Exam Questions - Audit Profession & Planning - Part I

The generally accepted audit standard that requires "Adequate technical training and proficiency" is normally interpreted as requiring the auditor to have:

A) Continuing professional education. 
B) Adequate practical experience for the work to be performed. 
C) Formal education in auditing and accounting. 
D) All of the above.

Which of the following is the basic fundamental concept that underlies the audit process? 

A) Skepticism. 
B) Materiality. 
C) Risk. 
D) All of the above.

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? 

A) Adequate disclosure. 
B) Materiality and audit risk. 
C) Quality control. 
D) Client acceptance.

The audit committee of a company must be made up of: 

A) Members of the board of directors who are not officers or employees.
B) Representatives of the major equity interests, such as preferred and common stockholders. 
C) The audit partner, the chief financial officer, the legal counsel and at least one outsider. 
D) Representatives from the client's management, investors, suppliers, and customers. 

Which one of the following is not one of the three general standards? 

A) Due professional care. 
B) Independence of mental attitude.
C) Adequate training and proficiency. 
D) Proper planning and supervision. 

Which one of the following is not a fieldwork standard? 

A) Sufficient appropriate audit evidence. 
B) Understanding the entity and its environment including internal control. 
C) Adequate planning and supervision.
D) Due professional care. 

The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and changes in cash flow is applied within the framework of: 

A) The auditor's evaluation of the audited company's internal control. 
B) Generally accepted auditing standards. 
C) Generally accepted accounting principles. 
D) Generally accepted standards of quality control.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the 

A) Schedules and analyses to be prepared by the client's staff. 
B) Pending legal matters to be included in the inquiry of the client's attorney. 
C) Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
D) Methods of statistical sampling to be used in confirming accounts receivable. 

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? 

A) The anticipated sample size for planned substantive tests.
B) The assertions that are embodied in the financial statements. 
C) The entity's financial statements of the prior year. 
D) The results of the initial assessment of control risk.

A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the CPA firm's adherence to prescribed standards of 

A) Due professional care. 
B) Fieldwork. 
C) Supervision and review. 
D) Quality control.

The CPA firm of Coach and Talbot is auditing the financial statements of Mays Corporation. LeAnn Jones is a close relative of a covered member of this audit engagement. Which of the following would cause the CPA firm to have a problem with its independence? 

A) Jones owns 100 shares of Mays although the amount is viewed as immaterial.
B) Jones is employed by Mays as vice-president in charge of advertising. 
C) Jones is employed by Mays as head of payroll accounting. 
D) Jones works for Coach and Talbot as a senior auditor in a different office of the firm. 

Eigen Von is working on the audit engagement of the Eppston Corporation for the CPA firm of York and Associates. As part of the engagement team, Eigen is a covered member on the audit. Which of the following situations would not cause the CPA firm to have an independence problem? 

A) Eigen'’s sister, who is his dependent for tax purposes, works for Eppston as a sales clerk, a position viewed as visible to the public.
B) A friend of Eigen, who is his dependent for tax purposes, works for Eppston as a member of the management. 
C) Eigen holds a bond issued by Eppston. The amount is viewed as immaterial. 
D) Eigen’s brother, who is not his dependent for tax purposes, works for Eppston as the assistant controller. 

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods 

A) Affect the auditor's preliminary judgment about materiality levels. 
B) Assist in evaluating the planned audit objectives. 
C) Determine the auditor's acceptable level of audit risk.
D) Influence the design of internal control. 

A CPA is subject to criminal liability if the CPA:

A) Willfully omits a material fact from a set of financial statements. 
B) Performs an audit in a negligent manner. 
C) Refuses to turn over requested audit document to a client.
D) Willfully breaches a contract with a client. 

What is the meaning of the generally accepted auditing standard which requires that the auditor be independent? 

A) The auditor may have a direct ownership interest in his client's business if it is not material. 
B) The auditor must adopt a critical attitude during the audit.
C) The auditor's sole obligation is to third parties. 
D) The auditor must be without bias with respect to the client under audit. 

A CPA is most likely to refer to one or more of the three general auditing standards in determining 

A) The integrity of the client. 
B) Whether the CPA should undertake an audit engagement. 
C) The scope of the CPA's auditing procedures. 
D) The nature of the CPA's report qualification.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the: 

A) Audit procedures performed are approved in the professional standards. 
B) Results are consistent with the conclusions to be presented in the auditor's report.
C) Auditor's system of quality control has been maintained at a high level. 
D) Audit has been performed by persons having adequate technical training and proficiency as auditors. 

The members of the Public Company Accounting Oversight Board are appointed and overseen by: 

A) By U.S. Congress. 
B) The Securities and Exchange Commission. 
C) The Auditing Standards Board. 
D) The American Institute of Certified Public Accountants.

The Securities and Exchange Commission can impose all but which of the following sanctions? 

A) Prohibit a CPA from accepting new SEC clients for a period of time. 
B) Suspend a CPA from auditing SEC clients. 
C) Require a CPA to participate in continuing professional educations programs and make changes in their practice.
D) Revoke a CPA license. 

Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC? 

A) Every company issuing new securities. 
B) Every corporation which is chartered by a state government. 
C) Every corporation.
D) Every corporation with securities traded on national and over-the-counter exchanges. 

Which of the following factors most likely would cause an auditor not to accept a new audit engagement? 

A) An inadequate understanding of the entity's internal control structure.
B) An inability to perform preliminary analytical procedures before assessing control risk. 
C) The close proximity to the end of the entity's fiscal year. 
D) Concluding that the entity's management probably lacks integrity. 

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to 

A) Minimize the likelihood of association with clients whose management lacks integrity.
B) Satisfy the CPA firm's duty to the public concerning the acceptance of new clients. 
C) Anticipate before performing any field work whether an unqualified opinion can be expressed. 
D) Enable the CPA firm to attest to the reliability of the client. 

Historically, most major lawsuits against CPA firms have dealt with: 

A) Disputes over income tax preparation services. 
B) Disputes over the accuracy of bookkeeping services. 
C) Disputes arising in the performance of MAS contracts. 
D) Audited and unaudited financial statements.

To succeed in an action against the auditor, the client company must be able to show that: 

A) The auditor was fraudulent. 
B) The auditor was grossly negligent. 
C) There was a written contract.
D) There is a close causal connection between the auditor's behavior and the damages suffered by the client. 

Which of the following is an illustration of a liability to clients under common law? 

A) Client sues auditor for not discovering a theft of assets by an employee. 
B) Federal government prosecutes auditor for knowingly issuing an incorrect audit report. 
C) Combined group of stockholders sue auditor for not discovering materially misstated financial statements.
D) Bank sues auditor for not discovering that borrower's financial statements are misstated. 

In planning an audit, an auditor would most likely obtain an understanding of a continuing client's business by:

A) Reviewing prior-year working papers and the permanent file for the client.
B) Reading specialized industry journals. 
C) Performing tests of details of transactions and balances. 
D) Reevaluate the client's internal control environment. 

In accordance with SAS No. 105 (AU Section 150), which of the following correctly denotes the revised wording of the first general standard of auditing? 

A) The audit must be performed by a person or persons who are partners in a CPA firm. 
B) The audit must be performed by a person or persons with a college degree in accounting. 
C) The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor. 
D) The audit should be performed by a person or persons having adequate technical training and proficiency as an auditor.

Jane Eyre works as a staff auditor for the CPA firm of East & West.   She is currently working on the audit engagement of the Hitchcock Corporation.   Her daughter is employed by Hitchcock.   Her daughter is 27 years old and not a dependent of Jane Eyre.   The firm is trying to determine whether Jane Eyre must be removed from the audit team because of a lack of independence.   In applying these rules, which designation is applied to the daughter? 

A) Member of immediate family 
B) Distant relative 
C) General member of family
D) Close relative 

Independence of mind, as defined in the AICPA's conceptual framework, is the state of mind that permits an individual to act with all of the following EXCEPT:  

A) Objectivity 
B) Reasonable suspicion 
C) Integrity
D) Professional skepticism 

Lana Lily and Jill Jazz are in a debate about the appropriate attitude an auditor should have when interacting with client personnel during an audit.  Each claims that the other is misconstruing the definition of professional skepticism in the AICPA standards.  The definition of professional skepticism includes all of the following elements EXCEPT:  

A) Assuming that material misstatement due to fraud is present in the financial statements 
B) Objective and critical assessment of audit evidence 
C) Possessing a questioning mind during the audit 
D) Not being influenced by past experience with the entity and beliefs about management's integrity and honesty

An auditor should design the written audit program so that:

A) Each account balance will be tested under either tests of controls or tests of transactions.
B) Substantive tests prior to the balance date will be minimized. 
C) All material transactions will be selected for substantive testing. 
D) The audit procedures selected will achieve specific audit objectives. 

In designing the audit program, an auditor should establish specific audit objectives that relate primarily to the:

A) Timing of the audit procedures. 
B) Selected audit techniques. 
C) Financial statement assertions.
D) Cost-benefit of gathering evidence. 

Audit programs should be designed so that 

A) Most of the required procedures can be performed as interim work. 
B) The auditor can make constructive suggestions to management. 
C) The audit evidence gathered supports the auditor's conclusions.
D) Inherent risk is assessed at a sufficiently low level. 

When allocating materiality, most practitioners choose to allocate to: 

A) The income statement because they are most important. 
B) The balance sheet accounts because there are fewer. 
C) Both balance sheet and income statement accounts because there could be errors on either. 
D) All of the financial statements because they are all equally important.

When an auditor is attempting to determine the extent to which external users rely on a client's financial statements, they may consider several factors including: 

A) Types and amounts of liabilities. 
B) Client size. 
C) Concentration of ownership. 
D) All of the above.

