Whittington -principles of auditing 19e

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Chapter 01 The Role of the Public Accountant in the American Economy

True / False Questions

1. Independent audits of today place more emphasis on sampling than did the audits of the 19th century. True False

2. The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs

to practice. True False

3. A company is either audited by the GAO or internal auditors, but not both.

True False

4. The SEC does not pass on the merits of the securities that are registered with the agency.

True False

5. The American Institute of Certified Public Accountants has the primary authority to establish

accounting standards. True False

6. An annual peer review is a requirement of the AICPA.

True False

7. Many small companies elect to have their financial statements reviewed by a CPA firm, rather

than incur the cost of an audit. True False

8. Staff assistants in CPA firms generally are responsible for planning and coordinating audit

engagements. True False

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9. The Sarbanes-Oxley Act requires that auditors of certain publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations. True False

10. Auditing is frequently only a small part of the practice of local CPA firms.

True False

Mult iple Choice Questions

11. A summary of findings rather than assurance is most likely to be included in a(n): A. Agreed-upon procedures report.

B. Compilation report.

C. Examination report.

D. Review report.

12. The Statements on Auditing Standards have been issued by the:

A. Auditing Standards Board.

B. Financial Accounting Standards Board.

C. Securities and Exchange Commission.

D. Federal Bureau of Investigation.

13. The risk associated with a company's survival and profitability is referred to as:

A. Business Risk.

B. Information Risk.

C. Detection Risk.

D. Control Risk.

14. Historically, which of the following has the AICPA been most concerned with providing?

A. Professional standards for CPAs.

B. Professional guidance for regulating financial markets.

C. Standards guiding the conduct of internal auditors.

D. Staff support to Congress.

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15. The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: A. Auditing Standards Board.


C. Government Accounting Standards Boards.

D. Securities and Exchange Commission.

16. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA

firm is referred to as a(n): A. Peer Review Engagement.

B. Quality Control Engagement.

C. Quality Assurance Engagement.

D. Attestation Engagement.

17. The serially-numbered pronouncements issued by the Auditing Standards Board over a period of

years are known as: A. Auditing Statements of Position (ASPs).

B. Accounting Series Releases (ASRs).

C. Statements on Auditing Standards (SASs).

D. Statements on Auditing Principles (SAPs).

18. The Government Accountability Office (GAO):

A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal

government.

B. Conducts operational audits and reports the results to Congress.

C. Is a multinational organization of professional accountants.

D. Is primarily concerned with budgets and forecasts approved by the SEC.

19. The risk that information is misstated is referred to as:

A. Information risk.

B. Inherent risk.

C. Relative risk.

D. Business risk.

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20. The risk that a company will not be able to meet its obligations when they become due is an aspect of: A. Information risk.

B. Inherent risk.

C. Relative risk.

D. Business risk.

21. Which of the following attributes most clearly differentiates a CPA who audits management's

financial statements as contrasted to management? A. Integrity.

B. Competence.

C. Independence.

D. Keeping informed on current professional developments.

22. The attest function:

A. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or

other services.

B. Includes the preparation of a report of the CPA's findings.

C. Requires a consideration of internal control.

D. Requires a complete review of all transactions during the period under examination.

23. Attestation risk is limited to a low level in which of the following engagement(s)?

A. Both examinations and reviews.

B. Examinations, but not reviews.

C. Reviews, but not examinations.

D. Neither examinations nor reviews.

24. When compared to an audit performed prior to 1900, an audit today:

A. Is more likely to include tests of compliance with laws and regulations.

B. Is less likely to include consideration of the effectiveness of internal control.

C. Has bank loan officers as the primary financial statement user group.

D. Includes a more detailed examination of all individual transactions.

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25. Which of the following are issued by the Securities and Exchange Commission? A. Accounting Research Studies.

B. Accounting Trends and Techniques.

C. Industry Audit Guides.

D. Financial Reporting Releases.

26. Which of the following is not correct relating to the Sarbanes-Oxley Act?

A. It toughens penalties for corporate fraud.

B. It restricts the types of consulting CPAs may perform for audit clients.

C. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.

D. It eliminates a significant portion of the accounting profession's system of self-regulation.

27. An operational audit differs in many ways from an audit of financial statements. Which of the

following is the best example of one of these differences? A. The usual audit of financial statements covers the four basic statements, whereas the

operational audit is usually limited to either the balance sheet or the income statement.

B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.

C. Operational audits do not ordinarily result in the preparation of a report.

D. The operational audit deals with pre-tax income.

28. The review of a company's financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit.

B. Requires detailed analysis of the major accounts.

C. Is of similar scope as an audit and adds similar credibility to the statements.

D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.

29. Which statement is correct with respect to continuing professional education (CPE) requirements

of members of the AICPA? A. Only members employed by the AICPA are required to take such courses.

B. Only members in public practice are required to take such courses.

C. Members, regardless of whether they are in public practice, are required to meet such requirements.

D. There is no requirement for members to participate in CPE.

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30. The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over: A. Compliance with laws and regulations.

B. Financial reporting.

C. Effectiveness of operations.

D. Efficiency of operations.

31. Passage of the Sarbanes-Oxley Act led to the establishment of the:

A. Auditing Standards Board.

B. Accounting Enforcement Releases Board.

C. Public Company Accounting Oversight Board.


32. Which of the following professionals has primary responsibility for the performance of an audit?

A. The managing partner of the firm.

B. The senior assigned to the engagement.

C. The manager assigned to the engagement.

D. The partner in charge of the engagement.

33. Which of the following types of services is generally provided only by CPA firms?

A. Tax audits.

B. Financial statement audits.

C. Compliance audits.

D. Operational audits.

34. The right to practice as a CPA is given by which of the following organizations?

A. State Boards of Accountancy.

B. The AICPA.

C. The SEC.

D. The General Accounting Office.

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35. Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor? A. Operational audit.

B. Internal audit.

C. Compliance audit.

D. Government audit.

36. Inquiries and analytical procedures ordinarily form the basis for which type of engagement?

A. Agreed-upon procedures.

B. Audit.

C. Examination.

D. Review.

37. Which of the following best describes the reason why independent auditors report on financial

statements? A. A management fraud may exist and it is more likely to be detected by independent auditors.

B. Different interests may exist between the company preparing the statements and the persons using the statements.

C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.

D. Poorly designed internal control may be in existence.

38. Governmental auditing often extends beyond examinations leading to the expression of opinion on

the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also: A. Accuracy.

B. Evaluation.

C. Compliance.

D. Internal control.

39. Operational auditing is primarily oriented toward:

A. Future improvements to accomplish the goals of management.

B. The accuracy of data reflected in management's financial records.

C. The verification that a company's financial statements are fairly presented.

D. Past protection provided by existing internal control.

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40. A typical objective of an operational audit is for the auditor to: A. Determine whether the financial statements fairly present the entity's operations.

B. Evaluate the feasibility of attaining the entity's operational objectives.

C. Make recommendations for improving performance.

D. Report on the entity's relative success in attaining profit maximization.

41. An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on:

A. Option A

B. Option B

C. Option C

D. Option D

Matching Questions

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42. Accountants are regulated by a variety of organizations. Match the following statements with the most directly related organizations. Organizations may be used once or not at all. 1. Formed to improve standards of financial accounting for state and local government entities

State Boards of Accountancy. ____

2. Issue CPA certificates Government Accounting

Standards Board. ____

3. Develop accounting standards for public and nonpublic companies

American Institute of Certified Public

Accountants. ____ 4. Develop accounting standards for the U.S. Government

Financial Accounting Standards Board. ____

5. Issue auditing standards for public companies

Federal Accounting Standards Advisory Board. ____

6. Prepares the CPA exam

Public Company Accounting Oversight

Board. ____

Essay Questions

43. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors. a. Describe the events that led up to the passage of the Act. b. Describe the major changes made by the Act.

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44. Many people confuse the responsibilities of the independent auditors and the client's management with respect to audited financial statements. a. Describe management's responsibility regarding audited financial statements. b. Describe the independent auditors' responsibility regarding audited financial statements. c. Evaluate the following statement: "If the auditors disagree with management regarding an accounting principle used in the financial statements the auditors should express their views in the notes to the financial statements."

45. An investor is considering investing in one of two companies. The companies have very similar

reported financial position and results of operations. However, only one of the companies has its financial statements audited. a. Describe what creates the demand for an audit in this situation. Include a discussion of how audited financial statements facilitate this investment transaction, and the effect of the audit on business risk and information risk. b. Identify the potential consequences to the company of not having its financial statements audited.

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Chapter 01 The Role of the Public Accountant in the American Economy Answer Key


1. Independent audits of today place more emphasis on sampling than did the audits of the 19th century. TRUE

AACSB: Analytic

AICPA BB: Industry AICPA FN: Decision Making

Blooms: Remember Difficulty: 2 Medium

Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits

2. The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice. FALSE

AACSB: Analytic



Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession

3. A company is either audited by the GAO or internal auditors, but not both. FALSE

AACSB: Analytic


Blooms: Remember Difficulty: 1 Easy

Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits

4. The SEC does not pass on the merits of the securities that are registered with the agency. TRUE

AACSB: Analytic

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5. The American Institute of Certified Public Accountants has the primary authority to establish accounting standards. FALSE

AACSB: Analytic




6. An annual peer review is a requirement of the AICPA. FALSE

AACSB: Analytic




7. Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit. TRUE

AACSB: Analytic




8. Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements. FALSE

AACSB: Analytic



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Learning Objective: 01-08 Describe how public accounting firms are typically organized and the responsibilities of auditors at the various levels in the organization.

Topic: Public Accounting Profession

9. The Sarbanes-Oxley Act requires that auditors of certain publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations. FALSE

AACSB: Analytic




10. Auditing is frequently only a small part of the practice of local CPA firms. TRUE

AACSB: Analytic





Mult iple Choice Questions

11. A summary of findings rather than assurance is most likely to be included in a(n): A. Agreed-upon procedures report.

B. Compilation report.

C. Examination report.

D. Review report.

AACSB: Analytic



Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function

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12. The Statements on Auditing Standards have been issued by the: A. Auditing Standards Board.


C. Securities and Exchange Commission.

D. Federal Bureau of Investigation.

AACSB: Analytic




13. The risk associated with a company's survival and profitability is referred to as: A. Business Risk.

B. Information Risk.

C. Detection Risk.

D. Control Risk.

AACSB: Analytic




14. Historically, which of the following has the AICPA been most concerned with providing? A. Professional standards for CPAs.

B. Professional guidance for regulating financial markets.

C. Standards guiding the conduct of internal auditors.

D. Staff support to Congress.

AACSB: Analytic




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15. The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: A. Auditing Standards Board.


C. Government Accounting Standards Boards.


AACSB: Analytic




16. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n): A. Peer Review Engagement.

B. Quality Control Engagement.

C. Quality Assurance Engagement.

D. Attestation Engagement.

AACSB: Analytic




17. The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as: A. Auditing Statements of Position (ASPs).

B. Accounting Series Releases (ASRs).

C. Statements on Auditing Standards (SASs).

D. Statements on Auditing Principles (SAPs).

AACSB: Analytic




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18. The Government Accountability Office (GAO): A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal

government.

