Releases.
Which of the following types of services is generally provided only by CPA
Financial Reporting Releases. firms?
A) Tax audits.
Which of the following is not correct relating to the Sarbanes-Oxley Act? B) Financial statement audits.
A) It toughens penalties for corporate fraud. C) Compliance audits.
B) It restricts the types of consulting CPAs may perform for audit clients. D) Operational audits.
C) It created the Public Company Accounting Oversight Board (PCAOB) as a
replacement for the Financial Accounting Standards Board. Financial statement audits.
D) It eliminates a significant portion of the accounting profession's system of
self-regulation. The right to practice as a CPA is given by which of the following
organizations?
It created the Public Company Accounting Oversight Board (PCAOB) as a A) State Boards of Accountancy.
replacement for the Financial Accounting Standards Board. B) The AICPA.
C) The SEC.
An operational audit differs in many ways from an audit of financial D) The General Accounting Office.
statements. Which of the following is the best example of one of these
differences? State Boards of Accountancy.
A) The usual audit of financial statements covers the four basic statements,
whereas the operational audit is usually limited to either the balance sheet Which of the following terms best describes the audit of a taxpayer's tax
or the income statement. return by an IRS auditor?
B) The boundaries of an operational audit are often drawn from an A) Operational audit.
organization chart and are not limited to a single accounting period. B) Internal audit.
C) Operational audits do not ordinarily result in the preparation of a report. C) Compliance audit.
D) The operational audit deals with pre-tax income. D) Government audit.

The boundaries of an operational audit are often drawn from an organization Compliance audit.
chart and are not limited to a single accounting period.
Inquiries and analytical procedures ordinarily form the basis for which type
The review of a company's financial statements by a CPA firm: of engagement?
A) Is substantially less in scope of procedures than an audit. A) Agreed-upon procedures.
B) Requires detailed analysis of the major accounts. B) Audit.
C) Is of similar scope as an audit and adds similar credibility to the C) Examination.
statements. D) Review.
D) Culminates in issuance of a report expressing the CPA's opinion as to the
D) Review.
fairness of the statements.
Which of the following best describes the reason why independent auditors
Is substantially less in scope of procedures than an audit.
report on financial statements?
Which statement is correct with respect to continuing professional education A) A management fraud may exist and it is more likely to be detected by
(CPE) requirements of members of the AICPA? independent auditors.
A) Only members employed by the AICPA are required to take such courses. B) Different interests may exist between the company preparing the
B) Only members in public practice are required to take such courses. statements and the persons using the statements.
C) Members, regardless of whether they are in public practice, are required C) A misstatement of account balances may exist and is generally corrected
to meet such requirements. as the result of the independent auditors' work.
D) There is no requirement for members to participate in CPE. D) Poorly designed internal control may be in existence.

Members, regardless of whether they are in public practice, are required to Different interests may exist between the company preparing the statements
meet such requirements. and the persons using the statements.

The FDIC Improvement Act requires that management of large financial Governmental auditing often extends beyond examinations leading to the
institutions engage auditors to attest to assertions by management about the expression of opinion on the fairness of financial presentation and includes
effectiveness of the institution's internal controls over: audits of efficiency, economy, effectiveness, and also:
A) Accuracy. F
B) Evaluation.
C) Compliance. T/F: The pronouncements of the International Auditing and Assurance
D) Internal control. Standards Board do not override the national auditing standards of its
members, even when financial statements are issued by a multinational
Compliance. company.

Operational auditing is primarily oriented toward: T

A) Future improvements to accomplish the goals of management.
B) The accuracy of data reflected in management's financial records. Audits of financial statements are designed to obtain reasonable assurance
C) The verification that a company's financial statements are fairly presented. of detecting misstatement due to:
D) Past protection provided by existing internal control.
Fraudulent Financial Reporting /Misappropriation of Assets
Future improvements to accomplish the goals of management. A) Yes Yes
B) Yes No
A typical objective of an operational audit is for the auditor to: C) No Yes
A) Determine whether the financial statements fairly present the entity's D) No No
operations.
B) Evaluate the feasibility of attaining the entity's operational objectives. Yes Yes
C) Make recommendations for improving performance.
D) Report on the entity's relative success in attaining profit maximization. Financial statements are prepared following a(an)
A) Applicable financial reporting framework.
Make recommendations for improving performance. B) Appropriate subject matter.
C) Generally accepted auditing standards.
An integrated audit performed under the Sarbanes-Oxley Act requires that D) Set of quality control standards.
auditors report on:
Applicable financial reporting framework
Financial Statements Internal Control
A) Yes Yes An attestation engagement:
B) Yes No A) Has as its primary source of standards the assurance standards.
C) No Yes B) Includes a report on subject matter, or on an assertion about subject
D) No No matter.
C) Includes search and verification procedures for all major accounts.
Yes Yes D) Is ordinarily an examination, review or compilation engagement.

T/F: To express an opinion on financial statements, the auditor obtains Includes a report on subject matter, or on an assertion about subject matter.
reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error. An audit provides reasonable assurance of detecting which of the following
types of material illegal acts?
T
Direct Effect/ Without a Direct Effect
T/F: The auditors' report on a corporation's financial statements usually is A) Yes Yes
addressed to the president of the company. B) Yes No
C) No Yes
F D) No No
T/F: The auditors are primarily responsible for preparing the financial Y, N
statements and expressing an opinion on whether they follow generally
accepted auditing standards. Which of the following is not a type of auditors' opinion?
A) Adverse.
F B) Ordinary.
C) Qualified.
T/F: Partners in CPA firms usually have the responsibility for signing the audit
D) Unmodified.
report.
Ordinary
T
Which of the following is one of the elements of AICPA quality control?
T/F: An audit is more likely to detect tax evasion than violations of antitrust
A) Assurance of proper levels of association.
laws.
B) Due professional care.
T C) Engagement performance.
D) Supervision.
T/F: The attestation standards do not supersede generally accepted auditing
standards. Engagement performance.

T A procedure in which a quality control partner periodically tests the

application of quality control procedures is most directly related to which
T/F: A peer review is generally performed by employees of the AICPA. quality control element?
A) Engagement performance.
F B) Human resources.
C) Leadership responsibilities for quality with the firm.
T/F: If the auditors discover illegal acts by a client, they ordinarily must D) Monitoring
immediately resign from the engagement.
Monitoring
F
Requirements for training, independence and due professional care are
T/F: An audit should be designed to obtain reasonable assurance of detecting included in which group of the generally accepted auditing standards of the
non-compliance with all laws.
PCAOB? By definition, proper professional skepticism on an audit requires
A) Fieldwork.
B) General. Questioning mind/Subjective assessment of audit evidence
C) Reporting. A) No No
D) Quality control. B) No Yes
C) Yes No
General D) Yes Yes
Which of the following is a principle underlying an audit conducted in Y/N
accordance with generally accepted auditing standards?
A) The audit provides reasonable assurance the client will remain in business When a Statement Auditing Standards uses the word "should" relating to a
for at least one year. requirement, it means that the auditor:
B) The audit report expresses an opinion on whether the financial statements
are free of material and immaterial misstatement. Must comply with requirements unless the auditor demonstrates and
C) Auditors are responsible for, among other things, maintaining professional documents that alternative actions are sufficient to achieve the objectives of
objectivism, exercising professional engagement, and obtaining appropriate the standards.
documentation.
D) An auditor's opinion enhances the degree of confidence that intended An unconditional responsibility to follow an AICPA professional standard
users can place in the financial statements. exists when the professional standard uses the term(s)
Must Should
An auditor's opinion enhances the degree of confidence that intended users A) Yes Yes
can place in the financial statements. B) Yes No
C) No Yes
A set of criteria used to determine measurement, recognition, D) No No
representation, and disclosure of all material items appearing the in the
financial statements is referred to as a(n) Y/N
A) Financial reporting framework.
C) Public Company Accounting Oversight Board Criteria. Which of the following best describes a portion of the auditors' responsibility
B) Quality control presentation standard. regarding noncompliance with laws by clients?
D) Special purpose audit standard. A) The auditors have a responsibility to discover all material noncompliance.
B) If audit procedures reveal noncompliance, the auditors should take
Financial reporting framework. appropriate actions.
C) If the auditors suspect noncompliance, they should conduct a legal audit
An audit should be designed to obtain reasonable assurance of detecting of the company.
material misstatements due to: D) The auditors' responsibility for the detection of all noncompliance is the
A) Errors. same as their responsibility regarding material misstatements due to errors
B) Errors and fraud. and fraud.
C) Errors, fraud, and noncompliance with laws with a direct effect on
financial statement amounts. If audit procedures reveal noncompliance, the auditors should take
D) Errors, fraud and noncompliance with all laws. appropriate actions.

Errors, fraud, and noncompliance with laws with a direct effect on financial The auditors who find that the client has committed an illegal act would be
statement amounts. most likely to withdraw from the engagement when the:
A) Management fails to take appropriate corrective action.
Which of the following is accurate, as indicated in the principles underlying B) Illegal act has material financial statement implications.
an audit? C) Illegal act has received widespread publicity.
A) Management is expected to provide the auditors with all needed evidence D) Auditors cannot reasonably estimate the effect of the illegal act on the
prior to the beginning of audit work. financial statements.
B) An auditor is unable to obtain absolute assurance that he financial
statements are free from material misstatement. Management fails to take appropriate corrective action.
C) Auditors are responsible for having appropriate competence to perform
the audit without the assistance of outside specialists. Which of the following is not included as a part of the description of the
D) Management is responsible for preparing accurate financial statement auditor's responsibility in a nonpublic company unmodified report?
amounts, while auditors are responsible for auditing those amounts and for A) The audit was performed in accordance with generally accepted
preparing note disclosures related to those amounts. accounting principles.
B) An audit involves performing procedures to obtain audit evidence about
An auditor is unable to obtain absolute assurance that he financial the amounts and disclosures in the financial statements.
statements are free from material misstatement. C) The procedures selected depend on the auditor's judgment.
D) An audit includes evaluating the appropriateness of accounting policies
Which of the following is not an underlying premise of an audit? used.
A) Management must provide the auditor with all information relevant to the
preparation and fair presentation of the financial statements. The audit was performed in accordance with generally accepted accounting
B) Management and the auditors have responsibility for the preparation of principles.
financial statements in accordance with the applicable financial reporting
framework. Primary responsibility for the financial statements lies with:
C) Where appropriate, the auditor may obtain information from those
charged with governance. Auditors Management
D) The auditors should be provided unrestricted access to those within the A) Yes Yes
entity from whom the auditor determines it necessary to obtain audit B) Yes No
evidence. C) No Yes
D) No No
Management and the auditors have responsibility for the preparation of
financial statements in accordance with the applicable financial reporting N/Y
framework.
Which of the following is explicitly included as a part of the description of
management's responsibility in an unmodified audit report?
A) Management is responsible for making a judgment on which used.
misstatements are material vs. immaterial. C) An audit includes evaluating the overall presentation of the financial
B) Management is responsible for providing auditors with all relevant statements.
evidence. D) Accounting principles have been consistently applied.
C) Management is responsible for the design, implementation, and
maintenance of internal control. Accounting principles have been consistently applied.
D) Management is responsible for listing all illegal acts with a direct effect on
financial statement amounts and disclosures. An audit performed in accordance with generally accepted auditing
standards generally should:
Management is responsible for the design, implementation, and A) Be expected to provide absolute assurance that noncompliance with all
maintenance of internal control. laws will be detected where internal control is effective.
B) Be relied upon to disclose violations of truth in lending laws.
The auditors' report for a nonpublic company should indicate: C) Encompass a plan to actively search for all illegalities which relate to
A) That the audit was made in accordance with auditing standards generally operating aspects.
accepted in the United States of America. D) Not be relied upon to provide absolute assurance that all noncompliance
B) Any weakness in internal control observed by the auditors. with laws will be detected.
C) That accounting principles have been consistently applied.
D) That no illegal acts have been identified. Not be relied upon to provide absolute assurance that all noncompliance
with laws will be detected.
That the audit was made in accordance with auditing standards generally
accepted in the United States of America. When the auditors express an opinion on financial statements their
responsibilities extend to:
The Auditing Standards Board's guidance on matters such as the purpose of A) The underlying wisdom of their client's management decisions.
an audit, the premise of an audit, and auditor personal responsibilities is B) Whether the results of their client's operating decisions are fairly
included in: presented in the financial statements.
A) The 10 Generally Accepted Auditing Standards. C) Active participation in the implementation of the advice given to their
B) The Code of Professional Conduct. client.
C) Accounting Series Releases. D) An ongoing responsibility for their client's solvency.
D) Principles Underlying an Audit Conducted in Accordance with GAAS.
Whether the results of their client's operating decisions are fairly presented
Principles Underlying an Audit Conducted in Accordance with GAAS. in the financial statements.

A requirement that working papers be reviewed by the supervisor, and any Authoritative GAAP sources include:
deficiencies be discussed with the preparer is an example of a quality control FASB Concepts Statements/ FASB Codification
procedure in the area of: A) Yes Yes
A) Acceptance and continuance of client relationships and specific B) Yes No
engagements. C) No Yes
B) Engagement performance. D) No No
C) Human resources.
D) Relevant ethical requirements. n/y

Engagement performance. An investor reading the financial statements of The Sundby Corporation
observes that the statements are accompanied by an unmodified auditors'
A requirement to design recruitment processes and procedures to help the report. From this the investor may conclude that:
firm select individuals meeting minimum academic requirements established A) Any disputes over significant accounting issues have been settled to the
by the firm is an example of a quality control procedure in the area of: auditors' satisfaction.
A) Acceptance and continuance of client relationships and specific B) The auditors are satisfied that Sundby is operationally efficient.
engagements. C) The auditors have ascertained that Sundby's financial statements have
B) Engagement performance. been prepared accurately.
C) Human resources. D) Informative disclosures in the financial statements but not necessarily in
D) Relevant ethical requirements. the footnotes are to be regarded as reasonably adequate.

Human resources. Any disputes over significant accounting issues have been settled to the
auditors' satisfaction.
The body that issues international pronouncements providing auditing
procedural and reporting guidance is the: The auditors' report may be addressed to the company whose financial
A) International Federation of Auditors. statements are being examined or to that company's:
B) Multinational Reporting Commission. A) Chief operating officer.
C) International Auditing and Assurance Standards Board. B) President.
D) AICPA Auditing Standards Board. C) Board of Directors.
D) Chief financial officer.
International Auditing and Assurance Standards Board.
Board of Directors.
To present fairly in conformity with generally accepted accounting principles
the financial statements must: Which of the following best describes what is meant by generally accepted
A) Be consistently applied. auditing standards?
B) Inform users of all matters that could materially affect a decision. A) Acts to be performed by the auditors.
C) Reflect transactions and events within a range of reasonable limits. B) Measures of the quality of the auditors' performance.
D) Be considered preferable to the users of those financial statements. C) Procedures to be used to gather evidence to support financial statements.
D) Audit objectives generally determined on audit engagements.
Reflect transactions and events within a range of reasonable limits.
Measures of the quality of the auditors' performance.
Which of the following is not included in the auditors' standard unmodified
audit report? If noncompliance with a law is discovered during the audit of a publicly held
A) The procedures selected by the auditor depend on the auditor's judgment. company, the auditors should first:
B) An audit includes evaluating the appropriateness of accounting policies A) Notify the regulatory authorities.
B) Determine who was responsible for the noncompliance. To minimize the likelihood of association with clients whose managements
C) Intensify the examination to identify noncompliance with any laws. lack integrity.
D) Report the act to high level personnel within the client's organization and
to the audit committee. Which of the following is not an element of quality control?
A) Documentation.
Report the act to high level personnel within the client's organization and to B) Engagement performance.
the audit committee. C) Monitoring.
D) Relevant ethical requirements.
Which of the following is the name used to describe financial reporting
frameworks other than GAAP which include: cash basis, tax basis, regulatory Documentation.
basis, or contractual basis.
A) Applicable. Generally accepted auditing standards established by the AICPA through
B) PCAOB. April of 2003:
C) Special reports. A) Have been accepted as interim standards by the Public Company
D) Special purpose. Accounting
Oversight Board.
Special purpose. B) Provide accounting guidance for nonpublic companies.
C) Have all been superseded by Public Company Accounting Oversight Board
Which of the following statements best describes the primary purpose of standards.
Statements on Auditing Standards? D) Are now developed by the Securities and Exchange Commission.
A) They are guides intended to set forth auditing procedures which are
applicable to a variety of situations. Have been accepted as interim standards by the Public Company Accounting
B) They are procedural outlines which are intended to narrow the areas of Oversight Board.
inconsistency and divergence of auditor opinion.
C) They are authoritative statements, enforced through the Code of The Public Company Accounting Oversight Board has authority to establish
Professional Conduct. which of the following relating to public companies?
D) They are interpretations which may be useful guidance to auditors.
Attestation Standards Ethics Standards
They are authoritative statements, enforced through the Code of A) Yes Yes
Professional Conduct. B) Yes No
C) No Yes
The primary responsibility for the adequacy of disclosure in the financial D) No No
statements of a publicly held company rests with the:
A) Partner assigned to the audit engagement. Y/Y
B) Management of the company.
C) Auditor in charge of the fieldwork. Which of the following is least likely to be directly examined in an inspection
D) Securities and Exchange Commission. performed by the PCAOB?
A) Audit engagements.
Management of the company. B) Review engagements.
C) Compilation engagements.
Within the context of quality control, the primary purpose of continuing D) CPA firm quality control system.
professional education and training activities is to enable a CPA firm to
provide personnel within the firm with: Compilation engagements.
A) Technical training that assures proficiency as an auditor.
B) Professional education that is required in order to perform with due As compared with the US public company audit report, the international
professional care. audit report:
C) Knowledge required to fulfill assigned responsibilities and to progress A) Is shorter in length.
within the firm. B) Includes enhanced explanation of the audit process.
D) Knowledge required in order to perform a peer review. C) Includes the name of the partner and managers on the audit, while the US
report includes only the CPA firm name.
Knowledge required to fulfill assigned responsibilities and to progress within D) Is dated as of year-end, whereas the US report is dated as of the last date
the firm. of significant field work.

In pursuing a CPA firm's quality control objectives, a CPA firm may maintain Includes enhanced explanation of the audit process.
records indicating which partners or employees of the CPA firm were
previously employed by the CPA firm's clients. Which quality control A peer review in which the peer reviewers study and appraise a CPA firm's
objective would this be most likely to satisfy? system of quality control to perform accounting and auditing work is referred
A) Acceptance and continuance of clients and engagements. to as a(n):
B) Engagement performance. A) Engagement review.
C) Personnel management. B) Inspection review.
D) Relevant ethical requirements. C) Supervision review.
D) System review.
Relevant ethical requirements.
System review.
A CPA firm establishes quality control policies and procedures for deciding
whether to accept a new client or continue to perform services for a current An engagement review form of peer review is least likely to include a peer
client. The primary purpose for establishing such policies and procedures is: reviewer's detailed analysis of:
A) To enable the auditor to attest to the integrity or reliability of a client. A) Compilation reports.
B) To comply with the quality control standards established by regulatory B) Documentation of procedures followed on a review
bodies. C) Overall system of quality control.
C) To minimize the likelihood of association with clients whose managements D) Review reports.
lack integrity.
D) To lessen the exposure to litigation resulting from failure to detect fraud Overall system of quality control.
in client financial statements.
Of the following, which are current types of peer review?
System Review Engagement Review Yes Yes No
A) Yes Yes
B) Yes No Financial statement assertions are established for classes of transactions,
C) No Yes Account Balances / Disclosures
D) No No A) Yes Yes
B) Yes No
Y/Y C) No Yes
D) No No
T/F: The professional standards consider calculating depreciation expense a
"routine" transaction. YY

F Further audit procedures include:

Risk assessment procedures/ Tests of controls
T/F: The most reliable form of documentary evidence generally is considered A) Yes Yes
to be documents created by the client. B) Yes No
C) No Yes
F D) No No
T/F: A vendor's invoice is an example of documentary evidence created by a NY
third party and held by the client.
Assertions that have a meaningful bearing on whether an account balance,
T transaction class or disclosure is fairly stated are referred to as:
A) Appropriate assertions.
T/F: In performing analytical procedures, the auditors may use dollar
B) Sufficient assertions.
amounts, physical quantities, or percentages.
C) Relevant assertions.
T D) Reliable assertions.

T/F: The primary purpose of a letter of representations is to obtain additional Relevant assertions.
evidence about specific accounts.
Which of the following is not an assertion relating to classes of transactions?
F A) Accuracy.
B) Sufficiency.
T/F: The auditors should propose an adjusting journal entry for all material C) Cutoff.
related-party transactions. D) Classification.

F Sufficiency.

T/F: When the risk of material misstatement for an account is high, the Which of the following is required documentation in an audit?
auditors may perform additional substantive procedures to restrict detection A) A list of major accounts.
risk to a lower level. B) A flowchart of the client's organization.
C) A written audit program.
T D) A memo setting forth the scope of the audit.

