Test 1 7dd

Independence standards are required for audits of public companies, but not for audits of private
companies.
True
False
Decision makers demand reliable information that is provided by accountants.
True
False
Information asymmetry seldom occurs.
True
False
Conflicts of interest often occur between absentee owners and managers.
True
False
Auditing services and attestation services are the same.
True
False
Auditing is a type of attest service.
True
False
Testing all transactions that occurred during the period is cost prohibitive.
True
False
Why do auditors generally use a sampling approach to evidence gathering?
Auditors are experts and do not need to look at much to know whether the financial
statements are correct or not.
Auditors must balance the cost of the audit with the need for precision.
Auditors must limit their exposure to their client to maintain independence.
The auditor's relationship with the client is generally adversarial, so the auditor will
not have access to all of the financial information of the company.
Which of the following statements best describes a relationship between sample size and other
elements of auditing?
If materiality increases, so will the sample size.

If the desired level of assurance increases, sample sizes can be smaller.
If materiality decreases, sample size will need to increase.
There is no relationship between sample size and materiality or the desired level of
assurance.
Which of the following statements about the study of auditing is NOT true?
The study of auditing can be valuable to future accountants and business decision
makers whether or not they plan to become auditors.
The study of auditing focuses on learning the analytical and logical skills necessary to
evaluate the relevance and reliability of information.
The study of auditing focuses on learning the rules, techniques, and computations
required to analyze financial statements.
The study of auditing begins with the understanding of a coherent logical framework
and techniques useful for gathering and analyzing evidence about others' assertions.
The basic purpose of a financial statement audit is to
Detect fraud.
Examine individual transactions so that the auditor may certify as to their validity.
Provide assurance regarding whether the client's financial statements are fairly stated.
Assure the consistent application of correct accounting procedures.
Assurance services may improve all of the following except:
Relevance.
Credibility.
Periodicity.
Reliability.
Evidence is reliable if it
Signals the true state of a management assertion.
Applies to the period being audited.
Relates to the audit assertion being tested.
Is consistent with management's assertions.
Which of the following best describes the concept of audit risk?
The risk of the auditor being sued because of association with an audit client.
The risk that the auditor will provide an unqualified opinion on financial statements
that are, in fact, materially misstated.
The overall risk that a material misstatement exists in the financial statements.
The risk that auditors use audit procedures that are inappropriate.
An auditor who accepts an audit engagement and does not possess expertise with respect to the
business entity's industry, should
Engage financial experts familiar with the nature of the business entity.
Obtain a knowledge of matters that relate to the nature of the entity's business.
Refer a substantial portion of the audit to another CPA, who will act as the principal
auditor.
First inform management that an unqualified opinion cannot be issued.
For publicly-held companies, which of the following is integrated into the audit of
financial statements?
Budgetary information audit.
The audit of internal controls.
Audit of management forecasts.
Audit of interim financial statements.
During the first phase of an audit, a CPA most likely would
Identify specific internal control activities that are likely to prevent fraud.
Evaluate the reasonableness of the client's accounting estimates.
Evaluate the integrity of management.
Inquire of the client's attorney as to whether any unrecorded claims are probable or
asserted.
In the context of agency theory, information asymmetry refers to the idea that
Information can vary in its reliability.
Information can vary in its relevance.
Management has more information about the entity's true financial position than do
the absentee owners (i.e. stockholders).
Management likely will not act in the best interests of the absentee owners.
Which of the following best describes why an independent auditor is asked to express an opinion
on the fair presentation of financial statements?
It is difficult to prepare financial statements that fairly present a company's financial
position and changes in cash flows without the expertise of an independent auditor.
It is management's responsibility to seek available independent aid in the appraisal of

the financial information shown in its financial statements.
The opinion of an independent party is needed because a company is not likely to be
considered objective with respect to its own financial statements.
It is a customary courtesy that all stockholders of a company receive an independent
report on management's stewardship in managing the affairs of the business.
Which of the following best describes the fundamental, underlying reason for why there is
demand for an independent auditor to report on financial statements?
A management fraud may exist and it is more likely to be detected by auditors if they
are independent.
Different interests may exist between the company preparing the statements and the
parties using the statements.
A misstatement of account balances may exist and it is the independent auditor's
responsibility to ensure that financial statements are not misstated.
A poorly designed internal control system may be in place.
Which of the following best describes why publicly-traded corporations follow the practice of
having the external auditor appointed by the board of directors or elected by the stockholders?
To promote an adversarial relationship between the auditor and the corporation's
management.
To enhance auditor independence from the management of the corporation.
To encourage a policy of rotation of the independent auditors.
To give management more leverage over the auditor's decisions.
The definition of auditing refers to auditing as a "systematic process of objectively obtaining and
evaluating evidence regarding assertions" What is meant by "systematic process"?
All audits involve obtaining the same evidence.
All audits involve evaluating evidence in the same manner.
There should be a well-planned approach for obtaining and evaluating evidence.
All assertions are equally important for all audits.
Which of the following would best be described as an assurance service?
Preparing a report representing a client's position during an IRS audit.
Working with a client to develop a more efficient method of processing financial
transactions.
Offering an opinion concerning the accuracy of statements made on a client's website
relating to the client's online privacy policies.
Assisting a client in identifying potential sources of capital for potential acquisitions.
Which of the following statements is not true with respect to assurance, attest, and audit
services?
These services are applied only to financial statements and financial statement
accounts.
These services all involve obtaining and evaluating evidence.
These services all involve determining the correspondence of some information to a
set of criteria.
These services all involve issuing a report.
Auditors are most likely to use the most rigorous audit procedures to examine
Routine transactions.
Management assertions that are deemed to be of low risk.
Only the rights and obligations assertion.
Management assertions that are deemed to be of high risk.
When obtaining an understanding of the entity and its environment, the auditor should obtain an
understanding of internal controls primarily to
Identify areas of relatively high risk of misstatement and plan the audit accordingly.
Provide suggestions for improvement to the client.
Serve as a basis for setting audit risk and materiality.
Decide whether to perform an audit for the client.
Which one of the following statements best describes the concept of materiality?
Materiality is determined by reference to specific quantitative guidelines established
by the AICPA.
Materiality depends only on the dollar amount of an item relative to other items in the
financial statements.
Materiality depends on the nature of an item but not on the dollar amount of the item.
Materiality is largely a matter of professional judgment.
Before accepting an engagement to audit a new client, an auditor is required to
Make inquiries of the predecessor auditor.
Tell the client whether or not the auditor is willing to issue a "clean" opinion.
Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
Become a member of the client's board of directors.
An investor is reading the financial statements of the Stankey Corporation and observes that the
statements are accompanied by an auditor's unqualified report. From this, the investor may
conclude that
Any disputes over significant accounting issues have been settled to the auditor's
satisfaction.
The auditor is satisfied that Stankey will be highly profitable in the future.
The auditor is certain that Stankey's financial statements have been prepared
accurately and that all account balances are precisely correct.
The auditor has determined that Stankey's management is not qualified to lead the
company.
Preliminary engagement activities include
Evaluating internal controls.
Assessing audit risk at the account balance level.
Setting materiality.
Ensuring the independence of the audit team.
The auditor's report is generally addressed to the
Chief operating officer.
Securities and Exchange Commission.
Stockholders of the company.
Chief financial officer.
An auditor would issue an adverse opinion if
The auditor encounters adverse attitudes toward the auditor on the part of client
management.
A qualified opinion cannot be given because the auditor is not qualified to do so.
An immaterial misstatement is present.
The statements taken as a whole do not fairly present the financial condition and
results of operations of the company.
Which of the following is true with respect to the auditor's report?
The report indicates that the client's financial statements were audited in accordance
with generally accepted accounting standards.
with applicable auditing standards.
with the auditor's best judgment.
with statements issued by the FASB.
Which of the following is not a concept that is included in the scope paragraph of the auditor's
report?
The conformance of the financial statements with generally accepted accounting

principles.
The audit was conducted in accordance with applicable auditing standards.
The audit was planned and performed to obtain reasonable, rather than absolute,
assurance.
An audit involves examining items on a test (i.e. sampling) basis.
The Audit Committee consists of
Members of management.
A subcommittee of the AICPA who establish the SAS.
Members of the Board of Directors.
Appointed government overseers.
What organization is responsible for setting auditing standards for audits of publicly-traded
companies in the U.S.?
AICPA.
FASB.
GASB.
PCAOB.
The Public Company Accounting Oversight Board's role is to

Conduct the final review of auditors' work before the auditor's opinion is issued.
Oversee the auditors of public companies in order to protect the interests of investors.
Conduct audits of governmental entities.
Sanction auditors who fail to follow GAAS.

The authoritative body designed to promulgate standards concerning an accountant's association
with audited financial statements of an entity that is required to file financial statements with the
SEC is the
Financial Accounting Standards Board.
General Accounting Office.
Public Company Accounting Oversight Board.
Auditing Standards Board.

The auditor must be independent of the audit client unless
The lack of independence does not influence his or her professional judgment.
Both parties agree that the independence issue is not a problem.
The lack of independence is insignificant.
None of the abovethe auditor cannot lack independence.
Which of the following describes the PCAOB generally accepted auditing standard requiring a
critical review of the work done and the judgment exercised by those assisting in an audit at
every level of supervision?
Proficiency.
Audit risk.
Inspection.
Due care.
Which of the following best describes the general character of the three PCAOB generally
accepted auditing standards that are classified as standards of fieldwork?
The competence, independence, and professional care of persons performing the
audit.
Criteria for the content of the auditor's report on financial statements and related
footnote disclosures.
The criteria of audit planning and evidence-gathering.

The need to maintain independence in mental attitude in all matters relating to the
audit.
The first PCAOB general standard requires that the examination of financial statements is to be
performed by a person or persons having adequate technical training and
Independence with respect to the financial statements and supplementary disclosures.
Exercising professional care as judged by peer reviewers.
Proficiency as an auditor which likely has been acquired from previous experience.
Objectivity as an auditor as verified by proper supervision.

The first PCAOB standard of reporting requires that, "the report shall state whether the financial
statements are presented in accordance with generally accepted accounting principles." This
passage requires
A statement of fact by the auditor.
An opinion by the auditor.

An implied measure of fairness.
An objective measure of compliance.

Because of the risk of material misstatement, an audit of financial statements in accordance with
generally accepted auditing standards should be planned and performed with an attitude of
Objective cynicism.
Independent differentialism.
Professional skepticism.
Impartial conservatism.
The accuracy of information included in footnotes accompanying the audited financial
statements issued by a company whose shares are traded on a stock exchange is the primary
responsibility of
The stock exchange officials.
The independent auditor.
The company's management.
The Securities and Exchange Commission.

The primary responsibility for the adequacy of disclosures in the financial statements of a
publicly held company rests with the
Partner assigned to the audit engagement.
Management of the company.

Auditor in charge of the fieldwork.

The largest public accounting firms typically are structured as
Subchapter S corporations.
Professional corporations.
Limited liability partnerships.
Limited liability corporations.

Typically, an external auditor first gets supervisory experience at what level of authority?
Associate.
Senior.
Manager.
Partner.
An "in-charge" auditor typically holds the rank of

Associate.
Senior.
Manager.
Partner.
Which of the following best describes the concept of risk assessment on which auditors can
provide independent assurance?
The risk that financial statements are misstated because of fraud.
The risk that financial statements are misstated because of error or fraud.
Whether management has systems in place to evaluate and effectively manage the
entity's business risks.
Developing client acceptance and continuance practices that minimize the likelihood
of lawsuits against the auditor.
Forensic audits include all of the following except:
Criminal investigations.
Manufacturers' assertions about product quality.