B. Conducts operational audits and reports the results to Congress.

C. Is a multinational organization of professional accountants.

D. Is primarily concerned with budgets and forecasts approved by the SEC.

AACSB: Analytic




19. The risk that information is misstated is referred to as: A. Information risk.

B. Inherent risk.

C. Relative risk.

D. Business risk.

AACSB: Analytic




20. The risk that a company will not be able to meet its obligations when they become due is an aspect of: A. Information risk.

B. Inherent risk.

C. Relative risk.

D. Business risk.

AACSB: Analytic




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21. Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management? A. Integrity.

B. Competence.

C. Independence.

D. Keeping informed on current professional developments.

AACSB: Analytic



Learning Objective: 01-01 Describe the nature of assurance services. Topic: Assurance Services

22. The attest function: A. Is an essential part of every engagement by the CPA, whether performing auditing, tax

work, or other services.

B. Includes the preparation of a report of the CPA's findings.

C. Requires a consideration of internal control.

D. Requires a complete review of all transactions during the period under examination.

AACSB: Analytic




23. Attestation risk is limited to a low level in which of the following engagement(s)? A. Both examinations and reviews.

B. Examinations, but not reviews.

C. Reviews, but not examinations.

D. Neither examinations nor reviews.

AACSB: Analytic




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24. When compared to an audit performed prior to 1900, an audit today: A. Is more likely to include tests of compliance with laws and regulations.

B. Is less likely to include consideration of the effectiveness of internal control.

C. Has bank loan officers as the primary financial statement user group.

D. Includes a more detailed examination of all individual transactions.

AACSB: Analytic




25. Which of the following are issued by the Securities and Exchange Commission? A. Accounting Research Studies.

B. Accounting Trends and Techniques.

C. Industry Audit Guides.

D. Financial Reporting Releases.

AACSB: Analytic




26. Which of the following is not correct relating to the Sarbanes-Oxley Act? A. It toughens penalties for corporate fraud.

B. It restricts the types of consulting CPAs may perform for audit clients.

C. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.

D. It eliminates a significant portion of the accounting profession's system of self-regulation.

AACSB: Analytic



Learning Objective: 01-05 Describe how the credibility of the accounting profession was affected by the large number of companies reporting accounting irregularities in the beginning of this century.

Topic: Financial Statement Audits

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27. An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? A. The usual audit of financial statements covers the four basic statements, whereas the

operational audit is usually limited to either the balance sheet or the income statement.

B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.

C. Operational audits do not ordinarily result in the preparation of a report.

D. The operational audit deals with pre-tax income.

AACSB: Analytic




28. The review of a company's financial statements by a CPA firm: A. Is substantially less in scope of procedures than an audit.

B. Requires detailed analysis of the major accounts.

C. Is of similar scope as an audit and adds similar credibility to the statements.

D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.

AACSB: Analytic




29. Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA? A. Only members employed by the AICPA are required to take such courses.

B. Only members in public practice are required to take such courses.

C. Members, regardless of whether they are in public practice, are required to meet such requirements.

D. There is no requirement for members to participate in CPE.

AACSB: Analytic



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30. The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over: A. Compliance with laws and regulations.

B. Financial reporting.

C. Effectiveness of operations.

D. Efficiency of operations.

AACSB: Analytic




31. Passage of the Sarbanes-Oxley Act led to the establishment of the: A. Auditing Standards Board.

B. Accounting Enforcement Releases Board.

C. Public Company Accounting Oversight Board.


AACSB: Analytic





32. Which of the following professionals has primary responsibility for the performance of an audit? A. The managing partner of the firm.

B. The senior assigned to the engagement.

C. The manager assigned to the engagement.

D. The partner in charge of the engagement.

AACSB: Analytic



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33. Which of the following types of services is generally provided only by CPA firms? A. Tax audits.

B. Financial statement audits.

C. Compliance audits.

D. Operational audits.

AACSB: Analytic




34. The right to practice as a CPA is given by which of the following organizations? A. State Boards of Accountancy.

B. The AICPA.

C. The SEC.

D. The General Accounting Office.

AACSB: Analytic




35. Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor? A. Operational audit.

B. Internal audit.

C. Compliance audit.

D. Government audit.

AACSB: Analytic




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36. Inquiries and analytical procedures ordinarily form the basis for which type of engagement? A. Agreed-upon procedures.

B. Audit.

C. Examination.

D. Review.

AACSB: Analytic




37. Which of the following best describes the reason why independent auditors report on financial statements? A. A management fraud may exist and it is more likely to be detected by independent auditors.

B. Different interests may exist between the company preparing the statements and the persons using the statements.

C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.

D. Poorly designed internal control may be in existence.

AACSB: Analytic



Source: AICPA Topic: Financial Statement Audits

38. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also: A. Accuracy.

B. Evaluation.

C. Compliance.

D. Internal control.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making

Blooms: Understand Difficulty: 3 Hard

Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Source: AICPA

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39. Operational auditing is primarily oriented toward: A. Future improvements to accomplish the goals of management.

B. The accuracy of data reflected in management's financial records.

C. The verification that a company's financial statements are fairly presented.

D. Past protection provided by existing internal control.





40. A typical objective of an operational audit is for the auditor to: A. Determine whether the financial statements fairly present the entity's operations.

B. Evaluate the feasibility of attaining the entity's operational objectives.

C. Make recommendations for improving performance.

D. Report on the entity's relative success in attaining profit maximization.





41. An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on:

A. Option A

B. Option B

C. Option C

D. Option D

AACSB: Analytic

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Matching Questions

42. Accountants are regulated by a variety of organizations. Match the following statements with the most directly related organizations. Organizations may be used once or not at all. 1. Formed to improve standards of financial accounting for state and local government entities

State Boards of Accountancy. 2

2. Issue CPA certificates Government Accounting

Standards Board. 1

3. Develop accounting standards for public and nonpublic companies

American Institute of Certified Public

Accountants. 6 4. Develop accounting standards for the U.S. Government

Financial Accounting Standards Board. 3

5. Issue auditing standards for public companies

Federal Accounting Standards Advisory Board. 4

6. Prepares the CPA exam

Public Company Accounting Oversight

Board. 5

AACSB: Analytic



Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies.

Topic: Financial Statement Audits Topic: Public Accounting Profession

Essay Questions

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43. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors. a. Describe the events that led up to the passage of the Act. b. Describe the major changes made by the Act.

a. The events leading up to the passage of the Sarbanes-Oxley Act include: • A large number of misstatements of financial statements, many of which resulted from fraudulent financial reporting. Notably including WorldCom and Enron. • The conviction of the Big 5 accounting firm of Arthur Andersen on charges of destroying evidence. b. The major reforms made the Act include: • Tougher penalties for fraud. • Restrictions on the types of consulting services that may be provided by auditors to their public audit clients. • The creation of the Public Company Accounting Oversight Board to create auditing standards and oversee accounting firms that audit public companies. • Requirements for management to make an assertion about the effectiveness of internal control. • Requirements for auditors of public companies to audit and report on internal control.





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44. Many people confuse the responsibilities of the independent auditors and the client's management with respect to audited financial statements. a. Describe management's responsibility regarding audited financial statements. b. Describe the independent auditors' responsibility regarding audited financial statements. c. Evaluate the following statement: "If the auditors disagree with management regarding an accounting principle used in the financial statements the auditors should express their views in the notes to the financial statements."

a. Management has primary responsibility for the fairness of the financial statements and internal control. b. The auditors are responsible for performing an independent audit of the financial statements and issuing a report on them in accordance with generally accepted auditing standards. c. The statement if false. The notes to the financial statements should contain only representations of management. The auditors should express their reservations in their report.

AACSB: Analytic




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45. An investor is considering investing in one of two companies. The companies have very similar reported financial position and results of operations. However, only one of the companies has its financial statements audited. a. Describe what creates the demand for an audit in this situation. Include a discussion of how audited financial statements facilitate this investment transaction, and the effect of the audit on business risk and information risk. b. Identify the potential consequences to the company of not having its financial statements audited.

a. Audits add credibility to the financial statements of the company. The individual can invest in the company knowing that there is a low probability that the financial statements depart materially from generally accepted accounting principles. Audited financial statements facilitate this transaction by reducing risk related to the investment. Specifically, audits reduce information risk--the risk that information used to make the investment decision is misstated--related to the financial statements. Audited financial statements do not directly affect business risk, which is the risk that the company will not be able to meet its financial obligations. b. The potential consequences of not having an audit are: • If the investor is particularly risk averse, he or she may not invest in the company at all. • If the investor decides to invest in the company, he or she will not be willing to pay as high a price because the investor will want to be compensated for the additional risk that is involved in relying upon unaudited financial statements.

AACSB: Analytic




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Chapter 02 Professional Standards

Multiple Choice Questions

1. The attestation standards of reporting do not require the attestation report to include a statement that A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria. B. Indicates that the practitioner has significant reservations about the engagement. C. Identifies the subject matter or assertion being reported on. D. Indicates that the accountant assumes no responsibility to update the report.

2. Control risk is A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B. The probability that a material misstatement could occur and not be detected by auditors' procedures. C. The risk that auditors will not be able to complete the audit on a timely basis. D. The risk that auditors will not properly control the staff on the audit engagement.

3. The responsibilities principle under generally accepted auditing standards does not include which of the following? A. Competence and capabilities. B. Independent attitude. C. Due care. D. Planning and supervision.

4. Which of the following types of auditors' reports does not require an explanatory paragraph to support the opinion? A. Unqualified opinion. B. Adverse opinion. C. Qualified opinion. D. Disclaimer of opinion.

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5. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? A. Lending credibility to a client's financial statements. B. Using statistical sampling techniques. C. Acceptance and continuance of clients. D. Membership in the Center for Public Company Audit Firms (CPCAF).

6. Which of the following presumptions does not relate to the reliability of audit evidence? A. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements. B. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

7. An important role of the Public Company Accounting Oversight Board (PCAOB) is to oversee the A. Issuance of statements by the Financial Accounting Standards Board. B. Preparation and grading of the Uniform CPA Examination. C. Peer review of member firms of the Private Companies Practice Section. D. Regulation of firms that audit public companies.

8. Audit evidence is usually considered sufficient when A. It is reliable. B. There is enough quantity to afford a reasonable basis for an opinion on financial statements. C. It has the qualities of being relevant, objective, and free from unknown bias. D. It has been obtained through random selection methods.

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9. Which of the following is not considered a type of audit evidence? A. The company's trial balance. B. Auditors' calculations. C. Physical observation. D. Verbal statements made by client personnel.

10. The AICPA attestation standards differ from the AICPA responsibilities principle, performance principle and reporting principle in that: A. The attestation standards contain no requirement to obtain an understanding of the entity and assess the risk of material misstatement. B. The attestation standards do not require competence and capabilities. C. The attestation standards do not require planning for attestation engagements or supervision of accountants and consultants who perform the work. D. The attestation standards do not require a report that states the character of the engagement.

11. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: A. Certify the correctness of Camden's financial statements. B. Make a complete examination of Camden's records and verify all of Camden's transactions. C. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

12. Auditors try to achieve independence in appearance in order to: A. Maintain public confidence in the profession. B. Become independent in fact. C. Comply with the responsibilities principle. D. Maintain an unbiased mental attitude.

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13. The independent auditors' plan prepared prior to the start of field work is appropriately considered documentation of A. Planning. B. Supervision. C. Information evaluation. D. Quality assurance.

14. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's accounting staff held in private. B. Inspection of pre-‐numbered client shipping documents. C. Inspection of bank statements obtained directly from the client's financial institution. D. Analytical procedures performed by auditors on the client's trial balance.

15. Which of the following is not an attestation standard? A. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report. B. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement. C. The practitioner must adequately plan the work and must properly supervise any assistants. D. A sufficient understanding of the client's internal controls shall be obtained to plan the engagement.

16. Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. C. An auditor on the engagement owns a financial interest in the stock of the client. D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

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17. A vendor's invoice received and held by the client would be considered what type of evidence? A. External. B. Internal. C. External-‐internal. D. Written representation.

18. Which of the following statements is generally correct about the appropriateness of audit evidence? A. Auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be reliable, audit evidence must be either valid or relevant, but need not be both. C. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on client financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

19. The standard auditors' report refers to GAAS and GAAP in which paragraph? A. GAAS: Scope only; GAAP: Opinion only B. GAAS: Introductory only; GAAP: Scope and opinion C. GAAS: Introductory and scope; GAAP: Opinion only D. GAAS: Introductory only; GAAP: All paragraphs

20. Which of the following is not included in the auditors' standard report representing an unqualified opinion? A. A brief indication of the responsibility of auditors and management for the financial statements. B. An indication that all appropriate disclosures have been made and included in the financial statements. C. An indication that the audit was conducted in accordance with standards established by the PCAOB. D. The auditors' opinion on the fairness of the financial statements.

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21. Internal evidence A. Is obtained directly from third parties independent of the client. B. Originates outside of the client's system but has been received and processed by the client. C. Consists of documents that are produced, used, and stored within the client's information system. D. Consists of representations made by the client's officers, directors, owners, and employees.

22. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable form of audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective system of internal control provides more assurance about the reliability of audit evidence.

23. When auditors do not mention consistency in the auditors' report, a reader of the financial statements may infer A. That the applicable financial reporting framework (e.g., GAAP) has been consistently observed in the current period in relation to the preceding period. B. That no material departure from the applicable financial reporting framework (e.g., GAAP) has been detected. C. That no reclassification of items or change in classifications has occurred. D. Nothing about application of accounting principles within the period.

24. The auditors' responsibility to express an opinion on the financial statements is A. Implicitly represented in the auditors' standard report. B. Explicitly represented in the introductory paragraph of the auditors' standard report. C. Explicitly represented in the scope paragraph of the auditors' standard report. D. Explicitly represented in the opinion paragraph of the auditors' standard report.

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25. Which of the following is not a concept from the performance principle under generally accepted auditing standards? A. The auditor must plan the work and properly supervise any assistants. B. The auditor must express an opinion in accordance with the auditor's findings. C. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. D. The auditor must determine and apply an appropriate materiality level throughout the audit.

26. Under generally accepted auditing standards, which of the following reflects a concept related to the responsibilities principle? A. The initial planning of the audit engagement should occur with the audit partner, manager, senior, and client personnel. B. The confirmation of accounts receivable should occur on each audit. C. The completion of an internal control questionnaire. D. Maintaining professional skepticism and exercising professional judgment.

27. Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? A. Auditing procedures. B. Auditing standards. C. Due care. D. System of quality control.

28. Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors perform the engagement with prudent auditors, but not expert auditors. B. Auditors obtain expertise in their client's industry as they are conducting the audit examination. C. Auditors are directly involved with a client manager in a strategic decision-‐making capacity. D. Auditors fail to document their assessment of control risk following their study of internal control.

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29. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? A. Auditors would be required to rely on external (rather than internal) forms of evidence. B. Auditors would be required to perform procedures at interim periods, rather than at year end. C. Auditors would be required to confirm a larger number of customer accounts receivable balances. D. Auditors would be required to obtain more evidence through direct personal observation.

30. As it relates to audit evidence, appropriateness refers to the A. Originality of evidence gathered. B. Quality of evidence gathered. C. Quantity of evidence gathered. D. Timeliness of evidence gathered.

31. Which of the following information would not be included in the auditors' standard report? A. The names of the financial statements audited. B. A description of the nature of an audit. C. An indication that all necessary disclosures have been presented. D. An opinion on the entity's financial statements.

32. The primary purpose of the auditors' study of internal control for a nonpublic entity is: A. To provide constructive suggestions to the client for improving its internal control. B. To report on internal control as required by Auditing Standard No. 5. C. To identify and detect fraud and irregularities perpetrated by client personnel. D. To determine the nature, timing, and extent of substantive procedures.

33. Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)? A. Unqualified or disclaimer of opinion. B. Qualified or disclaimer of opinion. C. Unqualified or adverse. D. Qualified or adverse.

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34. Which of the following is most closely related to system of quality control regarding engagement performance? A. Requiring all of the firm's personnel to provide a summary of their investments and other financial relationships. B. Evaluating the firm's system of quality controls on a periodic basis. C. Utilizing standardized audit plans and audit documentation on engagements in a particular industry. D. Evaluating the firm's ability to provide a quality audit to a prospective client.

Question also found in textbook

35. Which of the following categories of principles is most closely related to gathering audit evidence? A. Performance. B. Reasonable assurance. C. Reporting. D. Responsibilities.

36. To exercise due care, an accountant should A. Take continuing professional education classes. B. Report whether the financial statements are in accordance with the applicable financial reporting framework (e.g., GAAP, IFRS). C. Gather enough audit evidence to have complete assurance that there is enough support for the accountant's opinion on the financial statements. D. Conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis.

37. One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following A. Generally Accepted Auditing Standards (GAAS). B. Standards within a system of quality control. C. Generally Accepted Accounting Practices (GAAP). D. International Auditing Standards.

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38. Which of the following best demonstrates the concept of professional skepticism? A. Relying more extensively on external evidence rather than internal evidence. B. Focusing on items that have a more significant quantitative effect on the entity's financial statements. C. Critically assessing verbal evidence received from the entity's management. D. Evaluating potential financial interests held by auditors in the client.

39. The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is A. To determine the nature, timing, and extent of further audit procedures to be performed. B. To make consulting suggestions to the management. C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. D. To determine whether the entity has changed any accounting principles.

40. Ordinarily, what source of evidence should least affect audit conclusions? A. External. B. Inquiry of management. C. Auditor prepared. D. Inquiry of entity legal counsel.

41. The most persuasive evidence regarding the existence of newly acquired computer equipment is A. Inquiry of management. B. Documentation prepared externally. C. Observation of auditee's procedures. D. Physical observation.

42. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of pre-‐numbered client purchase orders filed in the vouchers payable department. C. Inspection of vendor sales invoices received from client personnel. D. Inspection of bank statements obtained directly from the client's financial institution.

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43. Breaux & Co., CPAs require that all audit documentation contain the initials of the preparer and the reviewer in the top right-‐hand corner. This procedure provides evidence of Breaux & Co., CPAs' professional concern regarding which of the following? A. Independence. B. Adequate competence and capabilities. C. Adequate planning and supervision. D. Gathering sufficient appropriate evidence.

44. The attestation standards do not contain a requirement that auditors obtain A. Adequate knowledge in the subject matter of the assertions being examined. B. An understanding of the auditee's internal controls. C. Sufficient evidence for the conclusions expressed in an attestation report. D. Independence in mental attitude.

45. Which of the following concepts is least related to the standard of due care? A. Independence in fact B. Professional skepticism C. Prudent auditor D. Reasonable assurance

46. The evidence considered most appropriate by auditors is best described as A. Internal documents such as sales invoice copies produced under conditions of strong internal control. B. Written representations made by the president of the entity. C. Documentary evidence obtained directly from independent external sources. D. Direct personal knowledge obtained through physical observation and mathematical recalculation.

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47. Auditors' understanding of the internal control in an entity contributes information for A. Determining whether members of the audit team have the required competence and capabilities to perform the audit. B. Ascertaining the independence in mental attitude of members of the audit team. C. Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. D. Planning the nature, timing, and extent of further audit procedures on an audit.

48. Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? A. Acceptance and continuance of clients. B. Engagement performance. C. Monitoring. D. Relevant ethical requirements.

49. Which of the following standards is not correctly associated with its rule-‐making body? A. Public Company Accounting Oversight Board, Auditing Standards B. Governmental Accounting Standards Board, Government Auditing Standards C. Auditing Standards Board, Statements on Auditing Standards D. International Auditing and Assurance Standards Board, International Statements on Auditing

50. Kramer, CPA consulted with an independent appraiser regarding the valuation of fine art for a not-‐for-‐profit museum. Consultation with a specialist in this case would A. Be considered proper due care. B. Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement. C. Not be considered a violation of GAAS because GAAS does not apply to not-‐for-‐profit entities. D. None of the above.

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51. Which of the following topics is not addressed in the auditors' report for a public entity? A. Responsibilities of the auditor and management in the financial reporting process. B. Absolute assurance regarding the fairness of the entity's financial statements in accordance with the applicable financial reporting framework (e.g., GAAP). C. A description of an audit engagement. D. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.

52. Which of the following is a conceptual difference between attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements. B. The requirement that the practitioner be independent is not required under attestation standards. C. The attestation standards do not permit an attestation engagement to examine prospective "what-‐if" financial statements. D. Requirements related to evidence are not included in the attestation standards.

Questions also found in Study Guide

53. The attestation standards are a general set of standards intended to guide work in A. Audits of financial statements. B. Financial forecasts and prospective financial information. C. Areas other than audits of financial statements. D. Understanding internal control.

54. Statements on Auditing Standards (SASs) are considered to be A. Specialized to obtain evidence to render an opinion. B. Detailed interpretations of the fundamental principles. C. Standards for preparation of financial statements. D. Standards to govern the quality of a specific firm's audit practice.

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55. Which of the following is not a subject related to the performance principle of GAAS? A. Risk of material misstatement B. Planning and supervision C. Sufficient appropriate evidence D. Due care

56. Which of the following statements is true for attestation standards, but not for the fundamental principles of generally accepted auditing standards? A. The practitioner or practitioners must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users. B. The work shall be adequately planned and assistants, if any, are to be properly supervised. C. Due care shall be exercised. D. A sufficient understanding of the internal control is to be obtained.

57. The quality control of personnel management in a public accounting firm includes which of the following? A. Supervision appropriate for the competencies of the personnel assigned to the work is important. B. Professional development continuing education should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities. C. People at all organizational levels must maintain independence in fact and appearance. D. When accepting and continuing client relationships, firms should consider their own competence.

58. Which of the following is not an implicit message in the opinion paragraph in the auditors' unqualified opinion? A. The accounting principles in the financial statements have general acceptance. B. The accounting principles used by the entity are appropriate in the circumstances. C. The audit was performed in accordance with generally accepted auditing standards. D. The financial statements are accurate within practical materiality limits.

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59. Auditors' opinions on statements "taken as a whole" would not include A. Disclaimers of opinion. B. Adverse opinions. C. Qualified opinions. D. Unqualified opinions.

60. The opinion paragraph of the auditors' standard report includes a statement that A. The financial statements are the responsibility of management. B. The audit was conducted in accordance with generally accepted auditing standards. C. The audit provides a reasonable basis for an opinion. D. The financial statements are presented in conformity with generally accepted accounting principles.

