Chapter 1, Auditing and the Public Accounting Profession

1. Operational audits generally have been conducted by internal auditors and governmentalaudit agencies, but may be performed by certified public accountants. A primary purpose ofan operational audit is to provideA. a means of assurance that internal controls are functioning as planned.B. aid to the independent auditor, who is conducting the audit of the financial statements.C. the result of internal examinations of financial and accounting matters to a company'stop-level management.D. evidence about the efficiency and effectiveness of an entity's operations.

2. An attestation engagement is one in which a CPA is engaged toA. issue a written communication expressing a conclusion about the reliability of a writtenassertion that is the responsibility of another party.B. provide tax advice or prepare a tax return based on financial information the CPA has notaudited or reviewed.C. testify as an expert witness in accounting, auditing, or tax matters, given certainstipulated facts.D. assemble prospective financial statements based on the assumptions of the entity'smanagement without expressing any assurance.

3. Which of the following services would be considered attest services?A. a financial statement auditB. a review providing negative assurance on financial statementsC. an examination of prospective financial informationD. All of the above are attest services.

4. Which of the following are elements of a CPA firm's quality control that should beconsidered in establishing its quality control policies and procedures?A. Personnel Management – Yes; Monitoring – Yes; Consultation – NoB. Personnel Management – Yes; Monitoring – Yes; Consultation – YesC. Personnel Management – No; Monitoring – Yes; Consultation – YesD. Personnel Management – Yes; Monitoring – No; Consultation – Yes

5. A CPA firm studies its personnel advancement experience to ascertain whether individualsmeeting stated criteria are assigned increased degrees of responsibility. This is evidence ofthe firm's adherence to prescribed standards ofA. supervision and review.B. quality control.C. continuing professional education.D. professional development.

6. A CPA firm would be reasonably assured of meeting its responsibility to provide servicesthat conform with professional standards byA. adhering to generally accepted auditing standards.B. having an appropriate system of quality control.C. joining professional societies that enforce ethical conduct.D. maintaining an attitude of independence in its engagements.

7. Which one of the following are normally part of the audit process?A. Assertions about economic events – Yes; Evaluating Evidence – No; Using EstablishedCriteria – YesB. Assertions about economic events – No; Evaluating Evidence – No; Using EstablishedCriteria – YesC. Assertions about economic events – Yes; Evaluating Evidence – Yes; Using EstablishedCriteria – YesD. Assertions about economic events – Yes; Evaluating Evidence – No; Using EstablishedCriteria – No

8. Which of the following best describes the established criteria for a compliance audit?A. generally accepted accounting principlesB. COSO criteria for evaluating internal controlsC. objectives set by managementD. management's policy or laws and regulations

9. Assurance Services are:A. professional services that result in issuing an independent opinion.B. a systematic process for evaluating evidence.C. independent professional service that improve the quality of information, or its context,for decision makers.D. independent judgments made by qualified professional to render an opinion on financialstatements.

10. Which of the following best describe an inherent limitation of the audit?A. The audit is limited by access to capital markets.B. Audits cannot add exactness to the uncertainty of accounting estimates.C. There is a conflict of interest between management and shareholders.D. Financial statement users cannot expect direct access to accounting records.

11. Which of the following is a public sector organization associated with the public accountingprofession?A. The American Institute of CPAsB. The Institute of Internal AuditorsC. The Financial Accounting Standards BoardD. The Securities and Exchange Commission

12. Which of the following is a private sector, nonprofit corporation that was created by theSarbanes – Oxley Act of 2002 to oversee the auditors of public companies?A. The Public Companies Auditing Oversight Board.B. The Securities and Exchange CommissionC. The Public Companies Accounting Oversight Board.D. The Certified Public Accountants Oversight Board.

13. Which of the following is a level of assurance that is substantially less than an audit wherethe CPA states that he or she is not aware of any material modifications that should be madeto management's assertion?A. an examination engagementB. an agreed-upon procedures engagementC. a compilation engagementD. a review engagement

14. Which of the following organizations has the authority to issue a license to practice as aCPA?A. The Securities and Exchange CommissionB. The Public Companies Accounting Oversight Board.C. State Boards of AccountancyD. The American Institute of CPAs.