T/F: Working papers of continuing audit interest usually are filed with the A written audit program.
administrative working papers.
Which of the following is not considered to be an analytical procedure?
F A) Comparisons of financial statement amounts with source documents.
B) Comparisons of financial statement amounts with nonfinancial data.
T/F: The use of lead schedules is designed to increase the detail of the C) Comparisons of financial statement amounts with budgeted amounts.
working trial balance. D) Comparisons of financial statement amounts with comparable prior year
amounts.
F
Comparisons of financial statement amounts with source documents.
T/F: Adjusting journal entries are ordinarily recorded by the client, while
reclassifying journal entries need not be recorded. An auditor plans to apply substantive tests to the details of asset and liability
accounts as of an interim date rather than as of the balance sheet date. The
T
auditor should be aware that this practice
To be effective, analytical procedures performed near the end of the audit A) Eliminates the use of certain statistical sampling methods that would
should be performed by otherwise be available.
A) The partner performing the quality review of the audit. B) Presumes that the auditor will reperform the tests as of the balance sheet
B) A beginning staff accountant who has had no other work related to the date.
engagement. C) Should be especially considered when there are rapidly changing
C) A manager or partner who has a comprehensive knowledge of the client's economic conditions.
business and industry. D) Potentially increases the risk that errors that exist at the balance sheet
D) The CPA firm's quality control manager. date will not be detected.

Overall system of quality control. Potentially increases the risk that errors that exist at the balance sheet date
will not be detected.
The components of the risk of misstatement are:
An auditor compared the current-year gross margin with the prior-year gross
Inherent Risk /Control Risk /Detection Risk margin to determine if cost of sales is reasonable. What type of audit
A) Yes Yes Yes procedure was performed?
B) Yes Yes No A) Test of transactions.
C) Yes No No B) Analytical procedures.
D) No Yes Yes C) Test of controls.
D) Test of details.
Analytical procedures. An auditor should expect that fair value is the price that would be received to
sell an asset in an orderly transaction between the market participants at
The inspection of a vendor's invoice by the auditors is: the:
A) Direct evidence about occurrence of a transaction. A) Acquisition date of the asset.
B) Physical evidence about occurrence of a transaction. B) Audit report date.
C) Documentary evidence about occurrence of a transaction. C) Expected replacement date of the asset.
D) Part of the client's accounting system. D) Measurement date (ordinarily the date of the financial statements).
Documentary evidence about occurrence of a transaction. Measurement date (ordinarily the date of the financial statements).

The auditors of Smith Electronics wish to limit the audit risk of material Which of the following best describes the reason that auditors are concerned
misstatement in the test of accounts receivable to 5 percent. They believe with the detection of related party transactions?
that inherent risk is 100%, and there is a 40% risk that material misstatement A) The financial statements must often be adjusted for the effects of material
could have bypassed the client's system of internal control. What is the related party transactions.
maximum detection risk the auditors should specify in their substantive B) Material related party transactions must be disclosed in the notes to the
procedures of details of accounts receivable? financial statements.
A) 5%. C) The substance of related party transactions will differ from their form.
B) 12.5%. D) In a related party transaction one party has the ability to exercise
C) 42.7%. significant influence over the other party.
D) 60%.
Material related party transactions must be disclosed in the notes to the
12.5%. financial statements.
Analytical procedures are required at the risk assessment stage and as: Which of the following is not a basic procedure used in an audit?
A) Tests of internal control. A) Risk assessment procedures.
B) Substantive procedures. B) Substantive procedures.
C) A part of the final overall review. C) Tests of controls.
D) Computer generated procedures. D) Tests of direct evidence.
A part of the final overall review. Tests of direct evidence.

During financial statement audits, auditors seek to restrict which type of risk? Which of the following is not a financial statement assertion relating to
A) Control risk. account balances?
B) Detection risk. A) Completeness
C) Inherent risk. B) Existence.
D) Account risk. C) Rights and obligations.
D) Recorded value and discounts.
Detection risk.
Recorded value and discounts.
Which of the following groups are not considered a specialist by AICPA
Professional Standards: Which of the following is generally true about the sufficiency of audit
A) Appraisers. evidence?
B) Internal auditors. A) The amount of evidence that is sufficient varies inversely with the
C) Engineers. acceptable risk of material misstatement.
D) Geologists. B) The amount of evidence concerning a particular account varies inversely
with the materiality of the account.
Internal auditors C) The amount of evidence concerning a particular account varies inversely
with the inherent risk of the account.
CPA wishes to use a representation letter as a substitute for performing
D) When evidence is appropriate with respect to an account it is also
other audit procedures. Doing so:
sufficient.
A) Violates professional standards.
B) Is acceptable, but should only be done when cost justified. The amount of evidence that is sufficient varies inversely with the acceptable
C) Is acceptable, but only for non-public clients. risk of material misstatement.
D) Is acceptable and desirable under all conditions.
Which of the following is true about analytical procedures?
Violates professional standards. A) Performing analytical procedures results in the most reliable form of
evidence.
Which of the following best describes the problem with the use of published
B) Analytical procedures are tests of controls used to evaluate the quality of
industry averages for analytical procedures?
a client's internal control.
A) Lack of comparability.
C) Analytical procedures are used for planning, but they should not be used
B) Lack of sufficiency.
to obtain evidence as to the reasonableness of specific account balances.
C) Lack of accuracy.
D) Analytical procedures are used in risk assessment, as a substantive
D) Lack of availability.
procedure for specific accounts, and near the completion of the audit of the
Lack of comparability. audited financial statements.

In auditing an asset valued at fair value, which of the following potentially Analytical procedures are used in risk assessment, as a substantive procedure
provides the auditor with the strongest evidence? for specific accounts, and near the completion of the audit of the audited
A) A price for a similar asset obtained from an active market. financial statements.
B) An appraisal obtained discounting future cash flows.
Which of the following is a basic approach often used by auditors to evaluate
C) Management's judgment of the cost to purchase an equivalent asset.
the reasonableness of accounting estimates?
D) The historical cost of the asset.
A) Confirmation.
A price for a similar asset obtained from an active market. B) Observation.
C) Reviewing subsequent events or transactions.
D) Analyzing corporate organizational structure.
Reviewing subsequent events or transactions. The auditors use analytical procedures during the course of an audit. The
most important phase of performing these procedures is the:
An auditor is performing an analytical procedure that involves comparing a A) Vouching of all data supporting various ratios.
client's account balances over time. This technique is referred to as: B) Investigation of significant variations and unusual relationships.
A) Vertical analysis. C) Comparison of client-computed statistics with industry data on a quarterly
B) Horizontal analysis. and full-year basis.
C) Cross-sectional analysis. D) Recalculation of industry date.
D) Comparison analysis.
Investigation of significant variations and unusual relationships.
Horizontal analysis.
The auditors must obtain written client representations that normally should
An auditor is performing an analytical procedure that involves comparing a be signed by:
client's ratios with other companies in the same industry. This technique is A) The president and the chairperson of the board.
referred to as: B) The treasurer and the internal auditor.
A) Vertical analysis. C) The chief executive officer and the chief financial officer.
B) Horizontal analysis. D) The corporate counsel and the audit committee chairperson.
C) Cross-sectional analysis.
D) Comparison analysis. The chief executive officer and the chief financial officer.

Cross-sectional analysis. Which of the following ultimately determines the specific audit procedures
necessary to provide independent auditors with a reasonable basis for the
An auditor is performing an analytical procedure that involves developing expression of an opinion?
common-size financial statements. This technique is referred to as: A) The audit time budget.
A) Vertical analysis. B) The auditors' judgment.
B) Horizontal analysis. C) Generally accepted accounting quality standards.
C) Cross-sectional analysis. D) The auditors' working papers.
D) Comparison analysis.
The auditors' judgment.
Vertical analysis.
Failure to detect material dollar errors in the financial statements is a risk
Which of the following is not a basic approach often used by auditors to which the auditors primarily mitigate by:
evaluate the reasonableness of accounting estimates? A) Performing substantive procedures.
A) Confirmation of amounts. B) Performing tests of controls.
B) Review of management's process of development. C) Assessing control risk.
C) Independent development of an estimate. D) Obtaining a client representation letter.
D) Review of subsequent events.
Performing substantive procedures.
Confirmation of amounts.
An independent auditor finds that the Simmer Corporation occupies office
The audit time budget is an example of: space, at no charge, in an office building owned by a shareholder. This
A) A supporting schedule. finding indicates the existence of:
B) An administrative working paper. A) Management fraud.
C) A lead schedule. B) Related party transactions.
D) A corroborative working paper. C) Window dressing.
D) Weak internal control.
An administrative working paper
Related party transactions.
A schedule set up to combine similar general ledger accounts, the total of
which appears on the working trial balance as a single amount, is referred to Which of the following would not necessarily be considered a related party
as a: transaction?
A) Supporting schedule. A) Payment of a bonus to the president.
B) Lead schedule. B) Purchases from another corporation that is controlled by the corporation's
C) Corroborating schedule. chief stockholder.
D) Reconciling schedule. C) Loan from the corporation to a major stockholder.
D) Sale of land to the corporation by the spouse of a director.
Lead schedule.
Payment of a bonus to the president.
Which of the following is not a function of working papers?
A) Provide support for the auditors' report. The date of the management representation letter should coincide with the:
B) Provide support for the accounting records. A) Date of the auditor's report.
C) Aid partners in planning and conducting future audits. B) Balance sheet date.
D) Document staff compliance with generally accepted auditing standards. C) Date of the latest subsequent event referred to in the notes to the
financial statements.
Provide support for the accounting records. D) Date of the engagement agreement.
A schedule listing account balances for the current and previous years, and Date of the auditor's report.
columns for adjusting and reclassifying entries proposed by the auditors to
arrive at the final mount that will appear in the financial statement, is An example of an analytical procedure is the comparison of:
referred to as a: A) Financial information with similar information regarding the industry in
A) Working trial balance. which the entity operates.
B) Lead schedule. B) Recorded amounts of major disbursements with appropriate invoices.
C) Summarizing schedule. C) Results of a statistical sample with the expected characteristics of the
D) Supporting schedule. actual population.
D) EDP generated data with similar data generated by a manual accounting
Working trial balance. system.
Financial information with similar information regarding the industry in To support the financial statements.
which the entity operates.
Concerning retention of working papers, the Sarbanes-Oxley Act:
When considering the use of management's written representations as audit A) Has no provisions.
evidence about the completeness assertion, an auditor should understand B) Requires permanent retention.
that such representations: C) Requires retention for at least 7 years.
A) Complement, but do not replace, substantive procedures designed to D) Requires retention for a period of 4 or less years.
support the assertion.
B) Constitute sufficient evidence to support the assertion when considered in Requires retention for at least 7 years.
combination with a moderate assessed level of control risk.
C) Are generally sufficient audit evidence to support the assertion regardless During an audit engagement pertinent data are prepared and included in the
of the assessed level of control risk. audit working papers. The working papers primarily are considered to be:
D) Replace the assessed level of control risk as evidence to support the A) A client-owned record of conclusions reached by the auditors who
assertions. performed the engagement.
B) Evidence supporting financial statements.
Complement, but do not replace, substantive procedures designed to C) Support for the auditors' representations as to compliance with generally
support the assertion. accepted auditing standards.
D) A record to be used as a basis for the following year's engagement
Which of the following expressions is least likely to be included in a client's
representation letter? Support for the auditors' representations as to compliance with generally
A) No events have occurred subsequent to the balance sheet date that accepted auditing standards.
require adjustment to, or disclosure in, the financial statements.
B) The company has complied with all aspects of contractual agreements that Although the quantity, type, and content of working papers will vary with the
would have a material effect on the financial statements in the event of circumstances, the working papers generally would include the:
noncompliance. A) Copies of those client records examined by the auditor during the course
C) Management acknowledges responsibility for illegal actions committed by of the engagement.
employees. B) Evaluation of the efficiency and competence of the audit staff assistants
D) Management has made available all financial statements, including notes. by the partner responsible for the audit.
C) Auditor's comments concerning the efficiency and competence of client
Management acknowledges responsibility for illegal actions committed by management personnel.
employees. D) Auditing procedures followed and the testing performed in obtaining
audit evidence.
Which of the following statements is generally correct about audit evidence?
A) The auditor's direct personal knowledge, obtained through observation Auditing procedures followed and the testing performed in obtaining audit
and inspection, is more persuasive than information obtained indirectly from evidence.
independent outside sources.
B) To be appropriate, audit evidence must be sufficient. The permanent file section of the working papers that is kept for each audit
C) Accounting data alone may be considered sufficient appropriate audit client most likely contains:
evidence to issue an unqualified opinion on financial statements. A) Review notes pertaining to questions and comments regarding the audit
D) Appropriateness of audit evidence refers to the amount of corroborative work performed.
evidence to be obtained. B) A schedule of time spent on the engagement by each individual auditor.
C) Correspondence with the client's legal counsel concerning pending
The auditor's direct personal knowledge, obtained through observation and litigation.
inspection, is more persuasive than information obtained indirectly from D) Narrative descriptions of the client's accounting procedures and controls.
independent outside sources.
Narrative descriptions of the client's accounting procedures and controls.
Which of the following statements relating to audit evidence is the most
accurate statement? Working papers that record the procedures used by the auditor to gather
A) Audit evidence gathered by an auditor from outside an enterprise is evidence should be:
reliable. A) Considered the primary support for the financial statements being
B) Accounting data developed under satisfactory conditions of internal examined.
control are more relevant than data developed under unsatisfactory internal B) Viewed as the connecting link between the books of account and the
control conditions. financial statements.
C) Oral representations made by management are not valid evidence. C) Designed to meet the circumstances of the particular engagement.
D) The auditor must obtain sufficient appropriate audit evidence. D) Destroyed when the audited entity ceases to be a client.

The auditor must obtain sufficient appropriate audit evidence. Designed to meet the circumstances of the particular engagement.

Which of the following is not a typical analytical procedure? In general, which of the following statements is correct with respect to
A) Study of relationships of the financial information with relevant ownership, possession, or access to working papers prepared by a CPA firm
nonfinancial information. in connection with an audit?
B) Comparison of the financial information with similar information regarding A) The working papers may be obtained by third parties where they appear
the industry in which the entity operates. to be relevant to issues raised in litigation.
C) Comparison of recorded amounts of major disbursements with B) The working papers are subject to the privileged communication rule
appropriate invoices. which, in a majority of jurisdictions, prevents third-party access to the
D) Comparison of the financial information with budgeted amounts. working papers.
C) The working papers are the property of the client after the client pays the
Comparison of recorded amounts of major disbursements with appropriate fee.
invoices. D) The working papers must be retained by the CPA firm for a period of ten
years.
Which of the following is not a primary purpose of audit working papers?
A) To coordinate the examination. The working papers may be obtained by third parties where they appear to
B) To assist in preparation of the audit report. be relevant to issues raised in litigation.
C) To support the financial statements.
D) To provide evidence of the audit work performed. Confirmation would be most effective in addressing the existence assertion
for the:
A) Addition of a milling machine to a machine shop. D) An overly complex organizational structure involving unusual lines of
B) Payment of payroll during regular course of business. authority.
C) Inventory held on consignment.
D) Granting of a patent for a special process developed by the organization. An overly complex organizational structure involving unusual lines of
authority.
Inventory held on consignment.
Which of the following factors would most likely cause a CPA to decide not to
T/F: Audit committees should be made up of the most qualified directors accept a new audit engagement?
regardless of whether they are part of management of the company. A) Lack of understanding of the potential client's internal auditors' computer-
assisted audit techniques.
F B) Management's disregard for internal control.
C) The existence of related party transactions.
T/F: Analytical procedures are seldom used during the risk assessment stage D) Management's attempt to meet earnings per share growth rate goals.
of an audit engagement because they are substantive procedures.
Management's disregard for internal control.
F
Which of the following matters is generally included in an auditor's
T/F: Preliminary arrangements with clients should be set forth in the engagement letter?
management letter. A) Limitations of the engagement.
B) Factors to be considered in establishing preliminary judgments about
F
materiality.
T/F: An audit plan includes a detailed listing of the audit procedures to be C) Management's liability for all illegal acts committed by its employees.
performed in the verification of items in the financial statements. D) The auditor's responsibility to obtain negative assurance relating to non-
compliance with laws and regulations.
F
Limitations of the engagement.
T/F: The auditors' tests of controls are designed to substantiate the fairness
of specific financial statement accounts. Which of the following would heighten an auditor's concern about the risk of
fraudulent financial reporting?
F A) Inability to generate positive cash flows from operations, while reporting
large increases in earnings.
T/F: At least a portion of the auditors' consideration of internal control B) Management's lack of interest in increasing the dividend paid on common
usually is performed at an interim date rather than at the balance sheet date. stock.
C) Large amounts of liquid assets that are easily convertible into cash.
T D) Inability to borrow necessary capital without obtaining waivers on debt
covenants.
T/F: The substantive approach to an audit is appropriate for many small
businesses. Inability to generate positive cash flows from operations, while reporting
large increases in earnings.
T
To best test existence, an auditor would sample from the:
T/F: Confirming a bank account establishes existence but not rights to the
A) General ledger to source documents.
cash balance.
B) General ledger to the financial statements.
F C) Source documents to the general ledger.
D) Source documents to journals.
T/F: The completeness of recording of assets is generally verified by tracing
from the source documents to the recorded entry. General ledger to source documents.

T The auditors' understanding established with a client should be established

through a (an):
T/F: Vouching the acquisition of assets is an audit procedure that is often A) Oral communication with the client.
performed to establish the valuation of the assets. B) Written communication with the client.
C) Written or oral communication with the client.
T D) Completely detailed audit plan.

Which of the following factors most likely would cause a CPA to not accept a Written communication with the client.
new audit engagement?
A) The prospective client has fired its prior auditor. Which of the following would be least likely to be considered an audit
B) The CPA lacks a thorough understanding of the prospective client's planning procedure?
operations and industry. A) Use an engagement letter.
C) The CPA is unable to review the predecessor auditor's working papers due B) Develop the overall audit strategy
to a major fire that destroyed both hard and soft copy documentation. C) Perform the risk assessment.
D) The prospective client is unwilling to make financial records available to D) Develop the audit plan.
the CPA.
Perform the risk assessment.
The prospective client is unwilling to make financial records available to the
CPA. While assessing the risks of material misstatement auditors identify risks,
relate risk to what could go wrong, consider the magnitude of risks and:
Which of the following factors most likely would heighten an auditor's A) Assess the risk of misstatements due to illegal acts.
concern about the risk of fraudulent financial reporting? B) Consider the complexity of the transactions involved.
A) Large amounts of liquid assets that are easily convertible into cash. C) Consider the likelihood that the risks could result in material
B) Low growth and profitability as compared to other entity's in the same misstatements.
industry. D) Determine materiality levels.
C) Financial management's participation in the initial selection of accounting
principles. Consider the likelihood that the risks could result in material misstatements.
Which of the following is correct concerning requirements about auditor Which of the following is not one of the assertions made by management
communications about fraud? about an account balance?
A) Fraud that involves senior management should be reported directly to the A) Relevance.
audit committee regardless of the amount involved. B) Existence.
B) All fraud with a material effect on the financial statements should be C) Valuation.
reported directly by the auditor to the Securities and Exchange Commission. D) Rights and obligations.
C) Fraud with a material effect on the financial statements should ordinarily
be disclosed by the auditor through use of an "emphasis of a matter" Relevance.
paragraph added to the audit report.
D) The auditor has no responsibility to disclose fraud outside the entity under When a company has changed auditors, according to the Professional
any circumstances. Standards:
A) The successor auditor has the responsibility to initiate contact with the
Fraud that involves senior management should be reported directly to the predecessor auditor to ask about the client before the engagement is
audit committee regardless of the amount involved. accepted; the predecessor has no responsibility to initiate this contact, even
when aware of matters bearing on the integrity of management.
A predecessor auditor will ordinarily initiate communication with the B) The predecessor must always respond fully to all inquiries made by the
successor auditor: successor auditor.
C) The successor must discuss with the predecessor matters bearing on the
engagement prior to accepting the engagement.
Prior to the Successor's Acceptance of the Engagement/ Subsequent to the D) The successor may choose not to attempt any communication with the
Successor's predecessor auditor.
Acceptance of the Engagement
A) Yes Yes The successor auditor has the responsibility to initiate contact with the
B) Yes No predecessor auditor to ask about the client before the engagement is
C) No Yes accepted; the predecessor has no responsibility to initiate this contact, even
D) No No when aware of matters bearing on the integrity of management.

