WEEK ONE ACCT 444 Multiple-Choice Questions and Problems: 1-14; 115; 1-21; 2-16; 2-17; 2-21; 4-18;

4-19; 4-22; 26-20, 26-21; 26-22.

1-14 (Objectives 1-1, 1-3, 1-5) The following questions deal with audits by CPA firms. Choose the best response.
a. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? (1) It is difficult to prepare financial statements that fairly present a companys financial position, operations, and cash flows without the expertise of an independent auditor. (2) It is managements responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. (3) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. (4) It is a customary courtesy that all stockholders of a company receive an independent report on managements stewardship of the affairs of the business. b. Independent auditing can best be described as (1) a branch of accounting. (2) a discipline that attests to the results of accounting and other functional operations and data. (3) a professional activity that measures and communicates financial and business data. (4) a regulatory function that prevents the issuance of improper financial information. c. Which of the following professional services is an attestation engagement? (1) A consulting service engagement to provide computer-processing advice to a client. (2) An engagement to report on compliance with statutory requirements. (3) An income tax engagement to prepare federal and state tax returns. (4) The compilation of financial statements from a clients financial records. d. In performing an attestation engagement, a CPA typically (1) supplies litigation support services. (2) assesses control risk at a low level. (3) expresses a conclusion about an assertion.

(4) provides management consulting advice.

1-15 (Objectives 1-6, 1-7) The following questions deal with types of audits and auditors. Choose the best response.
a. 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 (1) (2) a means of assurance that internal accounting controls are functioning as planned. a measure of management performance in meeting organizational goals.

(3) the results of internal examinations of financial and accounting matters to a companys top-level management. (4) aid to the independent auditor, who is conducting the audit of the financial statements. b. In comparison to the external auditor, an internal auditor is more likely to be concerned with (1) (2) (3) (4) internal administrative control. cost accounting procedures. operational auditing. internal control.

c. Which of the following best describes the operational audit? (1) It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company. (2) It concentrates on implementing financial and accounting control in a newly organized company. (3) It attempts and is designed to verify the fair presentation of a companys results of operations. (4) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls. d. 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, as well as

(1) (2) (3) (4)

accuracy. evaluation. adherence to specific rules or procedures. internal control.

1-21 (Objectives 1-6, 1-7) In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following:
Required a. For these 12 examples below, state the most likely type of auditor (CPA, GAO, IRS, or internal) to perform each. b. In each example, state the type of audit (financial statement audit, operational audit, or compliance audit).

1. Federal income tax returns of an officer of the corporation to determine whether he or she has included all taxable income in his or her return. 2. Disbursements of a branch of the federal government for a special research project to determine whether it would have been possible to accomplish the same research results at a lower cost to the taxpayers. 3. Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible. 4. Annual statements for the use of management.

5. Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits. 6. Statements for bankers and other creditors when the client is too small to have an audit staff. 7. Financial statements of a branch of the federal government to make sure that the statements present fairly the actual disbursements made during a period of time. 8. Federal income tax returns of a corporation to determine whether the tax laws have been followed. 9. Financial statements for use by stockholders when there is an internal audit staff.

10. A bond indenture agreement to make sure a company is following all requirements of the contract. 11. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data. 12. Disbursements of a branch of the federal government for a special research project to determine whether the expenditures were consistent with the legislative bill that authorized the project.

2-16 (Objective 2-6) The following questions deal with generally accepted auditing standards. Choose the best response.
a. The first general standard, which states in part that the audit must be performed by a person or persons having adequate technical training, requires that an auditor have (1) (2) (3) (4) education and experience in the field of auditing. ability in the planning and supervision of the audit work. proficiency in business and financial matters. knowledge in the areas of financial accounting.

b. Which of the following best describes what is meant by generally accepted auditing standards? (1) (2) (3) (4) Acts to be performed by the auditor. Measures of the quality of the auditors performance. Procedures to be used to gather evidence to support financial statements. Audit objectives generally determined on audit engagements.

c. The general group of the generally accepted auditing standards includes a requirement that (1) field work be adequately planned and supervised.

(2) the auditors report state whether or not the financial statements conform to generally accepted accounting principles. (3) (4) due professional care be exercised by the auditor. informative disclosures in the financial statements be reasonably adequate.

d. What is the general character of the three generally accepted auditing standards classified as standards of field work?