15. One of the following is not a proper condition that supports the need for an independentaudit of financial statements.A. conflict of interest between management and the CPAB. complexity of the financial statementsC. remoteness of users from the accounting recordsD. consequences of the financial statements in the user's decision process

Chapter 4 .

1. If a stockholder sues a CPA for common law fraud based on false statements contained inthe financial statements audited by the CPA, which of the following is the CPA's bestdefense?A. The CPA did not financially benefit from the alleged fraud.B. There was contributory negligence of the client.C. The stockholder lacks privity to sue.D. The auditor followed GAAS.

2. Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors inapproving the merger was the strong financial statements of Silo, which were audited byCox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. Whileperforming the audit, Cox failed to discover material fraud, which subsequently causedStarr to suffer substantial losses. For Cox to be liable under common law under theUltramares decision, Starr at a minimum must prove that CoxA. was a party to the fraud.B. acted recklessly or with a lack of reasonable grounds for belief.C. failed to exercise due care.D. was grossly negligent.

3. Waldo, CPA, was engaged to audit the financial statements of Safe and Secure SavingsBank. Subsequent to issuing an unqualified opinion on the financial statements it wasdiscovered that the institution's only loan officer had embezzled a material amount from thebank. The CPA is liable to his client if, at a minimum, the client can prove that WaldoA. the CPA was negligent in performing the audit.B. the CPA was grossly negligent in performing the audit.C. the CPA was involved in committing the fraud.D. the CPA negligently failed to issue an engagement letter.

4. John Ross, CPA, audited the financial statements of False Value Hardware for the yearended June 30, 20X7. During the course of planning the audit, Ross noted that auditedfinancial statements were required for compliance with a debt covenant on a loan with FifthCounty Bank. Subsequently, copies of the financial statements were distributed to FifthCounty Bank and to Joan Bigbucks, a foreseeable third party who purchased of 50% of thestock of the business. On June 1, 20X8, it was discovered that the financial statements werematerially misstated, False Value declared bankruptcy, and the bank lost 80% of the valueof its loan and the purchaser of 50% of the stock lost 100% of her investment. Under theRosenblum decision, the benefits of “privity” extend toA. Fifty County Bank – yes; John Bigbucks - yesB. Fifty County Bank – yes; John Bigbucks - noC. Fifty County Bank – no; John Bigbucks - yesD. Fifty County Bank – no; John Bigbucks – no

5. Russell Vega, CPA audited the financial statements of Black Cherry Winery. Vegaacknowledged that the financial statements were used to secure a loan from First StateBank. Black Cherry Winery also secured a loan from Second County Bank, which wasunforeseen to Vega. It turned out that most of the inventory listed in the financialstatements did not exist and that the financial statements were materially misstated.Under the Credit Alliance decision, what third parties would only have to prove that Vegawas negligent in performing the audit?A. First State Bank – yes; Second County Bank – yesB. First State Bank – yes; Second County Bank – noC. First State Bank – no; Second County Bank – yesD. First State Bank – no; Second County Bank – no

6. One of the elements necessary to recover damages if there has been a materialmisstatement in a registration statement filed pursuant to the Securities Act of 1933 is thatA. there was a material false or misleading statement in the financial statements.B. the plaintiff knew the auditor.C. the issuer and plaintiff were in privity of contract with each other.D. the issuer failed to exercise due care in connection with the sale of the securities.

7. To be successful in a civil action against an auditor under the Securities Act of 1933concerning liability for a misleading registration statement, the plaintiff must proveA. defendant's intent to deceive – yes; the plaintiff's reliance on the financial statements –yesB. defendant's intent to deceive – yes; the plaintiff's reliance on the financial statements –noC. defendant's intent to deceive – no; the plaintiff's reliance on the financial statements –yesD. defendant's intent to deceive – no; the plaintiff's reliance on the financial statements –No

8. In which of the following statements concerning a CPA firm's action is scienter or itsequivalent absent?A. actual knowledge of fraudB. performance of substandard auditing proceduresC. reckless disregard for the truthD. intent to gain monetarily by concealing fraud

9. The Escott vs. BarChris Construction Corp. was a critical case under the 1933 SecuritiesAct because it established:A. that the auditor would have to be grossly negligent to be liable to third parties.B. that the auditor would not have been liable if the client had not gone bankrupt.C. that performing an audit in accordance with generally accepted auditing standardswould be a due diligence defense.D. that auditors could be found guilty of criminal liability.

