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WorksheetsExam 1 Prep
Total questions: 74
Worksheet time: 37mins
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
It is difficult to prepare financial statements that fairly present a company’s financial position, operations, and cash flows without the expertise of an independent auditor.
It is a customary courtesy that all stockholders of a company receive an independent report on management’s stewardship of the affairs of the business.
Which of the following professional services is an attestation engagement?
A consulting service engagement to provide computer-processing advice to a client
The preparation of financial statements from a client’s financial records
An income tax engagement to prepare federal and state tax returns
An engagement to report on compliance with statutory requirements
Which of the following attributes is likely to be unique to the audit work of CPAs as compared to the work performed by practitioners of other professions?
Independence
Competence
Due professional care
Complex body of knowledge
Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide
a means of assurance that internal accounting controls are functioning as planned.
the results of internal examinations of financial and accounting matters to a company’s top-level management.
a measure of management performance in meeting organizational goals.
Which of the following best describes the operational audit?
It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company.
It concentrates on implementing financial and accounting control in a newly organized company.
It focuses on verifying the fair presentation of a company’s results of operations.
It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.
Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and
adherence to specific rules or procedures.
accuracy.
evaluation.
internal control.
Which of the following best describes what is meant by U.S. auditing standards?
Acts to be performed by the auditor
Measures of the quality of the auditor’s performance
Procedures to be used to gather evidence to support financial statements
Audit objectives generally determined on audit engagements
The Responsibilities principle underlying AICPA auditing standards includes a requirement that
the audit be adequately planned and supervised.
the auditor’s report state whether or not the financial statements conform to generally accepted accounting principles.
professional judgment be exercised by the auditor.
informative disclosures in the financial statements be reasonably adequate.
Who establishes auditing standards applicable to private companies and other nonpublic entities in the U.S.?
Financial Accounting Standards Board (FASB)
Public Company Accounting Oversight Board (PCAOB)
American Institute of Certified Public Accountants (AICPA)
Securities and Exchange Commission (SEC)
Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?
Complying with laws and regulations
Using statistical sampling techniques
Managing human resources
Considering audit risk and materiality
One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this objective is provided through
continuing professional education.
a system of quality control.
a system of peer review.
compliance with generally accepted reporting standards.
Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards?
A title that emphasizes the report is from an independent auditor
The city and state of the audit firm issuing the report
A statement explaining management’s responsibilities for the financial statements
The name of the engagement partner
The date of the CPA’s opinion on the financial statements of the client should be the date of the
completion of all important audit procedures.
closing of the client’s books.
finalization of the terms of the audit engagement.
submission of the report to the client.
If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the
name of the other auditor.
nature of the inquiry into the other auditor’s professional standing and extent of the review of the other auditor’s work.
reasons for being unwilling to assume responsibility for the other auditor’s work.
portion of the financial statements audited by the other auditor.
An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)
unmodified opinion.
qualified opinion.
unmodified opinion with explanatory paragraph.
qualified opinion with explanatory paragraph regarding consistency.
When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n)
adverse opinion.
qualified opinion only.
unmodified opinion.
unmodified opinion with explanatory paragraph.
The auditor’s report contains the following: “We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors.” These sentences
assume responsibility for the other auditor.
indicate a division of responsibility.
require a departure from an unmodified opinion.
are an improper form of reporting.
What is the meaning of the rule that requires the auditor be independent? Choose the best response.
The auditor must adopt a critical attitude during the audit.
The auditor’s sole obligation is to third parties.
The auditor may have a direct ownership interest in the client’s business if it is not material.
The auditor must be without bias with respect to the client under audit.
Which of the following services can be offered to public company audit clients under SEC requirements and the Sarbanes–Oxley Act?
Tax services for executives involved in financial reporting
Tax planning not involving tax shelters
Internal audit outsourcing
Bookkeeping and other accounting services
An auditor strives to achieve independence in appearance to
comply with auditing standards related to audit performance.
become independent in fact.
maintain public confidence in the profession.
maintain an unbiased mental attitude.
In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the audit fee?