(1) The competence, independence, and professional care of persons performing the audit. (2) Criteria for the content of the auditors report on financial statements and related footnote disclosures. (3) The criteria of audit planning and evidence gathering.

(4) The need to maintain an independence in mental attitude in all matters pertaining to the audit.

2-17 (Objective 2-7) The following questions concern quality control standards. Choose the best response.
a. A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by (1) (2) (3) (4) adhering to generally accepted auditing standards. having an appropriate system of quality control. joining professional societies that enforce ethical conduct. maintaining an attitude of independence in its engagements.

b. The nature and extent of a CPA firms quality control policies and procedures depend on

c. Which of the following are elements of a CPA firms quality control that should be considered in establishing its quality control policies and procedures?

d. Which of the following is an element of a CPA firms quality control system that should be considered in establishing its quality control policies and procedures? (1) (2) (3) (4) Complying with laws and regulations. Using statistical sampling techniques. Managing personnel. Considering audit risk and materiality.

2-21 (Objective 2-6)

Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the companys records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditors report within 3 weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted. Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing the controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Rays financial statements. The students followed Holmess instructions and after 2 weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unqualified auditors report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles. Required Briefly describe each of the 10 generally accepted auditing standards and indicate how the action(s) of Holmes resulted in a failure to comply with each standard. Organize your answer as follows:*

Holmes Actions Resulting in Failure to Comply with GAAS Brief Description of GAAS

4-18 (Objective 4-6) The following questions concern independence and the Code of Professional Conduct or GAAS. Choose the best response.
a. What is the meaning of the generally accepted auditing standard that requires the auditor be independent? (1) (2) (3) The auditor must be without bias with respect to the client under audit. The auditor must adopt a critical attitude during the audit. The auditors sole obligation is to third parties.

(4) The auditor may have a direct ownership interest in the clients business if it is not material. b. The independent audit is important to readers of financial statements because it (1) determines the future stewardship of the management of the company whose financial statements are audited. (2) measures and communicates financial and business data included in financial statements. (3) involves the objective examination of and reporting on management-prepared statements. (4) reports on the accuracy of all information in the financial statements.

c. An auditor strives to achieve independence in appearance to (1) (2) (3) (4) maintain public confidence in the profession. become independent in fact. comply with the generally accepted auditing standards of field work. maintain an unbiased mental attitude.

4-19 (Objective 4-7) The following questions concern possible violations of the AICPA Code of Professional Conduct. Choose the best response.
a. 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?

(1) A fee based on whether the CPAs report on the clients financial statements results in the approval of a bank loan. (2) A fee based on the outcome of a bankruptcy proceeding.

(3) A fee based on the nature of the service rendered and the CPAs expertise instead of the actual time spent on the engagement. (4) A fee based on the fee charged by the prior auditor.

b. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential 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? (1) Disclosing confidential information in order to properly discharge the CPAs responsibilities in accordance with the professions standards. (2) Disclosing confidential information in compliance with a subpoena issued by a court. (3) Disclosing confidential information to another accountant interested in purchasing the CPAs practice. (4) Disclosing confidential information during an AICPA authorized peer review.

c. A CPAs retention of client records as a means of enforcing payment of an overdue audit fee is an action that is (1) (2) (3) (4) not addressed by the AICPA Code of Professional Conduct. acceptable if sanctioned by the state laws. prohibited under the AICPA rules of conduct. a violation of generally accepted auditing standards.

4-22 (Objectives 4-6, 4-7) Each of the following situations involves possible violations of the AICPAs Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and the rationale for the existing rule.
a. Pickens and Perkins, CPAs, are incorporated to practice public accounting. The only shareholders in the corporation are existing employees of the organization, including partners, staff members who are CPAs, staff members who are not CPAs, and administrative personnel.