10. The Ernst and Ernst v. Hochfeler case was:A. an important case under the 1933 securities act where the auditor had to found guiltyof intent to deceive.B. an important case under the 1934 securities act where the auditor had to found guiltyof intent to deceive.C. an important case under the 1933 securities act where the auditor had to found guiltyof only negligence.D. an important case under the 1934 securities act where the auditor had to found guiltyof only negligence.

11. The Private Securities Litigation Reform Act of 1995 resulted in a number of changes instatutory law that revised the SEC Acts of 1933 and 1934. Which of the following wasNOT one of the major changes that resulted from the Private Securities Litigation ReformAct of 1955?A. The statute instituted a system of proportionate liability for CPAs who were not foundto knowingly commit a violation of the securities laws.B. The statute imposed a responsibility to report indirect illegal acts to the SEC.C. That statute provided that auditors would not be held liable for private actions forstatements made in the reporting of direct and material illegal acts to the SEC.D. The statute created a cap on damages based on the amount of equity of a CPA firm.

12. How does the Securities Act of 1933, which imposes civil liability on auditors formisrepresentations or omissions of material facts in a registration statement, expandauditors' liability to purchasers of securities beyond that of common law?A. Purchasers only have to prove loss caused by reliance on audited financial statements.B. Privity with purchasers is not a necessary element of proof.C. Purchasers have to prove either fraud or gross negligence as a basis for recovery.D. Auditors are held to a standard of care described as “professional skepticism.”

13. The Sarbanes – Oxley Act of 2002:A. requires auditors to maintain all audit or review working papers for two years.B. makes it unlawful for any office or director of an issuer to take any action tofraudulently influence, coerce, manipulate, or mislead any auditor for the purpose ofrendering the financial statements materially misleading.C. makes it unlawful for management to hire an accountant to perform nonattest services.D. limits punitive damages by eliminating securities fraud as a basis for bring actionunder RICO.

Chapter 51. Which of the following best describe the steps involved in a financial statement audit?A. (1) Identify relevant financial statements assertions, (2) assess the risk of materialmisstatement, (3) collect evidence, (4) perform further audit procedures, (5) evaluateevidence, and (6) communicate audit finding.B. (1) Perform risk assessment procedures, (2) relate factors to potential misstatements inthe financial statements, (3) respond to assessed risks, (4) perform substantive tests, (5)evaluate evidence, and (6) communicate audit finding.C. (1) Perform risk assessment procedures, (2) assess the risk of material misstatement, (3)respond to assessed risks, (4) perform further audit procedures, (5) evaluate evidence,and (6) communicate audit finding.D. (1) Perform risk assessment procedures, (2) relate factors to potential misstatements inthe financial statements, (3) respond to assessed risks, (4) perform substantive tests, (5)evaluate evidence, and (6) write audit report.

2. The purpose of performing risk assessment procedures is to:A. fully understand the risk of material misstatement.B. allow the auditor to make preliminary judgments about materiality.C. support an opinion on the financial statements.D. prevent fraudulent financial reporting.

3. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventoryitems provide assurance about management's assertion ofA. completeness.B. presentation and disclosure.C. existence and occurrence.D. valuation and allocation.

4. In the mid 1990s, Sunbeam Corporation overstated revenues and receivables due tochannel stuffing and revenue recognition problems. This was a problem with which of thefollowing financial statement assertions?A. existence or occurrence.B. completeness.C. right and obligations.D. valuation or allocation.

5. An auditor most likely would inspect loan agreements under which an entity's inventoriesare pledged to support management's financial statements assertion ofA. existence or occurrence.B. completeness.C. presentation and disclosure.D. valuation or allocation.

