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Flashcards in Final Exam Review - Old Test Questions Deck (146):
1

The Sarbanes-Oxley Act applies to which of the following companies?

a) All public companies and privately held companies with assets greater than $500 million
b) Public companies
c) Privately held companies
d) All companies

b) Public companies

2

Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called:

a) finance
b) economics
c) auditing
d) accounting

d) Accounting

3

___________ risk reflects the possibility that the information upon which the business decision was made was inaccurate.

a) Information
b) Business
c) Control
d) Client acceptance

a) Information

4

Which of the following services provides the lowest level of assurance on a financial statement?

a) An audit
b) A review
c) Neither service provides assurance on financial statements
d) Each service provides the same level of assurance on financial statements

b) A review

5

The three requirements for becoming a CPA include all but which of the following?

a) Character requirements
b) Educational requirements
c) Uniform CPA examination requirement
d) Experience requirements

a) Character requirements

6

The use of the Certified Public Accountant title is regulated by:

a) state law through a licensing department or agency of each state
b) the Securities and Exchange Commission
c) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees
d) the federal government

a) state law through a licensing department or agency of each state

7

Which of the following statements is true as it relates to limited liability partnerships?

a) All partners must be AICPA members
b) Partners are personally liable for the acts of those under their supervision
c) Only senior partners are liable for the partnership's debts
d) Partners have no liability in a limited liability partnership agreement

b) Partners are personally liable for the acts of those under their supervision

8

The organization that is responsible for providing oversight for auditors of public companies is called the __________.

a) Public Oversight Board
b) Public Company Accounting Board
c) American Institute of Certified Public Accountants
d) Auditing Standards Board

b) Public Company Accounting Board

9

Members of the PCAOB are appointed and overseen by:

a) the American Institute of Certified Public Accountants
b) the Securities and Exchange Commission
c) the Auditing Standards Board
d) the U.S. Congress

b) the Securities and Exchange Commission

10

The AICPA has authority to establish standards and rules in all but which of the following areas?

a) Compilation and review standards
b) Auditing standards applicable to financial statements of private companies
c) Professional conduct
d) Auditing standards applicable to financial statements of private and public companies

d) Auditing standards applicable to financial statements of private and public companies

11

Statements on Standards for Accounting and Review Services are issued by the:

a) Professional Ethics Executive Committee
b) Accounting and Review Services Committee
c) Securities and Exchange Commission
d) Financial Accounting Standards Board

b) Accounting and Review Services Committee

12

Standards issued by the PCAOB must be followed by CPAs who audit:

a) public companies only
b) both private and public companies
c) private companies, public companies, and nonprofit entities
d) private companies only

a) public companies only

13

For privately held companies who is responsible for establishing auditing standards?

a) PCAOB
b) Auditing Standards Board
c) National Association of Accounting
d) Securities and Exchange Commission

b) Auditing Standards Board

14

If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter, the auditor should generally seek guidance from which of the following sources?

a) Regulations issued by the SEC
b) Statements on Auditing Standards
c) Statements on Standards for Accounting and Review Services
d) The AICPA Code of Professional Conduct

b) Statements on Auditing Standards

15

Which of the following is a true statement regarding auditing standards?

a) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for US public companies
b) PCAOB auditing standards are applicable to entities outside the US
c) The Auditing Standards Board has revised most of its standards to converge with the international standards
d) There are no similarities between PCAOB standards and International Standards on Auditing

c) The Auditing Standards Board has revised most of its standards to converge with the international standards

16

Historically auditing standards have been organized into three categories, including:

a) purpose of an audit
b) proper planning and supervision
c) standards of field work
d) responsibilities of the auditor

c) standards of field work

17

When assessing the risk of material misstatements in the financial statements,

a) company management is responsible for determining materiality levels
b) the auditor must have an understanding of the client's business and industry
c) inadequate internal control procedures will mitigate client business risk
d) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain

b) the auditor must have an understanding of the client's business and industry

18

In order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that:

a) the internal control policies and procedures are developed by the auditors
b) management is responsible for the preparation of the financial statements
c) the purpose of an audit is to prevent fraud
d) management can restrict the auditor's access to important information relevant to the financial statements

b) management is responsible for the preparation of the financial statements

19

Which of the following statements about Generally Accepted Audit Standards are true?
1) They serve as broad guidelines to auditor for conducting an audit engagement
2) They are sufficiently specific to provide any meaningful guide to practitioners
3) They represent a framework upon which the AICPA can provide interpretations

a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 1, 2, and 3

b) 1 and 3

20

Auditing standards require that the audit report must be titled and that the title must:

a) indicate if the auditor is a proprietorship, partnership, or corporation
b) indicate the type of audit opinion issued
c) include the word "independent"
d) indicate if the auditor is a CPA

c) include the word "independent"

