1) What client information is needed by auditors in creating lead schedules?
A) Interim statements prepared by the client for the company’s 3rd quarter financial
results
B) General ledger information, including unadjusted ending balances and beginning
balances for accounts
C) A schedule of adjusting entries made by the client for all balance sheet accounts
D) Detailed transaction information that may explain the changes in balance sheet
accounts for the current year under audit
2) In an audit of a non-public company, the less control risk there is, the smaller the
amount of planned substantive evidence that is required.
A) True
B) False
3) Which of the following statements is usually true?
A) It is easier for the auditor to uncover fraud than errors
B) It is easier for the auditor to uncover indirect-effect illegal acts than fraud
C) The auditor’s responsibility for detecting direct-effect illegal acts is similar to the
responsibility to detect fraud
D) The auditor’s responsibility for detecting indirect-effect illegal acts is similar to the
responsibility to detect fraud
4) The lower the dollar amount of the preliminary judgment the more audit evidence is
required.
A) True
B) False
5) The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate
off the engagement every five years?
A)
B)
C)
D)
6) Auditors often integrate procedures for presentation and disclosure objectives with:
A)
B)
C)
D)
7) If an auditor wishes to rely on the work of internal auditors (IA), the auditor must
obtain satisfactory evidence related to the IA’s competence, integrity, and objectivity.
A) True
B) False
8) In process cost systems, costs are accumulated by individual jobs.
A) True
B) False
9) A significant customer of the firm suffers a large economic loss after year end, but
prior to completion of field work. The audit client believes this event will have material
effect on the financial statements. The auditor should:
A) adjust the financial statements for the year under audit
B) add a paragraph to the audit report
C) advise the client to disclose the event in the notes to the financial statements
D) advise the client to delay issuing the financial statements until the economic loss can
be determined
10) Which of the following misstatements is most likely to be uncovered during an
audit of a client’s bank reconciliation?
A) Duplicate payment of a vendor’s invoice
B) Billing a customer at a lower price than indicated by company policy
C) Failure to record a collection of a note receivable by the bank on the client’s behalf
D) Payment to an employee for more than the hours actually worked
11) The test of details of balances procedure that requires the auditor to foot the
outstanding check list and deposits in transit is an attempt to satisfy which audit
objective?
A) Cutoff
B) Presentation and disclosure
C) Detail tie-in
D) Completeness
12) The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from
providing which of the following types of services to that company?
A) Reviews of quarterly financial statements
B) Preparation of corporate tax returns
C) Most consulting services
D) Tax services
13) Knowledge of both general and application controls is crucial for auditors in
understanding how accounting information is recorded and reported.
A) True
B) False
14) Accounts receivable confirmations must be controlled by the client from the time
they are prepared until the time they are returned to the auditor.
A) True
B) False
15) A client has a calendar year-end. Listed below are four events that occurred after
December 31. Which one of these subsequent events might result in adjustment of the
December 31 financial statements?
A) sale of a major subsidiary
B) adoption of accelerated depreciation methods
C) write-off of a substantial portion of inventory as obsolete
D) collection of 90% of the accounts receivable existing at December 31
16) The auditor must communicate significant deficiencies in internal control only after
the entire audit is complete to ensure the auditor has a sufficient understanding of the
circumstances surrounding the deficiency.
A) True
B) False
17) Tolerable misstatement as set by the auditor:
A) decreases acceptable audit risk
B) increases inherent risk and control risk
C) affects planned detection risk
D) does not affect any of the four risks
18) When a client uses perpetual inventory records, the tests of details of balances for
inventory can be significantly reduced if the auditor believes the records are accurate.
The controls over the acquisitions included in the records are normally tested as a part
of the:
A) tests of controls
B) tests of controls and tests of transactions
C) tests of details of balances
D) analytical procedures and tests of controls
19) The Public Company Accounting Oversight Board states that reasonable assurance
allows a:
A) small likelihood of ineffective internal controls
B) remote likelihood that material misstatements will not be prevented or detected by
internal control
C) likelihood that material misstatements will not be prevented or detected by internal
control
D) high likelihood that material misstatements will not be prevented or detected by
internal control
20) The scenarios below all involve a possible violation of the
1> Which rule of the Code the scenario falls under and
2> If the scenario is a violation of the Code for the CPA Firm.
Violation Code of Conduct Rule:
a. Yes b. No c. 101: Independence d. 102: Integrity and Objectivity e. 302: Contingent
Fees f. 501: Acts Discredible g. 503: Commission and Referal Fees h. 505: Form of
Organization & Name
Scenario
1> Margaret Henry is a partner in the Tupelo office of Jenkins & Thorn, CPAs.