6. An important reason for an auditor to understand the entity and its environment is:A. it supports the auditor's ability to sell consulting services.B. it directly supports an opinion on the financial statements.C. an auditor must understand the underlying economic substance of the business beingaudited.D. an auditor must understand the entity in order to be independent.

7. The concept of materiality will usually be important to the CPA in determining theA. scope of his or her audit of specific accounts.B. reliability of audit evidence.C. whether the auditor has sufficient competence to perform part of the audit.D. the significance of business risks.

8. The risk that an auditor's procedures will lead to the conclusion that a materialmisstatement does NOT exist in an assertion when, in fact, such misstatement does exist isreferred to asA. audit risk.B. inherent risk.C. control risk.D. detection risk

9. The auditor assesses that the risk of material misstatement for the completeness assertionfor accounts payable is at the maximum. The auditor's tests of controls show that internalcontrols are very effective, and as a result the auditor limits substantive tests to obtain thedesired level of reasonable assurance. Which of the articulations of the audit risk modelbest matches the situation described above?A. auditor risk = 100%; inherent risk = 100%; control risk = 20%; detection risk = 50%B. auditor risk = 100%; inherent risk = 100%; control risk = 75%; detection risk = 25%C. auditor risk = 2%; inherent risk = 100%; control risk = 50%; detection risk = 4%D. auditor risk = 2%; inherent risk = 100%; control risk = 7%; detection risk = 29%

10. Which of the following is NOT one of the reasons to understand the entity's system ofinternal control in the audit of a private company?A. to identify the types of potential misstatementsB. to express an opinion on internal control over financial reportingC. to consider factors that affect the risks of material misstatementD. to design the nature, timing and extent of further audit procedures

11. Which of the following best describes the elements of the fraud triangle?A. Opportunity, Incentives and Pressures and Inherent RiskB. Opportunity, Incentives and Pressures and Control RiskC. Opportunity, Incentives and Pressures and RationalizationD. Incentives and Pressures, Rationalization, and Detection Risk

12. Which of the following is NOT one of the steps in assessing the risk of materialmisstatement?A. relating risk factors to potential financial statement misstatementsB. determining the likelihood that risk will results in a material misstatementC. determining whether risk are of a magnitude that will result in a material misstatementin the financial statementsD. determining whether the client is ethical

13. The auditor normally responds to assessed risk by making decisions about:A. the nature, timing, extent and staffing of audit tests.B. the nature and timing of audit tests.C. whether or not to perform analytical procedures.D. making decisions about sample size.

14. Further audit procedures normally include:A. further risk assessment procedures and substantive tests.B. tests of controls and substantive tests.C. further risk assessment procedures, tests of controls, and substantive tests.D. client acceptance procedures, tests of controls, and substantive tests.

15. The purpose of substantive tests is to:A. provide evidence about whether internal controls are operating effectively.B. provide evidence about the fair presentation of management's assertions in thefinancial statements.C. provide evidence about whether the accounting principles chosen by the client arecomparable with others in the industry.D. provide evidence about the accuracy of the audit report.

16. When communicating the results of an audit:A. the auditor's only tool is the audit report.B. the auditor usually reports on internal controls in audits of private companies.C. the auditor is required to discuss additional issues, such as significant auditadjustments, with the audit committee or board of directors.D. the auditor will issue an adverse opinion if the company imposes a scope restriction.

Chapter 61. Which of the following statements is NOT true about accounting records?A. Accounting records generally include records of initial entries and supporting records.B. Examples of accounting records include invoices, checks, contracts, and the generaland subsidiary ledgers.C. Accounting records alone generally provide sufficient evidence on which to base anaudit opinion on the financial statements.D. Management prepares the financial statements based on the accounting records of theentity.

2. Which of the following statements is generally correct about the reliability of auditevidence?A. The auditor's direct personal knowledge, obtained through observation and inspection,is more persuasive than information obtained from inference.B. To be competent, evidential matter must be either valid or relevant, but need NOT beboth.C. Documents generated internally is a very strong source of reliable audit evidence.D. Competence of evidential matter refers to the amount of corroborative evidence to beobtained.