Employee fraud.
Management fraud.
A typical objective of an operational audit is for the auditor to
Determine whether the financial statements present fairly the entity's operations.
Evaluate the feasibility of attaining the entity's operational objectives.
Make recommendations for improving performance.
Report on the entity's relative success in attaining profit maximization.

Governmental auditing often extends beyond examinations leading to the expression of an
opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness,
and
Monetary stimulus.
Evaluation.
Accuracy.
Compliance.
External auditors are referred to as "external" because

They report to users outside of the audited entity.
They are paid by parties outside of the audited entity.
They are not employees of the entity being audited.
Their offices are not at the entity's place of business.

Which is not an attribute of an external auditor?
Independence.
Client advocacy.
Objectivity.
Concern for the public interest.

What is the general character of the work conducted in performing a forensic audit for a
company?
Providing assurance that the financial statements are not materially misstated.
Detecting or deterring fraudulent activity.

Offering an opinion on the reliability of the specific assertions made by management.
Identifying the causes of an entity's financial difficulties.

A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in
determining
The nature of the CPA's report qualification.
The scope of the CPA's auditing procedures.
Requirements for the review of the entity and its environment.
Whether the CPA should undertake an audit engagement.
Who bears ultimate responsibility for the financial statements?

Management of the organization, equally with the external auditor that audits the
statements.
Management and the shareholders of the organization.
The external auditor that audits the statements.
Management of the organization.
The three PCAOB general standards are concerned with

Adequate training and proficiency of the auditor, proper planning and supervision,
and due professional care.
Adequate training and independence.
Due professional care.
Both adequate training and independence, and due professional care.
The first PCAOB general standard recognizes that regardless of how capable an individual may
be in other fields, the individual cannot meet the requirements of the auditing standards without
the proper
Business and finance courses.
Quality control and peer review.
Education and experience in auditing.
Supervision and review skills.

The main difference between SAS and AU is
They are the same except that SAS are organized chronologically and the AU are
organized by topical area.
SAS are issued by the ASB and AU are issued by the PCAOB.
SAS are issued by the PCAOB and AU are issued by the ASB.
SAS define minimum standards of performance for auditors while AU define
financial accounting principles that must be followed according to GAAP.
The AICPA's Statements on Auditing Standards can be described as
Providing very specific guidance about the specific activities an auditor must perform
on each engagement.
Similar to financial accounting standards in that they are developed by the
government.
Defining the minimum standards of performance for an auditor.

Providing assurance that an auditor will not issue an incorrect opinion.
Due professional care requires auditors to
Obtain independent, third party (non-client) documentation as evidence for all
information presented in the financial statements.
Exercise professional skepticism during the audit.

Disregard any evidence generated by the client during the audit.
Find every error contained in the financial statements prepared by management.
The objective of the second PCAOB Standard of Reporting is to provide assurance that
There are no variations in the format and presentation of financial statements.
Substantially different transactions and events are not accounted for on an identical
basis.
The auditor is consulted before material changes are made in the application of
accounting principles.
The comparability of financial statements between periods is not materially affected

by changes in accounting principles that are not disclosed.
An internal auditor is likely to be more concerned with _________________ than the external
auditor.
Internal administrative procedures.
Cost accounting procedures.
The efficiency of operations.
Internal control.
Which of the following is not included in the broad category of assurance services?
Operational audit.
Reporting on internal control.
Accounting or review services.
Evaluation of the client's risk management framework.

Which of the following is not explicitly a part of the IIA's definition of internal auditing?
Internal auditing is an objective assurance activity.
Internal auditing is a consulting activity.
Internal auditing should help an organization accomplish its objectives.
Internal auditors should help external auditors complete the annual financial
statement audit.
Which of the following statements regarding the PCAOB is incorrect?
It is a quasi-governmental, nonprofit corporation.
It is overseen by the SEC.
It sets standards for public company audits.
It has delegated all of its standard-setting authority to the AICPA.
Due professional care requires
Auditors to plan and perform their duties with the skill and care that is commonly
expected of accounting professionals.
The examination of all available corroborating evidence.
The exercise of error-free judgment.
A study and review of internal controls that includes tests of controls.
Which of the following best describes the role of corporate governance?

Management decides which accounting principles are the most appropriate.
Shareholders vote to decide who should be members of the board of directors.
Holding the management team accountable to shareholders and other constituents for
the utilization of the entity's resources.
Management often is compensated based on the company's profitability.

The four PCAOB standards of reporting are concerned with all of the following except:
The presentation of the financial statements based on GAAS.

The presentation of the financial statements based on GAAP.
Whether principles are consistently applied, whether all informative disclosures have
been made and the degree of responsibility the auditor is taking.
The degree of responsibility the auditor is taking.
Which of the following best describes what is meant by generally accepted auditing standards?
Audit assertions generally determined on audit engagements.
Acts to be performed by the auditor.
Standards of quality for the auditor's performance.
Procedures to be used to gather evidence to support financial statements.

The fourth PCAOB standard of reporting requires an auditor to render a report whenever an
auditor's name is associated with financial statements. The overall purpose of the fourth standard
of reporting is to require that reports
State that the examination of financial statements has been conducted in accordance
with generally accepted auditing standards.
Indicate the character of the auditor's examination and the degree of responsibility
assumed by the auditor.
Imply that the auditor is independent in fact as well as in appearance with respect to
the financial statements under examination.
Express whether the accounting principles used in preparing the financial statements
have been applied consistently in the period under examination.
The three PCAOB standards of fieldwork are concerned with
Planning and supervision and understanding the client's internal control system.
Choosing evidence with due professional care.
Adequate training to understand the client's internal control system.
Ensuring consistency in financial statements for periods presented.
The fourth PCAOB reporting standard requires the auditor's report to contain either an
expression of opinion regarding the financial statements taken as a whole or an assertion to the
effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent
An auditor from reporting on one basic financial statement and not the others.
An auditor from expressing different opinions on each of the basic financial
statements.
Management from reducing its final responsibility for the basic financial statements.
Misinterpretations regarding the degree of responsibility the auditor is assuming.
The public has turned to CPAs to provide assurance services primarily because
The independence and objectivity of CPAs increase the public trust.

There is a need to develop new revenue streams for accounting firms.
Audits do not provide reliable information for decision makers.
CPAs have been proactive in identifying new types of assurance services to market to
customers.
Which of the following is the authoritative body designated to promulgate attestation standards
for nonpublic entities?
AICPA (Auditing Standards Board).

Governmental Accounting Standards Board.
In performing an attestation engagement, a CPA typically
Supplies litigation support services.
Assesses control risk at a low level.
Expresses a conclusion about an assertion.
Provides management consulting advice.

Which of the following is a conceptual difference between the attestation standards and generally
accepted auditing standards?
The attestation standards provide a framework for the attest function beyond
historical financial statements.
The requirement that the practitioner be independent in mental attitude is omitted
from the attestation standards.
The attestation standards do not permit an attest engagement to be part of a business
acquisition study or a feasibility study.

None of the standards of fieldwork in generally accepted auditing standards are
included in the attestation standards.
Which of the following conditions is necessary for a practitioner to accept an attest engagement
to examine and report on an entity's internal control over financial reporting?
The practitioner anticipates relying on the entity's internal control in a financial
statement audit.
Management accepts responsibility for the effectiveness of internal control.

The practitioner is a continuing auditor who previously has audited the entity's
Management agrees not to present the practitioner's report in a general-use document
to stockholders.
An accountant's report expressing an opinion on an entity's internal controls should state that
Only those controls on which the accountant intends to rely for purposes of the
financial statement audit were reviewed, tested, and evaluated.
The establishment and maintenance of the internal controls is the responsibility of

management.
The study and evaluation of the internal controls was conducted in accordance with
generally accepted auditing standards.
Distribution of the report is restricted for use only by management and the board of
directors.
For a practitioner to examine management's assertions about the effectiveness of internal
controls, all of the following conditions are necessary except:
Sufficient competent evidence can be developed to support the evaluation.
The practitioner must have already concluded that the financial statements are fairly
presented in accordance with the applicable accounting framework.
The entity's management accepts responsibility for the effectiveness of its internal
control.
All of the conditions above are necessary.

Prospective financial statements may be prepared for
General use.
Limited use.
Internal use.
All of the above.
Given one or more hypothetical assumptions, a responsible party may prepare, to the best of his
knowledge and belief, an entity's expected financial position, results of operations, and changes
in cash flows. Such prospective financial statements are known as
Pro forma financial statements.
Financial projections.
Partial presentations.
Financial forecasts.
Which of the following are prospective financial statements upon which an accountant may
appropriately report for general use?
Pro forma financial statements.
Financial projections.
Partial presentations.
Financial forecasts.
Accepting an engagement to examine an entity's financial projections would most likely be

appropriate if distribution of the projections were limited to
The general public on the entity's website.
Potential stockholders who request a prospectus or a registration statement.
A bank with which the entity is negotiating for a loan.
All stockholders of record as of the report date.

An examination of a financial forecast is a professional service that involves
Compiling or assembling a financial forecast that is based on management's
assumptions.
Limiting the distribution of the accountant's report to management and the board of
directors.
Assuming responsibility to update management on key events for one year after the
report's date.
Evaluating the preparation of a financial forecast and the support underlying

management's assumptions.
An accountant's standard report on a compilation of a projection should not include
A statement that he or she does not express an opinion on the statements or
assumptions.
A statement that a compilation of a projection is limited in scope.
A disclaimer of responsibility to update the report for events occurring after the
report's date.
A statement that the accountant expresses only limited assurance that the results may
be achieved.
Limited assurance is provided in
An audit engagement.
A compilation engagement.
A review engagement.
None of the above.

Absolute assurance is provided in
None of the above.
Reasonable assurance is provided in
None of the above.
Which of the following should not be included in an accountant's standard report based upon the
compilation of an entity's financial statements?
A statement that a compilation is limited to presenting, in the form of financial
statements, information that is the representation of management.
A statement that the compilation was performed in accordance with standards
established by the American Institute of CPAs.
A statement that the accountant has not audited or reviewed the financial statements.
A statement that the accountant does not express an opinion but expresses only
limited assurance on the financial statements.
Before issuing a report on the compilation of financial statements of a nonpublic entity, the
accountant should
Apply analytical procedures to selected financial data to discover any material
misstatements.
Corroborate at least a sample of the assertions management has embodied in the
Inquire of the client's personnel whether the financial statements omit substantially
all disclosures.
Read the financial statements to consider whether the financial statements are free
from obvious material errors.
During a review of the financial statements of a nonpublic entity, the CPA finds that the financial
statements contain a material departure from generally accepted accounting principles. If
management refuses to correct the problem, the CPA should
Disclose the departure in a separate paragraph of the report.