N/N Which of the following procedures is not performed as a part of planning an

audit engagement?
Which measure of materiality (or both) considers quantitative A) Reviewing the working papers of the prior year.
considerations? B) Developing an overall audit strategy.
C) Confirmation of all major accounts.
Planning/ Evaluation D) Designing an audit program.
A) Yes Yes
B) Yes No Confirmation of all major accounts.
C) No Yes
D) No No The risk of a material misstatement occurring in an account, assuming an
absence of internal control, is referred to as:
Y/Y A) Account risk.
B) Control risk.
Which of the following factors most likely would lead a CPA to conclude that C) Detection risk.
a potential audit engagement should not be accepted? D) Inherent risk.
A) There are significant related party transactions that management claims
occurred in the ordinary course of business. Inherent risk.
B) Internal control activities requiring the segregation of duties are subject to
management override. Which of the following is least likely to be considered a financial statement
C) Management continues to employ an inefficient system of information audit risk factor?
technology to record financial transactions. A) Management operating and financing decisions are dominated by top
D) It is unlikely that sufficient evidence is available to support an opinion on management.
the financial statements. B) A new client with no prior audit history.
C) Rate of change in the entity's industry is rapid.
D) It is unlikely that sufficient evidence is available to support an opinion on D) Profitability of the entity relative to its industry is inconsistent.
the financial statements.
Management operating and financing decisions are dominated by top
In using the information on the statement of cash flows while obtaining an management.
understanding of a profitable, growing company, which of the following
would ordinarily be least surprising to an auditor? Which of the following is an example of fraudulent financial reporting?
A) Decreases in accounts payable. A) Company management falsifies inventory count tags thereby overstating
B) Decreases in accounts receivable. ending inventory and understating cost of goods sold.
C) Negative cash flows from investing. B) An employee diverts customer payments to his personal use, concealing
D) Negative operating cash flows. his actions by debiting an expense account, thus overstating expenses.
C) An employee steals inventor and the "shrinkage" is recorded in cost of
C) Negative cash flows from investing. goods sold.
D) An employee "borrows" tools from the company and neglects to return
Audits of financial statements are designed to obtain reasonable assurance them; the cost is reported as a miscellaneous operating expense.
of detecting material misstatements due to:
Company management falsifies inventory count tags thereby overstating
Errors/ Misappropriation of Assets ending inventory and understating cost of goods sold.
A) Yes Yes
B) Yes No Which of the following is most likely to be considered a risk factor relating to
C) No Yes fraudulent financial reporting?
D) No No A) Low turnover of senior management.
B) Extreme degree of competition within the industry.
Y/Y C) Capital structure including various operating subsidiaries.
D) Sales goals in excess of any of the preceding three years.
Extreme degree of competition within the industry. D) Accepting the engagement.

Which of the following conditions identified during the audit increases the If the business environment is experiencing a recession, the auditor most
risk of employee fraud? likely would focus increased attention on which of the following accounts?
A) Large amounts of cash in the bank. A) Purchase returns and allowances.
B) Existence of a mandatory vacation policy for employees performing key B) Allowance for doubtful accounts.
functions. C) Common stock.
C) Inventory items of small size, but high value. D) Noncontrolling interest of a subsidiary purchased during the year.
D) Presence of reconciling items on a client prepared year-end proof of cash.
B) Allowance for doubtful accounts.
Inventory items of small size, but high value
The risk that the auditors' procedures will lead them to conclude that a
Which of the following statements is accurate about "fraud risk factors" material misstatement does not exist in an account balance when in fact
considered when conducting an audit? such a misstatement does exist is referred to as:
A) Factors whose presence indicates that fraud exists. A) Account risk.
B) Factors whose presence often have been observed in circumstances B) Control risk.
where frauds have occurred. C) Detection risk.
C) Factors whose presence will require modification to planned audit D) Inherent risk.
procedures.
D) Factors obtained during the audit which lead to required communications Detection risk.
with the
audit committee. Which of the following statements is correct regarding the auditor's
determination of materiality?
Factors whose presence often have been observed in circumstances where A) The planning level of materiality should normally be the larger of the
frauds have occurred. amount considered for the balance sheet versus the income statement.
B) The auditors' planning level of materiality may be disaggregated into
Which of the following is not an example of a likely adjustment in the smaller "tolerable misstatements" for the various accounts.
auditors' overall audit approach when significant risk is found to exist? C) Auditors may use various rules of thumb to arrive at an evaluation level of
A) Apply increased professional skepticism about material transactions. materiality, but not for determining the planning level of materiality.
B) Increase the assessed level of detection risk. D) The amount used for the planning should equal that used for evaluation.
C) Assign personnel with particular skill to areas of high risk.
D) Obtain increased evidence about the appropriateness of management's The auditors' planning level of materiality may be disaggregated into smaller
selection of accounting principles. "tolerable misstatements" for the various accounts.

Increase the assessed level of detection risk. The auditors must consider materiality in planning an audit engagement.
Materiality for planning purposes is:
Which of the following is least likely to be required on an audit? A) The auditors' preliminary estimate of the largest amount of misstatement
A) Evaluate the business rationale for significant, unusual transactions. that would be material to any one of the client's financial statements.
B) Make a legal determination of whether fraud has occurred. B) The auditors' preliminary estimate of the smallest amount of
C) Review accounting estimates for biases. misstatement that would be material to any one of the client's financial
D) Test appropriateness of journal entries and adjustments statements.
C) The auditors' preliminary estimate of the amount of misstatement that
Make a legal determination of whether fraud has occurred. would be material to the client's balance sheet.
D) An amount that cannot be quantitatively stated since it depends on the
Which of the following is (are) considered a further audit procedure(s) that nature of the item.
may be designed after assessing the risks of material misstatement?
The auditors' preliminary estimate of the smallest amount of misstatement
Substantive Tests of Details/ Substantive Analytical Procedures that would be material to any one of the client's financial statements.
A) Yes Yes
B) Yes No Which of the following topics is not normally included in an engagement
C) No Yes letter?
D) No No A) The auditors' preliminary assessment of internal control.
B) The auditors' estimate of the fee for the engagement.
Y/y C) Limitations on the scope of the engagement.
D) A description of responsibility for the detection of fraud.
Which of the following circumstances would an auditor most likely consider a
risk factor relating to misstatements arising from fraudulent financial The auditors' preliminary assessment of internal control.
reporting?
A) Several members of management have recently purchased additional Which of the following is most likely to be an overall response to fraud risks
shares of the entity's stock. identified in an audit?
B) Several members of the board of directors have recently sold shares of the A) Only use certified public accountants on the engagement.
entity's stock. B) Place increased emphasis on the audit of objective transactions rather
C) The entity distributes financial forecasts to financial analysts that predict than subjective transactions.
conservative operating results. C) Supervise members of the audit team less closely and rely more upon
D) Management is interested in maintaining the entity's earnings trend by judgment.
using aggressive accounting practices. D) Use less predictable audit procedures.

D) Management is interested in maintaining the entity's earnings trend by Use less predictable audit procedures.
using aggressive accounting practices.
Which of the following is not an assertion that is made in the financial
A successor auditor is required to attempt communication with the statements by management concerning each major account balance?
predecessor auditor prior to: A) Completeness.
A) Performing test of controls. B) Rights and obligations.
B) Testing beginning balances for the current year. C) Legality.
C) Making a proposal for the audit engagement. D) Valuation.
D) Accepting the engagement.
Legality. C) Results of tests of controls.
D) Inquiry of management and others.
Tests for unrecorded assets typically involve tracing from:
A) Source documents to recorded journal entries. Results of tests of controls.
B) Source documents to observations.
C) Recorded journal entries to documents. Auditors must assess fraud risk on every audit and respond to the risks that
D) Recorded journal entries to observations. are identified. Which of the following is not a procedure required to further
address the fraud risk of management override of internal control?
Source documents to recorded journal entries. A) Reviewing accounting estimates for biases.
B) Examining physical controls over assets.
Tracing from source documents forward to ledgers is most likely to address C) Evaluating the business rationale for significant unusual transactions.
which assertion related to posted entries: D) Examining journal entries and other adjustments for evidence of fraud.
A) Completeness.
B) Existence. Examining physical controls over assets.
C) Rights.
D) Valuation. Preliminary arrangements agreed to by the auditors and the client should be
reduced to writing by the auditors. The best place to set forth these
Completeness. arrangements is in:
A) A memorandum to be placed in the permanent section of the auditing
Determining that receivables are presented at net-realizable value is most working papers.
directly related to which management assertion? B) An engagement letter.
A) Existence. C) A client representation letter.
B) Rights. D) A confirmation letter attached to the constructive services letter.
C) Valuation.
D) Presentation and disclosure. An engagement letter.

Valuation The auditors are planning an audit engagement for a new client in a business
that is unfamiliar to the auditors. Which of the following would be the most
Which of the following is not a general objective for the audit of asset useful source of information for the auditors during the preliminary planning
accounts? stage when they are trying to obtain a general understanding of audit
A) Establishing existence of assets. problems that might be encountered?
B) Establishing proper valuation of assets. A) Client manuals of accounts and charts of accounts.
C) Establishing proper liabilities relating to assets. B) AICPA Industry Audit Guides.
D) Establishing the completeness of assets. C) Prior-year working papers of the predecessor auditors.
D) Latest annual and interim financial statements issued by the client.
) Establishing proper liabilities relating to assets.
Prior-year working papers of the predecessor auditors.
Which of the following is not used by auditors to establish the completeness
of recorded assets? The auditors will not ordinarily initiate discussion with the audit committee
A) Assessing control risk. concerning the:
B) Tracing from source documents to entries in the accounting records. A) Extent to which the work of internal auditors will influence the scope of
C) Performing analytical procedures. the examination.
D) Vouching transactions. B) Extent to which change in the company's organization will influence the
scope of the examination.
Vouching transactions. C) Details of potential problems which the auditors believe might cause a
qualified opinion.
To test for unsupported entries in the journals, the direction of audit testing
D) Details of the procedures which the auditors intend to apply.
should be to the:
A) Ledger entries. Details of the procedures which the auditors intend to apply.
B) Journal entries.
C) Original source documents. Which statement is correct relating to a potential successor auditor's
D) Financial statements. responsibility for communicating with the predecessor auditors in
connection with a prospective new audit client?
Original source documents. A) The successor auditors have no responsibility to contact the predecessor
auditors.
A form filed with the SEC when a company changes auditors is a:
B) The successor auditors should obtain permission from the prospective
A) Form 8-K.
client to contact the predecessor auditors.
B) Form 10-K.
C) The successor auditors should contact the predecessors regardless of
C) Form S-1.
whether the prospective client authorizes contact.
D) Form B-1.
D) The successor auditors need not contact the predecessors if the
Form 8-K. successors are aware of all available relevant facts.

Which of the following is least likely to render material a quantitatively small The successor auditors should obtain permission from the prospective client
misstatement material? to contact the predecessor auditors.
A) Affects the registrant's compliance with regulatory requirements.
Which of the following situations would most likely require special audit
B) Masks a change in earnings or other trends.
planning by
C) Arises from an item not capable of precise measurement.
the auditors?
D) The transaction involves a related party.
A) Some items of factory and office equipment do not bear identification
Arises from an item not capable of precise measurement. numbers.
B) Depreciation methods used on the client's tax return differ from those
Which of the following is not a required source of information for the used on the books.
auditors' assessment of fraud risk? C) Assets costing less than $500 are expensed even though the expected life
A) Discussion among audit team members. exceeds one year.
B) Fraud risk factors. D) Inventory is comprised of precious stones.
) Inventory is comprised of precious stones. Understanding as to the reasons for the change of auditors.

When planning an audit, an auditor should: Which of the following is least likely to be included in an auditor's inquiry of
A) Consider whether the extent of substantive procedures may be reduced management while obtaining information to identify the risks of material
based on the results of the internal control questionnaire. misstatement due to fraud?
B) Make preliminary judgments about materiality levels for audit purposes. A) Are all financial reporting operations at one location?
C) Conclude whether changes in compliance with prescribed control B) Does it have knowledge of fraud or suspect fraud?
procedures justifies reliance on them. C) Does it have programs to mitigate fraud risks?
D) Prepare a preliminary draft of the management representation letter. D) Has it reported to the audit committee the nature of the company's
internal control?
Make preliminary judgments about materiality levels for audit purposes.
Are all financial reporting operations at one location?
An auditor who accepts an audit engagement and does not possess the
industry expertise of the business entity, should: An auditor selects a sample from the file of shipping documents to determine
A) Engage financial experts familiar with the nature of the business entity. whether invoices were prepared. This test is performed to satisfy the audit
B) Obtain a knowledge of matters that relate to the nature of the entity's objective of:
business. A) Accuracy.
C) Refer a substantial portion of the audit to another CPA who will act as the B) Completeness.
principal auditor. C) Control.
D) First inform management that an unqualified opinion cannot be issued. D) Existence.

Obtain a knowledge of matters that relate to the nature of the entity's Completeness
business.
Individuals who commit fraud are ordinarily able to rationalize the act and
With respect to the auditor's planning of a year-end audit, which of the also have an:
following statements is always true? Incentive Opportunity
A) An engagement should not be accepted after the fiscal year-end. A) Yes Yes
B) An inventory count must be observed at the balance sheet date. B) Yes No
C) The client's audit committee should not be told of any specific audit C) No Yes
procedures which will be performed. D) No No
D) It is an acceptable practice to carry out parts of the examination at interim
dates. Y.Y

It is an acceptable practice to carry out parts of the examination at interim PCAOB standards suggest which of the following when interpreting the
dates. federal securities laws relating to materiality?
A) A material amount would significantly alter the "total mix" of information
Hawkins requested permission to communicate with the predecessor auditor made available to an investor.
and review certain portions of the predecessor auditor's working papers. The B) Materiality cannot be used as a basis for interpreting federal securities
prospective client's refusal to permit this will bear directly on Hawkins' laws.
decision concerning the: C) A material amount is that at which an individual's decision would be
A) Adequacy of the preplanned audit program. changed.
B) Ability to establish consistency in application of accounting principles D) Materiality is composed of quantitative and not qualitative aspects.
between years.
C) Apparent scope limitation. A material amount would significantly alter the "total mix" of information
D) Integrity of management. made available to an investor.

Integrity of management. Which of the following is correct concerning the PCAOB's concept of a
significant account?
The auditor faces a risk that the audit will not detect material misstatements A) It is the same as a relevant assertion.
in the financial statements. In regard to minimizing this risk, the auditor B) The auditor need only consider significant accounts when controls do not
primarily relies on: operate effectively.
A) Substantive procedures. C) In deciding whether an account is a significant account one does not
B) Tests of controls. consider the effect of internal control.
C) Internal control. D) It is an account for which qualitative materiality considerations are
D) Statistical analysis. particularly important.

Substantive procedures. In deciding whether an account is a significant account one does not consider
the effect of internal control.
An abnormal fluctuation in gross profit that might suggest the need for
extended audit procedures for sales and inventories would most likely be
identified in the risk assessment phase of the audit by the use of:
A) Tests of transactions and balances.
B) An assessment of internal control.
C) Specialized audit programs.
D) Analytical procedures.

Analytical procedures.

Before accepting an audit engagement, a successor auditor should make

specific inquiries of the predecessor auditor regarding the predecessor's:
A) Awareness of the consistency in the application of generally accepted
accounting principles between accounting periods.
B) Evaluation of all matters of continuing accounting significance.
C) Opinion of any subsequent events occurring since the predecessor's audit
report was issued. Create
D) Understanding as to the reasons for the change of auditors.
 Punitive damages Compensatory damages
Yes No
Auditing & Assurance Services
A(n) ________ failure occurs when an auditor issues an erroneous opinion D)
because it failed to comply with requirements of auditing standards. Punitive damages Compensatory damages
No Yes
audit
A
Distinguish between what is meant by business failure and audit failure
Under the laws of agency, partners of a CPA firm may be liable for the work
: Business failure occurs when a business is unable to repay its lenders or of others on whom they rely. This would not include:
meet expectations of its investors because of economic or business A) employees of the CPA firm.
conditions, such as recession, poor management decisions, or unexpected B) employees of the audit client.
competition in the industry. Audit failure occurs when the auditor issues an C) other CPA firms engaged to do part of the audit work.
incorrect audit opinion because it failed to comply with the requirements of D) specialists employed by the CPA firm to provide technical advice on the
auditing standards. audit.
Audit risk is the risk there will be an audit failure for a given audit B
engagement.
"Absence of reasonable care that can be expected of a person in a set of
False circumstances" defines:
A) pecuniary negligence.
The term "audit failure" refers to the situation when the auditor has followed
B) gross negligence.
auditing standards yet still fails to discover that the client's financial
C) extreme negligence.
statements are materially misstated.
D) ordinary negligence.
false
D
In the performance of an audit, a CPA:
An example of a breach of contract would likely include:
A) is legally liable for not detecting client fraud.
A) an auditor's refusal to return the client's general ledger book until the
B) must strictly follow GAAS for privately held clients.
client paid last year's audit fees.
C) must strictly follow PCAOB auditing standards for publicly held clients.
B) a bank's claim that an auditor had a duty to uncover material errors in
D) must exercise due professional care in the performance of their audit
financial statements that had been relied on in making a loan.
responsibilities.
C) a CPA firm's failure to complete an audit on the agreed-upon date because
D the firm had a backlog of other work which was more lucrative.
D) an auditor's claim that the client staff is unqualified.
Auditors who fail to exercise due care in their performance of professional
services may be liable for: C
A) punitive liability.
Privity of contract exists between:
B) breach of contract.
A) auditor and the federal government.
C) excess liability.
B) auditor and third parties.
D) criminal charges
C) auditor and client.
B D) auditor and client attorney

Recklessness in the case of an audit is present if the auditor knew an C

adequate audit was not done but still issued an opinion, even though there
An individual who is not party to the contract between a CPA and the client,
was no intent to deceive financial statement users. This description is the
but who is known by both and is intended to receive certain benefits from
legal term for:
the contract is known as:
A) ordinary negligence.
A) a third party.
B) gross negligence.
B) a common law inheritor.
C) constructive fraud.
C) a tort.
D) fraud.
D) a third-party beneficiary.
C
D
The standard of due care to which the auditor is expected to adhere to in the
Laws that have been passed by the U.S. Congress and other governmental
performance of the audit is referred to as the:
units are:
A) prudent person concept.
A) statutory laws.
B) common law doctrine.
B) judicial laws.
C) due care concept.
C) federal laws.
D) vigilant person concept.
D) common laws.
A
A
Auditors may be liable to their clients for:
The assessment against a defendant of the full loss suffered by a plaintiff
A)
regardless of the extent to which other parties shared in the wrongdoing is
Punitive damages Compensatory damages
called:
Yes Yes
A) separate and proportionate liability.
B) shared liability.
B)
C) unitary liability.
Punitive damages Compensatory damages
D) joint and several liability.
No No
D
C)
The assessment against a defendant of that portion of the damage caused by 1.)Gross negligence may constitute constructive fraud 2.)Fraud requires the
the defendant's negligence is called: intent to deceive
A) separate and proportionate liability. 3.)All fraud should be detected during audit
B) joint and several liability. 1.)No 2.)Yes 3.)No
C) shared liability.
D) unitary liability C)
1.)Gross negligence may constitute constructive fraud 2.)Fraud requires the
A intent to deceive
3.)All fraud should be detected during audit
Audit fraud occurs when: 1.)Yes 2.)No 3.)Yes
A) a misstatement is made and there is both knowledge of its falsity and the
intent to deceive. D)
B) a misstatement is made and there is knowledge of its falsity but no intent 1.)Gross negligence may constitute constructive fraud 2.)Fraud requires the
to deceive. intent to deceive
C) the auditor lacks even slight care in the performance in performing the 3.)All fraud should be detected during audit
audit. 1.)No 2.)No 3.)No
D) the auditor has an absence of reasonable care in the performance of the
audit. a
A When performing an audit the CPA is required to:
A) exercise the level of care of a reasonably prudent CPA.
Which of the following most accurately describes constructive fraud? B) strictly adhere of GAAS.
A) Absence of reasonable care C) strictly be liable for detection of material misstatements in the financial
B) Lack of slight care statements.
C) Knowledge and intent to deceive D) avoid gross negligence in the performance of their duties
D) Extreme or unusual negligence without the intent to deceive
A
D
Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff
Which of the following most accurately describes fraud? accountant. Elise was negligent while auditing several of the firm's clients.
A) Absence of reasonable care Under these circumstances, which of the following statements is true?
B) Lack of slight care A) Elise would have no personal liability for negligence.
C) Knowledge and intent to deceive B) Gregory & Hedrick is not liable for Elise's negligence because CPAs are
D) Extreme or unusual negligence without the intent to deceive generally considered to be independent contractors.
C) Gregory & Hedrick would not be liable for Elise's negligence if Winters
C
disobeyed specific instructions in the performance of the audits.
A third-party beneficiary is one which: D) Gregory & Hedrick can recover against its insurer on its malpractice policy
A) has failed to establish legal standing before the court. even if one of the partners was also negligent in reviewing Elise's work.
B) does not have privity of contract and is unknown to the contracting
D
parties.
C) does not have privity of contract, but is known to the contracting parties Laws that have been passed by the US Congress and other governmental
and intended to benefit under the contract. units
D) may establish legal standing before the court after a contract has been
consummated. Statutory Law
C Absence of reasonable care that can be expected of a person in a set of
circumstances.
) If the CPA negligently failed to properly prepare and file a client's tax return,
the CPA may be liable for: Ordinary negligence
A) the penalties the client owes the IRS.
B) the penalties and interest the client owes. Lack of even slight care, tantamount to reckless behavior that can be
C) the penalties and interest the client owes, plus the tax preparation fee the expected of a person.
CPA charged.
D) the penalties and interest, the tax preparation fee, and the amount of tax Gross negligence
that was underpaid.
The assessment against a defendant of that portion of the damage caused by
C the defendant's negligence.