Margaret’s father is the controller at Markrich Sporting Supplies, Inc., a publicly held
company in Tupelo. Markrich is one of Jenkins & Thorn’s audit clients. Margaret is not
involved in the audit of Markrich.
2> Jason Alexander is an audit manager with Reese & Co., CPAs. Jason owns 100
shares of common stock in one of the firm’s audit clients, but he does not provide any
audit or non-audit services to the company.
3> The accounting firm of Fine & Herman, CPAs, provides bookkeeping and tax
services for Henderson Corporation, a privately held company. Mr. Herman also
performs the annual audit of Henderson Corporation.
4> Elaine Cooper CPA, is the auditor of Paula’s Pizza. Towards the end of the audit,
Paula gave Elaine her estimate of receivable collectability and Elaine accepted it
without further cooperation.
5> Charley Ray, CPA, is a member of the engagement team that performs the audit of
Desiree Corporation. Charley’s five-year-old daughter, Becky, received ten shares of
Desiree common stock for her fifth birthday in a trust fund established by Becky’s
grandmother.
6> Freeman and Johnson formed a successful CPA practice ten years ago. In 20×4, they
approached Adam Sawtooth, a surgeon and medical expert, and asked him to assist
them with their growing medical consulting practice. Sawtooth agreed, but only after he
was given an ownership interest in the firm. Sawtooth does intend to reduce his private
practice hours and spend 40% of his working hours devoted to the Freeman & Johnson
practice.
7> Salley Preen has a successful computer network consulting business. Sally has
recommended one of her clients to Sam Walton, CPA. To show gratitude for the
referral, Sam has agreed to pay Sally a token gift of $50. Sam has not disclosed the
payment arrangement to his new clients.
8> The accounting firm of Swift & Taylor, CPAs, is negotiating a fee with a new audit
client where the client will pay $50,000 if the client obtains the line of credit needed for
working capital purposes otherwise, the fee will be $40,000.
9> Brad Long, CPA, was traveling from Orlando to Miami, Florida when he was pulled
over by a police officer on suspicion of driving under the influence. He was convicted
in court of driving while under the influence of alcohol and received six months
probation.
10> Sammy Bryant, CPA, is a senior in a one-office CPA firm that audits Childress,
Inc., a closely held corporation. Sammy’s sister was recently appointed as the assistant
controller for Childress, Inc.
21) Many companies use outside payroll services to process payroll. Which of the
following regarding the auditors responsibilities is most correct regarding their reliance
on the internal controls of these outside payroll services?
A) must
B) cannot
C) rarely
D) can often
22) Internal controls normally include procedures designed to provide reasonable
assurance that:
A) employees act with integrity when performing their assigned tasks
B) transactions are executed in accordance with management’s authorization
C) decision processes leading to management’s authorization of transactions are sound
D) collusive activities would be detected by segregation of employee duties
23) Match eight of the following terms (a-n) with the definitions provided below (1-8):
a.Foreign Corrupt Practices Act
b.Securities Exchange Act of 1934
c.Securities Litigation Uniform Standards Act of 1998
d.Securities Act of 1933
e.Ultramares doctrine
f.Audit risk
g.Audit failure
h.Standards failure
i.Business failure
j.Absence of causal connection
k.Contributory negligence
l.Lack of duty to perform
m.Private Securities Litigation Reform Act
n.Nonnegligent performance
________ 1> A situation in which an incorrect audit opinion is issued because it failed
to comply with the requirements of auditing standards.
________ 2> A federal statute dealing with companies that trade securities on national
and over-the-counter exchanges. Auditors are involved because the annual reporting
requirements include audited financial statements.
________ 3> An auditor’s legal defense under which the auditor claims that the client’s
own actions either resulted in the loss that is the basis for damages or interfered with
the conduct of the audit in such a way that prevented the auditor from discovering the
cause of the loss.
________ 4> A federal statute that makes it illegal to offer a bribe to an official of a
foreign country.
________ 5> A common-law approach to third-party liability in which ordinary
negligence is insufficient for liability to third parties, because of the lack of privity of
contract between the third-party and the auditor unless the third-party is a primary
beneficiary.
________ 6> A federal statute designed to significantly reduce the potential damages in
federal securities-related litigation by providing for proportionate liability in most
cases.
________ 7> An auditor’s legal defense under which the auditor claims that the audit
was performed in accordance with generally accepted auditing standards.
________ 8> An auditor’s legal defense under which the auditor claims that the failure
to follow auditing standards did not cause the damages suffered by the client.
24) When issuing a debt compliance letter, the auditor’s opinion should be in the form
of a negative assurance.
A) True
B) False
25) A proof of cash represents:
A) a test of controls and substantive test of transactions
B) a substantive test of transactions
C) a substantive test of transactions and test of details of balances
D) a test of details of balances
26) Which of the following is required for a firm to designate itself “Member of the
American Institute of Certified Public Accountants” on its letterhead?