21

The auditor's responsibility section of the standard unqualified audit report states that the audit is designed to:

a) discover all errors and/or irregularities
b) conform to generally accepted accounting principles
c) obtain reasonable assurance whether the statements are free of material misstatement
d) discover material errors and/or irregularities

c) obtain reasonable assurance whether the statements are free of material misstatement

22

The audit report date on a standard unqualified report indicates:

a) the last date on which users may institute a lawsuit against either client or auditor
b) the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements
c) the last day of the fiscal period
d) the date on which the financial statements were filed with the SEC

b) the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements

23

The management's responsibility section of the standard audit report for a non-public company states that the financial statements are:

a) the joint responsibility of management and the auditor
b) the responsibility of the auditor
c) the responsibility of management
d) none of the above

c) the responsibility of management

24

The introductory paragraph of the standard audit report for a non-public company performs which functions?
1) It states the CPA has performed an audit
2) It lists the financial statements being audited
3) It states the financial statements are the responsibility of the auditor

a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 1, 2, and 3

a) 1 and 2

25

If the balance sheet of a private company is dated December 31, 2011, the audit report is dated February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has searched for subsequent events that occurred up to:

a) December 31, 2011
b) January 1, 2012
c) February 15, 2012
d) February 8, 2012

d) February 8, 2012

26

The standard unqualified audit report:

a) is sometimes called a clean opinion
b) is sometimes called a disclaimer report
c) can be issued if only a balance sheet and income statements are included in the financial statements
d) can be issued only with an explanatory paragraph

a) is sometimes called a clean opinion

27

Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms?
1) A combined report on financial statements and internal control over financial reporting
2) Separate reports on financial statements and internal control over financial reporting

a) 1 only
b) 2 only
c) Either 1 or 2
d) Neither 1 nor 2

c) Either 1 or 2

28

The standard unqualified audit report for public entities includes the following three paragraphs:

a) introductory, scope, and opinion
b) scope, fieldwork, and conclusion
c) introductory, scope, and management's responsibility
d) materiality, scope, and report

a) introductory, scope, and opinion

29

Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include:

a) lack of consistent application of GAAP
b) material uncertainties
c) the use of other auditors
d) substantial doubt about the audited company (or the entity) continuing as a going concern

c) the use of other auditors

30

A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is:

a) included in the introductory paragraph
b) included in the scope paragraph
c) included in the opinion paragraph
d) included in a separate paragraph in the report

d) included in a separate paragraph in the report

31

All of the following are causes for the addition of an explanatory paragraph under both AICPA and PCAOB standards except for:

a) reports involving other auditors
b) lack of consistent application of GAAP
c) auditor agrees with a departure from promulgated accounting principles
d) emphasis of matter

a) reports involving other auditors

32

When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed:

a) six month from the date of the audit report
b) one year from the date of the audit report
c) six months from the date of the financial statements
d) one year from the date of the financial statements

d) one year from the date of the financial statements

33

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be:
1) an unqualified opinion with an explanatory paragraph
2) a disclaimer of opinion

a) 1 only
b) 2 only
c) 1 or 2
d) Neither 1 nor 2

c) 1 or 2

34

When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in:

a) an explanatory paragraph that appears before the opinion paragraph
b) the opinion paragraph
c) an explanatory paragraph after the opinion paragraph
d) the scope paragraph

c) an explanatory paragraph after the opinion paragraph

35

No reference is made in the auditor's report to other auditors who perform a portion of the audit when:
1) the other auditor audited an immaterial portion of the audit
2) the other auditor is well known or closely supervised by the principle auditor
3) the principle auditor has thoroughly reviewed the work of the other auditor

a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 1, 2, and 3

d) 1, 2, and 3

36

All of the following would require an emphasis of matter paragraph except for:

a) the existence of material related party transactions
b) important events occurring subsequent to the balance sheet date
c) the lack of auditor independence
d) material uncertainties disclosed in the footnotes

c) the lack of auditor independence

37

As a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unqualified audit report because:

a) the financial statements have not been prepared in accordance with GAAP
b) the scope of the audit has been restricted
c) the financial statements have not been audited in accordance with GAAS
d) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control

b) the scope of the audit has been restricted

38

An adverse opinion is issued when the auditor believes:

a) the financial statements would be found to be materially misstated if an investigation were performed
b) some parts of the financial statements are materially misstated or misleading
c) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP
d) the auditor is not independent

c) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP

39

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n):

a) adverse opinion
b) unqualified opinion
c) qualified opinion
d) disclaimer of opinion

c) qualified opinion

40

If most or all users' decision that are based on the financial statements are likely to be significantly affected, the materiality level is:

a) material
b) pervasive
c) unrestricted
d) risk

a) material
or
b) pervasive

41

A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of:

a) the SEC
b) a reasonable user of the financial statements
c) an accountant
d) the PCAOB

b) a reasonable user of the financial statements

42

For the report containing a disclaimer for lack of independence, the disclaimer is in the:

a) fourth or explanatory paragraph
b) third or opinion paragraph
c) second or scope paragraph
d) first and only paragraph

d) first and only paragraph

43

Financial statement users are typically more concerned with an unqualified report with explanatory paragraphs than they are with a disclaimer of opinion.

a) True
b) False

b) False

44

When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor will issue a(n):

a) adverse opinion
b) unqualified opinion
c) disclaimer opinion
d) unqualified opinion with an explanatory paragraph

b) unqualified opinion

45

In most audits, the auditor issues a:

a) adverse audit report
b) scope limited audit report
c) qualified audit report
d) unqualified audit report

d) unqualified audit report

46

Ethics are:

a) a set of moral principles or values
b) always incorporated in laws
c) needed in the professions, but is not needed for society in general
d) not formed by life experiences

a) a set of moral principles or values

47

Which of the following is not one of the four parts of the AICPA's Code of Professional Conduct?

a) Rules of Conduct
b) Principles
c) Definitions
d) Interpretations

c) Definitions

48

Of the four parts of the AICPA's Code of Professional Conduct, which part is enforceable?

a) Interpretations
b) Ethical Rulings
c) Rules of Conduct
d) Principles

c) Rules of Conduct

49

Ethical Rulings are:
1) explanations relating to broad hypothetical circumstances
2) not enforceable, but one must justify departure
3) explanations relating to specific factual circumstances

a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 1, 2, and 3

c) 2 and 3

50

Four of the six Ethical Principles in the AICPA's Code of Professional Conduct are equally applicable to all members of the AICPA. Which of the following principles applies only to members in public practice?

a) The Public Interest
b) Scope and Nature of Services
c) Integrity
d) Due Care

b) Scope and Nature of Services

51

What are the four conditions that must be met before an auditor can issue a standard unqualified report for the audit of a private company?

1) All financial statements must be present and complete
2) Financial statements must be in accordance with GAAP
3) The auditor must be satisfied that no explanatory paragraph need be included
4) Sufficient appropriate audit evidence has been accumulated and the auditor can conclude that the three fieldwork standards have been followed

52

If an auditor has thoroughly examined financial statements and gathered enough evidence to give an opinion, why can't he or she disclaim an opinion?

A disclaimer is only issued when the auditor does not have enough information to make an opinion or when the auditor is not independent

53

What can you say about GAAS?

There are 10 standards in 3 groups of standards:
- General Standards
- Technical training and proficiency
- Independence in fact and in assurance
- Professional care
- Standards of Fieldwork
- Supervision of assistants and planning of engagements
- Assess risk of material misstatement
- Sufficient evidence
- Reporting Standards
- Accordance with GAAP
- Consistency
- Disclosures adequate
- Opinion evaluated

54

The title of the Standard Unqualified Audit Report for Non-Public Entities must include the word _______________.

Independent

55

Auditors give ____________ assurance that financial statements are free from ________ misstatement.

Reasonable; assurance

56

Audits of public companies are subject to ___________.

Peer review

57

A public company with common equity >= 700 million is called an ________________.

Accelerated filer

58

According to the AICPA, the auditor of a component is called the __________ auditor.