Issue an adverse opinion.
Attach a footnote explaining the effects of the departure.
Issue a compilation report.
Which of the following procedures is not included in a review engagement of a nonpublic entity?
Inquiries of management.
Inquiries regarding significant events subsequent to the balance sheet date.
Any procedures designed to identify relationships among data that appear to be
unusual.
A study and evaluation of internal control.
Inquiry of the entity's personnel and analytical procedures are the primary bases for the issuance
of a(n)
Compilation report on financial statements for a nonpublic company in its first year
of operations.
Auditor's report on financial statements supplemented with price-level information.
Review report on comparative financial statements for a nonpublic company in its

second year of operations.
Management advisory report prepared at the request of the client's audit committee.
The report of a CPA on a review of the financial statements of a nonpublic entity should not
include a statement that
All information included in the financial statements is the representation of the
entity's management.
The review was performed in accordance with generally accepted auditing standards.
The CPA is not aware of any material modifications that should be made to the
financial statements in order for them to be in conformity with generally accepted
accounting principles.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data.
Prior to commencing the compilation of financial statements of a nonpublic entity, the
accountant should
Perform analytical procedures sufficient to determine whether fluctuations among
account balances appear reasonable.
Complete the preliminary phase of the study and evaluation of the entity's internal
control.
Verify that the financial information supplied by the entity agrees with the books of
original entry and supporting documentation.
Acquire a knowledge of any specialized accounting principles and practices used in

the entity's industry.
Compilation reports may include
Compilations when the accountant is not independent.
Compilations with full disclosure.
Compilations that omits substantially all disclosures.
Any of the above.
May an accountant plan and perform an engagement to compile or review the financial
statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry
accounting principles?
Only a compilation could be performed without the specialized knowledge.
Only a review could be performed without the specialized knowledge.
Both a compilation and a review could be performed without the specialized
knowledge.
Neither a compilation nor a review could be performed without the specialized

knowledge.
Compilations provide which of the following types of assurance about the fair presentation of
No assurance.
Negative assurance.
Limited assurance.
Reasonable assurance.
Which of the following is not a main goal of the internal auditing profession?
Add value to an organization's operations.
Help an organization to accomplish its objectives.
Provide reliable information to external users.
Improve the effectiveness of risk management of an organization.

Which of the following statements best describes the guidance developed by the AICPA related
to WebTrust services?
The Trust Services principles require the CPA to focus exclusively on the financial
information presented on a website.
Once earned, the WebTrust seal can remain on a website until the entity controlling
the site informs the CPA that the information on the site has changed.
In performing a WebTrust assurance engagement, a CPA does not have to consider
auditing or attestation standards.
The Trust Services principles provide a broad set of criteria that guide practitioners in
testing and evaluating websites.
Which of the following statements is true regarding the performance of an assurance service on
information systems reliability by a CPA?
The CPA is not permitted to provide any other services for the client if he or she is to
perform the service.
The service will require the CPA to apply all of the attestation and auditing standards.
The service provides information regarding whether the information system provides
reliable information for internal operating decisions.
Performing the service will not require the collection of evidence.

Which of the following statements is not true concerning assurance services?
The growth in assurance services has been driven in part by users' demands for more
relevant information.
Assurance services focus on improving the quality of information or its context, for
decision makers.
Unlike audit and attestation engagements, an engagement to perform assurance

services does not require the CPA to consider information reliability.
Auditing and attestation services can be viewed as subsets of assurance services since
there is overlap in their objectives.
An entity engaged a CPA to determine whether the client's websites meet defined criteria for
standard business practices and controls over transaction integrity and information protection. In
performing this engagement, the CPA should comply with the provisions of
Statements on Assurance Standards.
Statements on Standards for Attestation Engagements.

Statements on Standards for Management Consulting Services.
Statements on Auditing Standards.

Which of the following would be considered a part of a consulting services (non-assurance)
engagement?
I. Expressing a conclusion about the reliability of a client's financial statements.
II. Reviewing and commenting on a client-prepared business plan.
I only.
II only.
Both I and II.

Neither I nor II.
Independence is required
Under GAAS but not attestation standards.
Under both GAAS and attestation standards.

Under attestation standards but not GAAS.
Is preferred but not required under both GAAS and attestation standards.
Blue Co., a privately-held entity, asked its tax accountant, Cook, a CPA in public practice, to
reproduce Blue's internally-prepared interim financial statements on Cook's computer when
Cook prepared Blue's quarterly tax return. Cook should not submit these financial statements to
Blue unless, at a minimum, Cook complies with the provisions of
Statements on Responsibilities in Tax Practice.
Statements on Standards for Accounting and Review Services.

Statements on Responsibilities in Unaudited Financial Services.
Statements on Standards for Attestation Engagements.

Snow, CPA, was engaged by Master Co., a privately-held company, to examine and report on
management's written assertion about the effectiveness of Master's internal control over financial
reporting. Snow's report should state that
Because of inherent limitations of any internal controls, errors or fraud may occur
and not be detected.
Management's assertion is based on criteria established by the American Institute of
Certified Public Accountants.
The results of Snow's tests will form the basis for Snow's opinion on the fairness of
Master's financial statements in conformity with GAAP.
The purpose of the engagement is to enable Snow to plan an audit and determine the
nature, timing, and extent of tests to be performed.
An accountant may accept an engagement to apply agreed-upon procedures to prospective
financial statements provided that
Distribution of the report is restricted to the specified users involved.

The prospective financial statements also are examined.
Responsibility for the adequacy of the procedures performed is taken by the
accountant.
Negative assurance is expressed on the prospective financial statements taken as a
whole.
Accepting an engagement to compile a financial projection for a public company most likely
would be inappropriate if the projection were to be distributed to
A bank with which the entity is negotiating for a loan.

A labor union with which the entity is negotiating a contract.
The principal stockholder, to the exclusion of the other stockholders.
All stockholders of record as of the report date.
An accountant's compilation report on a financial forecast should include a statement that the
Compilation does not include evaluation of the assumptions underlying the forecast.
Hypothetical assumptions used in the forecast are reasonable.
Range of assumptions selected is one in which one end of the range is less likely to
occur than the other.
Prospective statements are limited to presenting, in the form of a forecast,
information that is the accountant's representation.
Responding to a question such as "What would happen if" is an attribute of which of the
following types of engagements?
Financial projection.
Financial forecast.
Financial forecast and financial projection.
Review.
When an accountant is not independent of a client and is requested to perform a compilation of
the client's financial statements, the accountant
Is precluded from accepting the engagement.
May accept the engagement and need not disclose the lack of independence.
May accept the engagement and should disclose the lack of independence, but need
not indicate the reason for the lack of independence.
May accept the engagement and should disclose both the lack of independence and
the reason for the lack of independence.
Before performing a compilation of the financial statements of a nonpublic entity, an accountant
should
Perform a thorough study and evaluation of the internal control system.
Complete a series of inquiries concerning the entity's procedures for recording,
classifying, and summarizing transactions.
Design working papers intended to provide sufficient competent evidential matter to
afford a reasonable basis for a compilation opinion.
Obtain an understanding of the accounting principles and practices of the industry in

which the entity operates.
A compilation of prospective financial statements involves all of the following except:
Performing analytical procedures.

Assembling the statements based on the responsible party's assumptions.
Issuing a compilation report.
Considering whether the statements appear to be not obviously inappropriate.

In a review engagement, the accountant must make all of the following inquiries except those to:
Identify subsequent events having a material effect on the statements.
Understand internal controls.

Identify actions taken at stockholders' meetings.
Ascertain whether statements are in accordance with GAAP.

Which of the following procedures is not usually performed by the accountant during a review
engagement of a nonpublic entity?
Inquiry about actions taken at meetings of the board of directors that may affect the
Issuance of a report stating that the review was performed in accordance with
standards established by the AICPA.
Reading of the financial statements to determine if they conform with generally
accepted accounting principles.
Communication of any material weaknesses discovered during the consideration of

internal control.
The expectation that an internal auditor does not accept gifts that may impair judgment is based
on the principle of
Integrity.
Objectivity.
Confidentiality.
Competency.
Which of the following is not an aspect of the assurances provided by a CPA WebTrust report?
Product or service quality.

System availability.
Confidentiality.
Processing integrity.
Direct services offered under PrimePlus include all of the following except:
Accounting for the client's income.
Providing assurances about the quality of care.

Supervising the client's investments.
Arranging for payment of care.

The type of report issued under a PrimePlus assurance engagement is likely which of the
following?
Unqualified.
Assurance.
Audit.
Agreed-upon procedures.
Trust Service principles cover

Hardware design.
Confidentiality.
Software design.
Physical protection of computer systems.

An attestation report should state that the use of the report is restricted to specified parties under
all of the following circumstances except when:
The criteria used to evaluate the subject matter are available only to specified parties.
The report is an attest engagement to apply agreed-upon procedures.
A written assertion on the subject matter of the report has not been provided by the
responsible party.
All of the above are circumstances that would dictate that the use of the report is
restricted to specific parties.
Which of the following is not an attestation standard?
Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion
that is expressed in the report.
The report shall identify the subject matter or assertion being reported on and state
the character of the engagement.
The work shall be adequately planned and assistants, if any, shall be properly
supervised.
A sufficient understanding of internal controls shall be obtained to plan the

engagement.
Which of the following would an accountant not need to know when conducting a compilation?
The accounting principles and practices of the industry in which the entity operates.
A general understanding of the nature of the entity's business transactions and the
form of its accounting records.

The accounting basis on which the financial statements are to be presented.
The accountant would need to know all of the above when conducting a compilation.
A CPA's report on agreed-upon procedures related to management's assertion about an entity's

compliance with specified requirements should contain
A statement of limitations on the use of the report.

An opinion about whether management's assertion is fairly stated.
Negative assurance that control risk has not been assessed.
An acknowledgement of responsibility for the sufficiency of the procedures.
Which of the following represents the order from the least assurance to the most assurance
provided for the types of services provided?
Review, compilation, audit.
Compilation, review, audit.

Audit, review, compilation.
Audit, compilation, review.

During an engagement to review the financial statements of a nonpublic entity, an accountant
becomes aware of a material departure from GAAP. If the accountant decides to modify the
standard review report because management will not revise the financial statements, the
accountant should
Express negative assurance on the accounting principles that do not conform with
GAAP.
Disclose the departure from GAAP in a separate paragraph of the report.

Issue an adverse or an "except for" qualified opinion, depending on materiality.
Express positive assurance on the accounting principles that conform with GAAP.
Which set of standards was created by the AICPA to cover services relating to unaudited
Standards on Selective Audits and Review Services (SSARS).
Statement on Auditing Standards (SAS).
Statements on Compilation and Review Standards (SCRS).
Statements on Standards for Accounting and Review Services (SSARS).
When engaged to compile the financial statements of a nonpublic entity, an accountant is

required to possess a level of knowledge of the entity's accounting principles and practices. This
requirement most likely will include obtaining a general understanding of the
Stated qualifications of the entity's accounting personnel.

Design of the entity's internal controls placed in operation.
Risk factors relating to misstatements arising from illegal acts.
Internal control awareness of the entity's senior management.
This concept, while used by both internal and external auditors, is typically assessed quite
differently for each.
Competence.
Objectivity.
Integrity.
Materiality.
An entity's WebTrust seal is managed by

The CPA who performed the service.
The AICPA.
A third-party service organization.
The entity receiving the seal.

A SysTrust engagement is conducted under which of the following sets of standards?
AICPA.
Review.
Attestation.
Audit.
Which of the following is not a part of the role of internal auditors?

Assisting the external auditors.
Providing reports on the reliability of financial statements to investors and creditors.
Consulting activities.
Operational audits.
Operational auditing is oriented primarily toward
Verification that an entitys financial statements are fairly presented.