Which of the following, if present, would most likely support a finding of Separate and Proportionate liability
constructive fraud on the part of a CPA?
A) Gross negligence in applying GAAS Failure of one or both parties in a contract to fulfill the requirements of the
B) Ordinary negligence in applying GAAS contract.
C) Lack of duty to perform
Breach of contract
D) Contributory negligence
The assessment against a defendant of the full loss suffered by a plaintiff
A
regardless of the extent to which other parties shared in the wrongdoing.
Which of the following statements is true?
Joint and several liability
A)
1.)Gross negligence may constitute constructive fraud 2.)Fraud requires the Existence of extreme or unusual negligence even though there was no intent
intent to deceive to deceive or do harm; also termed recklessness.
3.)All fraud should be detected during audit
1.)Yes 2.)Yes 3.)No Constructive fraud

B)
The standard of due care to which the auditor is expected to be held is D) the fraud was perpetrated by one employee who circumvented the
referred to as the prudent person concept. existing internal controls.
A) True
B) False B

A Which of the following is an illustration of liability to clients under common

law?
In a CPA firm operating as a limited liability partnership (LLP), the liability for A) Client sues auditor for not discovering a theft of assets by an employee.
one partner's actions does not extend to another partner's personal assets. B) Bank sues auditor for not discovering that borrower's financial statements
A) True are misstated.
B) False C) Combined group of stockholders sue auditor for not discovering materially
misstated financial statements.
A D) Federal government prosecutes auditor for knowingly issuing an incorrect
audit report.
In a CPA firm operating as a limited liability partnership (LLP), the liability for
one partner's actions does extend to the firm's assets. B
A) True
B) False Which of the following is an illustration of liability under the federal
securities acts?
A A) Client sues auditor for not discovering a theft of assets by an employee.
B) Bank sues auditor for not discovering that borrower's financial statements
Statutory laws are laws that have been developed through court decisions are misstated.
rather than through the U.S. Congress and other governmental units. C) Combined group of stockholders sue auditor for not discovering materially
A) True misstated financial statements.
B) False D) auditor sues client for not cooperating during engagement.
B C
The doctrine of joint and several liability is one factor that has contributed to A CPA firm normally uses one or a combination of four defenses when there
the recent increase in the number of lawsuits against auditors and the size of are legal claims by clients. Which one of the following is generally not a
awards to plaintiffs. defense?
A) True A) Lack of duty
B) False B) Non-negligent performance
C) Contributory negligence
A
D) Foreseeable users
Several states have statutes that permit privileged communication between
D
the client and auditor, allowing a CPA to refuse to testify in state and federal
courts. The legal term for when an auditor issues an opinion of an audit, knowing
A) True that an adequate audit was not performed is called?
B) False A) breach of contract
B) tort action for negligence
B
C) constructive fraud
Gross negligence is the existence of extreme or unusual negligence with the D) fraud
intent to deceive.
C
A) True
B) False Tort actions against CPAs are more common than breach of contract actions
because:
B
A) there are more torts than contracts.
Audit contracts (engagement letters): B) the burden of proof is on the auditor rather than on the person suing.
A) may be either oral or written. C) the person suing need prove only negligence.
B) must be written. D) the amounts recoverable are normally larger.
C) must be written and notarized.
D
D) must be written if the client is regulated by the Securities and Exchange
Commission. The principal issue to be resolved in cases involving alleged negligence is
usually:
B
A) the amount of the damages suffered by plaintiff.
In third-party suits, which of the auditor's defenses contends lack of privity of B) whether to impose punitive damages on defendant.
contract? C) the level of care exercised by the CPA.
A) Lack of duty D) whether defendant was involved in fraud.
B) Non-negligent performance
C
C) Contributory negligence
D) Absence of causal connections ) In the auditing environment, failure to meet auditing standards is often:
A) an accepted practice.
A
B) a suggestion of negligence.
) In connection with the audit of financial statements, an independent C) conclusive evidence of negligence.
auditor could be responsible for failure to detect a material fraud if: D) tantamount to criminal behavior.
A) statistical sampling techniques were not used on the audit engagement.
C
B) the auditor planned the audit in a negligent manner.
C) accountants performing important parts of the work failed to discover a A common way for a CPA firm to demonstrate its lack of duty to perform is
close relationship between the treasurer and the cashier. by use of a(n):
A) expert witness' testimony.
B) audit contract, or engagement letter. The 1136 Tenants case was a criminal case concerning a CPA's failure to
C) management representation letter. uncover fraud during a financial statement audit.
D) confirmation letter. A) True
B) False
B
b
To succeed in an action against the auditor, the client must be able to show
that: The preferred defense in third-party suits is absence of causal connection.
A) the auditor was fraudulent. A) True
B) the auditor was grossly negligent. B) False
C) there was a written contract.
D) there is a close causal connection between the auditor's behavior and the B
damages suffered by the client.
A financial institution sues the audit firm for failure to discover that a
D borrower's financial statements are materially misstated. This is an example
of which of the following legal liability concepts?
Matthews & Co., CPAs, issued an unqualified opinion on Dodgers A) Liability to clients
Corporation. Millennium Bank, which relied on the audited financial B) Liability to 3rd parties under common law
statements, granted a loan of $200,00,000 to Dodgers Corporation. Dodgers C) Civil liability under federal securities law
subsequently defaulted on the loan. To succeed in an action against D) Criminal liability
Matthews & Co., Millennium Bank must prove that the bank was:
A) in privity of contract with Dodgers. B
B) in privity of contract with Millennium.
C) free from contributory negligence. Which of the following auditor's defenses usually means non-reliance on the
D) justified in relying on the financial statements in granting the loan. financial statements by the user?
A) Lack of duty
D B) Non-negligent performance
C) Absence of causal connections
The preferred defense in third-party suits is: D) Contributory negligence
A) lack of duty to perform.
B) non-negligent performance. C
C) absence of causal connection.
D) client fraud. A group typically included as "third parties" in common law is:
A)
B Actual and potential stockholders
Employees of client
One of the changes in auditing procedure which was brought about as a Yes Yes
result of the 1136 Tenants case was that auditors were encouraged to begin
using: B)
A) letters of representation. Actual and potential stockholders
B) confirmation letters. Employees of client
C) engagement letters. No No
D) billet doux letters.
C)
C Actual and potential stockholders
Employees of client
The King Surety Company wrote a general fidelity bond covering thefts of Yes No
assets by the employees of Wilson, Inc. Thereafter, Cooney, an employee of
Wilson, embezzled $17,200 of company funds. When the activities were D)
discovered, King paid Wilson the full amount in accordance with the terms of Actual and potential stockholders
the fidelity bond, and then sought recovery against Wilson's auditors, Lynch Employees of client
& Merritt, CPAs. Which of the following would be Lynch & Merritt's best No Yes
defense?
A) King is not in privity of contract. A
B) The shortages were the result of clever forgeries and collusive fraud which
would not be detected by an examination made in accordance with generally The major conclusion of the 1931 Ultramares case was that:
accepted auditing standards. A) ordinary negligence is insufficient for liability to third parties.
C) Lynch & Merritt were not guilty either of gross negligence or fraud. B) ordinary negligence is sufficient for liability to third-party beneficiaries.
D) Lynch & Merritt were not aware of the King-Wilson surety relationship. C) fraud or gross negligence is sufficient for liability to third parties.
D) auditors have no liabilities to third parties.
B
A
There are four major sources of an auditor's legal liability. One source is
liability to the audit client. List the other three sources. ) Under common law, a foreseen user would be treated the same as:
A)
Liability to third parties under common law. A primary beneficiary
• Civil liability under federal securities laws. A known third party
• Criminal liability. Yes Yes
) An example of auditor legal liability to third parties under common law B)
would be the federal government prosecuting an auditor for knowingly A primary beneficiary
issuing an incorrect audit report. A known third party
A) True No No
B) False
C)
b
A primary beneficiary A) Booth & Haynes is assuming much greater third-party liability than it
A known third party assumes on engagements under common law.
Yes No B) If its examination is not fraudulent, Booth & Haynes may issue an
appropriate disclaimer to the financial statements and thereby avoid liability.
D) C) Booth & Haynes must incorporate if they wish to practice before the SEC.
A primary beneficiary D) Booth & Haynes must be a large interstate firm if they wish to practice
A known third party before the SEC.
No Yes
A
A
As a consequence of his failure to adhere to generally accepted auditing
A broad interpretation of the rights of third-party beneficiaries holds that standards in the course of his examination of the Lamp Corp., Harrison, CPA,
users that the auditor should have been able to foresee as being likely users did not detect the embezzlement of a material amount of funds by the
of financial statements have the same rights as those with privity of contract. company's controller. As a matter of common law, to what extent would
This is known as the concept of: Harrison be liable to the Lamp Corp. for losses attributable to the theft?
A) foreseen users. A) He would have no liability, since the ordinary examination cannot be
B) foreseeable users. relied upon to detect thefts of assets by employees.
C) expected users. B) He would have no liability because privity of contract is lacking.
D) four-party contracts C) He would be liable for losses attributable to his negligence.
D) He would be liable only if it could be proven that he was grossly negligent.
B
C
Which of the auditor's defenses is ordinarily not available when lawsuits are
filed by a third party? Of the three approaches to applying the concept of foreseen users (Credit
A) Absence of causal connections Alliance approach, restatement of torts approach, and foreseeable user
B) Contributory negligence approach), the approach followed by the most states is the Credit Alliance
C) Non-negligent performance approach.
D) Lack of duty A) True
B) False
B
B
According to the principle established by the Restatement of Torts case,
foreseen users must be members of: The restatement of torts approach to the concept of foreseen users states
A) any potential user group. that any users that the auditor should have reasonably been able to foresee
B) a legally protected class. as being likely users of financial statements have the same rights as those
C) a reasonably limited and identifiable user group. with privity of contract.
D) a reasonably limited and established user group. A) True
B) False
C
B
In an action against a CPA in a jurisdiction that follows the Ultramares
doctrine, lack of privity is a viable defense provided the plaintiff: The Credit Alliance approach to the concept of foreseen users states that to
A) is the client's creditor who sued the CPA for negligence. be liable to third parties, an auditor (1) must know and intend that the work
B) can prove gross negligence. product would be used by the third-party for a specific purpose, and (2) the
C) violated the Securities Act of 1933. knowledge and intent must be evidenced by the auditor's conduct.
D) violated the Securities Act of 1934. A) True
B) False
A
A
Under common law, an individual or company that (1) does not have a
contract with an auditor, (2) is known by the auditor in advance of the audit, Which of the following required an adequate system of internal control for
and (3) will use the auditor's report to make decisions about the client SEC registrants?
company has: A) Sarbanes-Oxley Act of 2002
A) no rights unless an auditor is grossly negligent. B) Securities Act of 1933
B) no rights unless an auditor is fraudulent. C) Foreign Corrupt Practices Act of 1977
C) no rights against an auditor. D) Securities Act of 1934
D) the same rights against an auditor as a client.
C
D
) The increased litigation under the federal securities laws has resulted from:
The basic legal concept which was affirmed in the 1985 New York case, Credit A)
Alliance, was that: 1.)The availability of class-action litigation
A) the auditor's defense of privity of contract is still valid against third 2.)The strict liability standards imposed on CPAs by the securities laws
parties. 3.)An excess of attorneys
B) the auditor is liable for ordinary negligence to specifically foreseen third 1.)Yes 2.)Yes 3.)Yes
parties.
C) the auditor is liable for ordinary negligence to reasonably foreseeable B)
third parties. 1.)The availability of class-action litigation
D) the auditor's defense of contributory negligence is no longer valid 2.)The strict liability standards imposed on CPAs by the securities laws
3.)An excess of attorneys
A 1.)Yes 2.)No 3.)No
The partnership of Booth & Haynes, CPAs, has been engaged to examine the C)
financial statements of Paul, Inc., in connection with the registration of Paul's 1.)The availability of class-action litigation
securities with the Securities and Exchange Commission. Under these 2.)The strict liability standards imposed on CPAs by the securities laws
circumstances, which of the following statements is true?
3.)An excess of attorneys B) establish the qualifications for accountants who are members of the
1.)Yes 2.)Yes 3.)No profession.
C) eliminate incompetent attorneys and accountants who participate in the
D) registration of securities to be offered to the public.
1.)The availability of class-action litigation D) provide a set of uniform standards and tests for accountants, attorneys,
2.)The strict liability standards imposed on CPAs by the securities laws and others who practice before the Securities and Exchange Commission.
3.)An excess of attorneys
1.)No 2.)No 3.)No A

... ) The leading precedent-setting auditing case in third-party liability is:

A) Escott et al. v. Bar Chris Construction Corp.
Under the Securities Act of 1933, the auditor's responsibility for making sure B) Hochfelder v. Ernst & Ernst.
the financial statements were fairly stated extends to: C) Ultramares Corporation v. Touche.
A) the date of the financial statements. D) United States v. Simon.
B) the date the registration statement becomes effective.
C) the date of the audit report. C
D) one year beyond the date of the financial statements.
Which of the following statements about the Securities Act of 1933 is not
B true?
A) A third-party that purchased securities described in the registration
Under the Securities Exchange Act of 1934, which type of organization is statement may sue the auditor for material misrepresentations or omissions
required to submit audited financial statements to the SEC? in the audited financial statements.
A) Every company with securities traded on national and over-the-counter B) A third-party user does not have the burden of proof that he/she relied on
exchanges. the financial statements.
B) Every corporation. C) A third-party user has the burden of proof that the auditor was either
C) Every company issuing new securities. negligent or fraudulent in doing the audit.
D) Every corporation which is chartered by a state government. D) A third-party user does not have the burden of proof that the loss was
caused by the misleading statements.
A
C
The Securities and Exchange Commission can impose all but which of the
following sanctions? The most significant audit issue that came as a result of the court decision in
A) Suspend a CPA from auditing SEC clients. the Escott et al. v. Bar Chris Construction Corporation case in 1968 was:
B) Prohibit a CPA from accepting new SEC clients for a period of time. A) the court's reaffirmation that the burden of proof was on the plaintiff to
C) Require a CPA to participate in continuing-education programs and make prove the auditor was negligent.
changes in their practice. B) the affirmation of the increased auditor's responsibility when performing
D) Revoke a CPA license. an S-1 review, a review of events subsequent to the balance sheet, for
registration statements.
D C) the increased auditor responsibility when associated with unaudited
financial statements.
The Foreign Corrupt Practices Act (FCPA) of 1977: D) the court's refusal to allow the percentage-of-completion method of
A) requires auditors to review and evaluate systems of internal control as a accounting for revenues.
part of an audit.
B) requires SEC registrants to maintain a reasonably complete and accurate B
set of records and an adequate system of internal control.
C) requires auditors to review client's internal control system in a manner Under the federal securities acts, one significant result occurring directly due
which is thorough enough to judge whether client meets the requirements of to the Escott et al. v. Bar Chris Construction Corporation case was that SAS
the FCPA. was changed to require:
D) requires auditors to file a report with the SEC if client's internal control A) greater emphasis on subsequent events procedures.
system is inadequate. B) new standards for unaudited statements.
C) a broader definition of third-party beneficiaries.
B D) more companies to file annual reports with the SEC.
While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal A
control provisions have been largely superseded by which of the following?
A) The Sarbanes-Oxley Act of 2002 Under the Securities Exchange Act of 1934, most of the litigation against the
B) The Racketeer Influenced and Corrupt Organization Act auditor has been generated because of the auditor's involvement with the:
C) The Federal False Statements Statute A) 8-K form.
D) The Federal Mail Fraud Statute B) 10-K form.
C) 10-Q form.
A D) S-1 form.
Which of the following is not likely a factor in the increase in the number of B
lawsuits and sizes of awards to plaintiffs related to auditor behavior?
A) Increased awareness of auditor responsibilities by users of financial Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often
statements. referred to as:
B) CPA firms are more willing to settle lawsuits. A) the antifraud provisions.
C) Difficulty judges and jurors have in understanding legal matters. B) the new issues provisions.
D) Increased consciousness on the part of the SEC for its responsibility to C) the full-employment act for accountants.
protect investors. D) the RICO provisions.

C A

A major purpose of federal securities regulations is to: In a leading securities law and CPA liabilities case, the U.S. Supreme Court
A) provide sufficient reliable information to the investing public who ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held
purchase securities in the marketplace. liable for Rule 10b-5 of the Securities Exchange Act of 1934, what would be
required to be shown to the court was the auditor's: A) True
A) ordinary negligence. B) False
B) gross negligence.
C) knowledge and intent to deceive. B
D) financial gain at the expense of the plaintiff.
The Foreign Corrupt Practices Act of 1977 allows an injured party to seek
C treble (triple) damages and recovery of legal fees in cases where it can be
demonstrated that the defendant was engaged in a pattern of fraudulent
The Sarbanes-Oxley Act of 2002 makes it felony to destroy or create activity.
documents to impede or obstruct a federal investigation. Those provisions A) True
were adopted following which of the following legal cases? B) False
A) United States v. Natelli
B) United States v. Andersen B
C) ESM Government Securities v. Alexander Grant & Co.
D) United States v. Simon ) In which case were auditors prosecuted for filing false financial statements
for a client with the government?
B A) 1136 Tenants case
B) United States v. Simon case
The Securities and Exchange Commission has authority to: C) Escott et al. v. Bar Chris case, aka Bar Chris
A) prescribe specific auditing procedures to detect fraud concerning D) Ultramares Corporation v. Touche case
inventories and accounts receivable of companies engaged in interstate
commerce. B
B) deny lack of privity as a defense in third-party actions for gross negligence
against the auditors of public companies. ) A CPA is subject to criminal liability if the CPA:
C) determine accounting principles for the purpose of financial reporting by A) refuses to turn over requested audit documentation to a client.
companies offering securities to the public. B) performs an audit in a negligent manner.
D) require a change of auditors of governmental entities after a given period C) willfully omits a material fact from a set of financial statements.
of years as a means of ensuring auditor independence. D) willfully breaches a contract with a client.

