Reference no: EM131179586

Question 1

describes the type of threat that occurs when management threatens to replace the audit firm because of a disagreement over an accounting issue.

•Management participation threat.
•Adverse interest threat.
•Undue influence threat.
•Coercion threat.
•Financial self-interest threat.

Question 2
The Utilitarian Theory requires all of the following actions, except:
•Identify the potential impact of actions on each affected party.
•Identify the potential problem.
•Identify the rights of the affected parties.
•Identify the desirability of each action.
•None of these answers is correct.

Question 3
The auditor will most likely issue which of the following audit reports if he decides to draw attention to large related party transactions occurring in the financial statements of the client?
•Consolidation
•Adverse
•Unqualified with an explanatory paragraph
•Qualified with an explanatory paragraph
•Qualified

Question 4
All of the following are threats to an auditor's independence, except:
•Self-review threat
•Management participation threat
•Political association threat
•Financial self-interest threat
•Advocacy threat

Question 5
All of the following statements are true except:
•The auditor uses professional judgment to determine which audit procedures to perform.
•Audit evidence used to support an audit opinion is obtained soley from audit procedures.
•Audit evidence consists of both information that corroborates management's assertions and information that contradicts such assertions.
•The type of audit evidence known as inquiry does not ordinarily provide sufficient audit evidence of the ab-sence of a material misstatement, nor is it alone sufficient to test the operating effectiveness of controls.
•A limitation of observation is that observing a process on one day does not necessarily indicate how the trans-actions were processed on a different day or over a relevant period of time.

Question 6
If the audit firm uses another CPA firm to perform part of the engagement on a client's subsidiary, the audit firm should ___.
•list the other CPA firm in the footnotes to the client's financial statements.
•merge with the other CPA firm.
•perform a peer review on the other CPA firm.
•disclaim an opinion on the financial statements.
•ensure the independence of the other CPA firm.

Question 7
_______ is not a way management obtains evidence regarding the effectiveness of internal control over the accounting system?
•Taking plant and operational tours.
•Making inquiries of banks and attorneys
•Reviewing system flowcharts.
•Performing a walkthrough of the accounting system.
•Reviewing system procedures manuals.

Question 8
Select all of the following statements that are true. (There are multiple answers)
•It is true that auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided.
•It is true that the audit report is modified to five paragraphs as a result of another audit firm performing part of the financial statement audit.
•It is true that audit evidence consists of both information that corroborates management's assertions and infor-mation that contradicts such assertions.
•It is true that complex audit judgments and decisions often involve accounts that require subjective estimates by management.
•It is true that walkthroughs and inquiries are often used to obtain an understanding of internal controls.

Question 9
Which of the following statements is false?
•During the audit, auditors should have heightened skepticism regarding period-end adjusting journal entries that relate to accounts with significant estimates.
•During the conduct of an audit, if a lawyer refuses to furnish the requested information about the client's con-tingencies to the auditor, the auditor should issue an unqualified audit opinion.
•It is true that CPA certificates for auditors are issued by state boards of accountancy.
•It is true that bondholders are one of the users of financial statements.
•It is true that financial statement estimates are based on both subjective and objective factors.

Question 10
Which of the following audit firm members are responsible for overseeing the day-to-day activities of a specific audit?
•Seniors
•Managers
•Partners
•Technical Specialists
•Owners

Question 11
Directional testing involves testing transactions or balances primarily for which type of error?
•None of these are correct.
•Either overstatement nor understatement.
•Understatement.
•Either overstatement or understatement.
•Overstatement.

Question 12
Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons?
•Confirmations are selected based upon zip codes.
•The address may be routed to the client for retrieval and fraudulent signing.
•None of these answers are correct.
•A P.O. Box is more reliable than a street address.
•Confirmations should be sent only to business addresses and not residential

Question 13
Which term describes the type of threat which occurs when top management threatens to replace the audit firm because of a disagreement over an accounting issue?
•Competitive threat
•Undue influence threat
•Financial self-interest threat
•Adverse interest threat
•Management participation threat

Question 14
If the audit client experiences a(an) _____________________, then the auditor would consider this to be an indication of a potential going-concern problem?
•large increase to sales in the month previous to year-end
•None of these answers are correct
•loss of the controller to a competitor
•improper reporting of internal controls by management
•adverse key financial ratios

Question 15
Appropriateness of evidence is a measure of ______________.
•Quality of evidence.
•None of these answers are correct.
•Sufficiency of evidence.
•Quantity of evidence.
•Meaning of evidence.

Question 16
All of the following statements are true, except:
•It is true that when misstatements are detected, but they individually are not material, they should be ignored when determining the appropriate audit report.
•It is true that the need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information.
•During an audit, review activities that are completed towards the end of the audit are quite varied.
•Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover ef-fects of prior-year uncorrected misstatements.
•It is true that, at the end of an audit, adjustments that are "waived" will remain uncorrected.