61. The auditors' standard report should be dated with the date A. The report was delivered to the client. B. When all significant procedures have been completed and auditors have gathered sufficient appropriate evidence. C. When the client's fiscal year ended. D. When the audit was completely reviewed by supervisory personnel.

62. To ensure that a public accounting firm is providing services that conform to professional standards, the firm should follow A. The performance principle of GAAS. B. Its system of quality controls. C. Generally accepted accounting principles. D. International auditing standards.

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Matching Questions

63. For each of the matters below, indicate through the appropriate letter the fundamental principle to which the matter is most closely related.

1. Responsibilities principle Maintaining professional skepticism. ____ 2. Responsibilities principle

An auditors' overall conclusion of the fairness of the client's financial statements. ____

3. Reporting principle The use of an audit plan to identify audit procedures

to be performed during the engagement. ____ 4. Performance principle

Auditors' assessment of the risk of material misstatement. ____

5. Performance principle

Accounting firm policies with respect to the level of expected continuing professional education. ____


Expressing an opinion in accordance with the auditor's findings. ____

7. Reporting principle Proper supervision of assistants on the audit. ____


Auditors' requests to obtain bank statements directly from financial institutions with whom the client does

business. ____ 9. Reporting principle An expression that an opinion cannot be expressed. ____ 10. Performance principle

Determining and applying an appropriate materiality level. ____


Question also Found in Study Guide

64. Auditors may be independent in fact but not independent in appearance. True False

65. Standards for accountants in public practice are limited to auditing services. True False

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66. The attestation standards provide guidance for a wide variety of attestation engagements. True False

67. The AICPA's Generally Accepted Auditing Standards must be followed on all audit engagements. True False

68. The reporting principle relates to a firm's system of quality control criteria for conducting an audit. True False

69. Auditors cannot effectively satisfy the responsibilities principle requiring due care if they have not also satisfied the performance principle. True False

70. Auditing procedures are quality guides that are less specific than auditing standards. True False

71. Auditing procedures are the same as auditing standards. True False

72. The concept of due care requires auditors to observe the performance, responsibilities and reporting principles. True False

73. Attestation standards require the practitioner to obtain a sufficient understanding of the client's internal control. True False

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74. The performance principle sets forth the quality criteria for conducting an audit. True False

75. Auditors of entities registered with the Securities and Exchange Commission are required to register with the Public Company Accounting Oversight Board (PCAOB). True False

76. Control risk is the probability that a material misstatement (error or fraud) could occur and not be prevented or detected on a timely basis by the entity's external auditors. True False

77. Evidence that is considered "appropriate" in auditing means that all underlying accounting data and corroborating information must be absolutely compelling to auditors. True False

78. Even in the audit of historical cost financial statements, auditors may have to make inferences about the future. True False

79. The contents of the auditors' report are guided exclusively by the reporting principle of GAAS. True False

80. The auditors' standard report should always make direct reference to consistency and disclosure. True False

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81. The auditors' standard report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. True False

82. Evidence is considered appropriate when it is both valid and relevant. True False

83. The statement on quality control standards No. 7 notes that the purpose of a system of quality control is to provide reasonable assurance that the firm and its personnel issue reports that are appropriate under the circumstances. True False

Fill in the Blank Questions

Question also found in Study Guide

84. The _____________________________ standards are a general set of standards to guide attestation engagements in areas other than audits of financial statements. ________________________________________

85. Audits of historical financial statements are guided by a broad set of principles referred to as _______________________ _________________________ _____________________________ _____________________________. ________________________________________

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86. Attestation reporting is different because attestation engagements related to nonfinancial information do not require information to be presented in accordance with _____________________________ _____________________________ _____________________________ _____________________________. ________________________________________

87. The AICPA's fundamental principles of generally accepted auditing standards are classified in three categories: _______________________ principle, _______________________ principle, and the _____________________________ principle. ________________________________________

88. A(n) _____________________________ _____________________________ is a list of auditing procedures that will be performed during the engagement to gather sufficient appropriate evidence. ________________________________________

89. The responsibilities principle of GAAS highlights the importance of complying with ethical requirements, including those pertaining to __________________________ and _____________________________. ________________________________________

90. The three aspects of practical independence are _____________________________ independence, _____________________________ independence, and _____________________________ independence. ________________________________________

91. The concept of _____________________________ relates to financial statement users' perceptions of auditors' independence. ________________________________________

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92. _____________________________ ________________________ reflects a level of performance that would be exercised by reasonable auditors in similar circumstances. ________________________________________

93. Since audit samples are used, audit evidence is considered to be _____________________________, rather than _____________________________. ________________________________________

94. The auditors' report must state whether the financial statements are presented in accordance with __________________________ _____________________________ _____________________________ _____________________________. ________________________________________

95. Under the reporting principle of GAAS, the auditor expresses an opinion in accordance with the ___________________ ______________. ________________________________________

96. Under the reporting principle of GAAS, the report will contain either an expression of _____________________________ regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. ________________________________________

97. An overall opinion that the financial statements present the financial condition, results of operations, and cash flows according to generally accepted accounting principles is a(n) _____________________________ opinion. ________________________________________

98. If a material departure from GAAP is noted, auditors can choose between a(n) __________________________ opinion or a(n) ___________________________ opinion. ________________________________________

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99. Auditors' indication that no opinion is given is referred to as a(n) _______________________ ___________________________________________ ________________________________________

100. The _____________________________ paragraph of the auditors' report declares that the audit was conducted in accordance with generally accepted _________________________________________________________ ________________________________________

101. A(n) _____________________________ _____________________________ is a study of an accounting firm's quality control policies and procedures, followed by a report on the firm's quality of audit practice in accordance with the system of quality controls. ________________________________________

102. The _____________________________ _____________________________ Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). ________________________________________

103. The PCAOB has two primary roles: _____________________________ and _____________________________. ________________________________________

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Essay Questions

104. Distinguish between attestation standards and the fundamental principles of generally accepted auditing standards by identifying and describing major differences between the two sets of standards.

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105. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan. Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything -‐ it will only make us go over the budget." When Alan came to the client near the end of field Work, one assistant was concerned that no inventory observation was done at the out-‐of-‐town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-‐town stores only). Happy Time had only one out-‐of-‐town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager. Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with these standards? Explain.

Matching Questions


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106. Using I (introductory), S (scope), O (opinion), A (additional), or N (none), indicate the paragraph in which the following statements or topics would be included in the auditors' report.

1. none The titles of the financial statements examined by the

auditors. ____

2. none A description of any scope limitation(s) encountered during

the audit. ____

3. introductory A statement that auditors were independent with respect to

the entity. ____

4. additional The auditors' conclusion with respect to the fairness of the

entity's financial statements. ____

5. opinion A statement that an audit was conducted in accordance with

generally accepted auditing standards. ____

6. opinion A statement that the entity's management is responsible for

the fairness of the financial statements. ____

7. introductory A description of an audit, which includes examining evidence

in support of the financial statements. ____ 8. scope Reference to generally accepted accounting principles. ____

9. scope A description of any specific departures from GAAP noted

during the audit that were material. ____

10. additional A statement that the financial statements were consistently

prepared compared to those of prior period(s). ____

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Chapter 02 Professional Standards Answer Key


1. The attestation standards of reporting do not require the attestation report to include a statement that A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria. B. Indicates that the practitioner has significant reservations about the engagement. C. Identifies the subject matter or assertion being reported on. D. Indicates that the accountant assumes no responsibility to update the report.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

2. Control risk is A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B. The probability that a material misstatement could occur and not be detected by auditors' procedures. C. The risk that auditors will not be able to complete the audit on a timely basis. D. The risk that auditors will not properly control the staff on the audit engagement.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

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3. The responsibilities principle under generally accepted auditing standards does not include which of the following? A. Competence and capabilities. B. Independent attitude. C. Due care. D. Planning and supervision.

Original


4. Which of the following types of auditors' reports does not require an explanatory paragraph to support the opinion? A. Unqualified opinion. B. Adverse opinion. C. Qualified opinion. D. Disclaimer of opinion.

Original

AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Easy

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5. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? A. Lending credibility to a client's financial statements. B. Using statistical sampling techniques. C. Acceptance and continuance of clients. D. Membership in the Center for Public Company Audit Firms (CPCAF).

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium

6. Which of the following presumptions does not relate to the reliability of audit evidence? A. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements. B. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Comprehension Difficulty: Hard

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7. An important role of the Public Company Accounting Oversight Board (PCAOB) is to oversee the A. Issuance of statements by the Financial Accounting Standards Board. B. Preparation and grading of the Uniform CPA Examination. C. Peer review of member firms of the Private Companies Practice Section. D. Regulation of firms that audit public companies.

Original


8. Audit evidence is usually considered sufficient when A. It is reliable. B. There is enough quantity to afford a reasonable basis for an opinion on financial statements. C. It has the qualities of being relevant, objective, and free from unknown bias. D. It has been obtained through random selection methods.

AICPA


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9. Which of the following is not considered a type of audit evidence? A. The company's trial balance. B. Auditors' calculations. C. Physical observation. D. Verbal statements made by client personnel.

Original


10. The AICPA attestation standards differ from the AICPA responsibilities principle, performance principle and reporting principle in that: A. The attestation standards contain no requirement to obtain an understanding of the entity and assess the risk of material misstatement. B. The attestation standards do not require competence and capabilities. C. The attestation standards do not require planning for attestation engagements or supervision of accountants and consultants who perform the work. D. The attestation standards do not require a report that states the character of the engagement.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Hard

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11. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: A. Certify the correctness of Camden's financial statements. B. Make a complete examination of Camden's records and verify all of Camden's transactions. C. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

Original


12. Auditors try to achieve independence in appearance in order to: A. Maintain public confidence in the profession. B. Become independent in fact. C. Comply with the responsibilities principle. D. Maintain an unbiased mental attitude.

Original

AACSB: Ethics AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium

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13. The independent auditors' plan prepared prior to the start of field work is appropriately considered documentation of A. Planning. B. Supervision. C. Information evaluation. D. Quality assurance.

Original


14. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's accounting staff held in private. B. Inspection of pre-‐numbered client shipping documents. C. Inspection of bank statements obtained directly from the client's financial institution. D. Analytical procedures performed by auditors on the client's trial balance.

AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Hard

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15. Which of the following is not an attestation standard? A. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report. B. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement. C. The practitioner must adequately plan the work and must properly supervise any assistants. D. A sufficient understanding of the client's internal controls shall be obtained to plan the engagement.

AICPA


16. Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. C. An auditor on the engagement owns a financial interest in the stock of the client. D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

Original

AACSB: Ethics AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

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17. A vendor's invoice received and held by the client would be considered what type of evidence? A. External. B. Internal. C. External-‐internal. D. Written representation.

Original


18. Which of the following statements is generally correct about the appropriateness of audit evidence? A. Auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be reliable, audit evidence must be either valid or relevant, but need not be both. C. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on client financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Medium

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19. The standard auditors' report refers to GAAS and GAAP in which paragraph? A. GAAS: Scope only; GAAP: Opinion only B. GAAS: Introductory only; GAAP: Scope and opinion C. GAAS: Introductory and scope; GAAP: Opinion only D. GAAS: Introductory only; GAAP: All paragraphs

AICPA

AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Medium

20. Which of the following is not included in the auditors' standard report representing an unqualified opinion? A. A brief indication of the responsibility of auditors and management for the financial statements. B. An indication that all appropriate disclosures have been made and included in the financial statements. C. An indication that the audit was conducted in accordance with standards established by the PCAOB. D. The auditors' opinion on the fairness of the financial statements.