The accuracy of data reflected in managements financial records.
Past protection provided by existing internal control.
Future improvements to accomplish the goals of management.
Expressing an opinion about the reliability of a clients financial statements.
Reviewing and
commenting on a
client-prepared
business plan.
II.
I only.
II only.
Both I and II.
Neither I nor II.
Which of the following best places the events of the last decade in proper sequence?
Increased consulting services to audit clients, Sarbanes-Oxley Act, Enron and other scandals, prohibition
of most consulting work for audit clients, establishment of PCAOB.
Sarbanes-Oxley Act, increased consulting services to audit clients, Enron and other scandals, prohibition
Increased consulting services to audit clients, Enron and other scandals, Sarbanes-Oxley Act, prohibition
Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to audit clients, prohibition
Which of the following statements best describes managements and the external auditors respective
levels of responsibility for a public companys financial statements?
Management has the primary responsibility to ensure that the companys financial statements are
prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of
material misstatement.
Management has the primary responsibility to ensure that the companys financial statements are
prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements
are free of material misstatement.
Neither management nor the external auditor has significant responsibility for the fairness of the entitys
financial statements in accordance with GAAP.
Management and the external auditor share equal responsibility for the fairness of the entitys financial
statements in accordance with GAAP.
Which of the following best describes the relationship between business objectives, strategies, processes,
controls, and transactions?
To achieve its objectives, a business formulates strategies and implements processes, which are carried
out through business transactions. The entitys information and internal control systems must be
designed to ensure that the transactions are properly executed, captured, and processed.
To achieve its strategies, a business formulates objectives and implements processes, which are carried
out through the entitys information and internal control systems. Transactions are conducted to ensure
that the processes are properly executed, captured, and processed.
To achieve its business processes, a business formulates objectives, which are carried out through the
entitys strategies. The entitys information and internal control systems must be designed to ensure that
the entitys strategies are properly executed, captured, and processed.
To achieve its objectives, a business formulates strategies to implement its transactions, which are
carried out through business processes. The entitys information and internal control systems must be
designed to ensure that the processes are properly executed, captured, and processed.
The Public Company Accounting Oversight Board
Is a quasi-governmental organization that has a policy to ignore public comment and input in the process
of setting auditing standards.
Is a quasi-governmental organization that has legal authority to set accounting standards for public
companies.
Is a quasi-governmental organization that is independent of the SEC in setting auditing standards.
Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public
companies.
Which of the following is correct regarding the types of audits over which the ASB and the PCAOB,
respectively, have standard-setting authority in the U.S.?
ASB
PCAOB
Nonpublic company audits
Public company audits
Which of the following best describes the general character of the three generally accepted auditing
standards classified as standards of field work?
Criteria for audit planning and evidence gathering.
Criteria for the content of the auditors report on financial statements and related footnote disclosures.
The competence, independence, and professional care of persons performing the audit.
The need to maintain an independence of mental attitude in all matters relating to the audit.
An independent audit aids in the communication of economic data because the audit
Assures the readers of financial statements that any fraudulent activity has been corrected.
Guarantees that financial data are fairly presented.
Lends credibility to the financial statements.
Confirms the exact accuracy of managements financial representations.

Which of the following best describes the reason why an independent auditor is often retained to report on
Different interests may exist between the entity preparing the statements and the persons using the
statements, and thus outside assurance is needed to enhance the credibility of the statements.
An entity may have a poorly designed internal control system.
Management fraud may exist, and it is more likely to be detected by independent auditors than by
internal auditors.
A misstatement of account balances may exist, and all misstatements are generally corrected as a result
of the independent auditors work.
Which of the following best describes relationships among auditing, attest, and assurance services?
Auditing and attest services represent two distinctly different types of services.
Attest is a type of auditing service.
Assurance is a type of attest service.
Auditing is a type of assurance service.
Which of the following statements relating to attest and assurance services is not correct?
Independence is an important attribute of assurance service providers.
In performing an attest service, the CPA determines the correspondence of the subject matter (or an
assertion about the subject matter) against criteria that are suitable and available to users.
Assurance services can be performed to improve the quality or context of information for decision
makers.
Financial statement auditing is a form of attest service but it is not an assurance service.
For what primary purpose does the auditor obtain an understanding of the entity and its environment?
To decide which facts about the entity to include in the audit report.
To limit audit risk to an appropriately high level.
To plan the audit and determine the scope of audit procedures to be performed.
To determine the audit fee.

Which of the following statements best describes the role of materiality in a financial statement audit?
The higher the level at which the auditor assesses materiality, the greater the amount of evidence the
auditor must gather.
The level of materiality has no bearing on the amount of evidence the auditor must gather.
Materiality refers to the material from which audit evidence is developed.

The lower the level at which the auditor assesses materiality, the greater the amount of evidence the
auditor must gather.
Which of the following is the most important reason for an auditor to gain an understanding of an audit
clients system of internal control over financial reporting?
Understanding a clients system of internal control can help the auditor make valuable recommendations
to management at the end of the engagement.
Understanding a clients system of internal control is not a required part of the audit process.
Understanding a clients system of internal control can help the auditor assess risk and identify areas
where financial statement misstatements might be more likely.
Understanding a clients system of internal control can help the auditor sell consulting services to the
client.
Preliminary engagement activities include
All of the above.
Understanding the client and the clients industry.

Ensuring the independence of the audit team and audit firm.
Determining audit engagement team requirements.
Which of the following statements best describes what is meant by an unqualified audit opinion?
Issuance of an unqualified auditors report indicates that the auditor is expressing different opinions on
each of the basic financial statements regarding whether the clients financial statements are fairly
presented in accordance with agreed-upon criteria.
Issuance of an unqualified auditors report indicates that the auditor is not qualified to express an opinion
that the clients financial statements are fairly presented in accordance with agreed-upon criteria.
Issuance of an unqualified auditors report indicates that in the auditors opinion the clients financial
statements are not fairly enough presented in accordance with agreed-upon criteria to qualify for a clean
opinion.
Issuance of a standard unqualified auditors report indicates that in the auditors opinion the clients
financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the
inclusion of qualifying phrases.
The auditing standards used to guide the conduct of the audit are
Implicitly referred to in the opening paragraph of the auditors standard report.
Explicitly referred to in the opening paragraph of the auditors standard report.
Explicitly referred to in the opinion paragraph of the auditors standard report.
Explicitly referred to in the scope paragraph of the auditors standard report.
Implicitly referred to in the scope paragraph of the auditors standard report.
Implicitly referred to in the opinion paragraph of the auditors standard report.

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The
resulting misstatement is moderately material, but the auditor does not consider it to be pervasive. The
auditor is unable to convince the client to alter its accounting treatment. The rest of the financial
statements are fairly stated in the auditors opinion. Which kind of audit report would an auditor most likely
issue under these circumstances?
Standard unqualified opinion.
Adverse opinion.
No opinion at all.
Qualified opinion due to departure from GAAP.
An assurance report on information can provide assurance about the informations
Reliability.
Relevance.
Timeliness.
All of the above.
Which of the following professional services would be considered an attest engagement?
Compilation of financial statements from a clients accounting records.
An engagement to report on compliance with statutory requirements.
An income tax engagement to prepare federal and state tax returns.

A management consulting engagement to provide IT advice to a client.
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial
statements, provided that
The prospective financial statements are also examined.
Responsibility for the adequacy of the procedures performed is taken by the accountant.
Distribution of the report is restricted to the specified users.
Negative assurance is expressed on the prospective financial statements taken as a whole.

Which of the following statements concerning prospective financial statements is correct?
Any type of prospective financial statement would normally be appropriate for general use.
Only a financial forecast would normally be appropriate for limited use.
Any type of prospective financial statement would normally be appropriate for limited use.
Only a financial projection would normally be appropriate for general use.

When compiling the financial statements of a nonpublic entity, an accountant should
Inquire of key personnel concerning related parties and subsequent events.
Perform ratio analyses of the financial data of comparable prior periods.
Understand the accounting principles and practices of the entitys industry.
Review agreements with financial institutions for restrictions on cash balances.

Which of the following statements is correct concerning both an engagement to compile and an
engagement to review a nonpublic entitys financial statements?
The accountant should obtain a written management representation letter.
The accountant must be independent in fact and appearance.
The accountant is not required to obtain an understanding of internal control.
The accountant expresses no assurance on the financial statements.

The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity
states that
A review includes assessing the accounting principles used and significant estimates made by
management.
The accountant does not express an opinion or any other form of assurance on the financial statements.
A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the
The accountant is not aware of any material modifications that should be made to the financial
statements.
Financial statements of a nonpublic entity that have been reviewed by an accountant should be
accompanied by a report stating that
A review is greater in scope than a compilation, the objective of which is to present financial statements
that are free of material misstatements.
A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the
All information included in the financial statements is the representation of the management of the entity.
The scope of the inquiry and the analytical procedures performed by the accountant have not been
restricted.
The general accreditation granted by the Institute of Internal Auditors is known as the
CFSA.
CIA.
CFE.
CGAP.
Which of the following is not a Trust Services principle?
Digital certificate authorization.
Online privacy.
Availability.
Processing integrity.
Which of the following assurances is not provided by an unqualified opinion on a SysTrust report?
There are procedures to protect the system against unauthorized physical access.
The financial statements created by the system are free of material misstatements.
Documented system processing integrity objectives, policies, and standards have been communicated to
authorized users and controls are functioning as documented.
The documented system availability objectives, policies, and standards have been communicated to
PrimePlus engagements are mainly designed to
Assist the elderly in perfecting their shuffleboard techniques.
Provide guidance to assisted-living care facilities to enhance quality of life for the elderly.
Provide guidance to health care providers in giving high-quality health care.
Assist the elderly to maintain their financial independence and desired lifestyle as they age.
Which of the following is not a type of PrimePlus service?
Systems design services.
Assurance services.
Direct services.
Consulting/facilitating services.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessors

Awareness of the consistency in the application of generally accepted accounting
principles between periods.
Understanding as to the reasons for the change of auditors.
Evaluation of all matters of continuing accounting significance.
Opinion of any subsequent events occurring since the predecessors audit report was
issued.
A written understanding between the auditor and the client concerning the auditors
responsibility for the discovery of illegal acts is usually set forth in a(n)
Engagement letter.
Letter of audit inquiry.
Management letter.
Internal control letter.
Miller Retailing, Inc., maintains a staff of three full-time internal auditors who report directly to
the audit committee. In planning to use the internal auditors to help in performing the audit, the
independent auditor most likely will
Increase the extent of the procedures needed to reduce control risk to an acceptable
level.
Avoid using the work performed by the internal auditors.
Place limited reliance on the work performed by the internal auditors.
Decrease the extent of the tests of controls needed to support the assessed level of
detection risk.
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of the audit procedures with the clients management.
Inquire of the clients attorney if it is probable that any unrecorded claims will be
asserted.
Evaluate the reasonableness of the clients accounting estimates.
When planning an audit, an auditor should
Determine planning materiality for audit purposes.

