Final Exam

Question 1

Every contingent liability must be recorded. T or F

Answer 1

False

Question 2

Type ll subsequent events are conditions that require an adjustment to the account balance shown on the financial statements. T or F

Answer 2

False

Question 3

An example of a Type l event or condition is the settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year-end financial statements. T or F

Answer 3

True

Question 4

The auditors primary means of obtaining corroboration of management’s information concerning litigation is a

Answer 4

Letter of audit inquiry to the entity’s lawyer.

Question 5

An auditor will ordinarily examine invoices from lawyers primarily to

Answer 5

identify actual or potential litigation against the entity.

Question 6

The refusal of an entity’s attorney to provide information is requested in the letter of audit inquiry is generally:

Answer 6

Considered to be a scope limitation

Question 7

An example of a Type l subsequent event is:

Answer 7

An event after the balance sheet date that confirms the auditor’s belief (documented prior to the end of the entity’s fiscal year) that a large portion of the entity’s inventory is obsolete.

Question 8

The purpose of analytical procedures at the completion of the audit includes all of the following except:

Answer 8

revising the audit plan.

Question 9

Which of the following auditing procedures is ordinarily performed last?

Answer 9

obtaining a management representation letter.

Question 10

The date of the management representation letter generally coincides with the:

Answer 10

date of the auditor report

Question 11

The management letter is used:

Answer 11

to make recommendations to the entity based on observations made during the audit.

Question 12

Generally, loss contingencies that are judged to be remote:

Answer 12

should not be disclosed in the footnotes

Question 13

A going concern issue requires an explanatory paragraph to be added to the standard unqualified audit report (public company) T or F

Answer 13

True

Question 14

A basic assumption that underlies financial reporting is that an entity will continue as a going concern. T or F

Answer 14

True

Question 15

A correction of a material misstatement is previously issued financial statements is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report: T or F

Answer 15

True

Question 16

Changes that affect comparability but that do not involve a change in accounting principle or the correction of a misstatement (E.G., a change in accounting estimate) are normally disclosed in the footnotes but do not require an explanatory paragraph in the audit report: T or F

Answer 16

True

Question 17

An auditor must disclaim an opinion when the auditor lacks independence. T or F

Answer 17

True

Question 18

The choice of which audit report to issue depends on the nature and the materiality of the condition giving rise to the departure from GAAP. T or F

Answer 18

True

Question 19

Which of the following situations will not result in modification of the auditors’ report because of a scope limitation?

Answer 19

reliance placed on the report of another auditor

Question 20

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditors report should cover:

Answer 20

both years

Question 21

If a public company issues financial statements that purport to present its financial postion and results of operations but omits the statement of cash flows, the auditor ordinarily will express an:

Answer 21

qualified opinion

Question 22

Which of the following would not require an explanatory paragraph in the auditors report?

Answer 22

Significant litigation that the client has appropriately disclosed, but which represents a material risk of loss to the entity.

Question 23

When are an auditors reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity’s financial statements?

Answer 23

When the independent auditor with sufficient appropriate evidence believes the financial statements are not prepared in accordance with GAAP.

Question 24

The term “ethics” refers to a persons propensity to follow the laws of the land. T or F

Answer 24

False

Question 25

Professionalism refers to the conduct, aims, or qualities that characterize a given profession. T or F

Answer 25

True

Question 26

When auditing a public company, a CPA must follow the auditing standards of the PCAOB and Code of Professional Conduct of the AICPA. T or F

Answer 26

True

Question 27

Rules of Conduct are enforceable. T or F

Answer 27

True

Question 28

Principles are stated at a conceptual level, not a detailed level. T or F

Answer 28

True

Question 29

If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA work: T or F

Answer 29

True

Question 30

An auditor can be sued by a clinet for negligence under common law. T or F

Answer 30

True

Question 31

Common law is written law enacted by the legislative branches of governments. T or F

Answer 31

False

Question 32

An auditor can be guilty under federal statuary law if she/he was reckless in performance of her/his professional duties: T or F

Answer 32

True

Question 33

The auditor failing to complete the services agreed to in the contract with the client is subject to liability under breach of contract. T or F

Answer 33

True

Question 34

To prevail in a suit alleging negligence, a third party must prove that the auditor had a duty to the auditor's client to exercise due care. T or F

Answer 34

False

Question 35

An audit client loses a lawsuit and the judgment is for an amount in excess of the contingent liability the client had recorded in the audited financial statements. The auditor, using the typical degree of due care as other members of the profession, determined that the amount of contingent liability recorded by the client in the financial statements for the pending lawsuit was reasonable, given the facts at the time of the audit. This judgement by the auditor is likely to result in:

Answer 35

no legal action whatsoever since due care was exercised

Question 36

Which of the following is not required for establishing an auditors liability for negligence:

Answer 36

An undetected material misstatement

Question 37

The Securities Exchange Act of 1934:

Answer 37

regulated ongoing reporting of securities listed and traded on exchanges

Question 38

Which of the following is not within the class of foreseen users of an accountant's work product:

Answer 38

a prospective shareholder of the client

Question 39

The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by:

Answer 39

-Expanding laws against fraud and obstruction of justice. -Increasing criminal penalties for fraud and its cover up -Strengthening sentencing guidelines applicable to large scale frauds.