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21. Internal evidence A. Is obtained directly from third parties independent of the client. B. Originates outside of the client's system but has been received and processed by the client. C. Consists of documents that are produced, used, and stored within the client's information system. D. Consists of representations made by the client's officers, directors, owners, and employees.

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22. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable form of audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective system of internal control provides more assurance about the reliability of audit evidence.

AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Hard

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23. When auditors do not mention consistency in the auditors' report, a reader of the financial statements may infer A. That the applicable financial reporting framework (e.g., GAAP) has been consistently observed in the current period in relation to the preceding period. B. That no material departure from the applicable financial reporting framework (e.g., GAAP) has been detected. C. That no reclassification of items or change in classifications has occurred. D. Nothing about application of accounting principles within the period.

AICPA

AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Hard

24. The auditors' responsibility to express an opinion on the financial statements is A. Implicitly represented in the auditors' standard report. B. Explicitly represented in the introductory paragraph of the auditors' standard report. C. Explicitly represented in the scope paragraph of the auditors' standard report. D. Explicitly represented in the opinion paragraph of the auditors' standard report.

AICPA

AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Hard

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25. Which of the following is not a concept from the performance principle under generally accepted auditing standards? A. The auditor must plan the work and properly supervise any assistants. B. The auditor must express an opinion in accordance with the auditor's findings. C. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. D. The auditor must determine and apply an appropriate materiality level throughout the audit.

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26. Under generally accepted auditing standards, which of the following reflects a concept related to the responsibilities principle? A. The initial planning of the audit engagement should occur with the audit partner, manager, senior, and client personnel. B. The confirmation of accounts receivable should occur on each audit. C. The completion of an internal control questionnaire. D. Maintaining professional skepticism and exercising professional judgment.

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27. Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? A. Auditing procedures. B. Auditing standards. C. Due care. D. System of quality control.

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28. Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors perform the engagement with prudent auditors, but not expert auditors. B. Auditors obtain expertise in their client's industry as they are conducting the audit examination. C. Auditors are directly involved with a client manager in a strategic decision-‐making capacity. D. Auditors fail to document their assessment of control risk following their study of internal control.

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AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

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29. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? A. Auditors would be required to rely on external (rather than internal) forms of evidence. B. Auditors would be required to perform procedures at interim periods, rather than at year end. C. Auditors would be required to confirm a larger number of customer accounts receivable balances. D. Auditors would be required to obtain more evidence through direct personal observation.

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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Hard

30. As it relates to audit evidence, appropriateness refers to the A. Originality of evidence gathered. B. Quality of evidence gathered. C. Quantity of evidence gathered. D. Timeliness of evidence gathered.

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31. Which of the following information would not be included in the auditors' standard report? A. The names of the financial statements audited. B. A description of the nature of an audit. C. An indication that all necessary disclosures have been presented. D. An opinion on the entity's financial statements.

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32. The primary purpose of the auditors' study of internal control for a nonpublic entity is: A. To provide constructive suggestions to the client for improving its internal control. B. To report on internal control as required by Auditing Standard No. 5. C. To identify and detect fraud and irregularities perpetrated by client personnel. D. To determine the nature, timing, and extent of substantive procedures.

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AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

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33. Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)? A. Unqualified or disclaimer of opinion. B. Qualified or disclaimer of opinion. C. Unqualified or adverse. D. Qualified or adverse.

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34. Which of the following is most closely related to system of quality control regarding engagement performance? A. Requiring all of the firm's personnel to provide a summary of their investments and other financial relationships. B. Evaluating the firm's system of quality controls on a periodic basis. C. Utilizing standardized audit plans and audit documentation on engagements in a particular industry. D. Evaluating the firm's ability to provide a quality audit to a prospective client.

Original


Question also found in textbook

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35. Which of the following categories of principles is most closely related to gathering audit evidence? A. Performance. B. Reasonable assurance. C. Reporting. D. Responsibilities.

Original


36. To exercise due care, an accountant should A. Take continuing professional education classes. B. Report whether the financial statements are in accordance with the applicable financial reporting framework (e.g., GAAP, IFRS). C. Gather enough audit evidence to have complete assurance that there is enough support for the accountant's opinion on the financial statements. D. Conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis.

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37. One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following A. Generally Accepted Auditing Standards (GAAS). B. Standards within a system of quality control. C. Generally Accepted Accounting Practices (GAAP). D. International Auditing Standards.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

38. Which of the following best demonstrates the concept of professional skepticism? A. Relying more extensively on external evidence rather than internal evidence. B. Focusing on items that have a more significant quantitative effect on the entity's financial statements. C. Critically assessing verbal evidence received from the entity's management. D. Evaluating potential financial interests held by auditors in the client.

Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Medium

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39. The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is A. To determine the nature, timing, and extent of further audit procedures to be performed. B. To make consulting suggestions to the management. C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. D. To determine whether the entity has changed any accounting principles.

Original


40. Ordinarily, what source of evidence should least affect audit conclusions? A. External. B. Inquiry of management. C. Auditor prepared. D. Inquiry of entity legal counsel.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Easy

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41. The most persuasive evidence regarding the existence of newly acquired computer equipment is A. Inquiry of management. B. Documentation prepared externally. C. Observation of auditee's procedures. D. Physical observation.

Original


42. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of pre-‐numbered client purchase orders filed in the vouchers payable department. C. Inspection of vendor sales invoices received from client personnel. D. Inspection of bank statements obtained directly from the client's financial institution.

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43. Breaux & Co., CPAs require that all audit documentation contain the initials of the preparer and the reviewer in the top right-‐hand corner. This procedure provides evidence of Breaux & Co., CPAs' professional concern regarding which of the following? A. Independence. B. Adequate competence and capabilities. C. Adequate planning and supervision. D. Gathering sufficient appropriate evidence.

Original


44. The attestation standards do not contain a requirement that auditors obtain A. Adequate knowledge in the subject matter of the assertions being examined. B. An understanding of the auditee's internal controls. C. Sufficient evidence for the conclusions expressed in an attestation report. D. Independence in mental attitude.

Original


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45. Which of the following concepts is least related to the standard of due care? A. Independence in fact B. Professional skepticism C. Prudent auditor D. Reasonable assurance

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Comprehension Difficulty: Medium

46. The evidence considered most appropriate by auditors is best described as A. Internal documents such as sales invoice copies produced under conditions of strong internal control. B. Written representations made by the president of the entity. C. Documentary evidence obtained directly from independent external sources. D. Direct personal knowledge obtained through physical observation and mathematical recalculation.

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47. Auditors' understanding of the internal control in an entity contributes information for A. Determining whether members of the audit team have the required competence and capabilities to perform the audit. B. Ascertaining the independence in mental attitude of members of the audit team. C. Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. D. Planning the nature, timing, and extent of further audit procedures on an audit.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Medium

48. Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? A. Acceptance and continuance of clients. B. Engagement performance. C. Monitoring. D. Relevant ethical requirements.

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49. Which of the following standards is not correctly associated with its rule-‐making body? A. Public Company Accounting Oversight Board, Auditing Standards B. Governmental Accounting Standards Board, Government Auditing Standards C. Auditing Standards Board, Statements on Auditing Standards D. International Auditing and Assurance Standards Board, International Statements on Auditing

Original


50. Kramer, CPA consulted with an independent appraiser regarding the valuation of fine art for a not-‐for-‐profit museum. Consultation with a specialist in this case would A. Be considered proper due care. B. Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement. C. Not be considered a violation of GAAS because GAAS does not apply to not-‐for-‐profit entities. D. None of the above.

Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Medium

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51. Which of the following topics is not addressed in the auditors' report for a public entity? A. Responsibilities of the auditor and management in the financial reporting process. B. Absolute assurance regarding the fairness of the entity's financial statements in accordance with the applicable financial reporting framework (e.g., GAAP). C. A description of an audit engagement. D. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.

Original


52. Which of the following is a conceptual difference between attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements. B. The requirement that the practitioner be independent is not required under attestation standards. C. The attestation standards do not permit an attestation engagement to examine prospective "what-‐if" financial statements. D. Requirements related to evidence are not included in the attestation standards.

Original


Questions also found in Study Guide

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53. The attestation standards are a general set of standards intended to guide work in A. Audits of financial statements. B. Financial forecasts and prospective financial information. C. Areas other than audits of financial statements. D. Understanding internal control.

Original


54. Statements on Auditing Standards (SASs) are considered to be A. Specialized to obtain evidence to render an opinion. B. Detailed interpretations of the fundamental principles. C. Standards for preparation of financial statements. D. Standards to govern the quality of a specific firm's audit practice.

Original


55. Which of the following is not a subject related to the performance principle of GAAS? A. Risk of material misstatement B. Planning and supervision C. Sufficient appropriate evidence D. Due care

Original


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56. Which of the following statements is true for attestation standards, but not for the fundamental principles of generally accepted auditing standards? A. The practitioner or practitioners must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users. B. The work shall be adequately planned and assistants, if any, are to be properly supervised. C. Due care shall be exercised. D. A sufficient understanding of the internal control is to be obtained.

Original


57. The quality control of personnel management in a public accounting firm includes which of the following? A. Supervision appropriate for the competencies of the personnel assigned to the work is important. B. Professional development continuing education should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities. C. People at all organizational levels must maintain independence in fact and appearance. D. When accepting and continuing client relationships, firms should consider their own competence.

Original

AACSB: Analytic AICPA BB: Resource Management AICPA FN: Research Bloom's: Comprehension Difficulty: Medium

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58. Which of the following is not an implicit message in the opinion paragraph in the auditors' unqualified opinion? A. The accounting principles in the financial statements have general acceptance. B. The accounting principles used by the entity are appropriate in the circumstances. C. The audit was performed in accordance with generally accepted auditing standards. D. The financial statements are accurate within practical materiality limits.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Reporting Bloom's: Communication Difficulty: Medium

59. Auditors' opinions on statements "taken as a whole" would not include A. Disclaimers of opinion. B. Adverse opinions. C. Qualified opinions. D. Unqualified opinions.

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60. The opinion paragraph of the auditors' standard report includes a statement that A. The financial statements are the responsibility of management. B. The audit was conducted in accordance with generally accepted auditing standards. C. The audit provides a reasonable basis for an opinion. D. The financial statements are presented in conformity with generally accepted accounting principles.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Reporting Bloom's: Communication Difficulty: Easy

61. The auditors' standard report should be dated with the date A. The report was delivered to the client. B. When all significant procedures have been completed and auditors have gathered sufficient appropriate evidence. C. When the client's fiscal year ended. D. When the audit was completely reviewed by supervisory personnel.

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AACSB: Analytic AICPA BB: Legal AICPA FN: Reporting Bloom's: Communication Difficulty: Medium

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62. To ensure that a public accounting firm is providing services that conform to professional standards, the firm should follow A. The performance principle of GAAS. B. Its system of quality controls. C. Generally accepted accounting principles. D. International auditing standards.

Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy Matching Questions

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63. For each of the matters below, indicate through the appropriate letter the fundamental principle to which the matter is most closely related.