A fee based on whether the CPA's report on the client's fin. stmt. results in the approval of a bank loan.
A fee based on the outcome of a bankruptcy proceeding.
A fee based on the nature of service rendered and the CPA's expertise instead of the actual time spent on the engagement.
A fee based on the fee charged by the prior auditor.
The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the Code?
Disclosing confidential information in compliance with a subpoena issued by a court.
Disclosing confidential information in order to properly discharge the CPA’s responsibilities in accordance with the profession’s standards.
Disclosing confidential information to another accountant interested in purchasing the CPA’s practice.
Disclosing confidential information during an AICPA-authorized peer review.
A CPA’s retention of client records as a means of enforcing payment of an overdue audit fee is an action that is
not addressed by the AICPA Code of Professional Conduct.
acceptable if sanctioned by state laws.
prohibited under the AICPA rules of conduct.
violation of GAAP.
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff
is the client’s creditor who sues the accountant for negligence.
can prove the presence of gross negligence that amounts to a reckless disregard for the truth.
is the accountant’s client.
bases the action upon fraud.
The 1136 Tenants case was important chiefly because of its emphasis on the legal liability of the CPA when associated with
an SEC engagement.
an audit resulting in a disclaimer of opinion.
letters for underwriters.
unaudited financial statements.
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on
negligence.
gross negligence.
strict liability.
criminal deceit.
The following questions deal with liability under the 1933 and 1934 securities acts. Choose the best response. Major, Major, and Sharpe, CPAs, are the auditors of MacLain Technologies. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements were revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement that included the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if
the misstatements were caused primarily by MacLain.
it can be shown that at least some of the investors did not actually read the audited fin. stmts.
it can prove due diligence in the audit of the fin. stmts. of MacLain.
MacLain had expressly assumed any liability in connection with the public offering.
Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities, Inc., to the SEC. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. The customers have instituted legal action against Donalds based on Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934. Which of the following is likely to be Donalds’ best defense?
Section 10b does not apply to them.
They did not intentionally certify false financial statements.
They were not in privity of contract with the creditors.
Their engagement letter specifically disclaimed any liability to any party that resulted from Markum’s fraudulent conduct.
A CPA audited the financial statements included in a registration statement for an issuance of securities to the public. If the financial statements contained an omission that caused a purchaser of the securities to sustain damages, the
SEC Act of 1934 applies.
purchaser must prove that (s)he was damaged by omission, but not negligence, privity or reliance.
CPA will be liable only for gross negligence.
due diligence defense is not available to the CPA.
The major reason an independent auditor gathers audit evidence is to
form an opinion on the financial statements.
detect fraud.
evaluate management.
assess control risk.
Which of the following best describes the reason why an independent auditor reports on financial statements?
A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.
Different interests may exist between the company preparing the statements and the persons using the statements.
A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.
Poorly designed internal controls may be in existence.
Because of the risk of material misstatement, an audit should be planned and performed with an attitude of
professional skepticism.
complete trust.
indifference.
overconfidence.
An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards?
Misappropriation of an asset or groups of assets
Clerical mistakes in the accounting data underlying the financial statements
Mistakes in the application of accounting principles
Misinterpretation of facts that existed when the financial statements were prepared
An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s assertion about account balances of:
existence.
completeness.
accuracy, valuation, and allocation.
rights and obligations.
An auditor will most likely review an entity’s periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management’s assertion about classes of transactions of:
occurrence.
classification.
completeness
accuracy
In the audit of accounts payable, an auditor’s procedures will most likely focus primarily on management’s assertion about account balances of
existence.
completeness.
accuracy, valuation, and allocation.
classification.
The auditor’s responsibility regarding material misstatements caused by fraud is
less than the auditor’s responsibility regarding material misstatements caused by error.
greater than the auditor’s responsibility regarding material misstatements caused by error.
the same as the auditor’s responsibility regarding material misstatements caused by error.
either less than or greater than the auditor’s responsibility regarding material misstatements caused by error, depending on the circumstances.