C C

One result from the Escott et al. v. Bar Chris case was a greater emphasis Which of the following best describes a trend in litigation involving CPAs?
being placed on audit staff understanding the client's business and industry. A) A CPA cannot render an opinion unless the CPA has audited all affiliates of
A) True a company.
B) False B) A CPA may not successfully assert that the CPA had no motive to be part
of a fraud.
A C) A CPA may be exposed to criminal as well as civil liability.
D) A CPA is primarily responsible for a client's footnotes filed with the SEC.
The only parties who can recover from auditors under the Securities Act of
1933 are original purchasers of securities. C
A) True
B) False The Sarbanes-Oxley Act of 2002 makes destruction of audit documentation
punishable by up to 10 years in prison.
A A) True
B) False
Under the Securities Act of 1933, a third-party plaintiff does not have the
burden of proof that he or she relied on the financial statements or that the B
auditor was negligent or fraudulent in doing the audit. Rather, the plaintiff
need only prove that the audited financial statements contained a material ) Which of the following resulted in a federal law passed in 1995 that
misrepresentation or omission. significantly reduced potential damages in securities-related litigation?
A) True A) Private Securities Litigation Reform Act
B) False B) Public Securities Damages and Settlements Act
C) Racketeer Influenced and Corrupt Organization Act
A D) U.S. Securities Claims Reform Act

Companies with securities traded on national and over-the-counter A

exchanges are required to submit audited financial statements once every
three years to the Securities and Exchange Commission. ) The Private Securities Litigation Reform Act of 1995 reduced potential
A) True damages in securities-related litigation, but because the act applied only to
B) False federal courts, attorneys began taking cases to state courts. Which of the
following eliminated this loophole?
B A) Private Securities Litigation Reform Amendment
B) Securities Litigation Uniform Standards Act of 1998
The same three defenses available to auditors in common lawsuits by third C) Racketeer Influenced and Corrupt Organization Act
parties-non-negligent performance, lack of duty, and absence of causal D) U.S. Securities Claims Reform Act
connection-are also available for suits under the Securities Exchange Act of
1934. B
A) True
B) False A situation in which an incorrect audit opinion is issued because it failed to
comply with the requirements of auditing standards.
A
Audit failure
The United States Supreme Court has ruled that outside professionals such
as accountants who don't help run corrupt businesses cannot be sued under A federal statute dealing with companies that trade securities on national
the provisions of the Foreign Corrupt Practices Act. and over-the-counter exchanges. Auditors are involved because the annual
reporting requirements include audited financial statements.
Securities Exchange Act of 1934 C) financial statement auditor.
D) company's internal audit department.
An auditor's legal defense under which the auditor claims that the client's
own actions either resulted in the loss that is the basis for damages or B
interfered with the conduct of the audit in such a way that prevented the
auditor from discovering the cause of the loss. ) If the auditor insists on financial statement disclosures that the
management finds unacceptable, the auditor can:
Contributory negligence A)
Issue an adverse audit report Issue a qualified audit report
A federal statute that makes it illegal to offer a bribe to an official of a foreign Yes Yes
country.
B)
Foreign Corrupt Practices Act Issue an adverse audit report Issue a qualified audit report
No No
A common-law approach to third-party liability in which ordinary negligence
is insufficient for liability to third parties, because of the lack of privity of
C)
contract between the third-party and the auditor unless the third-party is a
Issue an adverse audit report Issue a qualified audit report
primary beneficiary.
Yes No
Ultramares doctrine
D)
. A federal statute designed to significantly reduce the potential damages in Issue an adverse audit report Issue a qualified audit report
federal securities-related litigation by providing for proportionate liability in No Yes
most cases.
A
Securities Litigation Uniform Standards Act of 1998
In certifying their annual financial statements, the CEO and CFO of a public
An auditor's legal defense under which the auditor claims that the audit was company certify that the financial statements comply with the requirements
performed in accordance with generally accepted auditing standards of:
A) GAAP.
Nonnegligent performance B) the Sarbanes-Oxley Act.
C) the Securities Exchange Act of 1934.
An auditor's legal defense under which the auditor claims that the failure to D) GAAS.
follow auditing standards did not cause the damages suffered by the client
C
Securities Act of 1933
Which of the following statements is true of a public company's financial
The Private Securities Litigation Reform Act of 1995 capped damage awards statements?
against auditors to the amount of the audit fees charged. A) Sarbanes-Oxley requires the CEO only to certify the financial statements.
A) True B) Sarbanes-Oxley requires the CFO only to certify the financial statements.
B) False C) Sarbanes-Oxley requires the CEO and CFO to certify the financial
statements.
B
D) Sarbanes-Oxley neither requires the CEO nor the CFO to certify the
The objective of the ordinary audit of financial statements is the expression financial statements.
of an opinion on:
C
A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements. The responsibility for the preparation of the financial statements and the
C) the accuracy of the annual report. accompanying footnotes belongs to:
D) the accuracy of the balance sheet and income statement. A) the auditor.
B) management.
A
C) both management and the auditor equally.
If the auditor believes that the financial statements are not fairly stated or is D) management for the statements and the auditor for the notes.
unable to reach a conclusion because of insufficient evidence, the auditor:
B
A) should withdraw from the engagement.
B) should request an increase in audit fees so that more resources can be ) Responsibility for the fair presentation of financial statements rests equally
used to conduct the audit. with management and the auditor.
C) has the responsibility of notifying financial statement users through the A) True
auditor's report. B) False
D) should notify regulators of the circumstances.
B
C
The auditor's best defense when material misstatements are not uncovered
Auditors accumulate evidence to: is to have conducted the audit:
A) defend themselves in the event of a lawsuit. A) in accordance with generally accepted auditing standards.
B) justify the conclusions they have otherwise reached. B) as effectively as reasonably possible.
C) satisfy the requirements of the Securities Acts of 1933 and 1934. C) in a timely manner.
D) enable them to reach conclusions about the fairness of the financial D) only after an adequate investigation of the management team.
statements.
A
D
In order to provide reasonable assurance the audit must be performed with
The responsibility for adopting sound accounting policies and maintaining an attitude of professional skepticism. Which of the following is most correct
adequate internal control rests with the: regarding the "attitude" of professional skepticism?
A) board of directors. A) auditors should assume that management is dishonest
B) company management. B) auditors should assume that management is neither dishonest nor honest
C) auditors should assume that management is honest and mistakes are financial statements.
unintentional C) Contact the local law enforcement officials regarding potential criminal
D) auditors should assume that management is incumbent in preparing wrongdoing.
financial statements D) Consider the impact of the illegal act on the relationship with the
company's management.
B
C
Which of the following is not one of the reasons that auditors provide only
reasonable assurance on the financial statements? Auditing standards require that an audit be designed to provide reasonable
A) The auditor commonly examines a sample, rather than the entire assurance of detecting:
population of transactions. A) material errors in the financial statements.
B) Accounting presentations contain complex estimates which involve B) fraud in the financial statements.
uncertainty. C) material errors and fraud in the financial statements.
C) Fraudulently prepared financial statements are often difficult to detect. D) inadequate disclosure in the notes to the financial statements.
D) Auditors believe that reasonable assurance is sufficient in the vast
majority of cases. A

D The auditor has considerable responsibility for notifying users as to whether

or not the statements are properly stated. This imposes upon the auditor a
Which of the following statements is most correct regarding errors and duty to:
fraud? A) provide reasonable assurance that material misstatements will be
A) An error is unintentional, whereas fraud is intentional. detected.
B) Frauds occur more often than errors in financial statements. B) be a guarantor of the fairness in the statements.
C) Errors are always fraud and frauds are always errors. C) be equally responsible with management for the preparation of the
D) Auditors have more responsibility for finding fraud than errors. financial statements.
D) be an insurer of the fairness in the statements.
A
A
When an auditor believes that an illegal act may have occurred, the auditor
should first: ) "The auditor should not assume that management is dishonest, but the
A) inquire of management at a level above those likely to be involved. possibility of dishonesty must be considered." This is an example of:
B) consult with legal counsel of others knowledgeable about the illegal acts. A) unprofessional behavior.
C) accumulate additional evidence. B) an attitude of professional skepticism.
D) withdraw from the engagement. C) due diligence.
D) a rule in the AICPA's Code of Professional Conduct.
A
B
) The auditor has no responsibility to plan and perform the audit to obtain
reasonable assurance that misstatements, whether caused by errors or ) If the auditor were responsible for making certain that all of management's
fraud, that are not ________ are detected. assertions in the financial statements were absolutely correct:
A) important to the financial statements A) bankruptcies could no longer occur.
B) statistically significant to the financial statements B) bankruptcies would be reduced to a very small number.
C) material to the financial statements C) audits would be much easier to complete.
D) identified by the client D) audits would not be economically practical.

C D

) Fraudulent financial reporting is most likely to be committed by whom? The auditor's best defense when existing material misstatements in the
A) line employees of the company financial statements are not uncovered in the audit is:
B) outside members of the company's board of directors A) the audit was conducted in accordance with auditing standards.
C) company management B) the financial statements are the client's responsibility.
D) the company's auditors C) the client is guilty of contributory negligence.
D) the client is guilty of fraudulent misrepresentation.
C
A
Which of the following would most likely be deemed a direct-effect illegal
act? Which of the following is most correct with regard to the auditor's search of
A) violation of federal employment laws indirect-effect illegal acts that may have been committed by the client?
B) violation of federal environmental regulations A) No reason to search unless there is sufficient evidence to believe they
C) violation of federal income tax laws have occurred.
D) violation of civil rights laws B) Same audit responsibility as the search for financial statement fraud.
C) Same audit responsibility as the search for misappropriated assets.
C D) No reason to search as they would have an indirect effect on the financial
statements.
The concept of reasonable assurance indicates that the auditor is:
A) not a guarantor of the correctness of the financial statements. A
B) not responsible for the fairness of the financial statements.
C) responsible only for issuing an opinion on the financial statements. Which of the following statements is usually true?
D) responsible for finding all misstatements. A) It is easier for the auditor to uncover fraud than errors.
B) It is easier for the auditor to uncover indirect-effect illegal acts than fraud.
A C) The auditor's responsibility for detecting direct-effect illegal acts is similar
to the responsibility to detect fraud.
) Which of the following is the auditor least likely to do when aware of an D) The auditor's responsibility for detecting indirect-effect illegal acts is
illegal act? similar to the responsibility to detect fraud.
A) Discuss the matter with the client's legal counsel.
B) Obtain evidence about the potential effect of the illegal act on the C
Which is the following is most correct regarding the distinction(s) between an illegal act.
the auditor's responsibilities for searching for errors and fraud. D) withdraw from the engagement.
A) little
B) a significant C
C) no
D) various When the auditor knows that an illegal act has occurred, the auditor must:
A) report it to the proper governmental authorities.
C B) consider the effects on the financial statements, including the adequacy of
disclosure.
In comparing management fraud with employee fraud, the auditor's risk of C) withdraw from the engagement.
failing to discover the fraud is: D) issue an adverse opinion.
A) greater for management fraud because managers are inherently more
deceptive than employees. B
B) greater for management fraud because of management's ability to
override existing internal controls. ) If an auditor uncovers an illegal act at a public company, the auditor must
C) greater for employee fraud because of the higher crime rate among blue notify:
collar workers. A) local law enforcement officials.
D) greater for employee fraud because of the larger number of employees in B) the Public Company Accounting Oversight Board.
the organization. C) the Securities and Exchange Commission.
D) all of the above.
B
C
Which of the following statements is correct with respect to the auditor's
responsibilities relative to the detection of indirect-effect illegal acts? ) If an auditor conducted an audit in accordance with auditing standards,
A) The auditor has no responsibility for searching for indirect-effect illegal which of the following would the auditor likely detect?
acts. A) unrecorded transactions
B) The auditor has the same responsibility for searching for indirect-effect B) errors in postings of recorded transactions
illegal acts as any other potential misstatement that may occur. C) counterfeit signatures on paid checks
C) Auditors have responsibility for searching for any illegal act, whether D) fraud involving collusion
direct-effect or indirect-effect.
B
D) Discovery of indirect-effect illegal acts is usually easier than discovery of
fraud. Which of the following statements best describes the auditor's responsibility
with respect to illegal acts that do not have a material effect on the client's
A
financial statements?
When comparing the auditor's responsibility for detecting employee fraud A) Generally, the auditor is under no obligation to notify parties other than
and for detecting errors, the profession has placed the responsibility: personnel within the client's organization.
A) more on discovering errors than employee fraud. B) Generally, the auditor is under an obligation to inform the PCAOB.
B) more on discovering employee fraud than errors. C) Generally, the auditor is obligated to disclose the relevant facts in the
C) equally on discovering either one. auditor's report.
D) on the senior auditor for detecting errors and on the manager for D) Generally, the auditor is expected to compel the client to adhere to
detecting employee fraud. requirements of the Foreign Corrupt Practices Act.

C A

) If several employees collude to falsify documents, the chance a normal Which of the following statements best describes the auditor's responsibility
audit would uncover such acts is: regarding the detection of fraud?
A) very low. A) The auditor is responsible for the failure to detect fraud only when such
B) very high. failure clearly results from nonperformance of audit procedures specifically
C) zero. described in the engagement letter.
D) none of the above. B) The auditor is required to provide reasonable assurance that the financial
statements are free of both material errors and fraud
A C) The auditor may extend auditing procedures to actively search for
evidence of fraud where the examination indicates that fraud may exist.
When planning the audit, if the auditor has no reason to believe that illegal D) The auditor is responsible for the failure to detect fraud only when an
acts exist, the auditor should: unqualified opinion is issued.
A) include audit procedures which have a strong probability of detecting
illegal acts. B
B) still include some audit procedures designed specifically to uncover
illegalities. The essence of the attest function is to:
C) ignore the issue. A) assure the consistent application of correct accounting procedures.
D) make inquiries of management regarding their policies for detecting and B) determine whether the client's financial statements are fairly stated in
preventing illegal acts and regarding their knowledge of violations, and then accordance with an applicable financial reporting framework such as U.S.
rely on normal audit procedures to detect errors, irregularities, and GAAP or IFRS.
illegalities. C) examine individual transactions so that the auditor may certify as to their
validity.
D D) detect collusion and fraud.

When the auditor has reason to believe an illegal act has occurred, the B
auditor should:
A) inquire of management only at one level below those likely to be involved The auditor's evaluation of the likelihood of material employee fraud is
with the illegality. normally done initially as a part of:
B) begin communication with the FASB in accordance with PCAOB A) tests of controls.
regulations. B) tests of transactions.
C) consider accumulating additional evidence to determine if there is actually C) understanding the entity's internal control.
D) the assessment of whether to accept the audit engagement.
C The auditor's first course of action when an illegal act is uncovered should be
to immediately notify the appropriate authorities, including but not limited
Illegal acts are defined in auditing standards as: to the police, and for publicly held companies, the Securities and Exchange
A) violations of laws or government regulations. Commission.
B) violations of laws or government regulations other than errors. A) True
C) violations of laws or government regulations other than fraud. B) False
D) violations of law which would result in the arrest of the perpetrator.
B
C
An audit generally provides no assurance that indirect-effect illegal acts will
Most illegal acts affect the financial statements: be detected.
A) directly. A) True
B) only indirectly. B) False
C) both directly and indirectly.
D) materially if direct; immaterially if indirect A

B An auditor must inform a client's audit committee of an illegal act discovered

during an audit in writing.
With respect to the detection of indirect- effect illegal acts, auditing A) True
standards state that the auditor provides: B) False
A) no assurance that they will be detected.
B) the same reasonable assurance provided for other items. B
C) assurance that they will be detected, if material.
D) assurance that they will be detected, if highly material. The objective of the audit of financial statements by an independent auditor
is to verify that the financial statements are free of misstatements and
A accurately represent the company's financial position and results of
operations.
An auditor should recognize that the application of auditing procedures may A) True
produce evidence indicating the possibility of errors or fraud and therefore B) False
should:
A) plan and perform the engagement with an attitude of professional B
skepticism.
B) not rely on internal controls that are designed to prevent or detect errors The auditor's responsibility for uncovering direct-effect illegal acts is the
or fraud. same as for fraud.
C) design audit tests to detect unrecorded transactions. A) True
D) extend the work to audit most recorded transactions and records of an B) False
entity.
A
A
Why does the auditor divide the financial statements into smaller segments?
Errors are usually more difficult for an auditor to detect than frauds. A) Using the cycle approach makes the audit more manageable.
A) True B) Most accounts have few relationships with others and so it is more
B) False efficient to break the financial statements into smaller pieces.
C) The cycle approach is used because auditing standards require it.
B D) All of the above are correct.

Other than inquiring of management about policies they have established to A

prevent illegal acts and whether management knows of any laws or
regulations that the company has violated, the auditor should not search for Why does the auditor divide the financial statements into segments around
indirect-effect illegal acts unless there is reason to believe they may exist. the financial statement cycles?
A) True A) Most auditors are trained to audit cycles as opposed to entire financial
B) False statements.
B) The approach aids in the assignment of tasks to different members of the
A audit team.
C) The cycle approach is required by auditing standards.
When an auditor believes that an illegal act may have occurred, the first step D) The cycle approach allows the auditor to detect indirect-effect illegal acts.
he or she should take is to gather additional evidence to determine the
extent of the illegality. B
A) True
B) False The most important general ledger account included in and affecting several
cycles is the:
A A) cash account.
B) inventory account.
Audits are expected to provide a higher degree of assurance for the C) income tax expense and liability accounts.
detection of material frauds than is provided for an equally material error. D) retained earnings account.
A) True
B) False A

B When using the cycle approach to segmenting the audit, the reason for
treating capital acquisition and repayment separately from the acquisition of
Auditors have a higher degree of responsibility for detecting direct-effect goods and services is that:
illegal acts than indirect-effect illegal acts. A) the transactions are related to financing a company rather than to its
A) True operations.
B) False B) most capital acquisition and repayment cycle accounts involve few
transactions, but each is often highly material and therefore should be
A audited extensively.
C) both A and B are correct. conduct an audit is to obtain some assurance for each class of transaction
D) neither A nor B is correct. and for the ending balance of the related account.
B) Management's assertions follow and are closely related to the audit
C objectives.
C) The auditor's primary responsibility is to find and disclose fraudulent
In describing the cycle approach to segmenting an audit, which of the management assertions.
following statements is not true? D) Assertions about presentation and disclosure deal with whether the
A) All general ledger accounts and journals are included at least once. accounts have been included in the financial statements at appropriate
B) Some journals and general ledger accounts are included in more than one amounts.
cycle.
C) The "capital acquisition and repayment" cycle is closely related to the A
"acquisition of goods and services and payment" cycle.
D) The "inventory and warehousing" cycle may be audited at any time during Which of the following statements about the existence and completeness
the engagement since it is unrelated to the other cycles. assertions is not true?
A) The existence and completeness assertions emphasize different audit
D concerns.
B) Existence deals with overstatements and completeness deals with
Which of the following journals would be included most often in the various understatements.
audit cycles? C) Existence deals with understatements and completeness deals with
A) cash receipts journal overstatements.
B) cash disbursements journal D) The completeness assertion deals with unrecorded transactions.
C) general journal
D) sales journal C
C Which of the following assertions is described as "this assertion addresses
whether all transactions that should be included in the financial statements
Under the cycle approach to segmenting an audit, transactions recorded in are in fact included"?
different journals should never be combined with the general ledger A) occurrence
balances that result from those transactions. B) completeness
A) True C) rights and obligations
B) False D) existence
B B
Which of the following is not one of the three categories of assertions? Which of the following management assertions is not associated with
A) Assertions about classes of transactions and events for the period under transaction-related audit objectives?
audit A) Occurrence
B) Assertions about financial statements and correspondence to GAAP B) Classification and understandability
C) Assertions about account balances at period end C) Accuracy
D) Assertions about presentation and disclosure D) Completeness
B B
) If a short-term note payable is included in the accounts payable balance on Which of the following statements is true regarding the distinction between
the financial statement, there is a violation of the: general audit objectives and specific audit objectives for each account
A) completeness assertion. balance?
B) existence assertion. A) The specific audit objectives are applicable to every account balance on
C) cutoff assertion. the financial statements.
D) classification and understandability assertion. B) The general audit objectives are applicable to every account balance on
the financial statements.
D
C) The general audit objectives are stated in terms tailored to the
International auditing standards and U.S. GAAP classify assertions into three engagement.
categories. Which of the following is not a category of assertions that D) For any given class of transactions, usually only one audit objective must
management makes about the accounting information in financial be met to conclude the transactions are properly recorded.
statements?
B
A) Assertions about classes of transactions for the period under audit
B) Assertions about account balances at period end The auditor is determining that the recorded sales are for the amount of
C) Assertions about the quality of source documents used to prepare the goods shipped are correctly billed and recorded. She is gathering evidence
financial statements about which transaction related audit objective?
D) Assertions about presentation and disclosure A) existence
B) completeness
C
C) accuracy
Management assertions are: D) cut-off
A) directly related to the financial reporting framework used by the
C
company, usually U.S. GAAP or IFRS
B) stated in the footnotes to the financial statements. Which of the following combinations is correct?
C) explicitly expressed representations about the financial statements. A) Existence relates to whether the amounts in accounts are understated.
D) provided to the auditor in the assertions letter, but are not disclosed on B) Occurrence relates to whether balances exist.
the financial statements. C) Existence relates to whether amounts included exist.
D) Occurrence relates to whether the amounts in accounts occurred in the
A
proper year.
Which of the following statements is true?
C
A) Auditors have generally found that the most effective and efficient way to
After general audit objectives are understood, specific audit objectives for ) The detail tie-in is part of the ________ assertion for account balances.
each account balance on the financial statements can be developed. Which A) classification
of the following statements is true? B) valuation and allocation
A) There should be at least one specific objective for each relevant general C) rights and obligations
objective. D) completeness
B) There will be only one specific objective for each relevant general
objective. b
C) There will be many specific objectives developed for each relevant general
objective. ) The primary difference between an audit of the balance sheet and an audit
D) There must be one specific objective for each general objective of the income statement is that the audit of the income statement deals with
the verification of:
A A) transactions.
B) balances.
General transaction-related audit objectives vary from audit to audit, C) costs.
depending on the nature and characteristics of the client's business and D) cutoffs.
industry.
A) True a
B) False
Which of the following best describes tests of details of balances?
b A) audit procedures designed to test for monetary misstatements in the
accounts summarized in the financial statements
The audit objective of posting and summarization is associated with the B) audit procedures designed to test for the monetary amounts of
management assertion of accuracy. transactions
A) True C) audit procedures designed to test for reasonableness of account balances
B) False D) audit procedures designed to test for effectiveness in recording
accounting information
a
a
) The transaction-related audit objective of timing is related to the assertion
of cutoff. Which of the following statements is not true?
A) True A) Balance-related audit objectives are applied to ending account balances.
B) False B) Transaction-related audit objectives are applied to classes of transactions.
C) Balance-related audit objectives are applied to the ending balance in
a balance sheet accounts.
D) Balance-related audit objectives are applied to both beginning and ending
The effect of a violation of the existence transaction-related audit objective balances in balance sheet
for the sales account would be an overstatement of that account.
A) True d
B) False
Auditors have found that the most efficient way to conduct audits is to focus
a primarily on testing classes of transactions and performing tests of ending
account balances.
The effect of a violation of the completeness transaction-related audit A) True
objective for cash disbursements transactions would be an overstatement of B) False
cash disbursements.
A) True a
B) False
Balance-related audit objectives are usually applied to the ending balance in
b income statement accounts; transaction-related audit objectives are usually
applied to transactions reflected in balance sheet accounts.
The transaction-related audit objective that deals with whether recorded A) True
transactions have actually occurred is the completeness objective. B) False
A) True
B) False b