1. Responsibilities principle Maintaining professional skepticism. 1 2. Responsibilities principle

An auditors' overall conclusion of the fairness of the client's financial statements. 3

3. Reporting principle The use of an audit plan to identify audit procedures to be

performed during the engagement. 4 4. Performance principle

Auditors' assessment of the risk of material misstatement. 4


Accounting firm policies with respect to the level of expected continuing professional education. 1


Expressing an opinion in accordance with the auditor's findings. 3

7. Reporting principle Proper supervision of assistants on the audit. 4


Auditors' requests to obtain bank statements directly from financial institutions with whom the client does

business. 4 9. Reporting principle An expression that an opinion cannot be expressed. 3 10. Performance principle

Determining and applying an appropriate materiality level. 4

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium True / False Questions


64. Auditors may be independent in fact but not independent in appearance. TRUE

65. Standards for accountants in public practice are limited to auditing services. FALSE

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66. The attestation standards provide guidance for a wide variety of attestation engagements. TRUE

67. The AICPA's Generally Accepted Auditing Standards must be followed on all audit engagements. TRUE

68. The reporting principle relates to a firm's system of quality control criteria for conducting an audit. FALSE

69. Auditors cannot effectively satisfy the responsibilities principle requiring due care if they have not also satisfied the performance principle. TRUE

70. Auditing procedures are quality guides that are less specific than auditing standards. FALSE

71. Auditing procedures are the same as auditing standards. FALSE

72. The concept of due care requires auditors to observe the performance, responsibilities and reporting principles. TRUE

73. Attestation standards require the practitioner to obtain a sufficient understanding of the client's internal control. FALSE

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74. The performance principle sets forth the quality criteria for conducting an audit. TRUE

75. Auditors of entities registered with the Securities and Exchange Commission are required to register with the Public Company Accounting Oversight Board (PCAOB). TRUE

76. Control risk is the probability that a material misstatement (error or fraud) could occur and not be prevented or detected on a timely basis by the entity's external auditors. FALSE

77. Evidence that is considered "appropriate" in auditing means that all underlying accounting data and corroborating information must be absolutely compelling to auditors. FALSE

78. Even in the audit of historical cost financial statements, auditors may have to make inferences about the future. TRUE

79. The contents of the auditors' report are guided exclusively by the reporting principle of GAAS. FALSE

80. The auditors' standard report should always make direct reference to consistency and disclosure. FALSE

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81. The auditors' standard report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. TRUE

82. Evidence is considered appropriate when it is both valid and relevant. TRUE

83. The statement on quality control standards No. 7 notes that the purpose of a system of quality control is to provide reasonable assurance that the firm and its personnel issue reports that are appropriate under the circumstances. TRUE

Fill in the Blank Questions

Question also found in Study Guide

84. The _____________________________ standards are a general set of standards to guide attestation engagements in areas other than audits of financial statements. attestation

85. Audits of historical financial statements are guided by a broad set of principles referred to as _______________________ _________________________ _____________________________ _____________________________. generally accepted auditing standards

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86. Attestation reporting is different because attestation engagements related to nonfinancial information do not require information to be presented in accordance with _____________________________ _____________________________ _____________________________ _____________________________. generally accepted accounting principles

87. The AICPA's fundamental principles of generally accepted auditing standards are classified in three categories: _______________________ principle, _______________________ principle, and the _____________________________ principle. responsibilities, performance, reporting

88. A(n) _____________________________ _____________________________ is a list of auditing procedures that will be performed during the engagement to gather sufficient appropriate evidence. audit plan

89. The responsibilities principle of GAAS highlights the importance of complying with ethical requirements, including those pertaining to __________________________ and _____________________________. independence, due care

90. The three aspects of practical independence are _____________________________ independence, _____________________________ independence, and _____________________________ independence. programming, investigative, reporting

91. The concept of _____________________________ relates to financial statement users' perceptions of auditors' independence. independence in appearance

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92. _____________________________ ________________________ reflects a level of performance that would be exercised by reasonable auditors in similar circumstances. Due care

93. Since audit samples are used, audit evidence is considered to be _____________________________, rather than _____________________________. sufficient, absolute

94. The auditors' report must state whether the financial statements are presented in accordance with __________________________ _____________________________ _____________________________ _____________________________. generally accepted accounting principles

95. Under the reporting principle of GAAS, the auditor expresses an opinion in accordance with the ___________________ ______________. auditor's findings

96. Under the reporting principle of GAAS, the report will contain either an expression of _____________________________ regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. opinion

97. An overall opinion that the financial statements present the financial condition, results of operations, and cash flows according to generally accepted accounting principles is a(n) _____________________________ opinion. unqualified

98. If a material departure from GAAP is noted, auditors can choose between a(n) __________________________ opinion or a(n) ___________________________ opinion. qualified, adverse

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99. Auditors' indication that no opinion is given is referred to as a(n) _______________________ ___________________________________________ disclaimer of opinion

100. The _____________________________ paragraph of the auditors' report declares that the audit was conducted in accordance with generally accepted _________________________________________________________

Answer: scope, auditing standards

101. A(n) _____________________________ _____________________________ is a study of an accounting firm's quality control policies and procedures, followed by a report on the firm's quality of audit practice in accordance with the system of quality controls. peer review

102. The _____________________________ _____________________________ Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). Sarbanes-‐Oxley

103. The PCAOB has two primary roles: _____________________________ and _____________________________. standard setting, monitoring

Essay Questions

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104. Distinguish between attestation standards and the fundamental principles of generally accepted auditing standards by identifying and describing major differences between the two sets of standards.

1. Attestation standards do not attempt to describe one type of engagement (such as a GAAS audit) or identify one type of information on which assurance is provided (such as the financial statements). 2. In addition to general training and knowledge in the attest (audit) function, attestation standards require that practitioners have adequate knowledge of the subject matter to which the attestation engagement relates. (Because of the wide range of attestation engagements, this is a requirement that is necessary for attestation engagements but not audit engagements). 3. Practitioners can only accept attestation engagements if the subject matter is capable of being assessed against established criteria (since financial statements can always be assessed against GAAP, there is no requirement such as this in GAAS). 4. Attestation standards do not require auditors to obtain an understanding of the client to assess the risk of material misstatement. 5. Since attestation engagements may not depend upon one type of criteria (such as GAAP in an audit), information is evaluated based on "established or stated criteria". 6. Since attestation engagements may be conducted on a wide range of information, the use of the attestation report may be limited to specified individuals (the use of auditors' reports is generally available to any interested party).


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105. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan. Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything -‐ it will only make us go over the budget." When Alan came to the client near the end of field Work, one assistant was concerned that no inventory observation was done at the out-‐of-‐town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-‐town stores only). Happy Time had only one out-‐of-‐town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager. Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with these standards? Explain.

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According to the performance principle, to obtain reasonable assurance, which is high but not an absolute level of assurance, the auditor: 1. Plans the work and properly supervises any assistants. 2. Determines and applies appropriate materiality level or levels throughout the audit. 3. Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control 4. Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks. The Mellow Markets audit does not comply with these standards. With respect to planning, the failure to prepare an appropriate audit plan and lack of time and attention the inexperienced staff received from Alan violate the performance principle. In addition, there is no indication that any steps were taken to either understand the client's business or its internal control. Finally, these deficiencies suggest that the appropriate procedures were not performed to collect sufficient appropriate evidence. Further, the lack of a relevant plan to observe inventory in other cities and Alan's decision to limit inventory procedures to agreeing the inventory sheets and the general ledger inventory balance demonstrates the failure to gather sufficient appropriate evidence and represents an overall violation of the performance principle.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Hard Matching Questions


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106. Using I (introductory), S (scope), O (opinion), A (additional), or N (none), indicate the paragraph in which the following statements or topics would be included in the auditors' report.

1. none The titles of the financial statements examined by the auditors. 3

2. none A description of any scope limitation(s) encountered during the

audit. 4

3. introductory A statement that auditors were independent with respect to the

entity. 1

4. additional The auditors' conclusion with respect to the fairness of the

entity's financial statements. 5

5. opinion A statement that an audit was conducted in accordance with

generally accepted auditing standards. 8

6. opinion A statement that the entity's management is responsible for the

fairness of the financial statements. 3

7. introductory A description of an audit, which includes examining evidence in

support of the financial statements. 8 8. scope Reference to generally accepted accounting principles. 5

9. scope A description of any specific departures from GAAP noted during

the audit that were material. 4

10. additional A statement that the financial statements were consistently

prepared compared to those of prior period(s). 1 AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Hard

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Chapter 03

Professional Ethics True / False Questions

1. The Rules portion of the AICPA Code of Professional Conduct must be followed by only those members in private practice. True False

2. The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA. True False

3. An immaterial loan from the CPA to an officer of a client impairs the independence of the CPA. True False

4. Financial interests of a CPA's nondependent children are attributed directly to the CPA. True False

5. Statements on Accounting and Review Services are enforceable under the AICPA Code of Professional Conduct. True False

6. CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax. True False

7. A CPA may receive a commission for recommending a particular computer system to an audit client. True False

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8. The communications between CPAs and their clients are privileged under federal law. True False

9. CPAs can advertise the fees only for their nonattest services. True False

10. The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors. True False


11. ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard? A. Staff assistant on the audit. B. An audit partner in the Eloi office. C. A tax partner in Phoenix who performs no attest services for ABC Company or for any other clients. D. The partner in charge of Willingham CPAs (she does no work on the ABC Company Audit).

12. Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? A. The auditor is not independent. B. The auditor is independent if he or she is able to maintain a level of professional detachment. C. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. D. The auditor cannot audit the financial statements since a lack of integrity exists.

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13. Auditors are periodically punished for holding an investment in a client. This violates which ethical rule? A. Integrity. B. Independence. C. Non compliance with GAAP. D. Confidentiality.

14. The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-‐independence exists? A. AICPA ethics examiner. B. Peer. C. PCAOB inspector. D. Reasonably informed third party.

15. Which of the following is not a broad category of threat to auditor independence? A. Familiarity. B. Safeguards implemented by the client. C. Financial self interest. D. Undue Influence.

16. A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true? A. Appearance of independence may be lacking. B. The small CPA firm does not have the proficiency to perform a larger audit. C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. D. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion.

17. Contingency fee based pricing of accounting services is: A. Always strictly prohibited in public accounting practice. B. Never restricted in public accounting practice. C. Prohibited for clients for whom attestation services are provided. D. Considered an act discreditable to the profession.

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18. Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic audit client in the Oklahoma City office of a national CPA firm? A. A partner in the Oklahoma City office owns an immaterial amount of stock in the client. B. A partner in the Jersey City office owns 7% of the client's stock. C. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client. D. A partner in the Chicago office is also the vice president of finance for the audit client.

19. Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? A. A close relative has a material investment in that client of which the CPA is not aware. B. A cousin has an immaterial investment in the client of which the CPA is aware. C. The CPA's father is president of the audit client. D. The CPA's spouse participates in a savings plan sponsored by the client.

20. AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that: A. A questioning mind reveals doubt as to independence. B. An unacceptable risk of non-‐independence exists. C. The accountant is definitely not independent. D. There is substantial cause for a legal finding of non-‐independence.

21. If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence the auditor should: A. Conclude that the threat is not significant unless proven so. B. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. C. Consider the threat from the perspective of a reasonable an informed third party who has knowledge of all the relevant information. D. Consult the Statements on Auditing Standards for guidance.