Which of the following would not have a direct impact in determining the sufficiency of evidence gathered during an audit?
The cost-benefit relationship of obtaining the audit evidence
The quality of audit evidence obtained
The auditor’s professional judgment
The risk of material misstatement
When determining the auditor’s or management’s responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect?
The auditor is not responsible for preventing noncompliance with laws and regulations.
Management and those charged with governance are responsible for ensuring that the company’s operations are conducted in accordance with all applicable laws and regulations.
The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations.
The auditor is expected to detect the client’s noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself.
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
Confirmation of an account payable balance mailed by and returned directly to the auditor
A sales invoice issued by the client and supported by a delivery receipt from an outside trucker
A check, issued by the company and bearing the payee’s endorsement, that is included with the bank statements mailed directly to the auditor
An audit schedule prepared by the client’s controller and reviewed by the client’s treasurer
Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
Vendor’s invoice
Bank statement obtained from the client
Prenumbered sales invoices
Computations made by the auditor
Which of the following presumptions is correct about the reliability of audit evidence?
Information obtained indirectly from outside sources is the most reliable audit evidence.
To be reliable, audit evidence should be convincing rather than merely persuasive.
Reliability of audit evidence refers to the amount of corroborative evidence obtained.
Effective internal control provides more assurance about the reliability of audit evidence.
Which of the following situations has the best chance of being detected when a CPA compares 2023 revenues and expenses with the prior year and investigates all changes exceeding a fixed percent?
An increase in property tax rates has not been recognized in the company’s 2023 accrual.
The cashier began lapping accounts receivable in 2023.
Because of worsening economic conditions, the 2023 provision for uncollectible accounts was inadequate.
The company changed its capitalization policy for small tools in 2023.
Which of the following would not be considered to be an analytical procedure?
Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.
Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics.
Computing accounts receivable turnover by dividing credit sales by the average net receivables.
Developing the expected current-year sales based on the sales trend of the prior 5 years.
Which of the following is not a primary purpose of audit documentation? Choose the best response.
To coordinate the audit
To assist in preparation of the audit report
To support the financial statements
To provide evidence of the audit work performed
During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be:
evidence supporting financial statements
a client-owned record of conclusions reached by the auditors who performed the engagement
support for the auditor's representations as to compliance with auditing standards
a record to be used as a basis for the following year's engagement
Which of the following types of audit evidence is generally the most reliable?
A bank confirmation
A bank statement
Analytical procedures
Inquiries of the audit committee
An auditor most likely would apply analytical procedures in the overall review stage of an audit to
identify unusual or unexpected balances that were not previously identified.
obtain an understanding of high-risk areas.
evaluate the design and implementation of internal control.
identify related party transactions that may not have been previously identified.
Which of the following will most likely indicate the existence of related parties?
Writing down obsolete inventory prior to year end
Failing to correct deficiencies in the client’s system of internal control
An unexplained increase in gross margin
Borrowing money at a rate significantly below the market rate
Which of the following is least likely to be included in the auditor’s engagement letter?
Details about the preliminary audit strategy
Overview of the objectives of the engagement
Statement that management is responsible for the financial statements
Description of the level of assurance obtained when conducting the audit
When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether:
the predecessor’s work should be used.
the company follows the policy of rotating its auditors.
in the predecessor’s opinion, the system of internal control of the company has been satisfactory.
the engagement should be accepted.
A successor would most likely make specific inquiries of the predecessor auditor regarding:
specialized accounting principles of the client’s industry.
the competency of the client’s internal audit staff.
the uncertainty inherent in applying sampling procedures.
disagreements with management as to auditing procedures.
Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement?
Staff will need to be rescheduled to cover this new client.
There will be a client-imposed scope limitation.
The firm will have to hire a specialist in one audit area.
The client’s financial reporting system has been in place for 10 years.
Which one of the following statements is correct concerning the concept of materiality?
Materiality is determined by reference to guidelines established by the AICPA.
Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
Materiality depends on the nature of an item rather than the dollar amount.
Materiality is a matter of professional judgment.