During the initial planning phase of an audit, a CPA most likely would 

A) Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion. 
B) Discuss the timing of the audit procedure with the client's management. 
C) Identify specific internal control activities that are likely to prevent fraud. 
D) Evaluate the reasonableness of the client's accounting estimates.

A listing of all the things which the auditor will do to gather sufficient, competent evidence is the: 

A) Audit risk model. 
B) Audit procedure. 
C) Audit strategy.
D) Audit program. 

Risk affecting the preparation of financial statements can arise or change due to circumstances such as: 

A Corporate restructurings. 
B Rapid growth. 
C New accounting pronouncements. 
D All of the above.

In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? 

A) A very lucrative performance-based compensation system.
B) An unreliable accounting system. 
C) Management preoccupation with increased financial performance. 
D) Strained relationships between the auditors and management. 

Which of the following best describes what is meant by the term "fraud risk factor"? 

A) Reportable conditions identified during an audit.
B) Factors whose presence often have been observed in circumstances where frauds have occurred. 
C) Factors whose presence requires the modification of planned audit procedures. 
D) Factors whose presence indicates the present of fraud risk is high. 

Three conditions generally are present when fraud occur. Select the one that is not one of those conditions. 

A) Attitude. 
B) Opportunity.
C) Incentive or pressure. 
D) Supervisory position. 

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to 

A Errors. 
B Fraud. 
C Illegal acts. 
D Business risk.

The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when in fact, such misstatement does exist is referred to as: 

A) Inherent risk. 
B) Control risk. 
C) Business risk. 
D) Detection risk.

The auditors of Epps Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 4 percent. They believe that there is an inherent risk of a material misstatement of 80 percent. Based on their analysis, they also believe there is a 20 percent risk that a material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive tests of details of accounts receivable?  

A) 80%
B) 12.50% 
C) 8% 
D) 25% 

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are 

A) Elements of the auditor's tolerable risk level, while detection risk is not. 
B) Evaluated prior to the analysis of subsequent events. 
C) Considered when evaluating managements assertions about an account balance, while detection is not.
D) Functions of the client and its environment, while detection is not. 

In connection with the financial statements, an independent auditor could be responsible for failure to detect a material fraud if: 

A) The auditor planned the audit in a negligent manner. 
B) Statistical sampling techniques were not used on the audit engagement. 
C) Accountants performing the important parts of the work failed to discover a close relationship between the treasurer and cashier. 
D) The fraud was perpetrated by one employee who circumvented the existing internal controls.

The risk of material misstatement refers to: 

A) The combination of inherent risk and control risk. 
B) Control risk and acceptable audit risk. 
C) Inherent risk. 
D) None of the above.

Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting. 

A) The element of materiality and relative risk. 
B) The element of reasonable assurance.
C) The element of corroborating evidence. 
D) The element of internal control. 

The assessed level of detection risk in an audit is inversely related to which of the following? 

A) Risk of failing to discover material misstatements. 
B) Assurance provided by substantive tests. 
C) Preliminary judgment about materiality levels. 
D) Risk of misapplying auditing procedures.

As the acceptable level of detection risk decreases, an auditor may:

A) Reduce substantive testing by relying on the assessments of inherent risk and control risk. 
B) Lower the assessed level of control risk from the maximum level to below the maximum. 
C) Postpone the planned timing of substantive tests from interim dates to the year end.
D) Eliminate the assessed level of inherent risk from consideration as a planning factor. 

If the acceptable level of detection risk is reduced, the amount of audit evidence the auditor accumulates will: 

A) Decrease.
B) Be indeterminate.
C) Remain unchanged. 
D) Increase. 

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's: 

A) Risk assessment procedures.
B) Tests of controls. 
C) Tests of transactions. 
D) Audit Strategy. 

The firm of Bart and Simpson has accepted an engagement to audit the financial statements of Thompson, Inc. During the planning stage of the audit, the auditors made the determination that the substantive testing would need to reduce detection risk to a particular level before an unqualified opinion could be rendered. However, after the auditors had performed a significant amount of work, this earlier decision was modified. The acceptable level of detection risk was lowered as a prerequisite for an unqualified opinion. Which of the following is most likely to have led to that change? 

A) The auditors assessed control risk and determined that it was higher than they had expected. 
B) The level of overall audit risk that was deemed to be acceptable was raised. 
C) The auditors assessed inherent risk and it was lower than they had anticipated. 
D) No fraud risk factors were discovered during the early stages of the audit.

What are the three components of audit risk? 

A) Variable risk, attribute risk, and assessment risk
B) Preliminary risk, construction risk, and design risk 
C) Payment risk, receipt risk, and recording risk 
D) Inherent risk, control risk, and detection risk 

The CPA firm of Bryant and James is auditing Garnett Corporation and has made the decision that there is a increased amount of risk that the financial statements being issued contain a material misstatement. Which of the following is most likely to have led to that assessment? 

A) The company recently sold land and has reporting a gain on that transaction. 
B) Garnett is a bank in a region where several banks have failed in recent months. 
C) The president of Garnett holds two percent of the outstanding shares of the company.
D) The board of directors takes an active role in the oversight of company management. 