3. Which of the following best describes the auditor's decision about changing the nature ofaudit tests?A. The auditor chooses to perform analytical procedures rather than tests of controls.B. The auditor chooses to send confirmations of accounts receivable as of October 31rather than December 31.C. The auditor chooses to confirm 20% of the population of accounts receivable.D. The auditor chooses to perform tests of controls as part of both the interim and finalportions of the audit engagement.

4. Audit objectives are important because:A. they provide a more general framework than audit assertions.B. each audit objective usually is affected by different risks and requires differentevidence.C. each audit objective usually has different inherent risks but similar control risks for thesame assertion.D. audit objectives guide decisions about the necessary accounting records.

5. The auditor wants to design audit procedures to ascertain that all sales transactions wererecorded in the proper time period and that no January 20x2 transactions were recorded inDecember 20x1. This is related to which of the following audit objectives?A. ClassificationB. AccuracyC. CutoffD. Rights and obligations.

6. An auditor wants to determine that all sales returns have been recorded. This relates towhich of the following transaction class audit objectives?A. occurrenceB. classificationC. accuracyD. completeness

7. An auditor wants to determine that recorded receivables represent amounts actually owingfrom customers. This relates to which of the following audit objectives?A. the transaction class audit objective related to completenessB. the account balance audit objective related to existenceC. the disclosure audit objective related to classification and understandabilityD. the account balance audit objective related to valuation and allocation

8. The auditor wants to wants to determine that sales are recorded in correct amounts basedon the number of items shipped and appropriate prices. This related to which of thefollowing audit objectives?A. the transaction class audit objective related to accuracyB. the account balance audit objective related to valuation and allocationC. the disclosure audit objective related to completenessD. the transaction class audit objective related to cutoff

9. Which of the following best describe a situation which would cause the auditor to obtainmore evidence rather than less evidence?A. Assertions are less material to financial statement users.B. The auditor is auditing a small population.C. The assertion being audited has a higher risk of material misstatement.D. The audit population is more homogenous.

10. Which of the following situations represents the least reliable, rather than more reliable,evidence?A. Evidence is obtained from an independent source, such as a bank.B. Evidence is not documented in a contemporaneous fashion, such as a subsequent oralrepresentation.C. The auditor directly observe the application of an internal control.D. Evidence is obtained in the form of a written record of analysis of budget variations.

11. If the auditor studies plausible relations among both financial statement financial data andother nonfinancial data, this is best described as which of the following types of auditprocedures?A. computer assisted audit techniques.B. confirmationC. recalculationD. analytical procedures

12. If an auditor vouches entries in accounting records, such as a sales invoice, to supportingaccounting records, such as a bill of lading, this is an example of which of the followingtypes of audit procedures?A. inspection of documents and recordsB. observationC. confirmationD. inspection of tangible assets

13. Which of the following is the best example of changing the timing of audit procedures?A. The auditor obtains an understanding of the entity and its environment early in theaudit.B. The auditor sends confirmations at October 31st rather than December 31st (year-end).C. Early in the audit the auditor decides to assign more experienced staff to high riskaudit areas.D. After year-end the auditor investigates significant subsequent events.

14. An auditor's working papers shouldA. not be permitted to serve as a reference source for the client.B. not contain critical comments concerning management.C. show that the accounting records agree or reconcile with the financial statements.D. be considered the primary support for the financial statements being audited.

15. Which of the following statements concerning working papers is INCORRECT?A. An auditor may support an opinion by other means in addition to working papers.B. The form of working papers should be designed to meet the circumstances of aparticular engagement.C. An auditor's working papers are not the place to like assessed risks and resultant auditprocedures.D. Working papers should show that internal controls have been studied and evaluated tothe degree necessary.

16. The current file of the auditor's working papers generally should includeA. a flowchart of the internal accounting controls.B. organization charts.C. a copy of the financial statements.D. copies of bond and note indentures.

17. The audit working paper that reflects the major components of an amount reported in thefinancial statements is theA. interbank transfer schedule.B. carryforward schedule.C. supporting schedule.D. lead schedule.