b. Fenn and Company, CPAs, has a sophisticated network-based computer server that supports the firms technology systems and databases. Because of excess capacity available on the server, Fenn and Company agreed to maintain on its server accounting records for one of Fenns nonpublic audit clients, Delta Equipment Company. c. Godette, CPA, has a law practice. Godette has recommended one of his clients to Doyle, CPA. Doyle has agreed to pay Godette 10% of the fee for services rendered by Doyle to Godettes client. d. Theresa Barnes, CPA, has an audit client, Smith, Inc., that uses another CPA for management services work. Barnes sends her firms literature covering its management services capabilities to Smith on a monthly basis, unsolicited. e. A bank issued a notice to its depositors that it was being audited and requested them to comply with the CPAs effort to obtain a confirmation on the deposit balances. The bank printed the name and address of the CPA in the notice. The CPA has knowledge of the notice. f. Myron Jones, CPA, is a member of a national CPA firm. His business card includes his name, the firms name, address, and telephone number, and the title IT consultant. g. Gutowski, a practicing CPA, has written an article about international accounting standards that is being published in a professional publication. The publication wishes to inform its readers about Gutowskis background. The information, which Gutowski has approved, includes his academic degrees, other articles he has had published in professional journals, and a statement that he is an expert on international accounting standards. h. Ralph Williams is the partner on the audit of a nonprofit charitable organization. He is also a member of the board of directors, but this position is honorary and does not involve performing a management function. I. Poust, CPA, has sold his public accounting practice, which includes bookkeeping, tax services, and auditing, to Lyons, CPA. Poust obtained permission from all audit clients for audit-related working papers before making them available to Lyons. He did not get permission before releasing tax- and management services-related working papers. j. Murphy and Company, CPAs, is the principal auditor of the consolidated financial statements of Lowe, Inc. and subsidiaries. Lowe accounts for approximately 98% of consolidated assets and consolidated net income. The two subsidiaries, which are located in Europe, are audited by Trotman and Company, CPAs, a firm with an excellent professional reputation. Murphy insists on auditing the two subsidiaries because he deems this necessary to warrant the expression of an opinion.

MULTIPLE CHOICE QUESTIONS FROM CPA, IIA, AND CMA EXAMINATIONS

26-20 (Objectives 26-1, 26-4) The following questions deal with independence of auditors. Choose the best response.
a. The operational auditors independence is most likely to be compromised when the internal audit department is responsible directly to the (1) (2) (3) (4) (5) vice president of finance. president. controller. executive vice president. audit committee of the board of directors.

b. The independence of the internal audit department will most likely be assured if it reports to the (1) (2) (3) (4) (5) president. controller. treasurer. audit committee of the board of directors. vice president of finance.

c. Which of the following may compromise the independence of an internal auditor? (1) (2) (3) (4) Reviewing IT systems before implementation. Performing an audit where the auditor recently had operating responsibilities. Failing to review the audit report with the auditee prior to distribution. Following up on corrective action in response to audit findings.

26-21 (Objective 26-2) The following questions deal with governmental auditing. Choose the best response.
a. When performing the audit of a city that is subject to the requirements of the federal Single Audit Act, an auditor should adhere to (1) Governmental Accounting Standards Board General Standards.

(2) Governmental Finance Officers Governmental Accounting, Auditing, and Financial Reporting Principles.

(3) (4)

Government Auditing Standards. Securities and Exchange Commission Regulation S-X.

b. When engaged to audit a governmental entity in accordance with Government Auditing Standards, an auditor prepares a written report on internal control (1) (2) (3) (4) on all audits, regardless of circumstances. only when the auditor has noted material weaknesses. only when requested by the governmental entity being audited. only when requested by the federal government funding agency.

c. Ward is auditing an entitys compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Ward detected noncompliance with requirements that have a material effect on the program. Wards report on compliance should express (1) (2) (3) (4) no assurance on the compliance tests. reasonable assurance on the compliance tests. a qualified or adverse opinion. an adverse opinion or a disclaimer of opinion.

26-22 (Objectives 26-3, 26-4, 26-5) The following questions deal with operational auditing. Choose the best response.
a. Which of the following best describes the operational audit? (1) It requires constant review by internal auditors of the administrative controls as they relate to the operations of the company. (2) It concentrates on implementing financial and accounting controls in a newly organized company. (3) It attempts and is designed to verify the fair presentation of a companys results of operations. (4) It concentrates on seeking aspects of operations in which waste would be reduced by the introduction of controls. b. The evaluation of audit field work of an operating unit should answer the following questions: 1. What are the reasons for the results?

2. 3.

How can performance be improved? What results are being achieved?

What is the chronological order in which these questions should be answered? (1) (2) (3) (4) (5) 312 132 321 123 231

c. The purpose of governmental effectiveness or program auditing is to determine if the desired results of a program are being achieved. The first step in conducting such an audit is to (1) (2) (3) (4) evaluate the system used to measure results. determine the time frame to be audited. collect quantifiable data on the programs success or failure. identify the legislative intent of the program being audited.