Consider whether the extent of substantive procedures may be reduced based on the results of
the internal control questionnaire.
Conclude whether changes in compliance with prescribed internal controls justify reliance
on them.
Prepare a preliminary draft of the management representation letter.
As generally conceived, the audit committee of a publicly held company should be made up of
Representatives from the clients management, investors, suppliers, and customers.
Members of the board of directors who are not officers or employees.
Representatives of the major equity interests (preferred stock, common stock).
The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
An auditor who discovers that a clients employees paid small bribes to municipal officials most
likely would withdraw from the engagement if
The client receives financial assistance from a federal government agency.
The payments violated the clients policies regarding the prevention of illegal acts.
Management fails to take the appropriate remedial action.
Documentation that is necessary to prove that the bribes were paid does not exist.
Which of these statements concerning illegal acts by clients is correct?
An audit in accordance with generally accepted auditing standards normally includes audit
procedures specifically designed to detect illegal acts that have an indirect but material effect on
the financial statements.
An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on
An auditors responsibility to detect illegal acts that have a direct and material effect on the
financial statements is the same as that for errors and fraud.
An auditor considers illegal acts from the perspective of the reliability of managements
representations rather than their relation to audit objectives derived from financial statement
assertions.
The engagement partner and manager review the work of engagement team members to evaluate
which of the following:
12_30_2011
All of the above.
The objectives of the procedures were achieved.
The results of the work support the conclusions reached.
The work was performed and documented.
Tolerable misstatement is
Materiality for the balance sheet as a whole.
Materiality allocated to a specific account.
The amount of misstatement that management is willing to tolerate in the financial
statements.
Materiality for the income statement as a whole.
Which of the following concepts are pervasive in the application of generally accepted auditing
standards, particularly the standards of fieldwork and reporting?
Control risk.
Materiality and audit risk.
Internal control.
Expected misstatement.
The existence of audit risk is recognized by the statement in the auditors standard report that the
auditor
Obtains reasonable assurance about whether the financial statements are free of material
misstatement.
Is responsible for expressing an opinion on the financial statements, which are the responsibility
of management.
Assesses the accounting principles used and also evaluates the overall financial statement
presentation.
Realizes that some matters, either individually or in the aggregate, are important while other
matters are not important.
Risk of material misstatement refers to a combination of which two client components of the
audit risk model?
Audit risk and control risk.
Audit risk and inherent risk.
Control risk and detection risk.
Inherent risk and control risk.
As lower acceptable levels of both audit risk and materiality are established, the auditor should
plan
more
work
on
individual
accounts
to
Rev: 02-02-2012
Find smaller errors.
Increase the tolerable misstatements in the accounts.
Decrease the risk of overreliance.
Find larger errors.
When is a duty to disclose fraud to parties other than the clients senior management and its
audit committee most likely to exist?
In response to inquiries from a successor auditor.
When the fraud results from misappropriation of assets rather than fraudulent financial
reporting.
When a line manager rather than a lower-level employee commits the fraudulent act.
When the amount is material.
Which of the following characteristics most likely would heighten an auditors concern about
the risk of intentional manipulation of financial statements?
Insiders recently purchased additional shares of the entitys stock.
Management places substantial emphasis on meeting earnings projections.
Turnover of senior accounting personnel is low.
The rate of change in the entitys industry is slow.
Which of the following is a misappropriation of assets?
Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts
equal to 10 percent of sales.
Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with an
interest rate of 7 percent.
Classifying inventory held for resale as supplies.
An employee of a consumer electronics store steals 12 CD players.
Auditing standards require auditors to make certain inquiries of management regarding fraud.
Which of the following inquiries is required?
Whether management has any knowledge of fraud that has been perpetrated on or within the
entity.
Managements attitude about hiring ethical employees.
Managements attitudes toward regulatory authorities.
Whether management has ever intentionally violated the securities laws.
Which of the following is an example of fraudulent financial reporting?
An employee diverts customer payments to his personal use, concealing his actions by debiting
an expense account, thus overstating expenses.
Company management falsifies inventory count tags, thereby overstating ending inventory and
understating cost of sales.
An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
An employee borrows small tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.
Which of the following is correct concerning required auditor communications about fraud?
Any requirement to disclose fraud outside the entity is the responsibility of management and not
that of the auditor.
Fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
Fraud that involves senior management should be reported directly by the auditor to the audit
committee regardless of the amount involved.
The professional standards provide no requirements related to the communication of fraud, but
the auditor should use professional judgment in determining communication responsibilities.
Hawkins requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor auditor's working papers. The prospective client's refusal to permit
this will bear directly on Hawkins' decision concerning the
Adequacy of the preplanned audit program.
Ability to establish consistency in application of accounting principles between years.
Apparent scope limitation.
Integrity of management.
In assessing whether to accept a client for an audit engagement, a CPA should consider
the current financial health of the prospective client.
the integrity of management.
The CPA's overall engagement risk.
All of the above should be considered.
Evaluating a prospective client requires the following step(s):

Communicate with the predecessor auditor.
Preplan the audit.
Establish the terms of the engagement.
None of the above.
An auditor has withdrawn from an audit engagement of a publicly held company after finding
fraud that may materially affect the financial statements. The auditor should set forth the reasons
and findings in correspondence with the
Client's legal counsel.
Stock exchanges where the company's stock is traded.
Audit committee of the board of directors.
When a CPA is approached to perform an audit for the first time, the CPA should make inquiries
of the predecessor auditor. This is a necessary procedure because the predecessor may be able to
provide the successor with information that will assist the successor in determining
rev: 10_4_12
Whether the predecessor's work should be utilized.
Whether, in the predecessor's opinion, the financial statements are materially correct.
Whether, in the predecessor's opinion, the company's internal controls have been
satisfactory.
Whether the engagement should be accepted.
Which of the following should an auditor obtain from the predecessor auditor prior to accepting
an audit engagement?
Analysis of balance sheet accounts.
Analysis of income statement accounts.
All matters of continuing accounting significance.
Facts that might bear on management integrity.
Which of the following factors most likely would cause a CPA not to accept a new audit
engagement?
The prospective client's unwillingness to permit inquiry of its legal counsel.
The inability to review the predecessor auditor's documentation.

The CPA's lack of understanding of the prospective client's operations and industry.
Indications that management has not investigated employees in key positions before
hiring them.
An auditor who discovers that a client's employees paid small bribes to municipal officials most
likely would withdraw from the engagement if
The payments violated the client's policies regarding the prevention of illegal acts.
The client receives financial assistance from a federal government agency.
Documentation that is necessary to prove that the bribes were paid does not exist.
Management fails to take the appropriate remedial action.
A successor auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor's
Engagement letter.
Audit working papers.
Engagement letter and audit working papers.
It would not be typical to allow a review of either the engagement letter or the audit
working papers.
Evaluating a prospective client requires the following step(s):
Communicate with the SEC.
Preplan the audit.
Determine if the firm is independent of the client.
Communicate with the AICPA.
Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should be rejected?
The details of most recorded transactions are not available after a specified period of
time.
Internal control activities requiring segregation of duties are subject to management
override.
It is unlikely that sufficient appropriate evidence is available to support an opinion on
Management has a reputation for consulting with several accounting firms about
significant accounting issues.
Which of the following factors most likely would cause a CPA to decide not to accept a new
audit engagement?
The CPA's lack of understanding of the prospective client's internal auditor's
computer-assisted audit techniques.

Management's disregard of its responsibility to maintain an adequate control
environment.
The CPA's inability to determine whether related party transactions were
consummated on terms equivalent to arm's-length transactions.
Management's refusal to permit the CPA to perform substantive procedures before the
year-end.
Before accepting an engagement to audit a new client, a CPA is required to obtain
An understanding of the prospective client's industry and business.
The prospective client's signature on the engagement letter.
A preliminary understanding of the prospective client's control environment.
The prospective client's consent to make inquiries of the predecessor auditor, if any.
Which of the following situations would most likely require special audit planning?
Some items of factory and office equipment do not bear identification numbers.
Depreciation methods used on the client's tax return differ from those used on the
books.
Assets costing less than $500 are expensed even though the expected life exceeds one
year.
Inventory is comprised of precious stones.
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of the audit procedures with the client's management.
Inquire of the client's attorney as to any unrecorded claims.
An auditor is required to establish an understanding with a client regarding the responsibilities
for each engagement. This understanding generally includes
Management's responsibility to guarantee that there are no material misstatements
due to fraud.
The auditor's responsibility to plan and perform the audit to provide reasonable, but
not absolute, assurance of detecting material errors or fraud.
Management's responsibility for providing the auditor with an assessment of the risk
of material misstatement due to fraud.
The auditor's responsibility for the fairness of the financial statements.
A written understanding between the auditor and the client concerning the auditor's responsibility
for the discovery of illegal acts is usually set forth in a(n)
Client representation letter.

Letter of audit inquiry.
Management letter.
Engagement letter.
Engagement letters include all of the following except:
A list of additional services that will be provided.
A list of adjusting journal entries.
Information about the audit fee.
Arrangements involving the use of specialists.
Which of the following matters generally is included in an auditor's engagement letter?
Management's responsibility for the entity's compliance with laws and regulations.
The factors to be considered in setting preliminary judgments about materiality.
Management's liability for illegal acts committed by its employees.
The auditor's responsibility to guarantee accuracy of the financial statements.
To provide for the greatest degree of independence in performing internal audit functions, an
internal auditor most likely should report to the
Vice-President - Finance.
Corporate controller.
Corporate stockholders.
All of the following refer to an internal auditor's competence except:
The party in the entity to which the internal auditor reports.
The quality of internal audit documents and reports.
Professional certification.
Supervision and review of internal audit activities.
An independent auditor might consider the appropriateness of the procedures performed by the
internal auditors because
They are employees whose work must be reviewed during substantive testing.
They are employees whose work might be relied upon.
Their work impacts the cost/benefit tradeoff in evaluating inherent limitations.

Their degree of independence may be inferred by the nature of their work.
As generally conceived, the audit committee of a publicly held company should be made up of
Representatives of the major equity interests (preferred stock, common stock).
The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
Representatives from the client's management, investors, suppliers, and customers.
To emphasize auditor independence from management, publicly traded corporations are required
to
Appoint a partner of the CPA firm conducting the examination to the corporation's
audit committee.
Establish a policy of discouraging social contact between employees of the
corporation and the independent auditors.
Request that a representative of the independent auditor be on hand at the annual
stockholders' meeting.
Have the independent auditor report to an audit committee of independent members
of the board of directors.
An auditor obtains knowledge about a new client's business and its industry in order to
Make constructive suggestions concerning improvements to the client's internal
control.
Develop an attitude of professional skepticism concerning management's financial
statement assertions.
Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
Understand the events and transactions that may have an effect on the client's
Which of the following is an example of a related party transaction?
An action is taken by the directors of Company A to provide additional compensation
for vice presidents in charge of the principal business functions of Company A.
A long-term agreement is made by Company A to provide merchandise or services to
Company B, a long-time, friendly competitor.
A short-term loan is granted to Company A by a bank that has a depositor who is a
member of the board of directors of Company A.
A nonmonetary exchange occurs whereby Company A exchanges property for similar
property owned by Company B, an unconsolidated subsidiary of Company A.
An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in
an office building owned by a shareholder. This finding likely indicates the existence of
Management fraud.
Related party transactions.

Window dressing.
Weak internal control.
Which of the following would not necessarily be a related party transaction?
Sales to another corporation with a similar name.
Purchases from another corporation that is controlled by the corporation's chief
stockholder.
Loan from the corporation to a major stockholder.
Sale of land to the corporation by the spouse of a director.
The existence of a related party transaction may be indicated when another entity
Sells real estate to the corporation at a price that is comparable to its appraised value.
Absorbs expenses of the corporation under audit.
Borrows from the corporation at a rate of interest which equals the current market
rate.
Lends to the corporation at a rate of interest which equals the current market rate.
In the context of an audit of financial statements, substantive procedures are audit procedures
that
May be eliminated under certain conditions.
Are primarily designed to discover significant subsequent events.
May be either tests of details of transactions, tests of details of account balances, or
analytical procedures.
Will increase proportionately with an increase in the auditor's reliance on internal
control.
Which of the following is not an audit procedure that is commonly used in performing tests of
controls?
Inquiring.
Observing.
Confirming.
Inspecting.
Materiality allocated to an assertion.