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22. Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence? A. Safeguards created by the profession, legislation, or regulation. B. Safeguards created to assure proper training within both the client and attest environment. C. Safeguards implemented by the attest client. D. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.

23. Which of the following statements is correct? A. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received. B. CPA working papers are the joint property of the CPA and the client. C. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid. D. CPA working papers that include copies of client's records are not available to third parties under any circumstances.

24. When a threat to independence arises an auditor should consider A. Alternative threats to a lack of independence. B. Available safeguards to independence. C. Global independence rules. D. Required lack of independence approaches.

25. Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work? A. Integrity. B. Competence C. Independence D. Keeping informed on current professional developments.

26. Which of the following types of employees must be independent of an audit client? A. Staff assistants assigned to the engagement. B. Senior auditors assigned to the office that performs the audit. C. Managers assigned to an office that does not participate in the engagement. D. All firm professionals, regardless of their position.

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27. Which of the following are not enforceable under the AICPA Code of Professional Conduct? A. Statements on Auditing Standards. B. Statements on Standards for Accounting and Review Services. C. Statements on Responsibilities in Tax Practice. D. Statements of Standards for Consulting Services.

28. The AICPA allows an auditor to perform which of the following services for an audit client: A. Performance of bookkeeping services for the client. B. Authorization of transactions for the client. C. Preparation of client source documents. D. Preparation and posting of journal entries without the client's approval.

29. Which of the following forms of organization is most likely to protect the personal assets of any partner or shareholder who has not been involved on an engagement resulting in litigation? A. Professional corporation. B. Limited liability partnership. C. Partnership. D. Subchapter M Incorporation

30. Jones & Company CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client? A. The client owes the firm for two prior years' audit fees. B. A partner in the CPA firm is the son of the president of the client. C. The wife of a partner in the firm has a small direct financial interest in the client. D. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

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31. Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under Rule 501 of the AICPA Code of Professional Conduct? A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so. B. Engaging in discriminatory employment practices. C. Robbing a convenience store. D. Knowingly signing a false tax return.

32. Which of the following forms of advertising would most likely to be considered to be a violation of Rule 502 of the AICPA Code of Professional Conduct? A. Advertising including the types of services offered and the standard fees for the services. B. Advertising including the experience of the firm's professional staff. C. Advertising including an indication that the firm has a close relationship with several tax court judges. D. Advertising including the percentage of the firm's staff that have CPA certificates.

33. If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except: A. Admonish the offending member. B. Suspend the offending member. C. Expel the offending member. D. Revoke the offending member's CPA certificate.

34. Which of the following acts by a CPA would be most likely to be a violation of the AICPA Code of Professional Conduct? A. Assisting a client in preparing a financial forecast. B. Forming a professional corporation to practice as a CPA. C. Accepting a fee in a tax matter relating to an administrative proceeding. D. A "covered member" owns an immaterial amount of stock in an audit client.

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35. In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3? A. The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement. B. The covered member continues to hold an immaterial indirect financial interest in the client. C. The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions. D. The covered member's spouse owns an immaterial amount of shares of common stock in the client.

36. Independence is required of a CPA performing: A. Audits, but not any other professional services. B. All attestation services, but not other professional services. C. All attestation and tax services, but not other professional services. D. All professional services.

37. A CPA should maintain objectivity and be free of conflicts of interest when performing: A. Audits, but not any other professional services. B. All attestation services, but not other professional services. C. All attestation and tax services, but not other professional services. D. All professional services.

38. Bill Pan, CPA, has posted the general ledger and has maintained the financial records of Zorko Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired?

A. Option A B. Option B C. Option C D. Option D

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39. In determining the scope and nature of services to be performed in public practice, a CPA firm should: A. Require independence for all services performed. B. Determine that the performance of all services is consistent with the firm's members' role as professionals. C. Have in place internal control procedures. D. Only perform accounting related services.

40. Independence of a CPA with respect to a client is not impaired if: A. The CPA has a loan to an officer of the client. B. The CPA has an immaterial direct interest in the client. C. The CPA is trustee for the client's pension plan. D. The CPA has an immaterial joint, closely held business investment with the client.

41. A CPA firm may not designate itself as "members of the AICPA" unless: A. All of its partners or shareholders are members of the Institute. B. All of its professional staff are members of the Institute. C. A majority of its professional staff are members of the Institute. D. At least one partner or shareholder is a member of the Institute.

42. While performing an audit an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed

through: A. Option A B. Option B C. Option C D. Option D

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43. Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued: A. Only to persons qualified to practice public accounting. B. Only to employees and officers of the firm. C. Only to persons qualified to practice as CPAs and members of their immediate families. D. To the general public.

44. Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of professional conduct and to establish a mechanism for enforcing observation of the code? A. A distinguishing mark of a profession is its acceptance of responsibility to the public. B. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. C. A requirement of most state laws calls for the profession to establish a code of ethics. D. An essential means of self-‐protection for the profession is the establishment of flexible ethical standards by the professions.

45. A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is: A. Considered acceptable by the AICPA Code of Professional Conduct. B. Ill advised since it would impair the CPA's independence with respect to the client. C. Considered discreditable to the profession. D. A violation of generally accepted auditing standards.

46. The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee was: A. Fixed by a public authority. B. Based on a price quotation submitted in competitive bidding. C. Based on performing work relating to judicial proceedings. D. Payable if the audit of the financial statements led to a loan.

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47. An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue? A. Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function. B. The decision as to loss of independence must be made by the client based on the facts of the particular case. C. The auditor should not make management decisions for an audit client. D. The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.

48. The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the: A. Actual fee would be substantially higher. B. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services. C. Fee was a competitive bid. D. CPA would not be independent.

49. The concept of materiality would be least important to an auditor when considering the: A. Decision whether to use positive or negative confirmations of accounts receivable. B. Adequacy of disclosure of a client's illegal act. C. Discovery of weaknesses in a client's internal control. D. Effects of a direct financial interest in the client upon the CPA's independence.

50. When an accountant is not independent, the accountant is precluded from issuing a: A. Compilation report. B. Review report. C. Management advisory report. D. Tax planning report.

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51. Competence as a certified public accountant includes all of the following except: A. Having the technical qualifications to perform an engagement. B. Possessing the ability to supervise and to evaluate the quality of staff work. C. Warranting the infallibility of the work performed. D. Consulting others if additional technical information is needed.

52. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by: A. The trial board of the AICPA. B. An investigative body of a state CPA society. C. A CPA-‐shareholder of the client corporation. D. An AICPA voluntary quality review body.

53. A client company has not paid its 20X3 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X4 audit, the 20X3 audit fees must be paid before the: A. 20X3 report is issued. B. 20X4 fieldwork is started. C. 20X4 report is issued. D. 20X5 fieldwork is started.

54. A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client? A. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. B. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child. C. No, because the CPA would not be considered to have a direct financial interest in the client. D. No, because the CPA would not be considered to have a material indirect financial interest in the client.

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55. A primary purpose for establishing a code of conduct within a professional organization is to: A. Reduce the likelihood that members of the profession will be sued for substandard work. B. Ensure that all members of the profession perform at approximately the same level of competence. C. Demonstrate acceptance of responsibility to the interests of those served by the profession. D. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.

56. An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: A. Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. B. Establish standards to follow for effective accounting practice. C. Provide a framework within which accounting policies could be effectively developed and executed. D. Outline criteria that can be utilized in conducting interviews of potential new accountants.

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Essay Questions

57. The following is a list of circumstances that might be faced by a public accounting firm. If the circumstance represents a violation of one of the rules of the AICPA Code of Professional Conduct, provide the title of the rule. Write "no violation" in the space if the circumstance does not represent a violation of a

rule.

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58. CPAs are allowed to advertise under the Rules of the AICPA Code of Professional Conduct. a. List the general guidelines regarding the nature of acceptable advertising. b. Describe two specific forms of unacceptable advertising.

59. The Sarbanes-‐Oxley Act of 2002 placed significant restrictions on the types of consulting that may be performed by auditors for their public company audit clients. a. List four types of services that are prohibited by the Act. b. List three types of general consulting activities that would the AICPA Code of Professional Conduct indicates impair the auditors' independence.

60. The AICPA's Code of Professional Conduct consists of two parts, Principles and Rules. a. Describe the purpose of each of the two parts. b. Describe the disciplinary action that may be taken against a member who violates the Code. c. Must the Rules be followed by members of the AICPA that are not in public practice? Explain your answer.

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Chapter 03 Professional Ethics Answer Key


1. The Rules portion of the AICPA Code of Professional Conduct must be followed by only those members in private practice. FALSE

Difficulty: Medium

2. The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA. TRUE

Difficulty: Medium

3. An immaterial loan from the CPA to an officer of a client impairs the independence of the CPA. TRUE

Difficulty: Medium

4. Financial interests of a CPA's nondependent children are attributed directly to the CPA. FALSE

Difficulty: Medium

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5. Statements on Accounting and Review Services are enforceable under the AICPA Code of Professional Conduct. TRUE

Difficulty: Easy

6. CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax. FALSE

Difficulty: Medium

7. A CPA may receive a commission for recommending a particular computer system to an audit client. FALSE

Difficulty: Easy

8. The communications between CPAs and their clients are privileged under federal law. FALSE

Difficulty: Easy

9. CPAs can advertise the fees only for their nonattest services. FALSE

Difficulty: Easy

10. The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors. FALSE

Difficulty: Easy

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11. ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard? A. Staff assistant on the audit. B. An audit partner in the Eloi office. C. A tax partner in Phoenix who performs no attest services for ABC Company or for any other clients. D. The partner in charge of Willingham CPAs (she does no work on the ABC Company Audit).

Difficulty: Hard

12. Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? A. The auditor is not independent. B. The auditor is independent if he or she is able to maintain a level of professional detachment. C. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. D. The auditor cannot audit the financial statements since a lack of integrity exists.

Difficulty: Medium

13. Auditors are periodically punished for holding an investment in a client. This violates which ethical rule? A. Integrity. B. Independence. C. Non compliance with GAAP. D. Confidentiality.

Difficulty: Easy

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14. The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-‐independence exists? A. AICPA ethics examiner. B. Peer. C. PCAOB inspector. D. Reasonably informed third party.

Difficulty: Medium

15. Which of the following is not a broad category of threat to auditor independence? A. Familiarity. B. Safeguards implemented by the client. C. Financial self interest. D. Undue Influence.

Difficulty: Easy

16. A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true? A. Appearance of independence may be lacking. B. The small CPA firm does not have the proficiency to perform a larger audit. C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. D. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion.

Difficulty: Easy

17. Contingency fee based pricing of accounting services is: A. Always strictly prohibited in public accounting practice. B. Never restricted in public accounting practice. C. Prohibited for clients for whom attestation services are provided. D. Considered an act discreditable to the profession.

Difficulty: Hard

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18. Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic audit client in the Oklahoma City office of a national CPA firm? A. A partner in the Oklahoma City office owns an immaterial amount of stock in the client. B. A partner in the Jersey City office owns 7% of the client's stock. C. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client. D. A partner in the Chicago office is also the vice president of finance for the audit client.