A) At least one of the partners must be a member of the
B) All partners must be members of the
C) The partners whose names appear in the firm name must be members of the
D) A majority of the partners must be members of the
27) A major purpose of federal securities regulations is to:
A) provide sufficient reliable information to the investing public who purchase
securities in the marketplace
B) establish the qualifications for accountants who are members of the profession
C) eliminate incompetent attorneys and accountants who participate in the registration
of securities to be offered to the public
D) provide a set of uniform standards and tests for accountants, attorneys, and others
who practice before the Securities and Exchange Commission
28) Which of the following is an illustration of liability under the federal securities
acts?
A) Client sues auditor for not discovering a theft of assets by an employee
B) Bank sues auditor for not discovering that borrower’s financial statements are
misstated
C) Combined group of stockholders sue auditor for not discovering materially misstated
financial statements
D) auditor sues client for not cooperating during engagement
29) The audit objective that requires the auditor to determine that notes payable on the
notes payable schedule are properly classified can be tested by performing the
procedure to:
A) confirm notes payable
B) examine corporate minutes for loan approval
C) examine notes, minutes, and bank confirmations for restrictions
D) review the notes to determine whether any are with related parties
30) The auditor’s responsibility with respect to events occurring between the balance
sheet date and the end of the audit examination is best expressed by which of the
following statements?
A) The auditor is fully responsible for events occurring in the subsequent period and
should extend all detailed procedures through the last day of fieldwork
B) The auditor is responsible for determining that a proper cutoff has been made and
performing a general review of events occurring in the subsequent period
C) The auditor’s responsibility is to determine that a proper cutoff has been made and
that transactions recorded on or before the balance sheet date actually occurred
D) The auditor has no responsibility for events occurring in the subsequent period
unless these events affect transactions recorded on or before the balance sheet date
31) An auditor’s substantive analytical procedure provides the auditor with an interest
expense amount that is significantly higher than the client’s recorded interest expense.
This finding would most likely lead the auditor to conclude that:
A) client has not recorded all long-term interest bearing debt in the accounting records
B) client has not recorded all interest expense paid or accrued
C) client has not properly accounting for the discount of bonds payable account
D) client has not properly recorded interest income
32) Materiality is an essential consideration in determining the appropriate type of
report under a given set of circumstances. Which of the following is not considered an
immaterial instance that would not cause the financials to become qualified?
A) Immediately expensing office supplies rather than inventorying them
B) Recording prepaid insurance as an asset in the prior year and expensing it in the
current year
C) A misstatement in property, plant and equipment affects a user’s decision
D) All of the above are immaterial
33) The distribution of which of the following types of reports is unrestricted?
A) examinations and reviews
B) reviews and agreed-upon procedures
C) examinations and agreed-upon procedures
D) examinations, reviews, and agreed-upon procedures
34) The generally accepted auditing standard that requires “Adequate technical training
and proficiency” is normally interpreted as requiring the auditor to have:
A) formal education in auditing and accounting
B) worked for an entity similar to the entity being audited
C) independence in mental attitude
D) a graduate degree in a business field
35) When a client has changed their method of valuing inventory from FIFO to LIFO
and the change has a material effect on the financial statements. If the auditor does not
concur with the appropriateness of the change, the auditor should issue a(n):
A) disclaimer
B) adverse opinion
C) unqualified opinion
D) qualified opinion
36) Which is usually included in an engagement letter?
A)
B)
C)
D)
37) Receiving reports are normally only used to document the receipt of goods and are
not used to document the receipt of services.
A) True
B) False
38) When are auditors likely to encounter judgment problems in the use of analytical
procedures?
A) Whenever the auditor places reliance on management’s explanations for unusual
fluctuations in account balances without first developing independent expectations
B) Whenever the auditor allows unaudited balances to unduly influence his/her
expectations of current balances
C) Whenever the auditor fails to consider the pattern reflected by several unusual
fluctuations when trying to explain what caused them
D) The auditor is likely to encounter judgment problems in each of the above instances
39) A CPA who has been engaged to audit financial statements that were prepared on a
cash basis:
A) must ascertain that there is proper disclosure of the fact that the cash basis has been
used, the general nature of material items omitted, and the net effect of such omissions
B) may not be associated with such statements which are not in accordance with
generally accepted accounting principles
C) must render a qualified report explaining the departure from generally accepted
accounting principles in the opinion paragraph
D) must restate the financial statements on an accrual basis and then render the standard
(short-form) report
40) The process of assessing control risk considering only non IT controls is known as?
A) the single-stage audit
B) the test deck approach
C) auditing around the computer
D) generalized audit software (GAS)