Which of the following would an auditor most likely use in determining the auditor's planning
materiality?
The anticipated sample size for planned substantive procedures.
The entity's annualized interim (i.e. quarterly) financial statements.
The results of the internal control questionnaire.
The contents of the management representation letter.
Which of the following is not a qualitative factor that may affect an auditor's establishment of
materiality?
Potential for fraud.
The company is close to violating loan covenants.
Firm policy sets materiality at 4% of pretax income.
A small misstatement would interrupt an earnings trend.
Which of the following is not a concern as to whether a misstatement is qualitatively material?
The misstatement hides a failure to meet analysts' expectations.
The misstatement is less than 5% of pretax income.
The misstatement increases management's compensation.
The misstatement changes a small amount of profit to a small reported loss.
In assessing the competence of an internal auditor, an independent CPA most likely would obtain
information about the
Quality of the internal auditor's work.
Organization's commitment to integrity and ethical values.
Influence of management on the scope of the internal auditor's duties.
Organizational levels to which the internal auditor reports.
Which of the following procedures would an auditor most likely include in the initial planning of
a financial statement audit?
Perform detailed testing of the individual balance sheet accounts.
Examining documents to detect illegal acts having a material effect on the financial
statements.
Considering whether the client's accounting estimates are reasonable in the
circumstances.
Determining the extent of involvement of the client's internal auditors.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff
assistants
That immaterial fraud is not to be reported to the client's audit committee.
How the results of various auditing procedures performed by the assistants should be
evaluated.
How the overall audit strategy will allow the firm to reach a sufficiently low level of
audit risk.
How overall materiality was selected.
Which of the following audit procedures would be least likely to disclose the existence of related
party transactions of a client during the period under audit?
Reading "conflict-of-interest" statements obtained by the client from its management.
Scanning accounting records for large transactions at or just prior to the end of the
period under audit.
Reading minutes of the Board of Directors meetings for authorization or discussion
of material transactions.
Confirming purchases and sales transactions with the vendors and/or customers
involved.
A dual-purpose test
Simultaneously tests debits and credits.
Is a procedure completed by both the internal and external auditors.
Is useful to both the entity and the auditor.
Is both a substantive test of transactions and a test of controls.
The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
Methods of statistical sampling to be used in confirming accounts receivable.
Pending legal matters to be included in the inquiry of the client's attorney.
Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
Timing of the audit.
The audit client's board of directors and audit committee refused to take any action with respect
to an immaterial illegal act which was brought to their attention by the auditor. Because of their
failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was
primarily due to doubts concerning
Adequate financial statement disclosures.
Compliance with the statutory laws and regulations.

Scope limitations resulting from their inaction.
The integrity of management.
Which of the following procedures would an auditor most likely include in the initial planning of
an examination of financial statements?
Assess the need for the use of specialists in the audit.
Inquiring of the client's attorney as to any claims that are likely to be asserted.
Perform detailed testing of the individual financial statement accounts.
Determining whether necessary internal controls procedures are being applied as
prescribed.
An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this fraud by
Scanning the general journal for unusual entries.
Performing a revenue cutoff test at year-end.
Tracing a sample of journal entries to the general ledger.
Examining documentary evidence of sales returns and allowances recorded after
year-end.
Under the Sarbanes-Oxley Act, the audit committee of a public company has the following
requirement(s):
Each member of the committee must be a board member and shall be independent.
The audit committee must preapprove all audit and nonaudit services.
The audit committee must establish and maintain procedures to handle all issues that
relate to accounting, internal control, and auditing.
All of the above.
Which of the following is a general audit test?
Fee assessment procedures.
Tests of controls.
Preparation of corporate tax returns.
Active testing procedures.
Which of the following arranges the general types of audit tests in the order they are normally
performed in an audit?
Substantive procedures, tests of controls, and risk assessment procedures.

Substantive procedures, risk assessment procedures, and tests of controls.
Risk assessment procedures, tests of controls, and substantive procedures.
Risk assessment procedures, substantive procedures, and tests of controls.
Which of the following relatively small misstatements most likely would have a material effect
on an entity's financial statements?
An illegal payment to a foreign official that was not recorded.
A piece of obsolete office equipment that was not retired.
A petty cash fund disbursement that was not properly authorized.
An uncollectible account receivable that was not written-off.
Which of the following is the most important qualitative factor that auditors should consider
when making materiality judgments?
A misstatement exceeded five percent of net income.
The auditor also provides consulting services to the audit client.
The misstatement will cause the client to fail to meet an earnings forecast.
The audit committee is not well-educated about the accounting principle in question.
Which element(s) is/are pervasive to the application of generally accepted auditing standards,
particularly the standards of fieldwork and reporting?
The elements of materiality and audit risk.
The element of internal control.
The element of corroborating evidence.
The element of reasonable assurance.
Which of the following statements is not correct about materiality?
The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with GAAP, while other matters
are not important.
An auditor considers materiality for the aggregate level of misstatements that could
be material to any one of the financial statements individually.
Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments.
An auditor's consideration of materiality is influenced by the auditor's perception of
the needs of a reasonable person who will rely on the financial statements.
Engagement risk is
The risk of issuing an incorrect audit opinion.

The auditor's risk of loss from events arising in connection with financial statements
audited and reported upon.
The overall risk of material misstatement.
The risk of the client's financial failure.
Client risk as defined in the text is
The auditor's risk of loss from events arising in connection with financial statements
audited and reported upon.
The overall risk of material misstatement.
The risk that audit procedures will fail to detect material misstatements.
The risk of the client's financial failure.
Under Statements on Auditing Standards, which of the following would be classified as an error?
Misappropriation of assets for the benefit of management.
Misinterpretation by management of facts that existed when the financial statements
were prepared.
Preparation of records by employees to cover a fraudulent scheme.
Intentional omission of the recording of a transaction to benefit a third party.
When assessing the risk of material misstatement, auditors evaluate the reasonableness of an
entity's accounting estimates. An auditor normally would be concerned about assumptions that
are
Susceptible to bias.
Consistent with prior periods.
Insensitive to variations.
Similar to industry guidelines.
Which of the following characteristics most likely would heighten an auditor's concern about the
risk of intentional manipulation of financial statements?
Turnover of senior accounting personnel is low.
Insiders recently purchased additional shares of the entity's stock.
Management places substantial emphasis on meeting earnings projections.
The rate of change in the entity's industry is slow.
Which of the following is a known misstatement?
A management estimate that is outside the range of reasonable outcomes determined
by the auditor.
A fixed asset being recorded at the incorrect cost.

A projected misstatement resulting from errors found during sampling.
Difference in judgment between the auditor and management.
Engagement risk can be eliminated by
Establishing policies for client acceptance and continuance.
Lowering audit risk.
Lowering materiality.
Engagement risk cannot be eliminated.
The achieved (actual) level of audit risk
Can always be accurately assessed by the auditor.
Should be greater than or equal to acceptable audit risk.
Can never be known with certainty.
Is the same for all audit clients.
An auditor knows that an audit client operating in an industry in which common stock is valued
based on the price-earnings ratio will soon make an initial public offering. All of the following
are true except:
Materiality should be reduced.
Risk of material misstatement should increase.
Detection risk should increase.
Audit risk should increase.
The risk that an auditor will conclude, based on substantive procedures, that a material error does
not exist in an account balance when, in fact, such an error does exist is referred to as
Sampling risk.
Detection risk.
Nonsampling risk.
Inherent risk.
The risk of material misstatement differs from detection risk in that it
Arises from the misapplication of auditing procedures.
May be assessed in either quantitative or qualitative terms.
Exists independently of the actions of the auditor.

Can be changed at the auditor's discretion.
All of the following are inherent risk factors that are pervasive to the financial statements except:
Highly complex significant transactions.
Non-routine transactions.
Classes of transactions are not processed systematically.
Supplies inventory is difficult to count.
When an auditor increases the assessed level of risk of material misstatement because certain
control procedures were determined to be ineffective, the auditor would most likely increase the
Extent of tests of controls.
Level of detection risk.
Extent of substantive tests.
Level of inherent risk.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of risk of material misstatement from that originally planned. To achieve an overall audit
risk level that is substantially the same as the planned audit risk level, the auditor would
Decrease amount of substantive testing.
Decrease detection risk.
Increase detection risk.
Increase materiality levels.
The risk of material misstatement includes which of the following?
Detection risk.
Audit risk.
Inherent risk.
Nonsampling risk.
An auditor learns that a client employee in control of inventory gets divorced and is responsible
for paying a large amount of child support. All of the following for the audit of inventory likely
are true except:
Fraud risk increases.
The risk of misappropriation of assets increases.
Risk of material misstatement increases.

Detection risk increases.
Which of the following audit risk components may be assessed in qualitative terms?
Risk of material misstatement.
Detection risk.
Neither risk of material misstatement nor detection risk.
Both risk of material misstatement and detection risk.
When an entity moves into a significant new line of business, all of the following increase
except:
Client risk.
Acceptable audit risk.
Risk of material misstatement.
Entity business risk.
Which of the following procedures would not be used to obtain an understanding of the entity
and its environment?
Observe entity operations.
Reperform entity processes.
Verify proper valuation of inventory subject to technological obsolescence.
Review prior year's audit documentation.
Which of the following is not an important consideration in an auditor's evaluation of an entity's
business risk?
The specific business risks an entity faces that may result in financial statement errors
and fraud.
Business risk factors that impact the ability of the entity to be profitable and survive.
Audit standards include many entity business risk factors that identify circumstances
that increase the likelihood of material misstatements.
Audit standards require the auditor to evaluate the entity's business risk in order to
provide suggestions to improve the entity's profitability.
Which of the following is a source of detection risk?
Unstable business environment.
Poor client controls.
A non-representative sample.
Inherent risk assessed too high.
In general, material frauds perpetrated by which of the following are most difficult to detect?
Internal auditor.
Keypunch operator.
Cashier.
Controller.
Which of the following circumstances most likely would cause an auditor to believe that material
misstatements may exist in an entity's financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than
expected.
Audit trails of computer-generated transactions exist only for a short time.
The chief financial officer does not sign the management representation letter until
the last day of the auditor's field work.
Management consults with other accountants about significant accounting matters.
The primary responsibility for preventing fraud in an organization lies with
The audit committee of the board of directors.
The internal audit staff.
The external auditor.
The organization's management.
Which of the following is not a misstatement of the financial statements?
The client uses different inventory accounting methods for internal and external
reporting.
A departure from GAAP.
The footnote for pensions is omitted.
A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as
opposed to 13% of sales as determined by the controller.
All of the following represent an increased opportunity for management to commit fraud except:
Significant related party transactions.
The auditor's relationship with management is strained.
Management is dominated by a single person.
The financial statements included highly subjective estimates.
The auditor can respond to an increased risk of fraud by doing all of the following except:
Heavily emphasizing the importance of professional skepticism.
Assigning more experienced personnel to the audit.
Increasing detection risk.
Taking steps to obtain more reliable evidence.
An auditor discovers a likely fraud during an audit but concludes that the overall effect of the
fraud is not sufficiently material to affect the audit opinion. The auditor should probably
Disclose the fraud to the appropriate level of the client's management.
Disclose the fraud to appropriate authorities external to the client.
Discuss with the client the additional audit procedures that will be needed to identify
the exact amount of the fraud.
Modify the audit program to include tests specifically designed to identify the fraud
and its impact on the financial statements.
The acceptable level of detection risk is inversely related to the
Extent of the substantive procedures.
Risk of misapplying auditing procedures.
Planning materiality.
Risk of failing to discover material misstatements.
As the acceptable level of detection risk decreases, an auditor may change the
Timing of tests of controls by performing them at an interim date rather than at yearend.
Nature of substantive procedures from less effective to more effective procedures.
Timing of tests of controls by performing them at several dates rather than at one
time.
Assessed level of risk of material misstatement to a higher amount.
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive procedures should increase.
Substantive procedures should decrease.
Tests of controls should increase.
Tests of controls should decrease.
Increased fraud risk could also result in all of the following except:
Lower detection risk.
Higher inherent risk.