A CPA firm is auditing the financial statements of Valdese Computing. The auditors become aware of certain facts that indicate that fraud might have occurred. What are the two types of fraud that the auditor is concerned about? 

A) Fraudulent reporting and misappropriation of assets. 
B) Mistakes and errors 
C) Misstatements of the balance sheet and misstatements of the income statement 
D) Computer theft and manual system theft

In auditing, what is meant by the term “inherent risk?” 

A) It is the chance that a reporting entity will go bankrupt regardless of its current financial position. 
B) It is the chance that an independent auditor will make a mistake purely because of being a human being. 
C) It is the chance that a material misstatement will exist in a financial statement assertion, assuming no related internal controls are in place. 
D) It is the chance that an independent auditor will see a material misstatement but not recognize that it a material misstatement.

When an auditor becomes aware of a possible client illegal act, the auditor should obtain an understanding of the nature of the act to 

A) Determine the reliability of management's representations.
B) Evaluate the effect on the financial statements. 
C) Increase the assessed level of control risk. 
D) Recommend remedial actions to the audit committee. 

Most illegal acts affect the financial statements: 

A) Materially if direct; immaterially if indirect. 
B) Both directly and indirectly. 
C) Directly. 
D) Only indirectly.

With respect to the detection of illegal acts, which have an indirect effect on the financial statements, auditing standards state that the auditor provides: 

A) The same reasonable assurance provided for other items.
B) No assurance that they will be detected. 
C) Assurance that they will be detected, if highly material. 
D) Assurance that they will be detected, if material. 

If an auditor uncovers an illegal act at a public company, the auditor must notify: 

A) The Securities and Exchange Commission. 
B) Local law enforcement officials. 
C) The Public Company Accounting Oversight Board. 
D) All of the above.

When the auditor knows that an illegal act has occurred, the auditor must: 

A) Consider the effects on the financial statements, including the adequacy of disclosure. 
B) Issue an adverse opinion.
C) Report it to the proper authorities. 
D) Withdraw from the engagement. 

When the auditor has reason to believe an illegal act has occurred, the auditor should: 
A) Inquire of management at a level above those likely to be involved with the illegality. 
B) Consider accumulating additional evidence to determine if there is actually an illegal act. 
C) Consult with the client's legal counsel. 
D) Do all three of the above.

When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should: 
A) Include audit procedures which have a strong probability of detecting illegal acts. 
B) Still include some audit procedures designed specifically to uncover illegalities. 
C) Make inquires of management regarding their policies for detecting illegal acts and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors and illegalities. 
D) Ignore the issue.

Which of the following is an area in which the Public Company Accounting Oversight Board is not empowered to establish or adopt standards? 
A) Accounting. 
B) Quality Control. 
C) Independence. 
D) Auditing.

An independent auditor carries out an audit to reduce the risk that there is a material misstatement in any of the five assertions made by management about the financial statements it has produced. If that risk can be reduced to an acceptably low level, the auditor provides reasonable assurance that the statements are presented fairly according to US generally accepted accounting principles. For which of the following does the auditor not have to seek to reduce the level of risk? 
A) Misappropriation
B) Fraudulent financial reporting. 
C) An error (an unintentional misstatement). 
D) Indirect illegal act. 

An audit conducted in accordance with generally accepted auditing standards should be designed to provide reasonable assurance of detecting illegal acts: 
A) Having a material direct effect on the determination of financial statement amounts. 
B) Having an indirect effect on the income statement accounts. 
C) Perpetrated by top management. 
D) Involving violations of antitrust laws.

The Haynsworth CPA firm is auditing Agnestic Corporation. The auditors have come to the conclusion that certain illegal acts may have occurred during the year so that additional testing will be necessary. Which of the following is most likely to have led to this assessment? 
A) Confirmation of accounts receivable indicates that several recorded balances appear to be understated. 
B) The design of the company’s internal control policies and procedures has not been revised in four years. 
C) Related party transactions have occurred throughout the year. 
D) Checks were written to “cash” during the year despite policies to the contrary.

Mr. A makes a $3,000 payment on Monday to Acme Company. The money is stolen by one of Acme’s employees. On Friday, Ms. B makes a $3,000 payment to Acme Company. The same employee credits this payment to Mr. A’s account (rather than to Ms. B’s account) so that a second bill will not be sent to him. Several days later, a payment is received from Mr. C and it is posted to Ms. B’s account. What is this type of theft known as? 
A) Receivable Management Deficiency (RMD)
B) Reconciliation shortage 
C) Posting fraud 
D) Lapping 

The CPA firm of Nguyen & Assoc. discovers that the president of its biggest client committed several illegal acts in the name of the company last year.  He authorized the payment of bribes to officials of a competing company.   The board of directors was informed of this activity but chose to take no action because the amounts were judged to be immaterial in comparison to the reported balances taken as a whole.   Which of the following is the most likely decision by the CPA firm? 
A) Provide disclosure of the information in the audit report but do not change the audit opinion being rendered. 
B) Contact the appropriate government officials to disclose the actions of the president. 
C) Provide disclosure of the information in the audit report and do change the audit report to a qualified audit opinion. 
D) Consider quitting the engagement.