b Tests of details of balances typically involve the use of comparisons and

relationships to assess the overall reasonableness of account balances.
) In testing for cutoff, the objective is to determine: A) True
A) whether all of the current period's transactions are recorded. B) False
B) whether transactions are recorded in the correct accounting period.
C) the proper cutoff between capitalizing and expensing expenditures. b
D) the proper cutoff between disclosing items in footnotes or in account
balances. The general balance-related audit objective that deals with determining that
details in the account balance agree with related master file amounts, foot to
b the total in the account balance, and agree with the total in the general
ledger is the detail tie-in objective.
The detail tie-in objective is not concerned that the details in the account A) True
balance: B) False
A) agree with related subsidiary ledger amounts.
B) are properly disclosed in accordance with GAAP. a
C) foot to the total in the account balance.
D) agree with the total in the general ledger. The cutoff objective, "transactions near the balance sheet date are recorded
in the proper period," is a balance-related audit objective.
b A) True
B) False
a ) For a private company audit, tests of controls are normally performed only
on those internal controls the auditor believes have not been operating
Tests of details of balances are specific audit procedures that are intended effectively during the period under audit.
to: A) True
A) test for monetary errors in the financial statements. B) False
B) prove that the accounts with material balances are classified correctly.
C) prove that the trial balance is in balance. b
D) identify the details of the internal control system.
Auditors must make decisions regarding what evidence to gather and how
a much to accumulate. Which of the following is a decision that must be made
by auditors related to evidence?
Which of the following statements is not correct? A) Sample size
A) There are many ways an auditor can accumulate evidence to meet overall Timing of audit procedures
audit objectives. Yes Yes
B) Sufficient appropriate evidence must be accumulated to meet the
auditor's professional responsibility. B) Sample size
C) It is appropriate to minimize the cost of accumulating evidence. Timing of audit procedures
D) Gathering evidence and minimizing costs are equally important No No
considerations that affect the approach the auditor selects.
C) Sample size
d Timing of audit procedures
Yes No
Two overriding considerations affect the many ways an auditor can
accumulate evidence:
D) Sample size
Timing of audit procedures
1. Sufficient appropriate evidence must be accumulated to meet the
No Yes
auditor's professional responsibility.
2. Cost of accumulating evidence should be minimized. c
In evaluating these considerations: Audit procedures are concerned with the nature, extent, and timing in
A) the first is more important than the second. gathering audit evidence. Which, of the following, is true as to the timing of
B) the second is more important than the first. audit procedures?
C) they are equally important. A)
D) it is impossible to prioritize them. Prior to the fiscal year-end of the client
Subsequent to the fiscal year-end of the client
a Yes Yes
If the auditor has obtained a reasonable level of assurance about the fair
B)
presentation of the financial statements through understanding internal
Prior to the fiscal year-end of the client
control, assessing control risk, testing controls, and analytical procedures,
Subsequent to the fiscal year-end of the client
then the auditor:
No No
A) can issue an unqualified opinion.
B) can significantly reduce other substantive tests.
C)
C) can write the engagement letter.
Prior to the fiscal year-end of the client
D) needs to perform additional tests of controls so that the assurance level
Subsequent to the fiscal year-end of the client
can be increased.
Yes No
b
D)
After the auditor has completed all audit procedures, it is necessary to Prior to the fiscal year-end of the client
combine the information obtained to reach an overall conclusion as to Subsequent to the fiscal year-end of the client
whether the financial statements are fairly presented. This is a highly No Yes
subjective process that relies heavily on:
A) generally accepted auditing standards. a
B) the AICPA's Code of Professional Conduct.
Audit evidence has two primary qualities for the auditor; relevance and
C) generally accepted accounting principles.
reliability. Given the choices below which provides the auditor with the most
D) the auditor's professional judgment.
reliable audit evidence?
d A) general ledger account balances
B) confirmation of accounts receivable balance received from a customer
List the four phases of a Financial Statement Audit C) internal memo explaining the issuance of a credit memo
D) copy of month-end adjusting entries
1. Plan and design an audit approach
2. Perform tests of controls and substantive tests of transactions b
3. Perform analytical procedures and tests of details of balances
4. Complete the audit and issue the report Which of the following is not a characteristic of the reliability of evidence?
A) effectiveness of client internal controls
When an auditor has reduced assessed control risk based on tests of B) education of auditor
controls, he or she may then reduce the extent to which the accuracy of the C) independence of information provider
financial statement information directly related to those controls must be D) timeliness
supported through the accumulation of evidence using substantive tests.
A) True b
B) False
The auditor must gather sufficient and appropriate evidence during the
a course of the audit. Sufficient evidence must:
A) be well documented and cross-referenced in the audit documents.
B) be based on sources that are external to company. For audit evidence to be compelling to the auditor it must be sufficient and
C) provide evidence that prove or disprove an audit objective/assertion. appropriate. Which statement below is not correct regarding the
D) be persuasive enough to enable the auditor to issue an audit report. appropriateness of audit evidence?
A) The more effective the internal control system, the more assurance it
d provides the auditor about the reliability of financial reporting by the client.
B) An auditor's opinion, to be economically useful and profitable to the
Audit evidence obtained directly by the auditor will not be reliable if: auditing firm needs to be formed within a reasonable time and based on
A) the auditor lacks the competence to evaluate the evidence. evidence obtained that assures profits for the auditing firm.
B) it is provided by the client's attorney. C) Evidence obtained from independent sources outside the entity is
C) the client denies its veracity. generally more reliable than evidence secured solely within the entity.
D) it is impossible for the auditor to obtain additional corroboratory D) The independent auditor's direct personal knowledge, obtained through
evidence. inquiry, observation and inspection, is generally more persuasive than
information obtained indirectly.
a
b
Appropriateness of evidence is a measure of the:
A) quantity of evidence. Which one of the following is not one of the primary purposes of audit
B) quality of evidence. documentation prepared by the audit team?
C) sufficiency of evidence. A) A basis for planning the audit.
D) meaning of evidence. B) A record of the evidence accumulated and the results of the tests.
C) A basis for review by supervisors and partners.
b
D) A basis for determining work deficiencies by peer review teams.
Which of the following statements regarding the relevance of evidence is
d
correct?
A) To be relevant, evidence must pertain to the audit objective of the Which of the following is the most objective type of evidence?
evidence. A) A letter written by the client's attorney discussing the likely outcome of
B) To be relevant, evidence must be persuasive. outstanding lawsuits.
C) To be relevant, evidence must relate to multiple audit objectives. B) The physical count of securities and cash.
D) To be relevant, evidence must be derived from a system including C) Inquiries of the credit manager about the collectability of noncurrent
effective internal controls. accounts receivable.
D) Observation of cobwebs on some inventory bins.
a
b
Two determinants of the persuasiveness of evidence are:
A) competence and sufficiency. Due professional care, the third general standard, is concerned with what is
B) relevance and reliability. done by the independent auditor and how well it is done. For example, due
C) appropriateness and sufficiency. care in the matter of audit documentation requires that audit documentation
D) independence and effectiveness. of the evidence gathered by the auditor meets which of the following
criteria?
c
A) Workpapers be indexed to the general ledger accounts and include both a
The two characteristics of the appropriateness of evidence are: permanent file and a general file.
A) relevance and timeliness. B) The content be sufficient to provide support for the auditor's opinion,
B) relevance and accuracy. including the auditor's representation as to compliance with auditing
C) relevance and reliability. standards.
D) reliability and accuracy. C) Audit evidence is principally gathered to determine if the client's financial
statements, as prepared by management, can be relied upon to make
c managerial decisions about the firm.
D) Audit evidence as displayed in the workpapers is primarily performed to
Which of the following forms of evidence would be least persuasive in protect the auditing firm in the case of a lawsuit by investors.
forming the auditor's opinion about marketable securities and other
investments held by the company? b
A) Responses to auditor's questions by the president and controller regarding
the investments account. Which items affect the sufficiency of evidence when choosing a sample?
B) Correspondence with a stockbroker regarding the quantity of client's A) Selecting items with a high likelihood of misstatement
investments held in street name by the broker. The randomness of the items selected
C) Minutes of the board of directors authorizing the purchase of stock as an Yes Yes
investment.
D) The auditor's count of marketable securities. B) Selecting items with a high likelihood of misstatement
The randomness of the items selected
a No No

Which of the following statements is not correct? C) Selecting items with a high likelihood of misstatement
A) It is possible to vary the sample size from one unit to 100% of the items in The randomness of the items selected
the population. Yes No
B) The decision of how many items to test should not be influenced by the
increased costs of performing the additional tests. D) Selecting items with a high likelihood of misstatement
C) The decision of how many items to test must be made by the auditor for The randomness of the items selected
each audit procedure. No Yes
D) The sample size for any given procedure is likely to vary from audit to
audit. c

b Determine which of the following is most correct regarding the reliability of

audit evidence.
A) Information that is indirectly obtained from external sources is the most
reliable audit evidence. 2. Independence of provider
B) Reliability of audit evidence is dependent upon the evidence being 3. Effectiveness of client's internal controls
convincing. 4. Auditor's direct knowledge
C) Reliability of evidence refers to the amount of evidence obtained. 5. Degree of objectivity
D) An effective internal control system provides more reliable audit evidence. 6. Timeliness

d Relevance — Evidence must pertain to the audit objective if it is to be

persuasive. Relevance must be considered in terms of specific audit
Evidence is generally considered appropriate when: objectives as evidence may be relevant to one objective and not another.
A) it has been obtained by random selection. 2. Independence of provider — Evidence obtained from a source outside the
B) there is enough of it to afford a reasonable basis for an opinion on entity is more reliable and persuasive than that obtained from within.
financial statements. 3. Effectiveness of client's internal controls — When a client's internal
C) it has the qualities of being relevant, objective, and free from known bias. controls are effective, evidence obtained is more reliable than when they are
D) it consists of written statements made by managers of the enterprise weak.
under audit. 4. Auditor's direct knowledge — Evidence obtained directly by the auditor
through physical examination, observation, computation and inspection is
c more competent than information obtained indirectly.
5. Degree of objectivity — Objective evidence is more reliable than evidence
Given the economic and time constraints in which auditors can collect
that requires considerable judgment to determine whether it is correct.
evidence about management assertions about the financial statements, the
6. Timeliness — The timeliness of audit evidence can refer either to when it is
auditor normally gathers evidence that is:
accumulated or to the period covered by the audit. Evidence is usually more
A) irrefutable.
reliable for balance sheet accounts when it is obtained as close to the
B) conclusive.
balance sheet date as possible.
C) persuasive.
D) completely convincing. Below are 10 documents typically examined during an audit. Classify each
document as either internal or external.
c
1. Canceled checks for payments of accounts payable.
Which of the following statements is not a correct use of the terminology in 2. Payroll time cards.
relation to audit evidence? 3. Duplicate sales invoices.
A) Evidence obtained from an independent source outside the client 4. Vendors' invoices.
organization is more reliable than that obtained from within. 5. Bank statements.
B) Documentary evidence is more reliable when it is received by the auditor 6. Minutes of the board of directors' meetings.
indirectly rather than directly. 7. Signed lease agreements.
C) Documents that originate outside the company are considered more 8. Notes receivable.
reliable than those that originate within the client's organization. 9. Subsidiary accounts receivable records.
D) External evidence, such as communications from banks, is generally 10. Remittance advices.
regarded as more reliable than answers obtained from inquiries of the client.
1. External 6. Internal
b 2. Internal 7. External
3. Internal 8. External
Evidence is usually more persuasive for balance sheet accounts when it is 4. External 9. Internal
obtained: 5. External 10. External
A) as close to the balance sheet date as possible.
B) only from transactions occurring on the balance sheet date. Audit evidence to support an opinion about the fairness of a client's financial
C) from various times throughout the client's year. statements consists entirely of written information.
D) from the time period when transactions in that account were most A) True
numerous during the fiscal period. B) False

a b

Which of the following statements is true? The relevance of audit evidence depends on the audit objective being tested.
A) A large sample of highly competent evidence is persuasive if it is relevant A) True
to the objective being tested. B) False
B) A large sample of evidence that is neither competent nor timely is not
a
persuasive.
C) A small sample of only one or two pieces of relevant, competent, and Inquiries of the client are usually sufficient to provide appropriate evidence
timely evidence lacks persuasiveness. to satisfy an audit objective.
D) The persuasiveness of evidence can be evaluated after considering its A) True
sufficiency. B) False
a b
Which of the following statements relating to the competence of evidential A canceled check written by the client, made payable to a local supplier and
matter is always true? drawn on the client's bank account is one type of internal document.
A) Evidence from outside an enterprise is always reliable. A) True
B) Accounting data developed under satisfactory conditions of internal B) False
control are more relevant than data developed under unsatisfactory internal
control conditions. b
C) Oral representations made by management are not reliable evidence.
D) Evidence must be both reliable and relevant to be considered appropriate Objective evidence is more reliable, and hence more persuasive, than
subjective evidence.
d A) True
B) False
Discuss three of the following influences on the persuasiveness of evidence.
1. Relevance a
) Relevance of evidence can only be considered in terms of specific audit When the auditor uses tracing as an audit procedure for tests of transactions
objectives. she is primarily concerned with which audit objective?
A) True A) Occurrence
B) False B) Completeness
C) Cutoff
a D) Classification
Calculating the gross margin for the current year under audit as a percent of a
sales and comparing it with previous years is what type of evidence?
A) physical examination When the auditor used the audit procedure vouching she is primarily
B) analytical procedures concerned with which of the following audit objectives when testing classes
C) observation of transactions?
D) inquiry A) Occurrence
B) Completeness
b C) Authorization
D) Classification
When the auditor develops supporting evidence for amounts posted to
account balances with documentary evidence, that process is called: b
A) inquiry.
B) confirmation. When auditors use documentation to support recorded transactions and
C) vouching. amounts, the process is usually called:
D) physical examination. A) tracing.
B) confirmations.
c C) vouching.
D) reperformance.
An example of an external document that provides reliable information for
the auditor is: c
A) employees' time reports.
B) bank statements. Analytical procedures must be used during which phase(s) of the audit?
C) purchase order for company purchases. A) 1.)Test of Controls
D) carbon copies of checks. 2.)Planning 3.)Completion
1.)Yes 2.)Yes 3.)Yes
b
B) 1.)Test of Controls
An example of a document the auditor receives from the client, but which 2.)Planning 3.)Completion
was prepared by someone outside the client's organization, is a: 1.)No 2.)Yes 3.)Yes
A) confirmation.
B) sales invoice. C) 1.)Test of Controls
C) vendor invoice. 2.)Planning 3.)Completion
D) bank reconciliation. 1.)Yes 2.)No 3.)No
c
D) 1.)Test of Controls
"The use of comparisons and relationships to assess whether account 2.)Planning 3.)Completion
balances or other data appear reasonable compared to the auditor's 1.)No 2.) No 3.) No
expectations" is a definition of:
b
A) analytical procedures.
B) tests of transactions. Auditors may decide to replace tests of details with analytical procedures
C) tests of balances. when possible because the:
D) auditing. A) analytical procedures are more reliable.
B) analytical procedures are considerably less expensive.
a
C) analytical procedures are more persuasive.
Often, auditor procedures result in significant differences being discovered D) tests of details are more difficult to interpret.
by the auditor. The auditor should investigate further if:
b
A)
Significant differences are not expected but do exist Significant differences When making decisions about evidence for a given audit, the auditor's goal is
are expected but do not exist to obtain a sufficient amount of timely, reliable evidence that is relevant to
Yes Yes the information being verified. In addition, the goal of audit efficiency is to
gather and evaluate the information:
B) A) no matter the cost involved in obtaining such evidence.
Significant differences are not expected but do exist Significant differences B) even if cost is irrelevant to the auditor, because they bill the client for
are expected but do not exist costs incurred.
No No C) at the lowest possible total cost.
D) at the cost suggested in the engagement letter.
C)
Significant differences are not expected but do exist Significant differences c
are expected but do not exist
Yes No ) "Physical examination" is the inspection or count by the auditor of items
such as:
D) A) cash, inventory, and payroll timecards.
Significant differences are not expected but do exist Significant differences B) cash, inventory, canceled checks, and sales documents.
are expected but do not exist C) cash, inventory, canceled checks, and tangible fixed assets.
No Yes D) cash, inventory, securities, notes receivable, and tangible fixed assets.

a d
Which of the following statements is most correct regarding the primary business.
purpose of audit procedures? B) assess the going concern assumption.
A) to detect all errors or fraudulent activities as well as illegal activities C) indicate possible misstatements.
B) to comply with auditing standards promulgated by the PCAOB for publicly D) reduce detailed tests.
held clients
C) to gather corroborative audit evidence about management's assertions a
regarding the client's financial statements
D) to determine the amount of errors in the balance sheet accounts in order Which of the following is not a correct combination of terms and related type
to adjust the accounts to actual of audit evidence?
A) Inquire inquiries of client
c B) Count physical examination
C) Recompute documentation
Given the audit procedures below, which one provides the most reliable D) Read documentation
evidence?
A) Confirmations c
B) Recalculation
C) Reperformance Which of the following is not one of the major types of analytical
D) Observations procedures?
A) compare client with industry averages
a B) compare client with prior year
C) compare client with budget
Confirmations would almost always be used, assuming all the accounts below D) compare client with SEC averages
are material, for:
A) individual transactions between organizations, such as sales transactions. d
B) bank balances and accounts receivable.
C) fixed asset additions. An important benefit of industry comparisons is as:
D) payroll expenses. A) an aid to understanding the client's business.
B) an indicator of errors.
b C) an indicator of fraud.
D) a least-cost indicator for audit procedures.
To be considered reliable evidence, confirmations must be controlled by:
A) a client employee responsible for accounts receivable. a
B) a financial statement auditor.
C) a client's internal audit department. The auditor is concerned that a client is failing to bill customers for
D) a client's controller or CFO. shipments. An audit procedure that would gather relevant evidence would
be to:
b A) select a sample of duplicate sales invoices and trace each to related
shipping documents.
Indicate whether confirmation of accounts receivable and accounts payable, B) trace a sample of shipping documents to related duplicate sales invoices.
provided they each are significant accounts, is required or optional: C) trace a sample of Sales Journal entries to the Accounts Receivable
A) Accounts Receivable subsidiary ledger.
Accounts Payable D) compare the total of the Schedule of Accounts Receivable with the
Required Required balance of the Accounts Receivable account in the general ledger.