18. Audit evidence can come in different forms with different degrees of reliability. Which ofthe following is the least reliable type of evidence?A. regular bank statementsB. confirmationC. client sales invoicesD. vendor's invoice

Chapter 7

1. Which of these is not an analytical procedure ? A. Compute times interest earned ratio and compare to industry averages.B. Compare current balances to prior year balances for unusual fluctuationsC. Prepare common size income statements with items expressed as a % of sales.D. All are analytical procedures.

2. In an audit situation, communication between successor and predecessor auditors should be : A. Authorized in an engagement

B. Acknowledged in a representation letter

C. Either written or oral.

D. Written and included in the working papers.

3. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor'sA. awareness of the consistency in the application of GAAP between 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.D. understanding as to the reasons for the change of auditors.

4. A CPA is most likely to refer to one or more of the three general auditing standards in determining:A. the nature of the CPA's report qualification.B. the scope of the CPA's auditing procedures.C. requirements for the review of the internal control structure.D. whether the CPA should undertake an audit engagement.

5. Engagement letters are widely used in practice for professional engagements of all types. The primary purpose of the engagement letter is toA. provide a written record of the agreement with the client as to the services to be

provided.B. remind management that the primary responsibility for the financial statements rests

with management.C. satisfy the requirements of the CPA's liability insurance policy.D. provide a starting point for the auditor's preparation of the preliminary audit program.

6. Identifying special circumstances and risks during client acceptance and retention usually relates to the auditors consideration ofA. the auditor's business risk

B. the client's risk of material misstatement in the financial statements.C. the potential for disagreement with management about audit fees.D. the need for personnel with special skills on the audit team.

7. Which of the following issues might have the most negative influence on client acceptance or retention?A. Management shows integrity in business and accounting decisions.B. The client has a strong accounting system with good internal controls.C. The client is experiencing cash flow problems and is close to violations of debt

covenants.D. The audit firm must hire an outside specialist, which it has used in the past, to evaluate

certain audit evidence.

8. Which of the following steps is least likely to be performed as part of risk assessment procedures?A. making preliminary judgments about materialityB. performing substantive testsC. considering the risk of fraudD. developing preliminary audit strategies

9. The auditor would be LEAST likely to use an understanding of the entity and its environment to:A. evaluate the integrity of management.B. develop a knowledgeable perspective about the entity and its financial statements.C. evaluate the client's industry conditions.D. assess the risk of material misstatement in the financial statements.

10. The auditor would be LEAST likely to use an understanding of management's objectives, strategies, and related business risks to:A. evaluate the company's ability to generate revenues when faced with new technology

introduced by competitors.B. evaluate the risks associated with regulatory requirementsC. make decisions about the extent of audit procedures.D. evaluate the entity's need for financing.

11. Which of the following would NOT be considered part of the industry, regulatory, and other external factors that an auditor would normally understand when planning an audit?A. accounting principles and industry specific practicesB. the market and competition, including demand, capacity and price competitionC. the general level of economic activityD. government policies such as tariffs and trade restrictions

12. Which of the following factors would most likely influence a heightened risk of material

misstatement in the financial statements?A. The client has lost technological advantage to its competitors.B. The company is experiencing similar growth to overall economic growth.C. A start-up company is primarily equity financed.D. A company provides warranties for defects discovered in the first 3 months of use.

13. Which of the following would NOT be considered part of understanding an entity's business operations?A. understanding its methods of obtaining revenuesB. understanding its employment, union contracts, and post employment benefitsC. understanding the stages and methods of productionD. understanding the entity's operational approaches by which management intends to

achieve its objectives

14. Which of the following would NOT be considered part of understanding how an entity measures and reviews its financial performance?A. understanding its use of key performance indicatorsB. understanding its use of budgets, forecasts and variance analysesC. understanding its use of derivative financial instrumentsD. understanding its use of key ratios and operating statistics

15. Which of the following is NOT a typical analytical procedure ?A. Study of relationships of the financial information with relevant non financial informa

tionB. Comparison of the financial information with similar information regarding the

industry in which the entity operatesC. comparison of financial information with budget amounts

D. comparison of recorded amounts of major disbursements with appropriate invoices