Question 17
All of the following are true except:
•Materiality relates to the significance or importance of an item.
•Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.
•If an auditor wants to obtain evidence concerning the allowance for doubtful accounts he or she would most likely use an aged trial balance to help identify past due balances.
•Professional skepticism by the auditor is not needed when internal controls over revenue have been tested and found to be effective.
•An incentive for fraud may exist when the granting of stock options is dependent on reaching an earnings goal.

Question 18
All of the following statements are false, except:
•Communication between an auditor and an audit client is deemed to be privileged communication in most states.
•The SEC and PCAOB independence rules for auditors are identical.
•Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved.
•Rule 102, Integrity and Objectivity,of the AICPA Professional Code of Conduct, does not apply to a CPA who is a corporate CFO.
•The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor independence requirements.

Question 19
Before releasing the audit report, the auditor would most likely ___________________.
•issue a management letter
•check on a schedule of partner rotation
•do all of these activities
•estimate client fee for subsequent services to be performed
•perform an analytical review

Question 20
According to the SOX Act, an auditor may perform ______________ without impairing their independence.
•Performing any of these services would impair an auditor's independence.
•internal audit services
•actuarial services
•appraisal services
•tax services

Question 21
According to the Financial Reporting Council (FRC), when is the culture of an audit firm likely to provide a positive contribution to audit quality?
•When the leadership of the audit firm ensures financial considerations drive actions.
•When the leadership of the audit firm ensures partners and other staff have sufficient time and resources to deal with difficult issues as they arise.
•When the leadership of the audit firm ensures robust systems for client acceptance and continuation based on the likelihood of increased audit fees.
•When the leadership of the audit firm creates an environment where achieving efficiency is valued, invested in and rewarded.
•When the audit firm has multinational experience in conducting audits.

Question 22
One form of _____________ is when a cross-sectional analysis of revenue recorded across multiple sales locations is performed.
•ratio analysis
•trend analysis
•completeness analysis
•correlation analysis
•common size analysis

Question 23
Which of the following statements are false? (There are multiple answers)
•The FASB requires that Goodwill should be tested for impairment at least on a quarterly basis.
•A method used by companies to fraudulently inflate revenues includes the use of "side letters" giving the cus-tomer an irrevocable right to return the product.
•The Percentage Approach method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement.
•It is true that an example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits.
•Step 2 of the goodwill impairment test compares the fair value of goodwill with the carrying value of goodwill.

Question 24
Which of the following statements is true?
•Since the auditor is not responsible for the presentation of financial statements, he/she has no responsibility for fraud in the financial statements.
•A CFO intentionally overstating sales to boost profits is an example of fraudulent financial reporting.
•The treasurer's diversion of hundreds of thousands of dollars into a personal money market account is an ex-ample of fraudulent financial reporting.
•The Center for Audit Quality has the primary authority to set auditing standards.
•The Center for Audit Quality was started by the International Federation of Accountants.

Question 25
All of the following statements are true, except:
•Internal control is a process designed to guarantee the achievement of the objectives of reliable financial re-porting, compliance with laws and regulations and ineffective and inefficient operations.
•Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct.
•Under Common Law, liability concepts are developed through court decisions based on negligence, gross neg-ligence, or fraud.
•The need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information.
•The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement.

Question 26
If ______________________, the CPA would still be considered independent.
•CPA's father was a salesman at the CPA's audit client and now a major portion of the father's pension fund is invested in the audit client.
•A CPA's brother is the Vice-President of Sales at the CPA's audit client.
•A CPA's cousin works as a web-site designer at the audit client.
•A CPA's son works summers at the audit client and has earned 10 shares of stock in the audit client.
•The CPA would not be considered independent in any of these situations.

Question 27
The most common criteria against which the auditor measures the fairness of financial statement presentation for a U.S.-based company is:
•Government accounting principles
•Oxley compliance
•Generally accepted accounting principles
•Auditing standards
•Generally accepted accounting standards

Question 28
Which of the following statements is false?
•fee-based compensation for law firms is one of the reasons for increased litigation related to au-dits?
•The class action lawsuit is one of the reasons for increased litigation related to audits?
•If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly.
•The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client.
•Loans between the auditor and the client are permitted in some circumstances.

Question 29
Which of the following statements are true? (There are multiple answers and you should choose all that are true).
•It is true that the audit report can be a verbal presentation to the audit committee about the client.
•It is true that materiality judgments are made in light of the surrounding circumstances, but need not necessarily involve both quantitative and qualitative considerations.
•It is true that there are no differences in audit report requirements across the standards of the AICPA, PCAOB, and IAASB.
•It is true that an auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of users of financial statements.
•It is true that auditors are constantly challenged to evaluate the quality of a client's estimates, including areas such as obsolescence of inventory, allowance for doubtful accounts, and tax provisions among others.

