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 ao 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 effectivelyo Entity is following specific procedures or rules set down by some higher authorityo Management team is fulfilling is fiduciary responsibilities to shareholderso 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 audito Written communications from company employees or outsiderso Observations made by an auditoro 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 returnso GAO auditor’s evaluation of the computer operations of governmental unitso An internal auditor’s review of a company’s payroll authorization procedureso 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 supervisiono Independence of mental attitudeo Adequate training and proficiencyo 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 cliento 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? P89o 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 issuedo Management may make Ill-advised business decisionso Auditors may fail to uncover employee fraudo 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 Processo 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 firmo Employees of the audit cliento Other CPA firms engaged to do part of the audit worko 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 regulationso Violations of laws or government regulations other than errorso Violations of laws or government regulations other than fraudo 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 operationso Most capital acquisition and repayment cycle accounts involve few transactions, but

each is often highly material and therefore should be audited extensivelyo Both a and b are correcto 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 balanceso Confirmation of accounts receivable balance received from a customero 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 Confirmationo Vouchingo 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 audito Provide a basis for reviewing the work of subordinateso 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