Component

59

Which of the following offers limited liability to owners?

Proprietorship
General Partnership
General Corporation
Professional Corporation (PC)
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)

General Corporation
Professional Corporation (PC)
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)

60

For which of the following are taxes owed reported on the tax return of the owners/partners/members?

Proprietorship
General Partnership
General Corporation
Professional Corporation (PC)
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)

Proprietorship
General Partnership
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)

61

Auditors may be liable to their clients if they are found guilty of:

Ordinary Negligence Gross Negligence
a) No No
b) Yes Yes
c) No Yes
d) Yes No

b) Yes Yes

62

Constructive fraud:

a) requires an intent to deceive
b) involves collusion with the client
c) is also known as breach of contract
d) is also known as recklessness

d) is also known as recklessness

63

In the performance of an audit, a CPA:

a) is legally liable for detecting an immaterial client fraud
b) must exercise constructive professional care in the performance of their audit responsibilities
c) must strictly follow GAAP for privately held clients
d) must exercise due professional care in the performance of their audit responsibilities

d) must exercise due professional care in the performance of their audit responsibilities

64

As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?

a) He would be liable for losses attributable to his negligence
b) He would be liable only if it could be proven that he was grossly negligent
c) He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees
d) He would have no liability because privity of contract is lacking

a) He would be liable for losses attributable to his negligence

65

Which of the following most accurately describes fraud?

a) Lack of slight care
b) Extreme or unusual negligence without the intent to deceive
c) Knowledge and intent to deceive
d) Absence of reasonable care

c) Knowledge and intent to deceive

66

Two overriding considerations affect the many ways an auditor can accumulate evidence:
1) Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility
2) Cost of accumulating evidence should be minimized

In evaluating these considerations:

a) it is impossible to prioritize them
b) the first is more important than the second
c) the second is more important than the first
d) they are equally important

b) the first is more important than the second

67

When an auditor believes that an illegal act may have occurred, the auditor should first:

a) obtain an understanding of the nature and circumstances of the act
b) discuss the matter with the audit committee
c) withdraw from the engagement
d) consult with legal counsel or other knowledegeable about the illegal act

a) obtain an understanding of the nature and circumstances of the act

68

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to:

a) management
b) management for the statements and the auditor for the notes
c) the auditor
d) both management and the auditor equally

a) management

69

Tests of details of balances are specific audit procedures that are intended to:

a) prove that the trial balance is in balance
b) test for monetary misstatements in the financial statements
c) identify the details of the internal control system
d) prove that the accounts with material balances are classified correctly

b) test for monetary misstatements in the financial statements

70

The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must:

a) be based on sources that are external to company
b) be well documented and cross-referenced in the audit documents
c) provide evidence that prove or disprove an audit objective/assertion
d) be persuasive enough to enable the auditor to issue an audit report

d) be persuasive enough to enable the auditor to issue an audit report

71

Which of the following is the most objective type of evidence?

a) A letter written by the client's attorney discussing the likely outcome of outstanding lawsuits
b) Inquiries of the credit manager about the collectibility of non-current accounts receivable
c) The physical count of securities and cash
d) Observation of cobwebs on some inventory bins

c) The physical count of securities and cash

72

Which of the following is an illustration of liability to clients under common law?

a) The federal government prosecutes the auditor for knowingly issuing an incorrect audit report.
b) Client sues auditor for not discovering a theft of assets by an employee.
c) Combined group of stockholders sue auditor for not discovering materially misstated financial statements.
d) Bank sues auditor for not discovering that borrower's financial statements are misstated.

b) Client sues auditor for not discovering a theft of assets by an employee.

73

The basic legal concept which was affirmed in the 1985 New York case, Credit Alliance, was that:

a) the auditor's defense of privity of contract is still valid against third parties
b) the auditor's defense of contributory negligence is no longer valid
c) the auditor is liable for ordinary negligence to specifically foreseen third parties
d) the auditor is liable for ordinary negligence to reasonably foreseeable third parties

a) the auditor's defense of privity of contract is still valid against third parties

74

Which of the following statements is not correct?

a) It is appropriate to minimize the cost of accumulating evidence
b) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects
c) Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility
d) There are many ways an auditor can accumulate evidence to meet overall audit objectives

b) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects

75

Which of the following statements is most correct regarding the primary purpose of audit procedures?