Question 30
The relationship between audit risk and detection risk is ______________.
•inverse
•no relationship
•indirect
•none of these answers are correct
•direct

Question 31
All of the following statements are false, except:
•Not material and clearly trivial are terms that can be used interchangeably.
•Auditors and management should agree on what is considered material.
•When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently.
•If the client company has a consistent pattern of earnings growth, the auditor's concern for fraud in revenue recognition would be eliminated.
•Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been sold to the bank on a recourse basis.

Question 32
Which of the following statements is false?
•An alternative procedure for non-responses to positive confirmations is to examine supporting documents.
•side letter is a contract addendum and it does not increase audit risk.
•Positive confirmations require a response from the customer whether or not they agree or disagree with the indicated account balance.
•Negative confirmations are used when the customer has a large number of relatively small customer balances.
•If confirmations are returned as undeliverable, the auditor should determine the reason.

Question 33
An auditor may use ______________ as a defense under the Securities Act of 1933?
•Immaterial loss
•Independence
•Contributory Negligence
•Scienter
•Due Care

Question 34
All of the following are valid purposes for the management representation letter, except:
•None of these answers are correct.
•It implies that the auditor is responsible for the design of the internal controls.
•It decreases the possibility of misunderstanding concerning the matters that are the subject of the representa-tions.
•It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.
•It reminds management of its responsibility for the financial statements.

Question 35
_______ is an example of an internal risk for an organization.
•Changes in the reliability of source goods.
•Increases in substitute services or products.
•Changes in internal information technology.
•Changes in price of raw materials.
•Changes in regulation that make the business model unsustainable.

Question 36
Select all of the following statements that are true. (There are multiple correct answers and you must select all statements that are true)
•It is true that the most difficult decisions about which opinion to issue are generally centered around decisions based on the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the likelihood of the entity being a going concern.
•The primary client of the internal audit department is management and the audit committee of the Board of Directors.
•External auditors are typically responsible for performing information systems and security audits.
•Internal auditors perform operational audits.
•It is true that the auditor is only concerned about the aggregate internal control deficiencies when determining the appropriate opinion on internal control over financial reporting (ICFR).

Question 37
Which of the following statements are true? (There are multiple correct answers)
•It is true that the AICPA's fundamental principles and guidance for auditing standards can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results.
•It is true that all audit procedures must be completed before year end.
•It is true that the PCAOB is a public board, appointed by Congress, to provide oversight of the firms that audit public companies registered with the SEC.
•It is true that auditing exists because users need unbiased information on which to assess management perfor-mance and make economic decisions.
•It is true that when the risk of material misstatement is increased, the auditor increases the extent of audit pro-cedures and requires less evidence.

Question 38
Which of the following statements are false? (There are multiple correct answers)
•It is true that "clearly trivial" and "not material" are terms that can be used interchangeably.
•It is true that auditors and management should agree on what is considered material.
•According to auditing standards, it is true that accounts receivable confirmations are required to be used if the client's accounts receivable balances are immaterial.
•It is true that the auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate the occurrence assertion.
•The accounts receivable aging schedule is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate.

Question 39
Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to _________________.
•Decrease
•Remain the same
•Become more difficult to ascertain
•Become less difficult to ascertain
•Increase

Question 40
Which of the following statements are false? (There are multiple answers)
•It is true that the amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.
•It is true that materiality relates to the significance or importance of an item.
•It is true that liability concepts developed through court decisions are referred to as statutory law.
•It is true that the auditor uses professional judgment to determine which audit procedures to perform.
•It is true that the auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA.

Question 41
Which of the following statements are true? (There are multiple correct answers)
•It is true that the auditor uses professional judgement to determine which audit procedures to perform.
•According to auditing standards, it is true that accounts receivable confirmations are required to be used on every audit engagement.
•It it true that for external auditing, the primary scope of services performed includes audits of financial state-ments.
•It is true that the audit committee must be comprised of outsiders such as the company's attorney and the audit partner of the company's external audit firm.
•It is true that auditors are required to seek out and find all fraud, regardless of its magnitude.

Question 42
The process of vouching helps establish that ___________________.
•Transactions are complete.
•Transactions are valid.
•Transactions are presented properly.
•None of these answers are correct.
•Transactions have been recorded.

Question 43
______________ is the audit report referred to when the auditor has no reservations about management's fi-nancial statements.
•A peer review
•An integrated report
•An adverse report
•A qualified report
•An unqualified report

Question 44
All of the following statements are false, except:
•Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.
•A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.
•Audit procedures have to be announced or be completed at predictable times.
•An attitude of professional skepticism by the auditor is not needed when internal controls over revenue have been tested and found to be effective.
•The auditor's determination that day's sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis.

Question 45
Which of the following statements are false? (There are multiple answers and you must choose all the ones that are false)
•U.S. GAAP requires a three-step process to determine the impairment of goodwill.
•It is true that when circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures, a disclaimer of opinion will be rendered.
•Materiality applies to both interim financial statements and annual financial statements.
•It is true that an auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropri-ate evidence.
•The repeatability of a process is not a factor to consider when assessing an internal control deficiency.