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WorksheetsAuditing Final Exam
Total questions: 25
Worksheet time: 6hrs 15mins
Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance?
A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues.
Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.
Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character.
All of the following nonaudit services are identified by the SEC as generally impairing an auditor’s independence with respect to an audited entity except:
some specific tax services.
information systems design and implementation.
management functions.
human resource services.
Under the SEC’s rules regarding independence, which of the following must an entity disclose?
only fees for systems implementation and design and nonaudit services performed by the audit firm
fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm
only fees for the external audit
only fees for internal and external audit services provided by the audit firm
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a:
set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.
list of violations that would cause the automatic suspension of a CPA’s license.
complete list of all the different kinds of crimes that would be considered as acts discreditable to the profession.
description of a CPA’s procedures for responding to an inquiry from a trial board.
In which of the following situations would a CPA’s independence be considered impaired according to the Code of Professional Conduct?
1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers.
2. The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust.
3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.
1 and 3
2 and 3
1 and 2
1, 2, and 3
An audited company has not paid its 2021 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2022 audit, the 2021 audit fees must be paid before the:
2023 fieldwork is started.
2022 report is issued.
2022 fieldwork is started.
2021 report is issued.
Which of the following legal situations would be considered to impair the auditor’s independence?
An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed.
Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.
Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services.
Actual litigation by the auditor against the present management, alleging management fraud or deceit.
A violation of the profession’s ethical standards is least likely to occur when a CPA:
has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company.
receives a percentage of the amounts invested by the CPA’s audit entities in a tax shelter with the entities’ knowledge and approval.
purchases another CPA’s accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period.
forms an association—not a legally binding partnership—with two other sole practitioners and calls the association Adams, Betts & Associates, CPAs.
Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using:
a justice-based perspective.
a utilitarian perspective.
rule-based AICPA guidelines.
a rights-based approach.
During the audit of Moon Company, the auditor disagrees with management’s estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance?
There is a small but reasonable chance that Accounts Receivable as stated by Moon Company might turn out to be fully collectible.
Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information.
The interests of Moon Company, the auditor, and the public should be weighed equally in the decision.
Moon management has the right to make company estimates.
Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n):
federal court that has issued a valid subpoena.
disciplinary body created under state statute.
successor CPA firm that has been engaged to audit the former audit entity.
authorized quality management review board.
One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:
a system of peer review.
compliance with generally accepted reporting standards.
continuing professional education.
a system of quality management.
In connection with the element of engagement performance, a CPA firm’s system of quality management should ordinarily include procedures covering all of the following except:
financial considerations are not allowed to unduly influence client acceptance decisions.
differences of opinion among engagement team members are appropriately resolved.
engagement teams understand their responsibilities.
engagements exercise appropriate professional judgment.
Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss.
If Cable sues Drake for negligence in failing to discover the overstatement, Drake’s best defense would be that Drake did not:
violate generally accepted auditing standards in performing the audit.
perform the audit recklessly or with an intent to deceive.
have privity of contract with Cable.
sign an engagement letter.
Which of the following best describes whether a CPA has met the required standard of care in auditing an entity’s financial statements?
whether the audit was conducted to investigate and discover all acts of fraud
whether the statements conform to generally accepted accounting principles
whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances
whether the client’s expectations are met with regard to the accuracy of audited financial statements
Jenna Corporation approved a merger plan with Cord Corporation. One of the determining factors in approving the merger was the financial statements of Cord, which had been audited by Frank & Company, CPAs. Jenna had engaged Frank to audit Cord’s financial statements. While performing the audit, Frank failed to discover fraud that later caused Jenna to suffer substantial losses. For Frank to be liable under common-law negligence, Jenna at a minimum must prove that Frank:
was grossly negligent.
failed to exercise due care.
knew of the fraud.
acted with scienter.
Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King’s financial statements, Safe Bank loaned King $500,000. King Corporation and Safe Bank are both located in a state that follows the Ultramares doctrine. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used by King in obtaining a loan. King defaulted on the loan.
If Safe commences an action for ordinary negligence against Brown, and Brown believes it will be able to prove that it conducted the audit in conformity with GAAS, Brown will:
not be liable to Safe, because there is a conclusive legal presumption that following GAAS is the equivalent of acting reasonably and with due care.
be liable to Safe, because Safe relied on the financial statements.
be liable to Safe, because the statute of frauds has been satisfied.
not be liable to Safe, because there was a lack of privity of contract.
How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors’ liability to purchasers of securities beyond that of common law?
Purchasers have to prove only that a loss was caused by reliance on audited financial statements.
Purchasers have to prove either fraud or gross negligence as a basis for recovery.
Privity with purchasers is not a necessary element of proof.
Auditors are held to a standard of care described as “professional skepticism.”
To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove:
Defendant’s Intent to Deceive
Plaintiff’s Reliance on the Registration Statement
Yes & Yes
No & No
Yes & No
No & Yes
Dart Corporation engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay’s opinion was included in Dart’s registration statement. Hansen purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known.
In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Hansen must prove that:
the misstatements contained in Dart’s financial statements were material.
Jay was negligent.
the unqualified opinion contained in the registration statement was relied on by Hansen.
Jay knew of the misstatements.
Dart Corporation engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay’s opinion was included in Dart’s registration statement. Hansen purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known.
If Hansen succeeds in the Section 11 suit against Dart, Hansen will be entitled to:
damages of three times the original public offering price.
monetary damages comparable to the loss suffered.
damages, but only if the shares were resold before the suit was started.
rescind the transaction.
Fritz Corporation, whose shares are publicly traded, engaged Hay Associates, CPAs, to audit its financial statements. Hay gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Hay’s opinion was included in Fritz’s Form 10-K filed with the Securities and Exchange Commission. Samson purchased shares and suffered a loss when the stock declined in value after the misstatements became known.
In a suit against Hay under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Samson must prove all of the following except that:
the stock purchase involved a national securities exchange.
Samson was a foreseen user of the financial statements.
Hay acted with intent to deceive.
Samson suffered a loss as a result of reliance on the financial statements.
Under the Private Securities Litigation Reform Act, Baker, CPA, reported certain uncorrected illegal acts to Supermart’s board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart’s financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to:
resign from the audit engagement within 10 business days.
notify the stockholders that the financial statements are materially misstated.
deliver a report concerning the illegal acts to the SEC within one business day.
withhold an audit opinion until Supermart takes appropriate remedial action.
Which of the following is not a provision of the Sarbanes-Oxley Act?
Broad investigative and disciplinary authority over registered public accounting firms is granted to the Public Company Accounting Oversight Board.
It is a criminal offense to take any harmful action in retaliation against anyone who voluntarily comes forward to report a suspected accounting or securities fraud.
The statute of limitations for actions under Section 10(b) and Rule 10b-5 was reduced to one year from the discovery of fraud and five years after the fraud occurred.
A requirement to retain audit workpapers for at least five years.
Which of the following is a provision of the Foreign Corrupt Practices Act?
It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.
The auditor’s detection of illegal acts committed by officials of the auditor’s publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission.
If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not reasonably estimated, the auditor’s report should be modified.
Every publicly held company must devise, document, and maintain a system of internal accounting controls sufficient to provide reasonable assurance that internal control objectives are met.