Difficulty: Hard

19. Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? A. A close relative has a material investment in that client of which the CPA is not aware. B. A cousin has an immaterial investment in the client of which the CPA is aware. C. The CPA's father is president of the audit client. D. The CPA's spouse participates in a savings plan sponsored by the client.

Difficulty: Medium

20. AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that: A. A questioning mind reveals doubt as to independence. B. An unacceptable risk of non-‐independence exists. C. The accountant is definitely not independent. D. There is substantial cause for a legal finding of non-‐independence.

Difficulty: Medium

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21. If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence the auditor should: A. Conclude that the threat is not significant unless proven so. B. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. C. Consider the threat from the perspective of a reasonable an informed third party who has knowledge of all the relevant information. D. Consult the Statements on Auditing Standards for guidance.

Difficulty: Hard

22. Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence? A. Safeguards created by the profession, legislation, or regulation. B. Safeguards created to assure proper training within both the client and attest environment. C. Safeguards implemented by the attest client. D. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.

Difficulty: Hard

23. Which of the following statements is correct? A. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received. B. CPA working papers are the joint property of the CPA and the client. C. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid. D. CPA working papers that include copies of client's records are not available to third parties under any circumstances.

Difficulty: Medium

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24. When a threat to independence arises an auditor should consider A. Alternative threats to a lack of independence. B. Available safeguards to independence. C. Global independence rules. D. Required lack of independence approaches.

Difficulty: Easy.

25. Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work? A. Integrity. B. Competence C. Independence D. Keeping informed on current professional developments.

Difficulty: Medium

26. Which of the following types of employees must be independent of an audit client? A. Staff assistants assigned to the engagement. B. Senior auditors assigned to the office that performs the audit. C. Managers assigned to an office that does not participate in the engagement. D. All firm professionals, regardless of their position.

Difficulty: Hard

27. Which of the following are not enforceable under the AICPA Code of Professional Conduct? A. Statements on Auditing Standards. B. Statements on Standards for Accounting and Review Services. C. Statements on Responsibilities in Tax Practice. D. Statements of Standards for Consulting Services.

Difficulty: Hard

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28. The AICPA allows an auditor to perform which of the following services for an audit client: A. Performance of bookkeeping services for the client. B. Authorization of transactions for the client. C. Preparation of client source documents. D. Preparation and posting of journal entries without the client's approval.

Difficulty: Hard

29. Which of the following forms of organization is most likely to protect the personal assets of any partner or shareholder who has not been involved on an engagement resulting in litigation? A. Professional corporation. B. Limited liability partnership. C. Partnership. D. Subchapter M Incorporation

Difficulty: Medium

30. Jones & Company CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client? A. The client owes the firm for two prior years' audit fees. B. A partner in the CPA firm is the son of the president of the client. C. The wife of a partner in the firm has a small direct financial interest in the client. D. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

Difficulty: Hard

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31. Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under Rule 501 of the AICPA Code of Professional Conduct? A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so. B. Engaging in discriminatory employment practices. C. Robbing a convenience store. D. Knowingly signing a false tax return.

Difficulty: Easy

32. Which of the following forms of advertising would most likely to be considered to be a violation of Rule 502 of the AICPA Code of Professional Conduct? A. Advertising including the types of services offered and the standard fees for the services. B. Advertising including the experience of the firm's professional staff. C. Advertising including an indication that the firm has a close relationship with several tax court judges. D. Advertising including the percentage of the firm's staff that have CPA certificates.

Difficulty: Medium

33. If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except: A. Admonish the offending member. B. Suspend the offending member. C. Expel the offending member. D. Revoke the offending member's CPA certificate.

Difficulty: Medium

34. Which of the following acts by a CPA would be most likely to be a violation of the AICPA Code of Professional Conduct? A. Assisting a client in preparing a financial forecast. B. Forming a professional corporation to practice as a CPA. C. Accepting a fee in a tax matter relating to an administrative proceeding. D. A "covered member" owns an immaterial amount of stock in an audit client.

Difficulty: Hard

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35. In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3? A. The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement. B. The covered member continues to hold an immaterial indirect financial interest in the client. C. The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions. D. The covered member's spouse owns an immaterial amount of shares of common stock in the client.

Difficulty: Hard

36. Independence is required of a CPA performing: A. Audits, but not any other professional services. B. All attestation services, but not other professional services. C. All attestation and tax services, but not other professional services. D. All professional services.

Difficulty: Medium

37. A CPA should maintain objectivity and be free of conflicts of interest when performing: A. Audits, but not any other professional services. B. All attestation services, but not other professional services. C. All attestation and tax services, but not other professional services. D. All professional services.

Difficulty: Medium

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38. Bill Pan, CPA, has posted the general ledger and has maintained the financial records of Zorko Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired?

A. Option A B. Option B C. Option C D. Option D

Difficulty: Hard

39. In determining the scope and nature of services to be performed in public practice, a CPA firm should: A. Require independence for all services performed. B. Determine that the performance of all services is consistent with the firm's members' role as professionals. C. Have in place internal control procedures. D. Only perform accounting related services.

Difficulty: Medium

40. Independence of a CPA with respect to a client is not impaired if: A. The CPA has a loan to an officer of the client. B. The CPA has an immaterial direct interest in the client. C. The CPA is trustee for the client's pension plan. D. The CPA has an immaterial joint, closely held business investment with the client.

Difficulty: Hard

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41. A CPA firm may not designate itself as "members of the AICPA" unless: A. All of its partners or shareholders are members of the Institute. B. All of its professional staff are members of the Institute. C. A majority of its professional staff are members of the Institute. D. At least one partner or shareholder is a member of the Institute.

Difficulty: Medium

42. While performing an audit an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed

through: A. Option A B. Option B C. Option C D. Option D

Difficulty: Hard

43. Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued: A. Only to persons qualified to practice public accounting. B. Only to employees and officers of the firm. C. Only to persons qualified to practice as CPAs and members of their immediate families. D. To the general public.

Difficulty: Medium Source: AICPA

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44. Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of professional conduct and to establish a mechanism for enforcing observation of the code? A. A distinguishing mark of a profession is its acceptance of responsibility to the public. B. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. C. A requirement of most state laws calls for the profession to establish a code of ethics. D. An essential means of self-‐protection for the profession is the establishment of flexible ethical standards by the professions.

Difficulty: Easy Source: AICPA

45. A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is: A. Considered acceptable by the AICPA Code of Professional Conduct. B. Ill advised since it would impair the CPA's independence with respect to the client. C. Considered discreditable to the profession. D. A violation of generally accepted auditing standards.


46. The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee was: A. Fixed by a public authority. B. Based on a price quotation submitted in competitive bidding. C. Based on performing work relating to judicial proceedings. D. Payable if the audit of the financial statements led to a loan.


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47. An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue? A. Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function. B. The decision as to loss of independence must be made by the client based on the facts of the particular case. C. The auditor should not make management decisions for an audit client. D. The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.

Difficulty: Hard Source: AICPA

48. The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the: A. Actual fee would be substantially higher. B. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services. C. Fee was a competitive bid. D. CPA would not be independent.


49. The concept of materiality would be least important to an auditor when considering the: A. Decision whether to use positive or negative confirmations of accounts receivable. B. Adequacy of disclosure of a client's illegal act. C. Discovery of weaknesses in a client's internal control. D. Effects of a direct financial interest in the client upon the CPA's independence.


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50. When an accountant is not independent, the accountant is precluded from issuing a: A. Compilation report. B. Review report. C. Management advisory report. D. Tax planning report.


51. Competence as a certified public accountant includes all of the following except: A. Having the technical qualifications to perform an engagement. B. Possessing the ability to supervise and to evaluate the quality of staff work. C. Warranting the infallibility of the work performed. D. Consulting others if additional technical information is needed.

Difficulty: Easy Source: AICPA

52. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by: A. The trial board of the AICPA. B. An investigative body of a state CPA society. C. A CPA-‐shareholder of the client corporation. D. An AICPA voluntary quality review body.


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53. A client company has not paid its 20X3 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X4 audit, the 20X3 audit fees must be paid before the: A. 20X3 report is issued. B. 20X4 fieldwork is started. C. 20X4 report is issued. D. 20X5 fieldwork is started.


54. A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client? A. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. B. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child. C. No, because the CPA would not be considered to have a direct financial interest in the client. D. No, because the CPA would not be considered to have a material indirect financial interest in the client.


55. A primary purpose for establishing a code of conduct within a professional organization is to: A. Reduce the likelihood that members of the profession will be sued for substandard work. B. Ensure that all members of the profession perform at approximately the same level of competence. C. Demonstrate acceptance of responsibility to the interests of those served by the profession. D. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.

Difficulty: Medium Source: IIA

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56. An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: A. Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. B. Establish standards to follow for effective accounting practice. C. Provide a framework within which accounting policies could be effectively developed and executed. D. Outline criteria that can be utilized in conducting interviews of potential new accountants.

Difficulty: Medium Source: IIA Essay Questions 57. The following is a list of circumstances that might be faced by a public accounting firm. If the circumstance represents a violation of one of the rules of the AICPA Code of Professional Conduct, provide the title of the rule. Write "no violation" in the space if the circumstance does not represent a violation of a

rule.

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Difficulty: Hard

58. CPAs are allowed to advertise under the Rules of the AICPA Code of Professional Conduct. a. List the general guidelines regarding the nature of acceptable advertising. b. Describe two specific forms of unacceptable advertising.

a. Advertising is acceptable if it is not false, misleading, or deceptive. b. Unacceptable forms of advertising include advertising that (only two required): • Creates unjustified expectations of favorable results. • Indicates an ability to influence a court or other official body. • Misstates professional qualifications.

Difficulty: Medium

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59. The Sarbanes-‐Oxley Act of 2002 placed significant restrictions on the types of consulting that may be performed by auditors for their public company audit clients. a. List four types of services that are prohibited by the Act. b. List three types of general consulting activities that would the AICPA Code of Professional Conduct indicates impair the auditors' independence.

a. Services prohibited by the Act include (4 required): • Bookkeeping or other services related to the accounting records or financial statements. • Financial information systems design and implementation. • Appraisal, valuation and actuarial services. • Internal audit outsourcing services, management functions or human resources. • Various investment services. • Legal services and expert services unrelated to auditing. b. Consulting functions that the AICPA Code of Professional Conduct indicate impair independence include (3 required): • Authorizing, executing or consummating a transaction. • Preparing source documents. • Having custody of client assets. • Supervising client employees in their normal recurring activities. • Determining which recommendation should be implemented. • Reporting to the board of directors on behalf of management. • Serving as a client's stock transfer or escrow agent, registrar, or its general counsel.

Difficulty: Hard

60. The AICPA's Code of Professional Conduct consists of two parts, Principles and Rules. a. Describe the purpose of each of the two parts. b. Describe the disciplinary action that may be taken against a member who violates the Code. c. Must the Rules be followed by members of the AICPA that are not in public practice? Explain your answer.

a. Principles-‐goal-‐oriented, positively stated discussion of the profession's responsibilities to the public, clients, and fellow practitioners. Rules-‐-‐enforceable applications of the principles. b. For violations of the Code a member may be required to take remedial action, such as attending continuing education programs. For more serious violations, the member may be censured, suspended, or expelled. c. The Rules apply to all members of the AICPA, unless the wording of the rule indicates otherwise.

Difficulty: Medium

Whittington -principles of auditing 19e

Business

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