ACC-555 Midterm Exam Answers

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ACC-555 Midterm Exam Answers

Question :
opinion on:

(TCO F) The objective of the ordinary audit of financial statements is the expression of an

2.
Question :
fraud?

(TCO F) Which of the following statements is most correct regarding errors and

3.

(TCO F) If the auditor believes that the financial statements are not fairly stated or

Question :

is unable to reach an conclusion because of insufficient evidence, the auditor:

4.

Question :

(TCO F) Auditors accumulate evidence to:

5.

Question :

(TCO F) Which of the following forms of evidence is most reliable?

6.

Question :

(TCO F) Analytical procedures are required during which phase(s) of the audit?

Test of Controls; Planning; Completion

7.

Question :

(TCO F) To be considered reliable evidence, confirmations must be controlled by:

8.
Question :
(TCO F) When the auditor has reason to believe an illegal act has occurred
without any corrective action being taken, the auditor should:

9.

Question :

10.
Question :
procedures?

(TCO F) Traditionally, confirmations are used to verify:

(TCO G) Which of the following is correct with respect to the use of analytical

11.

Question :

(TCO G) Which is a liquidity activity ratio?

1.

Question :

(TCO A) Match the following definitions to the terms.

____ Public Company Accounting Oversight Board Auditing Standards

____ Generally Accepted Auditing Standards
____ Statements on Auditing Standards
a. Pronouncements providing specific guidance on auditing matters for all entities except public
companies
b. The standards used for public company audits
c. Standards used by non-public companies and for interim audits for public companies as initially
adopted by the PCAOB

2.

Question :

(TCO B) The following is a portion of a qualified audit report issued for a private

company:
Independent Auditors Report
To the shareholders of Tamarak Corporation,
We have audited the accompanying balance sheet of Tamarak Corporation as of October 31, 2009, and
the related statements of income, retained earnings, and cash flows for the past year. These financial
statements are the responsibility of the companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The company has included in property and debt in the accompanying balance sheet certain lease
obligations that, in our opinion, should be expensed in order to conform with generally accepted
accounting principles. If these lease obligations were capitalized, property would be decreased by
$4,000,000, long-term debt by $2,000,000, and retained earnings by $180,000 as of October 31, 2009,
and net income and earnings per share would be decreased by $180,000 and $0.62, respectively, for the
past year.
Required: Complete the above qualified audit report by preparing the opinion paragraph. Do not date or
sign the report.

3.

Question :

(TCO C) The following situation involves a possible violation of the AICPAs Code

of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2)
decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or
does not violate) the Code.
Your answer should be set up something like this:

Rule # __________ Violation? Yes or No

1 or 2 line explanation:
Brad Heist, CPA, was traveling from Dallas to Houston, Texas, when he was pulled over by a police officer
on suspicion of driving under the influence. The breath-a-lyzer and a subsequent blood test revealed that
Brad was definitely impaired. He was convicted in court of driving while under the influence of alcohol
(DUI). This was Brads fourth conviction of DUI in less than a year, a felony under current Texas law.
Accordingly, Brad was sentenced to 18 months in prison.

4.

Question :

(TCO C) The following situation involves a possible violation of the AICPAs Code

of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2)
decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or
does not violate) the Code.
Your answer should be set up something like this:
Rule # __________ Violation? Yes or No
1 or 2 line explanation:
Jim is the audit partner for the small CPA firm of Jim, CPA, PA. Jims neighbor Duffy has a financial
advisement practice whereby she sells mutual funds to individuals for their retirement. Jims firm is
performing the audit for a privately held company Jims best friend Cressy owns. Jim refers Cressy to
Duffy for retirement advice. Cressy buys 10 units of ABC Mutual Fund which generates Duffy a fat little
commission fee. Duffy buys Jim a $25 gift certificate to the local movie theater.

5.
Question :
(TCO C) Brandt, CPAs has obtained Big-Bucks, a new publicly-held client. BigBucks has various accounting-related needs that Brandt, CPAs would like to fulfill. Partner-in-charge D.
Brandt has discussed with Big-Bucks the possibility of performing the annual audit of Big-Bucks as well as
preparing the tax returns, business plan, quarterly write-up services, and providing consultation on the
viability and valuation of mining gas reserves in Tennessee. An outside expert would be hired by Brandt

CPAs to provide expert advice to the CPA firm on mining gas reserves. Additionally, Brandt, CPAs audit
manager who will be assigned to this audit has previously been approached by Big-Bucks to come work
for the company as Chief Financial Officer. The audit manager has refused the offer, since his cousins
sister-in-law is a 10 percent shareholder in Big-Bucks and does not want her to have any say in his
employment.
Under the Sarbanes-Oxley Act of 2002, what issues do you see and how would you advise Brandt,
CPAs? Is there ever a time when Brandt, CPAs could perform any of these services for Big-Bucks?

6.

Question :

(TCO D) There are four major sources of an auditors legal liability. One source is

liability to the audit client under common law. Briefly summarize the other three sources.

7.

Question :

(TCO F) Below are 10 documents typically examined during an audit. Classify

each document as either internal or external.

Type of Document Documents
________________ 1. Canceled checks for payments of accounts payable
________________ 2. Payroll time cards
________________ 3. Duplicate sales invoices
________________ 4. Vendors invoices
________________ 5. Bank statements

________________ 6. Minutes of the board of directors meetings

________________ 7. Signed lease agreements
________________ 8. Notes receivable
________________ 9. Subsidiary accounts receivable records
________________ 10. Remittance advices

8.

Question :

(TCO G) Discuss the essential activities involved in the initial planning of an audit.