An independent auditor is concerned about her responsibility for uncovering illegal acts that have been committed by an audit client.   Which of the following statements is not true? 
A) One reason that an auditor might not be expected to discover all client illegal acts is that some of these acts may involve nonfinancial problems.
B) One reason that an auditor might not be expected to discover all client illegal acts is that some of these acts may be well hidden from the auditors. 
C) A reporting company is guilty of polluting the local river and will be subjected to a heavy monetary fine if caught. This is an example of an indirect illegal act.
D) A company records false sales in its financial statements in order to obtain a bank loan. Defalcation has occurred. 

The treasurer of a company has stolen $10,000 in cash from the company.   At the end of the year, he is afraid that he will be caught so he transfers $10,000 from one company bank account to another.   He records the deposit on December 31 of the first year so that $10,000 cash is added.   He does not record the withdrawal from the other account until January 1 of the second year.   As a result, for one day, the company looks like it has $10,000 more than it really does.   What is this deception called? 
A) Zero Line Fraud
B) Kiting 
C) Simultaneous Origination 
D) Lapping 

Polly is joining the audit team of Big Minty Corporation.  Her first assignment is to assist with the assessment of fraud risk during the audit planning stage.  Under AICPA professional standards, Polly should perform all of the following procedures EXCEPT 
A) Designing the audit to detect all errors due to fraudulent financial reporting 
B) Considering the potential for management override of internal controls
C) Designing the audit to provide reasonable assurance of detecting misstatements that are material to the financial statements, whether due to error or fraud 
D) A discussion among the audit team about how and where the client's financial statements may be at risk for material misstatement due to fraud 

During the audit of Enormo Corporation, Waldo is involved with preliminary assessment of the risk of material financial statement fraud.  Which of the following procedures should be performed?  
A) Analytical procedures on revenue accounts, which are particularly susceptible to fraud 
B) Inquiry of management about any fraud, suspected fraud, or alleged fraud at the company 
C) Inquiry of management about internal controls that are intended to mitigate fraud risk 
D) All of the above procedures should be performed

The Public Company Accounting Oversight Board does not: 
A) Establish auditing standards that must be followed by all CPAs. 
B) Oversee auditors of public companies. 
C) Perform inspections of the quality controls at audit firms that audit public companies. 
D) Perform any of the above functions.

As a result of the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board (PCAOB) has been created. Which of the following is not true? 
A) The PCAOB is a government agency. 
B) The PCAOB is funded by fees charged to all publicly traded registered companies. 
C) The PCAOB comes under the oversight and enforcement authority of the SEC. 
D) All public accounting firms that participate in the preparation of an audit report for a company that issues securities must register with the PCAOB.

If the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm, which of the following may occur? 
A) The PCAOB could report the matter to the Securities and Exchange Commission. 
B) The PCAOB could report the matter to the appropriate state accountancy board. 
C) The PCAOB could enforce some disciplinary action against the accounting firm. 
D) The PCAOB could take any or all of the above steps if it identifies a violation.

The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the: 
A) Form 10-Q.
B) Form 8-K. 
C) Form 10-K. 
D) Form S-1. 

A basic objective of a CPA firm is to provide professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is provided through: 
A) Continuing professional education. 
B) Compliance with generally accepted reporting standards. 
C) A system of peer review. 
D) A system of quality control.

Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) should be looked upon by practitioners as: 
A) Ideals to work towards, but which are not achievable. 
B) Benchmarks to be used on all audits, reviews, and compilations. 
C) Maximum standards that denote excellent work. 
D) Minimum standards of performance that must be achieved on each audit engagement.

A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include 
A) Inquiry of third parties, such as the prospective client's bankers and attorneys, about information regarding the prospective client and its management. 
B) Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily. 
C) Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion. 
D) Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the extent of required substantive tests.

A typical objective of an operational audit is to determine whether an entity's 
A) Operational information is in accordance with generally accepted governmental auditing standards.
B) Internal control is adequately operating as designed. 
C) Specific operating units are functioning efficiently and effectively. 
D) Financial statements are presented fairly as a result of operations. 

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? 
A) Management places little emphasis on meeting earnings projections.
B) The board of directors makes all major financing decisions. 
C) Reportable conditions previously communicated to management are not corrected. 
D) Transactions selected for testing are not supported by proper documentation. 

What is an auditor's responsibility for supplementary information, such as segment information, which is outside the basic financial statements, but required by the FASB? 
A) The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted. 
B) The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. 
C) The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information.
D) The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information. 

Which of the following audits is most likely to be performed by an internal auditor? 
A) Financial statement audit. 
B) Government audit.
C) Operational audit. 
D) Compliance audit. 

