Organizations that might use a SAS 70 report are:
a. application service providers.
b. mortgage bankers that service mortgages for others.
c. Both a and b.
d. None of the above.
Companies are required to have an auditor complete a review of interim financial
information before filing which form with the SEC?
a. 10Q
b. 8Q
c. 12Q
d. 6Q
e. 4Q
Under GAAS,:
a. the auditor can amend the language of the ICFR audit report.
b. the auditor can issue an adverse opinion on the ICFR without withdrawing from the
engagement.
c. the auditor cannot issue an adverse opinion on ICFR without citing scope limitation.
d. the auditor can issue an adverse opinion on the ICFR only if (s)he issues a qualified
opinion on the financial statements.
A defense against a charge of fraud is that:
a. The auditor did not knowingly or intentionally perform the act.
b. The auditor performed the audit in accordance with GAAS.
c. The auditor relied on the work of third parties and is not subject to fraud charges.
d. All of the above.
The portfolio view of ERM is one in which management reduces risks to acceptable
levels by:
(a) sharing risks with employees.
(b) considering individual business unit risks and then aggregating those risks across
the entity.
(c) avoiding the use of third party service providers in all instances except those with
the highest risk of business interruption.
(d) terminating all entity activities that cause significant risk.
Which of the below depicts the correct path of action an auditor takes in assessing
assertions:
(a) management assertionsaudit proceduresrisk assessment.
(b) management assertionsrisk assessmentaudit evidence.
(c) management assertionsrisk assessmentaudit procedures.
(d) management assertionsmaterial risk assessmentaudit procedures.
When might an auditor choose arbitration over a trial:
a. When the cost of a trial is prohibitive.
b. To avoid possible damage to its reputation.
c. Both a and b.
d. None of the above.
Which of the following is not a step in the process of program development?
(a) Analysis and design.
(b) Construction.
(c) Testing and quality assurance.
(d) Batch processing.
In which publicly-filed document is an auditor most likely to find information about a
potential client’s financial trends?
(a) Form 8K.
(b) Management discussion and analysis section of the Form 10K.
(c) Proxy statements.
(d) Engagement letter.
Which of the following circumstances would not warrant special risk assessment
attention?
(a) New client personnel.
(b) New product lines.
(c) New information systems.
(d) New audit firm.
Which of the following measures is not a good example of a substantive analytical
procedure for inventory activities and related accounts?
a. The inventory turnover ratio.
b. Gross profit margin ratio.
c. Current ratio.
d. Number of days sales in inventory.
There are many different organizations that regulate and govern the accounting
profession, many of which have issued statements and standards that impact the
practice of the profession. Match each of the following terms with the correct
description. Each term will be used only once.
TASK
(a) A phrase meaning that the auditor behaves in a manner causing him or her to appear
independent to others.
(b) The ideal behavior standards included in the AICPA Code of Professional Conduct.
(c) Nonpublic companies; companies that are not required to file audited financial
statements with the SEC.
(d) The enforceable standards included in the AICPA Code of Professional Conduct.
(e) Entity within the AICPA that provides practice monitoring for individuals and firms.
(f) An occupational group with known expertise for a clearly specified body of
knowledge that controls standards of entry and membership for the group and has some
degree of control over its self-discipline and regulation.
(g) Pronouncements of the AICPA that explain the application of Rules and
Interpretations of the Code of Professional Conduct. These pronouncements relate to
specific factual situations for which AICPA members have requested guidance.
(h) Activities that when performed by a CPA make that CPA lack independence
regarding an audit. Certain of these activities are specified by the SEC, but all fall into
categories of auditing one’s own work, making management decisions, and being an
advocate for the client.
(i) An auditor’s state of mind, with no bias toward or against a client or issues related to
an audit engagement.
(j) A review conducted by another CPA firm or a team of CPAs that evaluates the
quality control policies and procedures of a CPA firm.
In general, who is responsible for the SAS 70 report?
a. The user auditor.
b. The service auditor.
c. The service provider.
d. All of the above.
Which of the following procedures should an accountant perform during an engagement
to review the financial statements of a nonpublic entity?
a. Communicate reportable conditions discovered during the assessment of control risk.
b. Send bank confirmation letters to the entity’s financial institutions.
c. Obtain a client representation letter from members of management.
d. Examine cash disbursements in the subsequent period for unrecorded liabilities.
e. Prepare the end-of-the-year bank reconciliation.
Which of the following would be a violation of the general auditing standards:
(a) the auditor accepts an engagement from a firm for whom his brother-in-law works
as the controller.
(b) the auditor hires marketing majors because it cannot afford accounting graduates but
trains them thoroughly.
(c) the auditor allows second-year staff to supervise beginning staff.
(d) All of the above are violations.
When a customer order is for a credit sale, the seller approves the customer’s credit and
documents the:
a. process.
b. approval.
c. order.
d. service.
e. appointment.
The engagement letter includes provisions for the electronic filing of the client
company’s financial reports with the SEC. These provisions include consents which will
authorize the:
(a) use of the audit firm’s logo on each page of the filing.
(b) use of the audit firm’s name in the electronic submission.
(c) retention of audit evidence for a period of 10 years following the audit engagement.
(d) dissemination of the audit report to the auditor’s other clients.
Which of the following is an example of sampling error?
a. Selection of the wrong transactions.
b. Misapplication of random sampling.
c. Selecting transactions not representative of the population.
d. All of the above are examples of sampling errors.
Significant developments in the client’s external environment that affect audit strategy
include:
(a) Industry competition has increased.
(b) Acquisitions or discontinued operations have recently occurred.
