Auditing theories

Which of the following is a “self review” threat to member independence?

• a. An engagement team member has a spouse that serves as CFO of the attest client

• b. A second partner review is required on all attest engagements.

• c. An engagement team member prepares invoices for the attest client.

• d. An engagement team member has a direct financial interest in the attest clien

Answer explanation

Self Review - the team member would be reviewing his or her own work.

Answer (a) is incorrect familiarity threat.

Answer (b) is incorrect safeguard to threats to independence.

Answer (d) is incorrect

it represents a financial self-interest threat to independence.

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?

• a. Obtaining a collateralized automobile loan from a financial institution client.

• b. Litigation with a client relating to billing for consulting services for which the amount is immaterial

• c. Employment of the CPA’s spouse as a client’s director of internal audit.

• d. Acting as an honorary trustee for a not-for-profit organization client.

Answer explanation

c. is the correct answer

The AICPA’s Code of Professional Conduct Independence Rule

Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions?

• a. Due to professional care

• b. Independence

• c. Competence

• d. Complex body of knowledge

Answer explanation

independence is absolutely required for the performance of audits; other professions do not in general require such independence.

The Sarbanes-Oxley Act of 2002 authorized creation of the

• a. Auditing Standards Board.

• b. Public Company Accounting Oversight Board

• c. Financial Accounting Standards Center.

• d. Corporate Governance Institute

When establishing an understanding with an audit client, that understanding should be documented

• a. Through use of an engagement letter.

• b.Through a written communication with the client

• c. Either orally or in writing witht the client.

• d. In a manner completely based on the auditor's seasoned professional judgment.

An effective system of internal control

• can reduce the cost of external audit

• eliminate risks and potential loss to the organization

• cannot be circumvented by the management

• can prevent collusion among employees

the overall atttitude and awareness of an entity's board of directors concerning the importance of the internal control usually is reflected in its

• computer-based controls

• control environment

• safeguard over access to assets

• system of segregation of duties

Material weaknesses in internal control of a public company must be reported in writing to which of the following?

• PICPA

• audit committee of the company's board of directors

• SEC

• members of the management who are responsible for the related area of the company

Test of controls are designed to obtain evidence to support the auditor's risk assessment of control risk

• at zero level

• at the maximum level

• at a high level

• at less than high level

A PCAOB engagement that focuses on the sufficiency of a CPA firm’s quality control system is most likely to be referred to as a(n)

• a. Financial statement audit.

• b. Inspection.

• c. Peer review.

• d. Quality control