Any CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) is subject to periodic inspections. Which of the following statements is true? 
A) Larger firms will be inspected annually whereas all other firms will only be inspected every three years.
B) These firms must undergo inspection by the PCAOB as well as peer review by an outside CPA firm. 
C) All firms will be inspected annually by the PCAOB. 
D) All firms will be inspected every three years by the PCAOB. 

In registering with the Public Company Accounting Oversight Board (PCAOB), a CPA firm must provide significant information. Which of the following is not a required disclosure? 
A) The annual fees from each client that is an issuer of securities, divided between audit and non-audit services. 
B) Information about any criminal actions pending against the firm. 
C) A list of all accountants participating in the audit of each client that is an issuer of securities.
D) A list of all audit clients.

The AICPA has the authority to establish standards and rules in all but which of the following areas? 
A) Professional conduct. 
B) Compilation and review standards.
C) Auditing standards applicable to financial statements of private companies. 
D) Auditing standards applicable to financial statements of private and public companies. 

Which of the following is not an essential component of quality control? 
A) Policies and procedures to ensure that the work performed by the personnel meet applicable professional standards.
B) Policies to ensure that monitoring activities are effectively applied. 
C) Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies. 
D) Policies to ensure that personnel maintain their independence in fact and in appearance. 

The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the: 
A) Form 10-Q. 
B) Form S-1 
C) Form 10-K. 
D) Form 8-K.

The form that must be completed and filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is which of the following? 
A) Form S-1. 
B) Form 10-Q. 
C) Form 8-K. 
D) Form 10-K.

If the Public Companies Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm, which of the following may occur? 
A) The PCAOB could report the matter to the Securities and Exchange Commission. 
B) The PCAOB could enforce some disciplinary action against the accounting firm. 
C) The PCAOB could report the matter to the appropriate state accountancy board. 
D) The PCAOB could take any or all of the above steps if it identifies a violation.

Early appointment of the auditor will enable 
A) A more sufficient audit to be planned. 
B) Sufficient competent evidential matter to be obtained.
C) A proper consideration of internal control to be performed. 
D) A more thorough audit to be performed. 

Which of the following is not a possible indication of fraud? 
A) Intentional omission of necessary information.
B) Accidental recording of a balance 
C) Intentional departure from fact. 
D) Misapplication of GAAP. 

Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit: 
A) Public companies only. 
B) All companies in the United States.
C) Private companies only. 
D) Private and Public partnerships only. 

Cox Company is being audited by Brown & Yellow CPAs.   This public accounting firm has offices in five locations but this audit is primarily performed out of the Baltimore office.   Smith is a partner in this firm and works out of the Baltimore office but does not participate in the Cox Company audit.   Jones is also a partner in this firm but works out of the Philadelphia office and does not participate in the Cox Company audit.   The CPA firm is now trying to determine who in the firm qualifies as a covered member of this engagement so audit independence rules can be verified.   Which of the following is true? 
A) Smith and Jones are both covered members for this audit engagement. 
B) Smith is a covered member but Jones is not 
C) Jones is a covered member but Smith is not 
D) Neither Smith nor Jones is a covered member

Darn Yarn Co. is audited by Scoop & Sweet, CPAs.  Which of the following parties is not considered a "covered member" for purposes of the AICPA Code of Professional Conduct independence standards?   
A) Brandy Carsen, human resources manager at Scoop & Sweet who determines pay raises for members of the audit team
B) Rob Jolly, who provides 40 hours of tax services to Darn Yarn every year 
C) Van Wafer, a secretary who faxes, mails, and files audit documentation for the Darn Yarn audit, and other audits, as needed 
D) Candy Cohen, a partner in the office of Scoop & Sweet from which the audit is conducted 

In which of the following scenarios would the independence of Bumble & Sweet, CPAs, be impaired with respect to its client, Cutie Cupcakery?   
A) Cutie Cupcakery leases its space from Bumble & Sweet under an operating lease 
B) Rob Sweet, partner in Bumble & Sweet, has sued Cutie Cupcakery in the firm's name in small claims court for unpaid tax fees in the amount of $200.
C) Due to slow economic times, Cutie Cupcakery is behind on its audit fees for the last two years 
D) Bob Bumble, lead audit partner at Bumble & Sweet, inherits stock in Cutie Cupcakery from his grandmother, Diane, and sells the stock 20 days after receipt 

Bravo CPAs is the auditor for Smiley Cat Corporation.  Although Bravo has been Smiley Cat's auditor without incident for five years, in the current year, litigation is initiated that involves the audit firm and its client.  Which of the following litigation scenarios would not threaten Bravo's independence from the audit of Smiley Cat?  
A) Smiley Cat management has sued Bravo for deficiency in its audit for failing to detect a material error in the financial statements. 
B) Smiley Cat's controlling shareholder has sued Bravo for deficiency in its audit and Bravo has not initiated any cross claims against Smiley Cat. 
C) Smiley Cat management has strongly indicated an intent to sue Bravo for deficiency in its audit, but has not yet filed suit
D) Bravo has sued Smiley Cat management for misrepresentation and fraud during the audit 