B) Accounts Receivable Accounts Payable b

Required Optional
In performing your audit for a privately-held firm your inquiries have yielded
C) Accounts Receivable Accounts Payable that one of the company's owner's primary motivations is to pay the least
Optional Required amount of income tax that is possible. Based on this observation which audit
objective for ending inventory would the auditor be most concerned about
D) Accounts Receivable Accounts Payable ascertaining?
Optional Optional A) Completeness
B) Accuracy
b C) Rights and obligations
D) Existence
The Auditing Standards Board has concluded that analytical procedures are
so important that they are required during: a
A) planning and test of control phases.
B) planning and completion phases. Which of the following statements is not correct?
C) test of control and completion phases. A) Analytical procedures are used to isolate accounts or transactions that
D) planning, test of control, and completion phases. should be investigated more extensively.
B) For certain immaterial accounts, analytical procedures may be the only
b evidence needed.
C) In some instances, other types of evidence may be reduced when
A benefit obtained from comparing the client's data with industry averages is analytical procedures indicate that an account balance appears reasonable.
that it provides a(n): D) Analytical procedures use supporting documentation to determine which
A) benchmark to compare the company against industry averages. account balances need additional detailed procedures
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets. d
D) comparison of "what is" with "what should be."
You are auditing the company's purchasing process for goods and services.
a You are primarily concerned with the company not recording all purchase
transactions. Which audit procedure below would be the most effective audit
) The primary purpose of performing analytical procedures in the planning procedure in this case?
phase of an audit is to: A) Vouching from the accounts payable account to the vendor invoices.
A) help the auditor obtain an understanding of the client's industry and B) Tracing vendor invoices to recorded amounts in the accounts payable
account. the same as the client's.
C) Confirmation accounts payable recorded amounts. 5. Compare — A comparison of information in two different locations.
D) Reconciling the accounts payable subsidiary ledger to the accounts 6. Count — A determination of assets on hand at a given time. This is
payable account. associated with evidence defined as physical examination.
7. Vouch — The use of documents to verify recorded transactions or
b amounts.
Which of the following discoveries through the use of analytical procedures Below are 12 audit procedures. Classify each procedure according to the
would most likely indicate a relatively high risk of financial failure? following types of audit evidence: (1) physical examination, (2) confirmation,
A) A decline in gross margin percentages. (3) documentation, (4) observation, (5) inquiry of the client, (6)
B) An increase in the balance in fixed assets. reperformance, and (7) analytical procedure.
C) An increase in the ratio of allowance for uncollectible accounts to gross 1. Watch client employees count inventory to determine whether company
accounts receivable, while at the same time accounts receivable turnover procedures are being followed.
also decreased. 2. Count inventory items and record the amount in the audit files.
D) A higher than normal ratio of long-term debt to net worth as well as a 3. Trace postings from the sales journal to the general ledger accounts.
lower than average ratio of profits to total assets. 4. Calculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of gross margin relative to the preceding year.
d 5. Obtain information about the client's internal controls by asking questions
of client personnel.
Which of the following statements is correct regarding the costs involved in
6. Trace column totals from the cash disbursements journal to the general
obtaining evidence?
ledger.
A) 1.)Physical examination is usually the least expensive type of audit
7. Examine a piece of equipment to make sure a recent purchase of
evidence
equipment was actually received and is in operation.
2.)Cost of obtaining evidence may be a factor in deciding whether to
8. Review the total of repairs and maintenance for each month to determine
obtain that evidence
whether any month's total was unusually large.
1.)Yes 2.)Yes
9. Compare vendor names and amounts on purchase invoices with entries in
the purchases journal.
B) 1.)Physical examination is usually the least expensive type of audit
10. Foot entries in the sales journal to determine whether they were
evidence
correctly totaled by the client.
2.)Cost of obtaining evidence may be a factor in deciding whether to
11. Make a surprise count of petty cash to verify that the amount of the
obtain that evidence
petty cash fund is intact.
1.)No 2.)No
12. Obtain a written statement from the client's bank stating the client's
year-end balance on deposit.
C) 1.)Physical examination is usually the least expensive type of audit
evidence 1. Observation
2.)Cost of obtaining evidence may be a factor in deciding whether to 2. Physical examination
obtain that evidence 3. Reperformance
1.)Yes 2.)No 4. Analytical procedure
5. Inquiry of the client
D) 1.)Physical examination is usually the least expensive type of audit 6. Reperformance
evidence 7. Physical examination
2.)Cost of obtaining evidence may be a factor in deciding whether to 8. Analytical procedure
obtain that evidence 9. Documentation
1.)No 2.)Yes 10. Reperformance
11. Physical examination
d
12. Confirmation
An analytical procedure used to test the reasonableness of an account
Match nine of the terms (a-k) with the definitions provided below (1-9):
balance occurs when the auditor calculates the expected balance and
compares it with the actual balance. The auditor's expected account balance
a. Foot
may be determined by:
b. Compute
A) using industry standards.
c. Scan
B) using Dun and Bradstreet reports.
d. Inquire
C) relating it to another account that involves financial statement
e. Count
articulation.
f. Trace
D) inquiry of the client.
g. Reperform
c h. Read
i. Examine
Define the following terms commonly used in audit procedures: j. Observe
1. Examine k. Compare
2. Scan
3. Compute ________ 1. A calculation done by the auditor independent of the client.
4. Foot
5. Compare ________ 2. Addition of a column of numbers to determine if the total is the
6. Count same as the client's.
7. Vouch
________ 3. A comparison of information in two different locations.
1. Examine — A reasonably detailed study of a specific document or record
to determine specific facts about it. It is the inspection or count by the ________ 4. A use of the senses to assess certain activities.
auditor of a tangible asset.
2. Scan — A less detailed examination of a document or record to determine ________ 5. Following details of transactions from original documents to
whether there is something unusual warranting further investigation. journals.
3. Compute — A calculation done by the auditor independent of the client.
4. Foot — Addition of a column of numbers to determine whether the total is ________ 6. A less detailed examination of a document or record to
determine if there is something unusual warranting further investigation. A) True
B) False
________ 7. Obtaining information from the client in response to specific
questions. b

________ 8. A determination of assets on hand at a given time. The type of audit evidence known as inquiry requires the auditor to obtain
oral information from the client in response to questions.
________ 9. An examination of written information to determine facts A) True
pertinent to the audit. B) False

1. b a
2. a
) Auditor judgment is the primary determinant in determining the amount of
3. k
evidence gathered.
4. j
A) True
5. f
B) False
6. c
7. d a
8. e
9. h Analytical procedures must be used in the planning and completion phases of
the audit.
Match five of the terms (a-h) with the definitions provided below (1-5): A) True
B) False
a. Audit documentation
b. Audit procedures a
c. Audit objectives
d. Analytical procedures Confirmations are ordinarily used to verify account balances, but may be
e. Budgets used to verify transactions.
f. Reliability of evidence A) True
g. Sufficiency of evidence B) False
h. Persuasiveness of evidence
a
________ 1. Use of comparisons and relationships to assess the
) Accounts receivable confirmations must be controlled by the client from the
reasonableness of account balances.
time they are prepared until the time they are returned to the auditor.
A) True
________ 2. Detailed instructions for the collection of a type of audit
B) False
evidence.
b
________ 3. The degree to which evidence can be considered believable or
trustworthy. Cost is never an adequate justification for omitting a necessary procedure or
not gathering an adequate sample size.
________ 4. Contains all the information that the auditor considers A) True
necessary to conduct an adequate audit and to provide support for the audit B) False
report.
a
________ 5. This is determined by the amount of evidence obtained.
Analytical procedures can be used to provide reliable substantive evidence
1. d for all balance-related audit objectives.
2. b A) True
3. f B) False
4. a
5. g b

Confirmations are among the most expensive type of evidence to obtain. ) One advantage of using statistical techniques when performing analytical
A) True procedures is that they eliminate the need for auditor judgment.
B) False A) True
B) False
a
b
) Whenever practical and reasonable, the confirmation of accounts
receivable is required of CPAs. ) Which of the following best describes one of the primary objectives of audit
A) True documentation?
B) False A) Defend against claims of a deficient audit.
B) Provide a basis for reviewing the work of subordinates.
a C) Provide reasonable assurance that the audit was conducted in accordance
with auditing standards.
Inquiries of clients and reperformance normally have a low cost associated D) Provide additional support of recorded amounts to the client.
with them.
A) True c
B) False
The permanent files included as part of audit documentation do not normally
a include:
A) a copy of the current and prior years' audit programs.
When analytical procedures reveal unusual fluctuations in an account B) copies of articles of incorporation, bylaws and contracts.
balance, the auditor will probably perform fewer tests of details for that C) information related to the understanding of internal control.
account and increase the tests of controls related to the account. D) results of analytical procedures from prior years.
a D) Audit documentation should be indexed and cross-referenced
Audit documentation should be organized to benefit the client's staff
The auditor's results of evidence gathering procedures are contained in audit No Yes
documentation for the audit. When preparing the requisite audit,
documentation should be cognizant of: c
A) Documents are kept by the client for easy reference for their accounting
staff. The permanent audit file would usually include the following:
B) Audit documents should be considered as a substitute for the clients A) client's working trial balance
accounting records. B) summary of the risk assessment procedures performed
C) Audit documents are designed to facilitate the review and supervision of C) organizational chart of the company's employees
the work performed by the audit team by a reviewing partner. D) summary of the auditors test of controls for the current years audit
D) Audit documents are the sole source of evidence that an auditor uses in
forming an opinion about the client's financial statements. c

Audit documentation should provide support for:

A) The audit report
The financial statements
Yes Yes

B) The audit report

The financial statements
No No

C) The audit report

The financial statements
Yes No

D) The audit report

The financial statements
No Yes

Audit documentation is the joint property of the auditor and the audit client.
A) True
B) False

Ordinarily, audit documentation can be provided to someone else only with

the express permission of the client.
A) True
B) False

What client information is needed by auditors in creating lead schedules?

A) Interim statements prepared by the client for the company's 3rd quarter
financial results.
B) General ledger information, including unadjusted ending balances and Auditing and Control
beginning balances for accounts.  integrated audit
C) A schedule of adjusting entries made by the client for all balance sheet
accounts. auditors provide opinions on internal control effectiveness
D) Detailed transaction information that may explain the changes in balance
sheet accounts for the current year under audit.  unqualified audit report

b when the auditor has nor reservations about management's financial

statements or internal controls
Audit documentation should possess certain characteristics. Which of the
following is true regarding those characteristics?  financial statement audit

A) Audit documentation should be indexed and cross-referenced a systematic process of objectivity and evaluating evidence regarding
Audit documentation should be organized to benefit the client's staff assertion about economic actions and events to ascertain the degree of
Yes Yes correspondence between those assertions and established criteria and
communicating the results to interested users
B) Audit documentation should be indexed and cross-referenced
 The Public
Audit documentation should be organized to benefit the client's staff
No No certified public accountants serve a number of diverse parties, but the most
important is....
C) Audit documentation should be indexed and cross-referenced
Audit documentation should be organized to benefit the client's staff > Need for Independent Assurance
Yes No
1) Potential Bias services where an expression of opinion by an auditor is made to third
2) Remoteness of Users parties concerning the correctness of assertions contained in financial
3) Complexity statements or other reports against which objective criteria and
4) Consequences of Inaccurate Information/Risk Management communicating the results to interested users

> Sarbanes-Oxley Act of 2002  due professional care

Auditor independence and the role of the audit committee a standard of care expected to be demonstrated by a competent professional
Required reporting on internal control over financial reporting in their field of expertise, set by the generally accepted auditing standards
Oversight of the accounting profession but supplemented in specific implementation instances by the standard of
care expected by a reasonably prudent auditior
 Independence
 internal auditing
having the auditor be objective and unbiased while performing audit services
an independent, objective assurance and consulting activity designed to add
> Concerns of Financial Statement Users value and improve and organizations operations (types - operational,
financial, compliance)
1) Completeness
2) Accuracy and Classification  operational audit
3) RIghts
4) Presentation and Disclosures a type of internal audit activity involving the analysis of company operations

> Auditing Complications  In determining the primary responsibility of the external auditor
for a company 's financial statements, the auditor owes primary
1) Estimation or Projection allegiance to which of the following parties?
2) Conflicts of Interest
3) Motivated Reasoning (preferences influence judgment stockholders, creditors, and investing public

> integrated audit report  Which of the following would NOT represent one of the primary
problems that create the demand for independent audits of a
1) express an opinion on F/S company's financial statements?
2) reasonable assurance on test basis in accordance to PCAOB standards
3) present fairly in all material respects financial position using accounting The downsizing of business and financial markets
general accepted in the US
4) give unqualified opinion of company's internal controls over financial  general standards
reporting
applicable to the auditor and audit firm
> PCAOB (Public Company Accounting Oversight Board) 1) Audit be performed by individuals having adequate technical training and
proficiency
a private sector nonprofit organization that overseas auditors of public
companies 2) Auditors be independent in their mental attitude in conducting the audit
(independence in fact) & be perceived by user as independent of the client
 SEC ( Securities and Exchange Commission) (independent as appearance)
established by Congress in 1934 to regulate the capital market system; 3) The audit be conducted with due professional care which is a standard of
oversight over PCAOB and public companies that are required to register care that would be expected of reasonably prudent auditor
with it to gain access to the US capital markets
 fieldwork standards
 AICPA ( American Institution or Certified Public Accountants)
applicable to the conduct of the audit
primary governing organization of the public accounting before PCAOB and
continue to set standards for non-public companies 1) An Audit be properly planned and supervised
 IAASB ( International Auditing and Assurance Standards Board)
2) Auditors develop understanding of the clients control as an important
sets International standards of auditing and facilitate the convergence of prerequisite to developing specific audit tests
national and international auditing standards
3) Auditors obtain sufficient appropriate audit evidence by performing audit
 Audit Opinion Formulation Process procedures to provide a reasonable basis for the audit opinion being
provided
Phase I&II Making Clients Decisions and Gaining and Understanding of the
Client  reporting standards
Phase III&IV Obtaining Evidence
Phase V Wrapping Up the Audit and Making Reporting Decisions applicable to communicating the auditors opinion

 assertion 1) statement fairly represented with frameworks of GAAP and IFRS

2) Auditor to identify where accounting principles have not been consistently
a positive statement about an action, event, condition, or the performance observed
of an entity or product over a specified periods of time; subject of attestation 3) auditor to review disclosures for adequacy, and if the auditor concludes
services informative disclosures are not reasonably adequate, the auditor must so
state in the auditors report
 assurance services 4) the auditor to express the opinion on the financial statements as a whole
or state that an opinion can not be expressed.
independent professional services that improve the context or quality of
information for decision-making purposes  reasonable assurance
 attestation services
designed to enhance the degree of confidence of the intended users other "Whistle-Blowing Program" - violations of company ethical code are reported
than the responsible party about the outcome of the evaluation or to the appropriate levels of the organization and the audit committee
measurement of subject matter against criteria.
 Significant Provisions of SOX (10/12)
1) there is always a third party involved and the assurance is provided to the
third party Cooling-Off period - auditors must wait about a year before taking a high-
2) there is measurement or evaluation against specific criteria level position at a company
3) auditor is expected to communicate a definite report, with reasonable  Significant Provisions of SOX (11/12)
assurance
Limiting the nonaudit services that audit firms can provide to their audit
 review
clients
a limited assurance engagement related to financial statement  Significant Provisions of SOX (12/12)
 Government Accountability Office (GAO)
Mandating analyses of audit firm competition and the potential need for
govt organization directly accountable to the Congress of the US that audit firm rotation
performs special investigations for the Congress and establishes broad  ethical problem
standards for the conduct of govt audits
when an individual is morally or ethically required to take an action that may
 corporate governance
conflict with his or her immediate self interest
a process by which the owners and creditors of an organization exert control  ethical dilemma
and require accountability for the resources entrusted to the organization
when there are conflicting moral duties or obligations, such as paying a debt
> Scandals that led to SOX
to one person when there is equal indebtedness to another person and
1) Incentives to drive up short-term stock prices, including lucrative executive sufficient funds do not exist to repay both
stock options.  Utilitarian Theory
2) economy and stock market boom.
3) Audit firms failing to observe auditing standards and ethical requirements holds that what is ethical is the action that achieves the greatest good for the
for the sake of greater profitability. greatest number of people
4) Ineffective regulation by lawmakers.
5) Rules-based, rather than principles-based, accounting - i.e., if the client's  Right Theory
desired treatment is not prohibited, it's ok
6) View of auditors more as "business partners" than as watchdogs. focuses on evaluating actions based on the fundamental rights of parties
involved - higher order rights take precedence of lower order rights
> Significant Provisions of SOX (1/12)
 IESBA Code of Ethics
Establishing the PCOAB with powers, including the power to set auditing
standards for auditing public companies integrity
objectivity
 Significant Provisions of SOX (2/12) professional competence and due care
confidentiality
Requiring the CEO and CFO certify quarterly and annual reports
 contingent fee
 Significant Provisions of SOX (3/12)
a fee established for the performance of any service in which a fee will not
Requiring management of public companies to provide a comprehensive be collected unless a specified finding or result was attained
report on internal controls over financial reporting

 Significant Provisions of SOX (4/12)

auditing chapter 2
Requiring management forfeiture of certain compensation in instances  audit committee
where there is a restatement as a result of misconduct the
a committee consisting of members of the board of directors charged with
 Significant Provisions of SOX (5/12) overseeing the entity's system of internal control over financial reporting
process. members typically must be independent of management.
Empowering audit committee to be the formal "audit client" with
responsibilities to hire and fire its external auditors and preapprove any  board of directors
nonaudit services provided by it external auditors
persons elected by the stockholders of a corporation to oversee
 Significant Provisions of SOX (6/12) management and to direct the affairs of the corporation
Requiring the audit committee having at least one person who is a financial  code of professional conduct
expert and the other have knowledge
a set of principles, rules, and interpretations that establish guidance for
 Significant Provisions of SOX (7/12) acceptable behavior for accountant and auditors
Requires partners in charge of audit engagements be rotated every 5 years  business processess
 Significant Provisions of SOX (8/12) processes implemented by management to achieve entity objectives.
business processes are typically organized into the following categories:
Increasing the disclosure of all "off balance" transactions or agreements that
revenue, purchasing, human resource management, inventory management,
may have material current or future effect on the financial condition of the
and financing processes
company
 corporate governanance
 Significant Provisions of SOX (9/12)
the oversight mechanisms in place to help ensure the proper stewardship (1) external auditors, (2) internal auditors, (3) government auditors, and (4)
over an entity's assets. management and board of directors play primary forensic auditors.
roles, and the independent auditor plays a key facilitating role.
> Examples of compliance audits include
 ethics
(1) internal auditors determining whether corporate rules and policies are
a system or code of conduct based on moral duties and obligations that being followed by departments within the organization, (2) an examination
indicates how an individual should behave of tax returns of individuals and companies by the Internal Revenue Service
for compliance with the tax laws, and (3) an audit under the Single Audit Act
 generally accepted accounting principals (GAAP) of 1984 to determine whether an entity receiving federal assistance is in
compliance with applicable laws and regulations.
accounting principles that are generally accepted for the preparation of
financial statements in the united states. GAAP standard are currently issued > Examples of operational audits include
primarily by FASB, with oversight and influence by the SEC. International
Financial Reporting Standards (IFRS) are set by the International Accounting (1) an audit by the GAO of the Food and Drug Administration to determine
Standards Board the efficiency and effectiveness of procedures for introducing new drugs to
the market, (2) internal auditors examining the effectiveness and efficiency
 generally accepted auditing standards (GAAS) of funds being spent on the entity's computer resources, and (3) a university
hiring an external auditor to examine the effectiveness and efficiency of
ten broad statements guiding the conduct of financial statement auditing. student advisory services.
the 10 GAAS are still found in PCAOB standards but they have been replaced
in the ASB standards by the "principles underlying an audit conducted in > Examples of forensic audits include
accordance with generally accepted auditing standards
(1) an examination by an external auditor of cash disbursements for
 Illegal acts payments to unauthorized vendors, (2) assistance by an auditor to a law
enforcement agency in tracing laundered monies by organized criminals, and
violations of laws or government regulations (3) an independent auditor helping identify hidden assets as part of a divorce
 settlement.
Indenpendence
> Which of the following in not a part of the roles of internal auditor
a state of objectivity in face and in appearance, including the absence of any
significant conflicts of interest Providing reports on the reliability of financial statements to investors and
creditors
 Integrated audit
Operational auditing is oriented primarily toward
an audit of both financial statements and internal control over financial
reporting, provided by the external auditor. required for public companies. future improvements to accomplish the goals of management
 international standards on auditing (ISA)  Which of the following would be considered an assurance service
engagement
statements issued by IFAC's international auditing and assurance standards
board expressing an opinion about the reliability of an entity's financial statements
 management advisory services  which of the following best places the events of the last decade in
proper sequence
consulting services that may provide advice and assistance concerning an
entity's organization, personnel, finances, operations, systems, or other increased consulting services to auditees, Enron and other scandals,
activities Sarbanes -Oxley Act, prohibition of most consulting work auditees,
establishment of PCAOB
 principles underlying an audit performed in accordance with
GAAS.  which of the following statements best describes management's
and the external auditor's respective levels of responsibility for a
the ASB replaced the 10 generally accepted auditing standards with these
public company's financial statements?
principals, organized in four parts: purpose of an audit and premise upon
which an audit is conducted, auditor responsibilities, audit performance, and management has the primary responsibility to ensure that the company's
audit reporting financial statements are prepared in accordance with GAAP, and the auditor
 provides reasonable assurance that the statements are free from material
public accounting firm
misstatement.
an organization created to provide professional accounting-related services,
 which of the following best describes the relationship between
including auditing. usually formed as proprietorship or as a form of
business objectives, strategies, processes, controls, and
partnership
transactions?
 standards of the PCAOB
to achieve its objectives, a business formulates strategies and implements
standards regarding the conduct of financial statement audits for public processes, which are carried out through business transactions. the entity's
companies. currently consist primarily of standards and statements information and internal control systems must designed to ensure that the
established by the ASB, as these statements and standards were adopted by transactions are properly executed, captured, and processed.
the PCAOB in 2003 on an interim basis, though the PCAOB has added a few
 the public company accounting oversight board
significant standards
is a quasi-governmental organization that has legal authority to set auditing
 statements on auditing standards (SAS)
standards for audits of public companies
statements issued by the AICPA's auditing standards board
 which of the following is correct regarding the types of audits over
> Auditors can be classified under four types: which the ASB and PCAOB, respectively, have standard-setting
authority in the U.S.?
ASB PCAOB  auditing has significant effect on
nonpublic company audits public company audits
information risk
 which of the following best describes the general character of the
three generally accepted auditing standards classified as  reasons we receive unreliable information
standards of field work?
remoteness of info; biases and motives of provider; voluminous data;
Criteria for audit planning and evidence gathering existence of complex exchange transactions

 remoteness of information

ch. 1 audit when information is obtained from others the un/intentional misstated info
increases