a) To comply with auditing standards promulgated by the PCAOB for publicly held clients
b) To gather corroborative audit evidence about management's assertions regarding the client's financial statements
c) To determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual
d) To detect all errors or fraudulent activities as well as illegal activities

b) To gather corroborative audit evidence about management's assertions regarding the client's financial statements

76

Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which provides the auditor with the most reliable audit evidence?

a) Internal memo explaining the issuance of a credit memo
b) General ledger account balances
c) Copy of month-end adjusting entries
d) Confirmation of accounts receivable balance received from a customer

d) Confirmation of accounts receivable balance received from a customer

77

If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of:

a) breach of contract
b) criminal neglect
c) constructive fraud
d) contract fraud

a) breach of contract

78

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is:

a) greater for management fraud because of management's ability to override existing internal controls
b) greater for employee fraud because of the larger number of employees in the organization
c) greater for management fraud because managers are inherently more deceptive than employees
d) greater for employee fraud because of the higher crime rate among blue collar workers

a) greater for management fraud because of management's ability to override existing internal controls

79

"Physical examination" is the inspection or count by the auditor of items such as:

a) cash, inventory, securities, notes receivable, and tangible fixed assets
b) cash, inventory, canceled checks, and tangible fixed assets
c) cash, inventory, canceled checks, and sales documents
d) cash, inventory, and payroll timecards

a) cash, inventory, securities, notes receivable, and tangible fixed assets

80

When practical and reasonable, US auditing standards require the confirmation of:

a) payroll expenses
b) accounts receivable
c) individual transactions between organizations, such as sales transactions
d) fixed asset additions

b) accounts receivable

81

The Auditing Standards Board has concluded that analytical procedures are so important that they are required during:

a) planning, test of control, and completion phases
b) planning and completion phases
c) test of control and completion phases
d) planning and test of control phases

b) planning and completion phases

82

Auditing standards require that records for audits of private companies be retained for a minimum of seven years.

a) True
b) False

b) False

83

The permanent audit file would usually include the following:

a) organizational chart of the company's employees
b) client's working trial balance
c) summary of the risk assessment procedures performed
d) summary of the auditors test of controls for the current years audit

a) organizational chart of the company's employees

84

The auditor's best defense when material misstatements are not uncovered is to have conducted the audit:

a) in a timely manner
b) in accordance with generally accepted auditing standards
c) only after an adequate investigation of the management team
d) as effectively as reasonably possible

b) in accordance with generally accepted auditing standards

85

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?

a) Auditors believe that reasonable assurance is sufficient in the vast majority of cases
b) Fraudulently prepared financial statements are often difficult to detect
c) The auditor commonly examines a sample, rather than the entire population of transactions
d) Accounting presentations contain complex estimates which involve uncertainty

a) Auditors believe that reasonable assurance is sufficient in the vast majority of cases

86

Which of the following is not one of the three categories of assertions?

a) Assertions about classes of transactions and events for the period under audit
b) Assertions about account balances at period end
c) Assertions about presentation and disclosure
d) Assertions about financial statements and correspondence to GAAP

d) Assertions about financial statements and correspondence to GAAP

87

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

a) True
b) False

b) False

88

The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the:

a) prudent person concept
b) constructive care concept
c) vigilant person concept
d) common law doctrine

a) prudent person concept

89

An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as:

a) a third party
b) a tort
c) a common law inheritor
d) a third-party beneficiary

d) a third-party beneficiary

90

Which of the following types of documentary evidence should the auditor consider to be the most reliable?

a) A sales invoice issued by the client and supported by a delivery receipt from an outside trucker
b) Confirmation of an account payable balance mailed by and returned directly to the auditor
c) A check, issued by the company and bearing the payee's endorsement, that is included with the bank statements mailed directly to the auditor
d) An audit schedule prepared by the client's controller and reviewed by the client's treasurer

b) Confirmation of an account payable balance mailed by and returned directly to the auditor

91

Listed below are several accounts listed from a company's trial balance. Next to each account put the letter corresponding to the transaction cycle used to audit the account:
S = Sales and collection cycle
A = Acquisition and payment cycle
P = Payroll and personnel cycle
I = Inventory and warehousing cycle
C = Capital acquisition and repayment cycle

1) Sales returns and allowances
2) Capital stock
3) Buildings
4) Notes payable
5) Salaries and commissions
6) Cost of goods sold
7) Trade accounts receivable
8) Rent

1) S
2) C
3) A
4) C
5) P
6) I
7) S
8) A

92

It occurs when a business is unable to repay its lender or meet the expectations of its investors because of economic or business conditions.