Darla Delaney is a new auditor who just graduated from her university program.  She is assigned to the audit of Smeagol, LLC, a local company specializing in fine jewelry.  Samantha Merriweather is the president of the company and is impressed with Darla's professionalism.  Which of the following scenarios would impair Darla's independence from Smeagol, LLC, under the independence guidelines and interpretations contained in the AICPA's Code of Professional Conduct? 
A) Samantha gives Darla a gold watch from the jewelry case that was abandoned by a client months ago, and is, therefore, no loss to Smeagol. 
B) Samantha holds a luncheon for Smeagol employees, suppliers, and customers, to which she invites Darla. 
C) Samantha invites Darla to a thank you dinner at a local restaurant after the audit is over.
D) Samantha gives Darla a small fruit basket on the last day of audit work with a thank you note attached. 

Charlie Chaucer has been in CPA practice for over 30 years and is well respected in the profession.  He has been asked to speak about the AICPA's Code of Professional Conduct, but has not reviewed the independence guidelines in several years.  When he notices the section about loans to and from clients, he becomes worried that his independence to a local client, Chipper Falls Credit Union, may be impaired.  In which of the following scenarios would Charlie's independence be impaired under the AICPA's independence guidelines? 
A) Charlie has a car loan through Chipper Falls Credit union for his son's car, which is collateral for the loan. 
B) Charlie's mortgage on his home, which was obtained through Chipper Regional Bank, was sold to Chipper Falls Credit Union. 
C) Charlie's mortgage on a vacation home, on which Charlie has forgotten to make payments for the last several months, was obtained through Chipper Falls before Charlie became the credit union's auditor. 
D) None of the above

The accounting firm of Light & Sabre, CPAs is a regional expert in auditing employee benefit plans.  Light & Sabre is currently conducting the audit of the employee benefit plan of Je D'ai Corporation.  Under the appropriate independence guidelines for auditors of such plans, a direct or material indirect financial interest in the plan is acceptable for which of the following individuals?  
A) Juan, a partner in an office in another city, who is not involved in the audit 
B) The firm, Light & Sabre 
C) Anakin, who is a junior auditor on the engagement 
D) None of the above

Daisy is seeking employment as an auditor at Mayes, CPAs.  This firm exclusively audits employee benefit plans of U.S. firms.  To prepare for her interview Daisy familiarizes herself with the independence standards promulgated by which of the following?  
A) Financial Accounting Standards Board 
B) International Federation of Accountants
C) Government Accountability Office 
D) Department of Labor 

In preparation for a career as a public accountant and auditor, Randy Macho is reviewing his responsibility to adhere to various professional standards and requirements.  Which of the following statements is true?  
A) As an accountant in public practice, Randy must adhere to the requirements of his state board of accountancy 
B) If Randy fails to adhere to the independence standards in the AICPA's Code of Professional Conduct, the AICPA may revoke his CPA license 
C) Randy will be subject to sanction if he fails to follow the guidelines set forth by the PCAOB during an audit of a private company 
D) All of the above statements are true

Monica Marchbanks is attempting to determine whether her firm is required to follow a particular standard included in the AICPA's Statements on Auditing Standards.  Which of the following statements is FALSE?  
A) Monica's firm may depart from a statement in the auditing standards that is "presumptively mandatory", but must document the justification for such a departure 
B) A statement in the auditing standards that uses the word "should" is explanatory material that does not impose a requirement on the auditor 
C) A statement in the auditing standards that uses the word "must" is an unconditional requirement and Monica's firm must comply with it 
D) Descriptive guidance contained in the standards that uses words such as "may," might," or "could" does not impose a requirement on the auditor

All of the following sets of AICPA professional guidance contain both "presumptively mandatory" and "unconditional" professional requirements EXCEPT:  
A) Statements on Quality Control Standards 
B) Statements on Standards for Accounting and Review Services
C) Statements on Auditing Standards 
D) Auditing Statements of Position 

Doris Dia has participated in public company audits for over twenty years and now serves as the reviewing partner for several key audits performed by her firm.  Which of the following statements is FALSE about the reviewing partner?   
A) During her review, Doris will focus on evaluating the engagement team's judgments and related conclusions during the audit 
B) The reviewing partner is not required to possess the level of knowledge and competence related to accounting, auditing, and financial reporting that would be required to serve as the audit partner on the audit under review
C) Doris may provide concurring approval of issuance of the audit report only if she is not aware of a significant engagement deficiency after conducting her review in accordance with professional standards 
D) Doris' firm may only allow clients to use the audit report after she provides the concurring approval of issuance 

In the evaluating the accuracy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of 
A) Completeness.
B) Rights and obligations. 
C) Existence or occurrence. 
D) Valuation or allocation. 

An auditor may achieve audit objectives related to certain assertions by 
A) Performing analytical procedures. 
B) Adhering to a system of good quality control. 
C) Preparing proper audit documentation.
D) Reducing the level of detection risk. 