 SOX applies to  auditing

only public companies the accumulation and evaluation of evidence about the information to
determine and reoirt on the degree of correspondence between the info and
 SOX is established criteria;

a federal securities laws that provides additional regulation of PUBLIC cos  audits should be performed by
and their auditors;
a competent with independent mental attitude
 SOX established
 audit must have information that is
PCAOB and requires auditors of larger public cos to audit the effectiveness of
internal control over financial reporting in verifiable form and standards or criteria by which the auditor can evaluate
the info
 evidence is
 audits of quantifiable info
any information used by the auditor to determine whether the info being
audited is stated in accordance with the established criteria; fin stmts and taxes

 different kinds of evidence include  audits of subjective info

electronic data, written commutation, observation, oral testimonies effectiveness of cpu systems or manufac ops

 Recording, classifying, and summarizing economic events in a  criteria used for the audit of historical fin stmts
logical manner for the purpose of providing financial information
for decision making is commonly called: in accordance with GAAP (Most Common) or IFRS

Accounting  criteria used for the audit of internal control over fin stmts

 Which department provides quantitative information in order for Internal control Framework by COSO
management and others to make decisions?  criteria used for the audit of tax
Accounting
Internal revenue code - by the IRS
 In "auditing" financial accounting data, the primary concern is  auditors must obtain
with
sufficient quality and quantity of evidence
determining whether recorded information properly reflects the economic
events that occurred during the accounting period  auditors must determine and evaluate
 The trait that distinguishes auditors from accountants is the the type and amt of evidence and if it corresponds to the criteria
auditor's accumulation and interpretation of evidence related to a company's  independent auditor
financial statements
CPAs or accy firms that perform audits of commercial and noncomm financial
 Information Risk entities
reflects the possibility that the information in which the business risk  the finial stage of auditing process
decision was made was inaccurate (EX- possibility of inaccurate information)
audit report
 bank determines rate on three factors:
 audit report
risk free rate; business risk for the customer; information risk
the communication of audit findings to user; differ in nature and form
 risk free rate
 steps of audit
rate the bank could earn in US treasury notes
have a competent and independent auditor; accumulate and evaluate
 business risk for the customer evidence; compare information to criteria to determine correspondence;
report results
the possibility the customer will not be able to repay
 expertise of auditor
 the use of CPA title is regulated by
accurate and interpret info; determine audit procedures; deciding on what to
state law through a licensing department or agency of each state
test; evaluating results
  Financial statement users often receive unreliable financial  Which of the following are required to have a written report
information from companies. Which of the following is not a regarding the assertion of another party
common reason for this?
fin stmt, ops, compliance, attestation
Each of these choices is a common reason for unreliable financial information
 Attestation services on information technology include WebTrust
 An audit of historical financial statements is most often services and SysTrust services. Which of the following statements
performed to determine whether the most accurately describes SysTrust services

none of these choices SysTrust services provide assurance on system reliability in critical areas such
as security and data integrity
 biases and motives of provider
 assurance service
when goals are inconsistent with those of the decision maker
an independent professional service that improves the quality of information
 voluminous data for decision makers; provider is independent and unbiased
increases the likelihood of improperly recorded info; can be buried in a large  assurance service is programed by
amt of other info
a CPA
 complex exchange transactions
 one type of assurance CPAs provide
increase of complexity results in difficulty to record properly; and increase in
complex standards attestation services

 three ways to reduce information risk  attestation services

very information; share info with management; audited fin stmts are A CPA firm issues a written report about a subject matter or assertion that is
provided made by another party

 user verifies information  five categories of attestation

user mat of to the business premises to examine records and obtain audit of historical fin stmts; of internal control over fin reporting; review of
formation about the reliability of the stmts (costly) (use of special audit historical fin stmts ; on information tech; more subjective services (board
team) range)

 user shares info risk with mgmt  audit of historical fin stmts

a difficulty is that users may not be able to collect on losses management asserts that stmts are fairly stated in accordance of accy
standards; issues a written report expressing an opinion about if the stmts
 audited fin stmts are provided are fairly stated;
(most common) is to have reliable info that has been independenty audited;  audit of historic fin stmts are the most
use info and assume that it is complete, accurate, and unbiased
common service of assurance provided by CPA firms
 relationship of auditor; client; external users
 public companies are
client hires auditor; auditor issues report to reduce info risk that user look at;
user provide capital to client; and client provides fin stmts to users required to have audits

 In the audit of historical financial statements, what accounting  private cos

criteria is most common
have audits to ensure financing from banks
Generally accepted accounting principles
 non -profits have audits to
 Any service that requires a CPA firm to issue a report about the
reliability of an assertion that is made by another party is a meet requirement of lenders or funding sources

attestation service  audit of internal control over fin reporting

 Three common types of attestation services are mgmt asserts that internal controls have been developed and implemented
following the criteria
audits, reviews, and attestations regarding internal controls
 SOX requires public cos to
 Which of the following services provides the lowest level of
assurance on a financial statement report managements assessment of the effectiveness of internal control

A review  effectiveness of internal control reduces

 Which of the following is not a SysTrust Services principle as the likelihood of future misstatements
defined by the AICPA
 review of historical fin stmts
Operational integrity
mgmt asserts that stmts are fairly stated in accordance of standards; a lower
 The Sarbanes-Oxley Act prohibits a CPA firm that audits a public level of assurance in compared to audit of historical stmts
company from providing which of the following types of services
to that company  Review vs audit

Most consulting services

review is lower lever; lower cost; requires less evidence; used by nonpublic  Operational audit
companies
evaluates the efficiency and effectiveness of any part of an orgs operation
 attestation svc on IT procedures and methods; expects recommendations for improving
operations; can include evaluation of structure, computer ops, production
mgmt makes assertions about the reliability and security of electronic info; methods, and marketing; extremely subjective more like consulting
web trust, systrust
 compliance audit
 web trust
conducted to determine wither the auditee is following specific procedures,
created by AICPA; seal assures users that site has met criteria of business rules, or regulations set by authority; report results to mgmt.
practices , transaction integrity; and information processes
 examples of compliance
 sys trust
whether accy personal is following procedures prescribed by controller; wage
created to evaluate and test the reliability such as security and data integrity; rates meet min wage laws; complying with legal requirements btw bankers
done by CPAs for assurance of the reliability of the IS and lenders; if mortgage bank in compilance with government
 Sys trust principles  fin stmt audits
online privacy; availability; security; processing integrity; and confidentiality conducted to determine whether the fin stmts are in accordance with
criteria; gathers evidence to determine if contains materail errors or
 assurance differ from attestation in misstatements
the CPA is not required to issue a written report; and the assurance does not  integrated approach to auditing
have to be about the reliability of another parts assertion about compliance
with criteria considers both misstatements and operating controls intended to prevent
misstatements; auditor must have knowledge of entity and environment
 other assurance services include including; industry, regulatory and ops environment and bus strategies and
processes
focusing on improving the quality of info for decision makers
 The three requirements for becoming a CPA include all but which
 relations btwn assurance and non assurance services
of the followingCharacter requirements
assurance services include: attestation services- audits and review, certain
Character requirements
mgmt consulting , and other services ; Non assurance services include:
certain mgmt consulting, accounting and book keeping, and tax services  most common type of auditors include
 services that are outside of assurance scope of work (non CPA firms, government accountability officer auditors, IRS agents, and
assurance) internal auditors
accy and book keeping; tax services; mgmt consulting  CPAs
 primary service of consulting external auditors or independent auditors; express opinions on fin stmts
to generate a recommendation to mgmt.  Government accountability office auditors
 audit reviews attestation on IT and other attestation svcs are GAO a nonpartisan agency in the legislative branch of the fed government;
reports to Congress; most are compliance audits for expenses and
examples of attestation which fall under the scope of assurance
operational for the efficiency of fed programs
 CPAs perform 3 types of audits
 IRS/ internal revenue agents
Ops, compliance, fin stmt
responsible for enforcing the tax laws and to audit TPs to determine
 One objective of an operational audit is to compliance with tax laws- solely compliance audits; must have tax
knowledge and auditing skills
make recommendations for improving performance
 Internal auditors
 An examination of part of an organization's procedures and
methods for the purpose of evaluating efficiency and audit for mgmt; responsibilities vary; many involve with ops auditing or
effectiveness is what type of audit evaluating computer systems; reports directly to exec; diff CPA firms and
internal is independence; may have CPA or CIA
Operational audit.
 three requirements of being a CPA
 An audit to determine whether an entity is following specific
procedures or rules set down by some higher authority is educational, experience, and examination
classified as
compliance audit
 Which one of the following is more difficult to evaluate
objectively

Efficiency and effectiveness of operations

 Which of the following audits can be regarded as generally being a

compliance audit ch2 audit
 The legal right to perform audits is granted to a CPA firm by
IRS agents' examinations of taxpayer returns. regulation of
each state one owner; litigation risk

 The four categories for describing the size of audit firms include: general partnership
the Big Four international firms; national firms; regional and local
firms; and small firms. multiple owners; litigation risk
 Which of the following is not a characteristic of a small firm
general corp
They do not audit publically traded companies
shareholder are liable to the extent of their investment
 Sarbanes-Oxley and the Securities Exchange Commission restrict
auditors from providing many consulting services to their professional corp
publically traded audit clients. Which of the following is true for
provides professional services owned by shareholders; liability similar to gen
auditors of publically traded companies
corp
There is no restriction on providing consulting services to non-audit clients.
llc
 Which of the following statements is true as it relates to limited
taxed like a partnership and owners have limited liab like general corp
liability partnerships
llp
Partners are personally liable for the acts of those under their supervision
owned by partners; structured and taxed like a corp; personally liable for
 big four firms
partners debts and obligations; partners are not liable for negligence of
international firms; audit most large companies and many small cos employees or partners not under their supervision; all big four are llp

 national firms structure of CPA firm

four firms within the US and has international capabilities; competes with big partners, shareholders,managers, supervisors, seniors auditors, and
four assistants; starts as assistant for 2-3 yrs

 regional and large local firm The organization that is responsible for providing oversight for auditors of
public companies is called the ________.
less than 200 firms with staff more than 100; compete with big four an
national firms; have international affiliations ) Public Company Accounting Oversight Board

 small local firms Members of the Public Company Accounting Oversight Board are appointed
and overseen by
fewer than 25 professionals in office; perform audits and servers for small
business or no-profit entities; many do not audit instead provide accy and tax the Securities and Exchange Commission
services
The Public Company Accounting Oversight Board
 accy and book keeping
perform inspections of the quality controls at audit firms that audit public
given to a third party to review or audit; or compilation report which companies
provides no assurance; major source of revenue for large CPA firms
Assume the Public Company Accounting Oversight Board (PCAOB) identifies a
 tax services violation during its inspection of a registered accounting firm. The PCAOB

prepare corp and imdivid tax returns for audit an non audit clients; small can enforce disciplinary action against the accounting firm;report the matter
firms gain more revenue here than audit to the Securities and Exchange Commission

 mgmt consulting services SOX established the

provide services that enable their clients to operate their business more PCAOB
effectively; also called advisory; large firms have depts exclusively in
PCAOB
consulting;
provides oversight for auditors of public cos, establishes auditing and quality
auditors of public cos are restricted in
control standards for public co audits and performs inspections of the quality
also giving consulting services controls at audit firms performing those audits; requires annual inspections
of audit firms; violation results in disciplinary actions and reported to the SEC
 audit firms of private cos are not restricted to
SEC appoints and oversees
providing consulting services
PCAOB
 six organizational structures
SEC
proprietorship, general partnership, general corp, professional corp, llco, lllp,
an agency of the fed; assists in providing investors with reliable info for
 promote auditor independence investments; require fin stmts w/ opinion of independent public accountant

all except proprietorship s-1

 protection from litigation IPO

general corp ,prof corp, lllco, llp 8-k

 proprietorship to report significant events that are of interest of investors

10-k Standards issued by the Public Company Accounting Oversight Board must be
followed by CPAs who audit
fin info; audited fin stmts; filed annually
public companies only
10-q
The Audit Standards Board of the AICPA has undertaken the Clarity &
filed quarterly; auditors reviews of fin stmts Convergence Project to make GAAS easier to read understand and apply; as
well as converge GAAS with the International Standards on Auditing (ISAs).
FASB Which of the following statements concerning the Clarity & Convergence
Project is(are) true
independent org that establishes GAAP
The "General" standards of GAAS will be termed "Responsibilities"; The
The form that must be completed and filed with the Securities and Exchange
"Fieldwork" standards will be termed "Performance"; The "Reporting"
Commission whenever a company experiences a significant event that is of
standards will be termed "Communications"
interest to public investors is the
If an auditor of a public company cannot find guidance issued by the PCAOB
Form 8-K
on a particular audit matter, the auditor should generally seek guidance from
The form that must be filed with the Securities and Exchange Commission which of the following sources
whenever a company plans to issue new securities to the public is the
Statements on Auditing Standards
Form S-1.
The Auditing Standards Board of the AICPA has undertaken a Clarity and
The AICPA has authority to establish standards and rules in all but which of Convergence Project whose aim is to make GAAS easier to read, apply and
the following areas converge with International Audit Standards. As a result the GAAS will
become "Auditing Principles". The principles will be consistent with the three
Auditing standards applicable to financial statements of private and public categories of GAAS. Accordingly, which of the following is true
companies
The General Standards will be termed Responsibilities Principles.; The
AICPA Fieldwork Standards will be termed Performance Principles.

membership restricted to CPAs; sets professional requirements for CPA, auditing standards are
conducts research and publishes material on accy related material; promotes
the profession; set standards and rules that all members and CPAs must general guidlines to aid auditors in fulfilling their professional responsibilities
follow; help in various educational ways in the audit of historical fin stmts

the rules AICPA sets standards and rules for 3 main sets of auditing standards

auditing standards (Private co) , compilation and review standards; other ISA, GAAS, and PCAOB
attestation standards; code of professional conduct
ISA
AICPA auditing standards
are issued by international auditing and assurance standards board of the
ASB issues pronouncement on private co auditing matter call SAS (stmts on international fed of accounts; works to improve the uniformity of auditing
auditing standards) practices worldwide; do not override a countrys regulations governing the
audit of financial; used as a basis for the US
AICPA compilation and review
auditing standards for private cos in US
committee issues pronouncements on CPAs responsibilities of a private cos
fin stmt w/a review- limited assurance or compilation - no assurance are established by ASB of the AICPA; standards are referred to as SAS and
GAAS; similar to international standards
AICPA other attestation standards
auditing standards for public cos and sec registrants in US
reports on prospective fin info in forecasts and projections
PCAOB issued PCAOB Auditing Standards
AICPA code of professional conduct
Which one of the following is not one of the three General Standards
committee sets rules on relationship to ethical conduct
Proper planning and supervision
Statements on Standards for Accounting and Review Services are issued by
the Which one of the following is not a Field Work Standard

Accounting and Review Services Committee Due professional care

Which of the following is not an essential component of quality control The generally accepted auditing standard that requires "Adequate technical
training and proficiency" is normally interpreted as requiring the auditor to
Policies and procedures to ensure that firm personnel are actively engaged in have
marketing strategies
formal education in auditing and accounting
Which of the following are audit standards used in professional practice by
audit firms Which of the following statements most accurately captures the intent of the
standards of field work
International Standards on Auditing; U.S. Generally Accepted Auditing
Standards; PCAOB Auditing Standards Field work standards are primarily directed at the auditor's planning,
understanding of internal control, and evidence accumulation
For privately held companies who of the following is responsible for
establishing auditing standards ) The Statements on Auditing Standards issued by the Auditing Standards
Board
Auditing Standards Board
interpret generally accepted auditing standards auditors fulfill two objs under the GAAS principles (AICPA)

An auditor need not abide by a particular auditing standard if the auditor 1. obtain reasonable assurance that fin stmt are free from material
believes that misstatement, whether due to fraud or error thereby expressing an opinion
on wether fin stmnts are fairly presented in all materials respect, in
the issue in question is immaterial in amount accordance of framework
2. report on fin stmts, and communicate, in accordance with findings
Under GAAS, which of the following reflects a concept from the general
group GAAS principles (AICPA)
The assignment of audit personnel to an engagement where they have no purpose, responsibilites, performance, reporting
financial interest
purpose
The third general standard states that due care is to be exercised in the
performance of an audit. This standard is generally interpreted to require to provide fin stmt users with an opinion issued by the auditor on whether
the stmts are presented fairly in all material respects, in accordance of
) critical review of work done at every level of supervision framework;
Which of the following statements best describes the primary purpose of mgmt is responsible for
Statements on Auditing Standards
prep of fin stmts in accordance of framework, and design implement and
They are interpretations that are intended to clarify the meaning of maintain internal control to the prep and presentation of stmt and free from
"generally accepted auditing standards material misstatements
Hansen Corporation's stock is listed on a national stock exchange and auditor presumes that mgtmt
registered with the Securities and Exchange Commission. Hansen's
management hires a CPA to perform an independent audit of Hansen's will provide the auditor access to info relevant to the prep an present of
financial statements. The primary objective of this audit is to provide stmts
assurance to the
responsibilities
investors in Hansen Corporation's stock
possess appropriate competence and capabilities; comply with ethical
Which of the following statements about Generally Accepted Audit requirements; maintain professional skepticsm and exercise professional
Standards are true? judgement

They serve as broad guidelines to auditors for conducting an audit Auditors comptent and capabilities
engagement; They represent a framework upon which the AICPA can provide
interpretations require formal education in audit and accounting with experience and
continued education and experience in industry
Generally Accepted Auditing Standards (GAAS) and Statements on Auditing
Standards (SAS) should be looked upon by practitioners as if one is not qualified to perform

minimum standards of performance that must be achieved on each audit one must acquire knowledge; suggest someone else who is qualified; decline
engagement engagement

Statements on Auditing Standards issued by the AICPA's Auditing Standards auditors comply with ethical requirement
Board are:
independence in audit engagement
interpretations of generally accepted auditing standards and departures
from such statements must be justified auditors maintain skeptism and prof judgment

GAAS have (PCAOB) incudes an atitude with a questioning mind, being alerts and critical
assessment; applying relevant training knowledge and experience in
10 standards; 3 catagories decisions; fulfilling duties diligently and carefully

GAAS 3 Categories (PCAOB) performance

general, field of work, and reporting obtain reasonable assurance; plan and supervise; determine materiality
levels; identify risks; obtain evidence
General standards(PCAOB)
planning and supervision
Adequate training and proficiency; indenpendce in mental attitude; due
professional care most of audit is done by staff less experienced

standards of field work(PCAOB) determine material

proper planning and supervision; sufficient understanding of internal control; a missstatment is considered material if knowledge of the misstatement will
sufficient evidence affect a decision of a reasonable user of the stmts

standards of reporting (PCAOB) assess risks

accordance of GAAP; circumstances when not GAAP consistence; informative auditor must have knowledge of industry; internal control risks; auditor must
disclosures; expression of opinion be sure of the internal controls

principles (AICPA) reporting

provide a framework to help auditors fulfill the two objs when conducting an
audit of fin stmt; are not requirements or authority
express opinion on stmts in a written report; whether stmts were presented
fairly in accordance of framework; if opinion cannot be expressed audit
should state that

Which of the following is not true for audit firms who audit publically traded
companies

They must have an AICPA peer review on all audit clients

A basic objective of a CPA firm is to provide professional services to conform

to professional standards. Reasonable assurance of achieving this basic
objective is provided through

a system of quality control

Within the context of quality control, the primary purpose of continuing

professional education and training activities is to enable a CPA firm to
provide its personnel with

knowledge required to fulfill assigned responsibilities

The purpose of establishing quality control policies and procedures to accept

or continue a client relationship is to

minimize the likelihood of associating with client's whose management may

lack integrity

Which of the following is an element of the CPA's quality control system that
should be considered in establishing it's quality control policies and
procedures

Assigning personnel to engagements

Which one of the following is not true regarding the American Institute of
Certified Public Accountants peer review requirement

Firms required to be registered with and inspected by the PCAOB are exempt

quality control

comprises the methods used to ensure that the firm meets its pfroesssional
responsibilities to clients; includes orgranizaional structure of CPA and
procedures; provide reasonable assurance that auditing standards are
followed

Auditing standards require each CPA firm to establish

quality control policies and procedures

quality controls are established for __ and auditing standards are established
for __

entire CPA firm; individual engagement

elements of control 6

leadership responsibilities for quality within the firm; relevant ethical

requirements; acceptance and continuation of clients and engagements; HR;
engagement performance; monitoring

public accy firms must be enrolled in an AICPA

approved practice monitoring program for members in the firm to be eligible

for membership

peer review

(practice monitoring) is the review by CPAs of another firms compliance with

its quality control; is to determine and report whether firm has developed
adequate control polices and procedures and follow them; administered by
the state every 3 yrs; (costly)

benefits of peer review

meet quality control; improves performance in audits; enhancing rep and

effectiveness; reducing lawsuits

...