Lower control risk.
Higher client risk.
The objectives of the engagement partner's communication with the audit team include
Maintaining an adversarial atmosphere between the auditor and management.
Complying with SEC rules.
Complying with FASB rules.
Emphasizing the importance of professional skepticism.
The auditor is most likely to presume that a high risk of a fraud exists if
The entity is a multinational company that does business in numerous foreign
countries.
The entity does business with several related parties.
Inadequate segregation of duties places an employee in a position to perpetrate and
conceal theft.
Inadequate employee training results in lengthy EDP exception reports each month.
Which of the following factors most likely would heighten an auditor's concern about the risk of
fraudulent financial reporting?
Inability to generate cash flows from operations while reporting substantial earnings
growth.
Management's lack of interest in increasing the entity's earnings trend.
Large amounts of liquid assets that are easily converted into cash.
Inability to borrow necessary capital without granting debt covenants.
A properly planned and performed audit may fail to detect a material misstatement resulting from
fraud because
Audit procedures that are otherwise effective may be ineffective for fraud that is
concealed through collusion.
An audit is planned and performed to provide reasonable assurance of detecting
material misstatements caused by errors but not by fraud.
The factors considered in assessing control risk indicated an increased risk of error
but only a low risk of fraud in the financial statements.
The auditor did not consider factors influencing audit risk for account balances that
have effects pervasive to the financial statements taken as a whole.
Which of the following is correct concerning required auditor communications about fraud?
Fraud that involves senior management should be reported directly by the auditor to
the audit committee regardless of the amount involved.
Fraud with a material effect on the financial statements should be reported directly by
the auditor to the Securities and Exchange Commission.
Any requirement to disclose fraud outside the entity is the responsibility of
management and not that of the auditor.
The professional standards provide no requirements related to the communication of
fraud, but the auditor should use professional judgment in determining
communication responsibilities.
Independence is required
Selected Answer:
Answers:

Under GAAS but not attestation standards.
Under attestation standards but not GAAS.
Is preferred but not required under both GAAS and attestation standards.
Which of the following best describes the reason why independent auditors report on
Selected
Answer:
Answers:
A management fraud may exist and it is more likely to be detected by

independent auditors.
A management fraud may exist and it is more likely to be detected by
independent auditors.
Different interests may exist between the company preparing the statements
and the persons using the statements.
A misstatement of account balances may exist and is generally corrected as
the result of the independent auditors' work.
Poorly designed internal control may be in existence.
For publicly-held companies, which of the following is integrated into the audit of financial
statements?
Selected Answer:
Answers:

Budgetary information audit.
The audit of internal controls.
Audit of management forecasts.

Selected
Answer:
Answers:
A qualified opinion cannot be given because the auditor is not qualified to

do so.
The auditor encounters adverse attitudes toward the auditor on the part of
client management.
do so.
The statements taken as a whole do not fairly present the financial condition
and results of operations of the company.
An examination of a financial forecast is a professional service that involves

Selected
Answer:
Answers:
Evaluating the preparation of a financial forecast and the support

underlying management's assumptions.
Compiling or assembling a financial forecast that is based on management's
assumptions.
Limiting the distribution of the accountant's report to management and the
board of directors.
Assuming responsibility to update management on key events for one year
after the report's date.

Evaluating the preparation of a financial forecast and the support
underlying management's assumptions.
Which of the following assurances is not provided by an unqualified opinion on a SysTrust

report?
Selected
Answer:
Answers:
Documented system processing integrity objectives, policies, and standards

have been communicated to authorized users and controls are functioning as
documented.
The financial statements created by the system are free of material
misstatements.
There are procedures to protect the system against unauthorized physical
access.
The documented system availability objectives, policies, and standards have
been communicated to
documented.
In performing an attestation engagement, a CPA typically

Selected Answer:
Answers:

Supplies litigation support services.
Assesses control risk at a low level.
Expresses a conclusion on an assertion about some type of subject
matter.
A CPA firm is reasonably assured of meeting its responsibility to provide services that
conform with professional standards by
Selected Answer:
Adhering to generally accepted auditing standards.
Answers:
Adhering to generally accepted auditing standards.
Having an appropriate system of quality control.
Joining professional societies that enforce ethical conduct.
Maintaining an attitude of independence in its engagements.
Independent auditing can best be described as

Selected
Answer:
A professional activity that measures and communicates financial and

business data.
Answers:
A branch of accounting.
A discipline that enhances the degree of confidence that users can place in
A professional activity that measures and communicates financial and

business data.
A regulatory function that prevents the issuance of improper financial

information.
The public has turned to CPAs to provide assurance services primarily because
Selected
Answer:
Answers:

There is a need to develop new revenue streams for accounting firms.
Audits do not provide reliable information for decision makers.
CPAs have been proactive in identifying new types of assurance services to
market to customers.
For what primary purpose does the auditor obtain an understanding of the entity and its
environment?
Selected
Answer:
Answers:
To plan the audit and determine the scope of audit procedures to be

performed.
To decide which facts about the entity to include in the audit report.
To plan the audit and determine the scope of audit procedures to be

performed.
To limit audit risk to an appropriately high level.
To determine the audit fee.
Which of the following is the authoritative body designated to promulgate attestation

standards for nonpublic entities?
Selected Answer:
Answers:

Governmental Accounting Standards Board.
An attestation engagement is one in which a CPA is engaged to

Selected
Answer:
Answers:
Provide tax advice or prepare a tax return based on financial information the
CPA has not audited or reviewed.
Issue a report on subject matter or an assertion about the subject matter that
is the responsibility of another party.
Provide tax advice or prepare a tax return based on financial information the
CPA has not audited or reviewed.
Testify as an expert witness in accounting, auditing, or tax matters, given
certain stipulated facts.
Assemble prospective financial statements based on the assumptions of the
entity's management without expressing any assurance.
Because of the risk of material misstatement, an audit of financial statements in accordance

with generally accepted auditing standards should be planned and performed with an attitude
of
Selected Answer:
Objective judgment.
Answers:
Objective judgment.
Independent integrity.
Absolute assurance is provided in

Selected Answer:
Answers:
None of the above.
0 out of 4.4 points
The basic purpose of a financial statement audit is to

Selected
Answer:
Detect fraud.
Answers:
Detect fraud.
Examine individual transactions so that the auditor may certify as to their
validity.
Provide assurance regarding whether the client's financial statements are
fairly stated.
Assure the consistent application of correct accounting procedures.
4.4 out of 4.4 points
During the first phase of an audit, a CPA most likely would

Selected
Answer:
Answers:
Inquire of the client's attorney as to whether any unrecorded claims are
probable or asserted.
0 out of 4.4 points
Which of the following would be considered a part of a consulting services (non-assurance)

engagement?
I. Expressing a conclusion about the reliability of a client's financial statements.
II. Reviewing and commenting on a client-prepared business plan.
Selected Answer:
I only.
Answers:
I only.
II only.
Both I and II.
Neither I nor II.
The report in a review engagement provides

Selected Answer:
Answers:
A summary of findings.
Limited assurance.
Positive assurance.
An opinion.
A summary of findings.
Selected
Answer:
Answers:

Management has more information about the entity's true financial position
than do the absentee owners (i.e. stockholders).
Selected Answer:
Answers:
No assurance.
Negative assurance.
Limited assurance.
Limited assurance is provided in

Selected Answer:
Answers:
None of the above.
Selected Answer:
Answers:
Forensic audits include all of the following except

Selected Answer:
Answers:
Employee fraud.
Criminal investigations.
Manufacturers' assertions about product quality.
Employee fraud.
Management fraud.
A CPA is most likely to refer to one or more of the three PCAOB general auditing standards
in determining
Selected Answer:
Answers:

The nature of the CPA's report qualification.
The scope of the CPA's auditing procedures.
Requirements for the review of the entity and its environment.

Selected
Answer:
Answers:

Management has more information about the entity's true financial position
than do the absentee owners (i.e. stockholders).
To exercise due professional care, an auditor should

Selected
Answer:
Attain the proper balance of professional experience and formal education.
Answers:
Examine all available corroborating evidence supporting management's
assertions.
Attain the proper balance of professional experience and formal education.
Design the audit to detect all instances of illegal acts.
Critically review the work performed and judgment exercised by those

assisting in the audit.
The auditors' responsibility to express an opinion on the financial statements is

Selected
Answer:
Answers:
Explicitly represented in the introductory paragraph of the auditors'

standard report.
Implicitly represented in the auditors' standard report.
Explicitly represented in the introductory paragraph of the auditors'
standard report.
Explicitly represented in the scope paragraph of the auditors' standard
report.
Explicitly represented in the opinion paragraph of the auditors' standard
report.
The Public Company Accounting Oversight Board's role is to

Selected
Answer:
Answers:
Oversee the auditors of public companies in order to protect the interests

of investors.
Conduct the final review of auditors' work before the auditor's opinion is
issued.
Oversee the auditors of public companies in order to protect the interests
of investors.
Conduct audits of governmental entities.
Sanction auditors who fail to follow GAAS.
Selected Answer:
Answers:
Limited assurance.
No assurance.
Negative assurance.
Limited assurance.
The standard auditors' report refers to standards of the PCAOB and GAAP in which
paragraph?
Selected Answer:
Answers:
Standards of the PCAOB: Introductory and scope; GAAP: Opinion only

Standards of the PCAOB: Scope only; GAAP: Opinion only
Standards of the PCAOB: Introductory only; GAAP: Scope and opinion
Standards of the PCAOB: Introductory and scope; GAAP: Opinion only
Standards of the PCAOB: Introductory only; GAAP: All paragraphs
Which of the following assurances is not provided by an unqualified opinion on a SysTrust

report?
Selected
Answer:
Answers:

misstatements.
misstatements.
There are procedures to protect the system against unauthorized physical
access.
The documented system availability objectives, policies, and standards have

been communicated to
documented.
The definition of auditing refers to auditing as a "systematic process of objectively obtaining

and evaluating evidence regarding assertions" What is meant by "systematic process"?
Selected
Answer:
Answers:
All audits involve obtaining the same evidence.

There should be a well-planned approach for obtaining and evaluating
evidence.
All assertions are equally important for all audits.
Selected Answer:
Answers:

Which of the following is considered an example of a compliance audit?
Selected
Answer:
The examination of a company's financial statements.
Answers:
The examination a company's claims that its product is superior to that of a
competitor on specific dimensions.
The examination of a school district networked computer system.
The examination of a company's adherence to government-mandated safety

provisions.
The examination of a company's financial statements.
The first PCAOB standard of reporting requires that, "the report shall state whether the
financial statements are presented in accordance with generally accepted accounting
principles." This passage requires
Selected Answer:
Answers:

A statement of fact by the auditor.
An opinion by the auditor.
An implied measure of fairness.
Which of the following best describes the roles of the AICPA and the PCAOB in establishing
auditing standards?
Selected
Answer:
All of the above.
Answers:
All of the above.
The PCAOB sets auditing standards for use in audits of publicly held
companies.
Auditing standards issued by the AICPA and the PCAOB are considered
minimum standards of performance for auditors.
The AICPA sets auditing standards for use in audits of non-public entities.
When obtaining an understanding of the entity and its environment, the auditor should obtain
an understanding of internal controls primarily to
Selected
Answer:
Answers:

Identify areas of relatively high risk of misstatement and plan the audit
accordingly.
Audit evidence is usually considered sufficient when

Selected
Answer:
Answers:
It has the qualities of being relevant, objective, and free from unknown
bias.
It is reliable.
There is enough quantity to afford a reasonable basis for an opinion on
It has the qualities of being relevant, objective, and free from unknown
bias.
It has been obtained through random selection methods.
The Audit Committee consists of

Selected Answer:
Answers:
A subcommittee of the AICPA who establish the SAS.
Members of the Board of Directors.
Appointed government overseers.

Selected
Answer:
Answers:

The auditor encounters adverse attitudes toward the auditor on the part of
client management.
do so.
The statements taken as a whole do not fairly present the financial condition
and results of operations of the company.