The CPA firm of Wilson and Williams has been hired to audit the financial statements of Harkins Corporation, a privately held company applying for a bank loan. Which of the following is not a financial statement assertion made by management about the financial statements? 
A) Valuation of assets and liabilities. 
B) Existence of recorded assets and liabilities.
C) Completeness of recorded assets and liabilities. 
D) Effectiveness of internal control. 

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of 
A) Existence. 
B) Control.
C) Accuracy. 
D) Completeness. 

An auditor select items for test counts while observing a client's physical inventory. The auditor then traces the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of 
A) Completeness.
B) Valuation. 
C) Existence or occurrence. 
D) Rights and obligations. 

Confirmation is most likely to be a relevant form of evidence with regard to assertion about accounts receivable when the auditor has concern about the receivables' 
A) Completeness.
B) Classification. 
C) Valuation. 
D) Existence. 

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and 
A) Completeness. 
B) Valuation or allocation. 
C) Existence. 
D) Obligations and Rights.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about 
A) Obligations and Rights.
B) Valuation or allocation. 
C) Presentation and disclosure. 
D) Existence or occurrence. 

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? 
A) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. 
B) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. 
C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. 
D) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be: 
A) Invoices filed in the entity's open invoice file. 
B) Vendors with whom the entity has previously done business. 
C) Payees of checks drawn in the month after the year end. 
D) Amounts recorded in the accounts payable subsidiary ledger.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of: 
A) Valuation or allocation. 
B) Presentation and disclosure. 
C) Completeness.
D) Existence or occurrence. 

Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of valuation or allocation and 
A) Completeness. 
B) Presentation and disclosure. 
C) Rights and obligations. 
D) Existence or occurrence.

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate which financial statement assertion made by management? 
A) Valuation and allocation. 
B) Presentation and disclosure. 
C) Rights and obligations.
D) Existence or occurrence. 

Which of the following procedures would an auditor perform to test the controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? 
A) Inquire about the employees' access to recorded but undeposited cash. 
B) Observe the consistency of the employees' use of cash registers and tapes. 
C) Compare the cash balance in the general ledger with the bank confirmation request. 
D) Trace the deposit in the cash receipt journal to the cash balance in the general ledger.

The confirmation of accounts receivable provides evidence about management's assertion of rights and obligations. For what other assertion does the confirmation of accounts receivable balances provide primary evidence? 
A) Completeness. 
B) Presentation and disclosure. 
C) Existence. 
D) Valuation or allocation.

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of 
A) Rights and obligations.
B) Valuation or allocation. 
C) Existence or occurrence. 
D) Completeness. 

An independent auditor uncovers a material misstatement in one of the assertions made by management about a set of financial statements. Which of the following is true? 
A) Some misstatements can be material even though they are smaller than other misstatements which are viewed as immaterial.
B) The term “material” relates to fraud rather than errors. 
C) The size of a material misstatement is the same (in percentage terms) for all audits. 
D) The term “material” is a quantitative analysis. 

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of 
A) Presentation and disclosure. 
B) Completeness. 
C) Existence or occurrence. 
D) Rights and obligations.

In testing the existence assertion for an asset, an auditor ordinarily works from the 
A) Accounting records to the supporting evidence.
B) Potentially unrecorded items to the financial statements. 
C) Supporting evidence to the accounting records. 
D) Financial statements to the potentially unrecorded items. 

In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of 
A) Valuation or allocation.
B) Completeness. 
C) Existence or occurrence. 
D) Presentation and disclosure. 

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about 
A) Presentation and disclosure. 
B) Completeness. 
C) Existence or occurrence. 
D) Valuation or allocation.

An auditor is analyzing documents created by a client company in connection with the purchase of a large warehouse. In studying the ten-year loan that was taken out to pay for the acquisition, the auditor discovers that the company must maintain a current ratio of at least 2-to-1 or the debt can be immediately called by the bank. The current ratio is well over 2-to-1 at the moment. What impact does this requirement have on the auditor’s investigation of the financial statements? 
A) The loan must be recorded as a current liability rather than as a noncurrent liability. 
B) The requirement impacts the book value reported for the liability. 
C) The requirement impacts the capitalized cost of the warehouse. 
D) The requirement must be disclosed in the notes to the financial statements.

The CPA firm of Jeter and Cano is auditing the Angel Corporation.  Currently, the auditors are looking at current liabilities that were recording shortly after the end of the fiscal year.  They are concerned that some of these liabilities were actually owed by the reporting company at the end of the year under audit.  Which financial statement assertion are the auditors most likely to be attempting to substantiate? 
A) Existence 
B) Allocation
C) Disclosure 
D) Completeness 

The Machieto Corporation produces a set of financial statements according to United States generally accepted accounting principles (GAAP).   However, by an accident, the accountant reported the book value of the company’s warehouse using a method that was not appropriate under GAAP.  The accountant has created a misstatement in which of the following assertions? 
A) Presentation 
B) Completeness 
C) Valuation
D) Existence