(c) A change in ownership and/or capital structure has occurred.
(d) All of the above
Stock compensation plans involve:
a. valuation.
b. compensation expense.
c. vesting plan.
d. All of the above.
Benchmarking is appropriate when:
(a) client ITGC are strong.
(b) client application controls are operating effectively.
(c) the application program has not changed.
(d) All of the above.
An IT specialist may be involved in an audit engagement to assist with any of the
following except
(a) inspecting systems documentation.
(b) inquiring of company personnel about how the processes are carried out and how IT
controls are designed.
(c) preparing the IT planning memo.
(d) planning the tests of IT controls.
An individual in a position to influence the attest engagement is one who:
A. evaluates the performance or recommends the compensation of the attest
engagement partner.
B. directly supervises or manages the attest engagement partner.
C. participates in or oversees, at all successively senior levels, quality control activities
including internal monitoring, with respect to the specific attest engagement.
D. All of the above.
Independence issues that would preclude an audit firm from proposing on a potential
audit client:
(a) are only applicable on public company audit engagements.
(b) are not affected by the Sarbanes-Oxley Act.
(c) cannot be determined until the audit planning process is complete.
(d) may result from current business relationships of the audit firm’s former employees.
The best way to determine whether internal controls and ERM systems are functioning
is through:
(a) communication with external users of accounting reports.
(b) managing a strategic balance between data availability and information overload.
(c) monitoring of day-to-day activities.
(d) reporting of ethical violations.
A proof of cash consists of which of the following:
(a) transfers per books.
(b) bank adjustments.
(c) bank debit memos.
(d) All of the above.
A lead schedule should include which of the following?
a. The client’s general ledger.
b. An line item for each account in the client’s working trial balance.
c. Reference to sample sizes used.
d. All of the above.
Forensic auditors:
a. Investigate only fraud.
b. Look for specific and detailed information.
c. Perform engagements that can result in a standard, clean audit report.
d. May not be CPAs.
The audit of taxes includes:
(a) only liabilities.
(b) both liabilities and receivables.
(c) both balance sheet and income statement accounts.
(d) only a review of current and prior years’ tax liability.
Residential home building companies are primarily involved in which of the following
business activities?
a. Community planning and construction.
b. Financing residential mortgages.
c. Selling land plots to developers.
d. Design of residential community centers.
Professional Payroll Plus: On a single day in May 2007 six businesses filed complaints
against Professional Payroll Plus (PPP). The Florida-based payroll provider filed for
bankruptcy. The IRS and the FBI initiated investigations. When PPP processed payroll
for its clients it withheld money for federal taxes. But at some point PPP stopped
sending the withheld funds to the IRS and instead kept the money for itself. Clients of
PPP discovered the problem when they received notices from the IRS regarding unpaid
taxes. Many of PPP’s clients had to lay off employees or make other cuts to keep their
businesses afloat while paying the IRS.
Using an outside payroll service exposes a company to risk that must be considered by
the auditor.
(a) List specific topics the auditor must address during the financial statement and ICFR
audits when the audit client uses an outside service provider.
(b) List characteristics used to define the role a service organization plays in the user
company’s information system? For each characteristic, identify how it impacts
whether the service provider is part of the company’s information processing system.
(c) What factors influence an auditor’s decision on whether a Type II audit report
provides sufficient evidence about the effectiveness of controls at service organizations?
If a nonpublic company uses IFRS to prepare its financial statements, it cannot receive
an unqualified opinion when audited using the AICPA Statements on Auditing
Standards.
In an audit engagement letter, a clause addressing document retention states that the
auditors will retain the client company’s accounting records until the audit fees have
been collected.
Tracing deals with selecting a document and looking for the posting of the document in
the accounting books and records.
Companies use documents to prepare records of sales and cash-related activities, assist
in verifying that functions are completed, and trigger recording activities in the
accounting records.
Fraud charges do not require the plaintiff to show (s)he has a direct relationship to the
auditor.
Mary Ellen Dillon is deciding between two different job offers, one from a regional
CPA firm engaged in the audit of public clients and the other from a regional accounting
firm who assists smaller clients with their accounting and tax work and who also
performs non-public company audits. The salary is identical and Mary Ellen has come
to you for advice. Provide the advantages as well as disadvantages to working for each
type of firm.
Regional, Public Company Clients: Regional, Non-public
Company Clients:
Advantage: Advantage:
Disadvantage: Disadvantage:
Currently, the primary authoritative body that regulates individual CPAs is the Congress
of the United States.
With respect to an integrated audit, describe the respective responsibilities of
management and the auditor. Provide at least five responsibilities for each party that
would be documented in an engagement letter.
Shareholders, management, and the Board of Directors/audit committee all benefit from
an audit but are said to have different perspectives. If each group were solely
responsible for the decision, would these three categories of constituents prefer to have
the same set of economic events reported differently? For example, would one group
benefit from more aggressive reporting, another from more conservative reporting, and
so on? How might these different preferences impact reporting?”
The auditor obtains representations from management and attorneys prior to issuing the
audit report.
Describe the different types of ICFR audit reports that can be issued and the
circumstances justifying each type of report.
The AICPA Quality Control Standards include leadership responsibilities, often referred
to as the “tone at the top.”
Regardless of the specific form, documentary evidence shows that the shipping process
occurred.
Cash received for sales comes in through several channels.
When payroll is outsourced and the auditor relies on a SAS 70 Type II audit report, dual
testing is not relevant.
The concept of standing determines whether or not the plaintiff may bring a lawsuit.
Unfilled orders are taken off the list after they are received and recorded.