Business failure

93

Occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards

Audit failure

94

Represents the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated

Audit risk

95

Sarbanes Oxley provides for CRIMINAL PENALTIES of up to ___ years

20

96

The two most expensive types of audit evidence are:

Physical examination
Confirmation

97

Tell me all you can about confirmations

Confirmations are one of the two most expensive types of audit evidence. It requires documented proof that the information is correct from a third party. The only way to make sure that a confirmation is truly reliable is to have the request for confirmation issued by the auditor to the third party and returned directly to the auditor.

98

Please mention ways that a CPA can protect him/herself from legal liability

Only work with clients that have integrity
Understand the client's business
Have insurance
Perform the audit based on the standards
Document all audit procedures
Hire reliable employees
Exercise professional skepticism

99

Please discuss what it would mean and whether it is possible to reduce AUDIT RISK to zero.

For audit risk to be zero, the auditor would be absolutely certain that the financial statements are completely free from material misstatement. It is not possible to reduce the risk to zero because management could have lied in the financial statements, the auditor could have missed something, etc.

100

What are the major components of a PCAOB audit engagement letter?

The objective of the audit
Auditor's responsibility
The information in the audit
Management's responsibility

101

Please discuss factors in determining INHERENT RISK. Which do you think is particularly important?

Nature of the business, complex/non-routine transactions, management's integrity, industry, fraud risk
I think that complex-non-routine transactions are particularly important - the more complex/non-routine transactions, the higher the risk

102

Please describe the different types of opinions an auditor can give on a 404 audit of internal control. When is it appropriate to use each?

Unqualified - no scope limitations or restrictions
Adverse - 1 or more restrictions present
Qualified/Disclaimer - there are scope limitations

103

Please describe all you know about communication between a successor and predecessor auditor.

The successor auditor is required to communicate with the predecessor auditor. The successor initiates the conversation. The predecessor has to respond. If there is a confidentiality issue, the predecessor has to tell the successor that they cannot share the information.

104

Define materiality (FASB definition)

The measure of the levels of material misstatement that could change the probably judgment of a reasonable user of the financial statements.

105

Name the five components of the COSO internal control framework:

Control environment
Risk assessment
Control activities
Set materiality
Weaknesses

106

Name two methods to document an internal control system:

Flowchart
Narrative

107

Explain the difference between a POPULATION and a SAMPLE

Population is all the data. It is what the conclusions are made about.
The sample is less than 100% of the population. It is the portion we are testing to draw conclusions about the population.

108

Is non-statistical sampling GOOD or BAD for an audit - explain?

Good - auditor can use own judgment and choose what needs to be tested
Bad - not mathematically powerful

109

___________________ is the risk on an incorrect conclusion based upon a sample.

Sampling risk

110

What are the 8 steps in a statistical sampling plan?

Determine objectives
Define population
Determine sampling risk
Calculate sample size
Select the sampling approach
Take the sample
Evaluate the results
Document

111

Tell me all you can about the AICPA Standard FORM to CONFIRM ACCOUNT BALANCE INFORMATION with Financial Institutions. Tell me about the form and how it is used by an auditor.

It is sent ASAP after the end of the year. Required. Includes the account #, balance, interest rate, etc. Gathers other information - comments, exceptions. CPA must maintain control.

112

What is lapping?

Using the money received from one account to cover what someone stole from another account

113

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that

a) shipments to customers were properly billed
b) sales billed to customers were actually shipped
c) no duplicate shipments to customers were made
d) entries in the accounts receivable subsidiary ledger were for sales actually shipped

b) sales billed to customers were actually shipped
or
d) entries in the accounts receivable subsidiary ledger were for sales actually shipped

114

Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables?

a) To meet budgets and forecasts
b) To avoid paying taxes
c) To window-dress the financial statements
d) All of the answers are correct

d) All of the answers are correct

115

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of over-reliance (99% confidence) that not more than 7% of the sales invoices lacked approval. A sample of 200 invoices was examined, and seven of them were lacking approval. The auditor then determined the achieved upper deviation limit to be 8%. The allowance for sampling risk was:

a) 1%
b) 3.5%
c) 4.5%
d) 5.5%

c) 4.5%

116

What standards are followed in governmental auditing? Who oversees the standards?

