Exam 1

 35 MC
 Any service that requires a CPA firm to issue a report about the reliability of an assertion that is
made by another party is a
o Attestation service
 Providing quantitative information that management and others can use to make decisions is
the function of
o accounting
 An audit of historical financial statements is most often performed to determine whether the
o Organization is operating efficiently and effectively
o Entity is following specific procedures or rules set down by some higher authority
o Management team is fulfilling is fiduciary responsibilities to shareholders
o None of these
 An examination of part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit
o Operational audit
 Which of the following is a type of audit evidence?
o Oral responses to the auditor from employees of the company under audit
o Written communications from company employees or outsiders
o Observations made by an auditor
o Evidence may take any of the above forms
 Which of the following audits can be regarded as generally being a compliance audit?
o IRS agent’s examinations of taxpayer returns
o GAO auditor’s evaluation of the computer operations of governmental units
o An internal auditor’s review of a company’s payroll authorization procedures
o A CPA firm’s audit of the local school district
 Which one of the following is not one of the three General standards?
o Proper planning and supervision
o Independence of mental attitude
o Adequate training and proficiency
o Due professional care
 Which one of the following is not a Field Work Standard?
o Due professional care (a general standard)
 Which of the following statements most accurately captures the intent of the standards of field
work
o Field work standards are primarily directed at the auditor’s planning, understanding of
internal control and evidence accumulation
 Standards issued by the public company accounting oversight board must be followed by CPAs
who audit
o Public companies only
 Note: private companies are AICPB
 The form that must be completed and filed with the Securities and Exchange Commission
whenever a company experiences a significant event that is of interest to public investors is the:
o From 8-K
 Hansen Corporation’s stock is listed on a national stock exchange and registered with the
Securities and Exchange Commission. Hansen’s management hires a CPA to perform an
independent audit of Hansen’s financial statements. The primary objective of this audit is to
provide assurance to the:
o Investors in Hansen Corporation’s stock
 The underlying reason for a code of professional conduct for any profession is:
o The need for public confidence in the quality of service of the profession
 Which of the following statements is true? The CPA firm will lose its independence if:
o A staff auditor providing audit services to the client acquires stock in that client
o A staff tax preparer who provides 15 hours of non-audit services to the client acquires
stock in that client
 Which of the following would be a violation of the rule requiring “objectivity” by the CPA?
o The auditor accepts management’s opinion regarding the collection of accounts
receivable without an independent evaluation
o In preparing a client’s tax return, the CPA encourages a client to take a deduction which
the CPA believes is risky, but unlikely to be found during an IRS audit
o Either a or b would be a violation of the rule
 The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off the
engagement every five years? P89
o In charge auditor- no, partner responsible for concurring review – yes
 Which of the following is required for a firm to designate itself “Member of the American
Institute of Certified Public Accounts” on its letterhead?
o All partners must be members of the AICPA
 An audit committee, consisting of members of the client’s board of directors who are not a part
of company management, is require for all companies:
o Listed on the New York Stock Exchange
 Which of the following may give rise to a business failure?
o An erroneous audit opinion is issued
o Management may make Ill-advised business decisions
o Auditors may fail to uncover employee fraud
o Poorly trained auditors may perform a company’s audit
 ______ risk represents the possibility that the auditor concludes after conducting an adequate
audit that the financial statements were fairly stated when they were actually misstated.
o Business
 o Process
o Audit
o Failure
 The standard of due care to which the auditor is expected to adhere is referred to as the:
o Prudent person concept
 Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom
they rely. This would not include:
o Employees of the CPA firm
o Employees of the audit client
o Other CPA firms engaged to do part of the audit work
o Specialists employed by the CPA firm to provide technical advice on the audit
 An example of a breach of contract would likely include:
o A CPA firm’s failure to complete an audit on the agreed-upon date because the firm had
a backlog of other work which was more lucrative
 Which of the following combinations is correct?
o Existence relates to whether amounts included exist
 Illegal acts are defined in SAS 54 (AU317) as:
o Violations of laws or government regulations
o Violations of laws or government regulations other than errors
o Violations of laws or government regulations other than fraud
o Violations of law which would result in the arrest of the perpetrator
 Tests of details of balances are specific procedures intended to:
o Test for monetary errors in the financial statements
 In comparing management fraud with employee fraud, the auditor’s risk of failing to discover
the fraud is:
o Greater for management fraud because of management’s ability to override existing
internal controls
 When using the cycle approach to segmenting the audit, the reason for treating capital
acquisition and repayment separately from the acquisition of goods and services is that:
o The transactions are related to financing a company rather than to its operations
o Most capital acquisition and repayment cycle accounts involve few transactions, but
each is often highly material and therefore should be audited extensively
o Both a and b are correct
o Neither a nor b is correct
 An auditor should recognize that the application of auditing procedures may produce evidence
indicating the possibility of errors or fraud and therefore should: (AU230)
o Plan and perform the engagement with an attitude of professional skepticism
 Which of the following forms of evidence is most reliable?
o General ledger account balances
o Confirmation of accounts receivable balance received from a customer
 o Internal memo explaining the issuance of a credit memo
o Copy of month-end adjusting entries
 When auditors use documents to support recorded transactions, the process is often called:
o Inquiry
o Confirmation
o Vouching
o Physical examination
 Which of the following forms of evidence would be least persuasive in forming the auditor’s
opinion?
o Responses to auditor’s questions by the president and controller regarding the
investments account
 What is the overall objective of audit documentation?
o Defense against claims of a deficient audit
o Provide a basis for reviewing the work of subordinates
o Provide reasonable assurance that the audit was conducted in accordance with
standards
 Which of the following discoveries through the use of analytical procedures would indicate a
relatively high risk of financial failure?
o A higher than normal ratio of long-term debt to net worth as well as a lower than
average ratio of profits to total assets
 Which of the following statements relating to the competence of evidential matter is always
true?
o Evidence must be both reliable and relevant to be considered appropriate