A client decides not to record an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
The financial statements do not conform with generally accepted accounting principles (GAAP).
The financial statements contain unadjusted misstatements that should result in a qualified opinion.
The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.
Which of the following procedures would a CPA least likely perform during the planning stage of the audit?
Determine the timing of testing
Take a tour of the client’s facilities
Perform inquiries of outside legal counsel regarding pending litigation
Determine the effect of information technology on the audit
A successor auditor’s inquiries of the predecessor auditor should include questions regarding
the number of engagement personnel the predecessor assigned to the engagement.
the assessment of the objectivity of the client’s internal audit function.
communication to management and those charged with governance regarding significant deficiencies in the system of internal control
the response rate for confirmations of accounts receivable
Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?
The entity’s management places no emphasis on meeting publicized earnings projections.
Significant differences between the physical inventory count and the accounting records are not investigated.
Monthly bank reconciliations ordinarily include several large outstanding checks.
Cash transactions are electronically processed and recorded, leaving no paper audit trail.
Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?
Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.
The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?
Presumptive
Judgmental
Criticizing
Questioning
Which of the following does not increase the need for sufficient appropriate audit evidence?
A lower acceptable level of detection risk
An increase in the assessed control risk
A lower acceptable audit risk
A decrease in the assessed inherent risk
As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to
find smaller misstatements.
find larger misstatements.
increase the performance materiality in the accounts.
increase inherent risk in the accounts.
An auditor may compensate for a high assessed level of control risk by increasing the:
level of detection risk.
extent of tests of controls.
preliminary judgement of acceptable audit risk.
extent of substantive tests.
Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as
detection risk.
inherent risk.
sampling risk.
The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as
sampling risk.
inherent risk.
control risk.
detection risk.
Inherent risk and control risk differ from planned detection risk in that they
arise from the misapplication of auditing procedures.
may be assessed in either quantitative or nonquantitative terms.
exist independently of the financial statement audit.
can be changed at the auditor’s discretion.
Which of the following procedures would a CPA most likely perform during the planning stage of the audit?
Evaluate the reasonableness of management’s allowance for doubtful accounts.
Determine areas where there is a higher risk of material misstatement.
Evaluate the significance of uncorrected misstatements.
Confirm a sample of accounts receivable.
Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk?
The furniture industry has experienced an overall increase in demand.
Modern Home recently engaged in a complex derivative transaction.
Modern Home experienced an increase in working capital.
Modern Home purchased expensive new equipment in the current year.
Which action regarding fraud is an activity related to performance of risk assessment procedures?
Document the results of procedures used to address the risk of fraud.
Discussions among the engagement team members regarding the risks of material misstatements due to fraud.
Consider the characteristics of journal entries, particularly those made near year end.
Consider whether estimates prepared and recorded by management could indicate a bias in reporting.
Analytical procedures used in planning an audit should focus on identifying
material weaknesses in the system of internal control.
the predictability of financial data from individual transactions.
the various assertions that are embodied in the financial statements.
areas that may represent specific risks relevant to the audit.
A successor would most likely make specific inquiries of the predecessor auditor regarding
specialized accounting principles of the client’s industry.
the competency of the client’s internal audit staff.
the uncertainty inherent in applying sampling procedures.
disagreements with management as to auditing procedures.
Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?
Property and equipment are usually sold at a loss before being fully depreciated.
Unusual discrepancies exist between the entity's records and confirmation reports.
Monthly bank reconciliations usually include several in-transit items.
Clerical errors are listed on a computer-generated exception report.
Which of the following statements reflects an auditor's responsibility for detecting fraud?
An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override.
An auditor should plan the audit to detect fraud caused by departures from GAAP.
An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection.
An auditor should design the audit to provide reasonable of detecting errors and fraud that are material to the financial statements.
Which of the following is least likely to suggest to an auditor that the client's management may have overridden internal control?
There are numerous delays in preparing timely financial reports.
Management does not correct internal control weaknesses that it knows about.
Differences are always disclosed on a computer exception report.
There have been two new controllers this year.