Generally Accepted Governmental Auditing Standards (GAGAS)
Government Accountability Office (GAO)

117

What auditing engagements follow GAGAS?

Recipients of federal aid or grants, state and local governments, wherever the federal money is

118

Describe several ways that GAGAS goes beyond GAAS

CPE requirements
External peer review every 3 years
Evaluate corrective actions
Communicate with legislature

119

What entities are subject to the Single _____ Act of _____?

Audit; 1984
Entities that have over $500,000 in government funds

120

Auditors test relevant assertions. A mnemonic for the assertions is CAVE CROC. What does the CROC stand for?

Cutoff
Rights and obligations
Occurrence
Classification and understandibility

121

In the past an auditor could observe the distribution of paychecks in order to test the EXISTENCE of employees. Why is this no longer reasonable? What could be done instead?

Most employers use direct deposit
Compare HR records to bank statements

122

How is sample size determined in Monetary Unit Sampling?

Total population divided by Sampling interval

123

Which of the following is TRUE (T) or FALSE (F)
1) In MUS it is easy to evaluate zero balance items
2) MUS automatically focuses on units with larger balances

1) False
2) True

124

When selecting a sample using monetary-unit sampling, the dollar is the sampling unit. For example, if the 300th dollar of invoices is selected,

a) Only an invoice with exactly $300 is audited
b) An invoice of less than $300 cannot be selected
c) The invoice containing the 300th dollar is audited
d) Only that dollar is audited

c) The invoice containing the 300th dollar is audited

125

In a monetary-unit sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement of this sample would be

a) $5,000
b) $4,000
c) $2,000
d) $1,000

d) $1,000

126

In order to become a CPA, a person must be _____ years old.

18

127

In order to become a CPA in Georgia, a person must meet requirements concerning:

Education
Experience
Exam

128

In order to become a CPA, a person must have completed _____ hours of education.

150

129

If a candidate works in industry under the supervision of a CPA, they must complete ______ hours of work.

2,000

130

Please describe any special requirements for a CPA engaged in the sale of insurance or financial services on a commission basis

You must write a letter to your clients stating that you are receiving a commission

131

TRUE or FALSE - a candidate can take the sections of the CPA exam in ANY order

TRUE

132

Candidates must pass all four sections of the CPA exam in a rolling _____ month period

18

133

A passing score on a section of the CPA exam is _______

75

134

TRUE or FALSE - a candidate can earn work experience while completing requisite accounting education requirements

FALSE

135

Please state Yes or No. Independence is required in a:
Compilation -
Review -
Audit -

No
Yes
Yes

136

Please state Yes or No. An engagement letter is required in a:
Compilation -
Review -
Audit -

Yes
Yes
Yes

137

What is a compilation?

Working with management to present financial information with no assurance

138

What level of assurance is given by an:
Audit -
Review -
Compilation -

Positive
Limited
None

139

Please describe factors a compilation does NOT contemplate:

Internal controls
Inquiries
Analytical procedures
Source documents

140

What if an accountant is NOT independent in a compilation?

Write a 4th paragraph on the compilation report stating that you are not independent

141

How is evidence collected in a review?

Analytical procedures
Inquiries
Written representations of management

142

Tell me everything you can about the representations of management in a REVIEW

It is required
Dated same as review report
Signed by the CEO and CFO
For all financial statements

143

Please list several analytical procedures you might use in a REVIEW

Compare current to last year
Compare budget to actual
Compare company to industry
Look at relevant non-financial information

144

What are the three paragraphs of a standard REVIEW report?

Scope
Management's responsibility
Auditor's responsibility

145

When is an auditor allowed to discuss the financial matters of a client?

Subpoena
Successor auditor
Legal counsel
To comply with laws and regulation

146

When performing an engagement to review a non-issuer's financial statements, an accountant most likely would

a) confirm a sample of significant accounts receivable balances
b) obtain an understanding of the entity's internal control
c) ask about actions taken at board of director's meeting
d) limit the distribution of the accountant's report

c) ask about actions taken at board of director's meeting