Selected
Answer:
Answers:
The risk that the auditor will provide an unqualified opinion on financial
statements that are, in fact, materially misstated.
The risk of the auditor being sued because of association with an audit
client.
The overall risk that a material misstatement exists in the financial
statements.
Because of the risk of material misstatement, an audit of financial statements in accordance

with generally accepted auditing standards should be planned and performed with an attitude
of
Selected Answer:
Answers:
Objective cynicism.
Independent differentialism.
Which of the following best describes the general character of the three PCAOB generally
accepted auditing standards that are classified as standards of fieldwork?
Selected
Answer:
Answers:
The competence, independence, and professional care of persons

performing the audit.
The competence, independence, and professional care of persons
performing the audit.
Criteria for the content of the auditor's report on financial statements and
related footnote disclosures.
The criteria of audit planning and evidence-gathering.
The need to maintain independence in mental attitude in all matters relating
to the audit.
The first PCAOB general standard requires that the examination of financial statements is to
be performed by a person or persons having adequate technical training and
Selected
Answer:
Answers:
Independence with respect to the financial statements and supplementary

disclosures.
Independence with respect to the financial statements and supplementary
disclosures.
Exercising professional care as judged by peer reviewers.
Proficiency as an auditor which likely has been acquired from previous
experience.
Objectivity as an auditor as verified by proper supervision.
Which is not an attribute of an external auditor?

Selected Answer:
Answers:

Independence.
Client advocacy.
Objectivity.
When obtaining an understanding of the entity and its environment, the auditor should obtain
an understanding of internal controls primarily to
Selected
Answer:
Answers:

Identify areas of relatively high risk of misstatement and plan the audit
accordingly.
The audit committee of a company which is responsible for the appointment of the
independent audit firm should consist of
Selected
Answer:
Answers:
Representatives from management, suppliers, and shareholders.
Representatives of major equity interests (i.e., common and preferred

shareholders).
Members of the board of directors who have a financial interest in the

company.
Selected
Answer:
Materiality allocated to a specific account
Answers:
Materiality allocated to a specific account
The amount of misstatement that management is willing to tolerate in the

Analytical procedures are audit methods of evaluating financial statement accounts by

studying and comparing relationships among financial and nonfinancial data. The primary
purpose of analytical procedures conducted during the planning stages is to
Selected Answer:
Answers:
Identify the appropriate schedules to be prepared by the client.

Identify the types of errors or frauds that can occur in transactions.
Identify unusual conditions that deserve additional audit effort.

Determine the existence of unrecorded liabilities or overstated assets.
Selected Answer:
Answers:

An independent auditor might consider the procedures performed by the internal auditors
because
Selected
Answer:
Answers:

They are employees whose work must be reviewed during substantive
testing.
Their work impacts the cost/benefit tradeoff in evaluating inherent
limitations.
Their degree of independence may be inferred by the nature of their
work.
Which of the following arranges the general types of audit tests in the order they are normally
performed in an audit?
Selected Answer:
Answers:
Risk assessment procedures, tests of controls, and substantive

procedures.
Substantive procedures, tests of controls, and risk assessment procedures.
Substantive procedures, risk assessment procedures, and tests of controls.
Risk assessment procedures, tests of controls, and substantive
procedures.
Risk assessment procedures, substantive procedures, and tests of
controls.
Analytical procedures used in planning an audit should focus on

Selected
Answer:
Reducing the scope of tests of controls and substantive tests.
Answers:
Reducing the scope of tests of controls and substantive tests.

Providing assurance that potential material misstatements will be
identified.
Enhancing the auditor's understanding of the client's business.
Assessing the adequacy of the available evidential matter.
that
Selected
Answer:
May be either tests of details of transactions, tests of details of account

balances, or analytical procedures.
Answers:
Will increase proportionately with an increase in the auditor's reliance on
internal control.

Hawkins requested permission to communicate with the predecessor auditor and review
certain portions of the predecessor auditor's working papers. The prospective client's refusal
to permit this will bear directly on Hawkins' decision concerning the
Selected
Answer:
Answers:
Adequacy of the preplanned audit program.

Ability to establish consistency in application of accounting principles
between years.
Apparent scope limitation.
that
Selected
Answer:
Answers:


Will increase proportionately with an increase in the auditor's reliance on
internal control.
The risk of material misstatement differs from detection risk in that it

Selected Answer:
Answers:
Exists independently of the financial statement audit.

Arises from the misapplication of audit procedures.
May be assessed in either quantitative or nonquantitative terms.
Exists independently of the financial statement audit.
Can be changed at the auditor's discretion.
Audit Risk and components-Definition

Question
Answers
F.
Selected
Match
C.
The overall risk of material misstatements

Client (or
auditee) risk
B.
An auditors exposure to financial loss and damage to
professional reputation
Engagement
Risk
Inherent Risk
B.
Engagement
Risk
E.
The probability that audit procedures will fail to produce
evidence of material misstatements.
Detection Risk Inherent Risk

D.
The probability that the client's internal control policies

and procedures will fail to detect material misstatements
if they have
Control Risk
C.
the likelihood that a material misstatement exists in the
financial statements without the consideration of internal
control
Inherent Risk
A.
A measure of how much risk the auditor is willing to
accept that the financial statements may be materially
misstated but an unqualified opinion has been issued
C.
Audit Risk
D.
Control Risk
F.
Client (or
auditee) risk
B.
Engagement
Risk
All of the following refer to an internal auditor's competence except:

Selected Answer:
Answers:
Professional certification.
The quality of internal audit documents and reports.
Supervision and review of internal audit activities.
All of the following are inherent risk factors that are pervasive to the financial statements
except:
Selected Answer:
Answers:
Classes of transactions are not processed systematically.
Non-routine transactions.
Highly complex significant transactions.
Question 16
4 out of 4 points
A dual-purpose test
Selected Answer:
Answers:
Simultaneously tests debits and credits.
Is a procedure completed by both the internal and external auditors.
Is useful to both the entity and the auditor.
An audit team uses the assessed risk of material misstatement to

Selected
Answer:
Answers:
Identify transactions and account balances where inherent risk is at the

maximum.
Evaluate the effectiveness of the entity's internal control policies and
activities.
Identify transactions and account balances where inherent risk is at the
maximum.
Indicate whether materiality thresholds for planning and evaluation
purposes are sufficiently high.
Determine the acceptable level of detection risk for financial statement
assertions.
Selected Answer:
Answers:

Materiality allocated to an assertion.

To provide for the greatest degree of objectivity in performing internal audit functions, an
internal auditor most likely should report to the
Selected Answer:
Answers:
Corporate controller.
Vice-President - Finance.
Corporate stockholders.
Selected
Answer:
Answers:

Sells real estate to the corporation at a price that is comparable to its
appraised value.
Borrows from the corporation at a rate of interest which equals the current
market rate.
Lends to the corporation at a rate of interest which equals the current
market rate.

Selected
Answer:
Answers:
The risk of the auditor being sued because of association with an audit
client.
The overall risk that a material misstatement exists in the financial
statements.
Engagement letters include all of the following except:

Selected Answer:
Answers:
Information about the audit fee.
A list of additional services that will be provided.
Arrangements involving the use of specialists.
Selected
Answer:
Answers:

Sells real estate to the corporation at a price that is comparable to its
appraised value.
Borrows from the corporation at a rate of interest which equals the current
market rate.
Lends to the corporation at a rate of interest which equals the current
market rate.
Analytical procedures are audit methods of evaluating financial statement accounts by

studying and comparing relationships among financial and nonfinancial data. The primary
purpose of analytical procedures conducted during the planning stages is to
Selected Answer:
Answers:

Identify the types of errors or frauds that can occur in transactions.
Identify unusual conditions that deserve additional audit effort.
Determine the existence of unrecorded liabilities or overstated assets.
An auditor has withdrawn from an audit engagement of a publicly held company after finding
fraud that may materially affect the financial statements. The auditor should set forth the
reasons and findings in correspondence with the
Selected Answer:
Answers:

Client's legal counsel.
Stock exchanges where the company's stock is traded.
Which of the following factors most likely would heighten an auditor's concern about the
risk of fraudulent financial reporting?
Selected
Answer:
d.
An overly complex organizational structure involving unusual lines of
authority.
Answers:
a.
Large amounts of liquid assets that are easily convertible into cash.
b.
Low growth and profitability as compared to other entity's in the same
industry.
c.
Financial management's participation in the initial selection of accounting
principles.
d.
An overly complex organizational structure involving unusual lines of
authority.
When an auditor increases the assessed level of risk of material misstatement because certain
control procedures were determined to be ineffective, the auditor would most likely increase
the
Selected Answer:
c.
Extent of substantive tests
Answers:
a.
Extent of tests of controls

b.
Level of detection risk
c.
Extent of substantive tests
d.
Level of inherent risk
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of risk of material misstatement from that originally planned. To achieve an
overall audit risk level that is substantially the same as the planned audit risk level, the
auditor would
Selected Answer:
b.
Decrease detection risk
Answers:
a.
Decrease amount of substantive testing
b.
Decrease detection risk
c.
Increase detection risk
d.
Increase materiality levels
Which of the following factors would most likely cause a CPA to decide not to accept a new
audit engagement?
Selected
Answer:
b.
Management's disregard for internal control.
Answers:
a.
Lack of understanding of the potential client's internal auditors' computerassisted audit techniques.
b.
Management's disregard for internal control.
c.
The existence of related party transactions.
d.
Management's attempt to meet earnings per share growth rate goals.
Which of the following would heighten an auditor's concern about the risk of fraudulent
financial reporting?
Selected
Answer:
a.
Inability to generate positive cash flows from operations, while reporting
large increases in earnings.
Answers:
a.
Inability to generate positive cash flows from operations, while reporting
large increases in earnings.
b.
Management's lack of interest in increasing the dividend paid on common
stock.
c.
Large amounts of liquid assets that are easily convertible into cash.
d.
Inability to borrow necessary capital without obtaining waivers on debt
covenants.
Which of the following would be least likely to be considered an audit planning procedure?
Selected Answer:
c.
Perform the risk assessment.
Answers:
a.
Use an engagement letter.
b.
Develop the overall audit strategy
c.
Perform the risk assessment.
d.
Develop the audit plan.
While assessing the risks of material misstatement auditors identify risks, relate risk to what
could go wrong, consider the magnitude of risks and
Selected
Answer:
c.
Consider the likelihood that the risks could result in material
misstatements.
Answers:
a.
Assess the risk of misstatements due to illegal acts.
b.
Consider the complexity of the transactions involved.
c.
Consider the likelihood that the risks could result in material
misstatements.
d.
Determine materiality levels.
Which of the following is correct concerning requirements about auditor communications

about fraud?
Selected
Answer:
a.
Fraud that involves senior management should be reported directly to the
audit committee regardless of the amount involved.
Answers:
a.
Fraud that involves senior management should be reported directly to the
audit committee regardless of the amount involved.
b.
All fraud with a material effect on the financial statements should be reported
directly by the auditor to the Securities and Exchange Commission.
c.
Fraud with a material effect on the financial statements should ordinarily be
disclosed by the auditor through use of an "emphasis of a matter" paragraph
added to the audit report.
d.
The auditor has no responsibility to disclose fraud outside the entity under any
circumstances.
Which of the following factors most likely would lead a CPA to conclude that a potential
audit engagement should not be accepted?
Selected
Answer:
d.
It is unlikely that sufficient evidence is available to support an opinion on
Answers:
a.
There are significant related party transactions that management claims
occurred in the ordinary course of business.
b.
Internal control activities requiring the segregation of duties are subject to
management override.
c.
Management continues to employ an inefficient system of information
technology to record financial transactions.
d.
It is unlikely that sufficient evidence is available to support an opinion on
Which of the following is not an example of a likely adjustment in the auditors' overall audit
approach when significant risk is found to exist?
Selected
Answer:
b.
Increase the assessed level of detection risk.
Answers:
a.
Apply increased professional skepticism about material transactions.
b.
Increase the assessed level of detection risk.
c.
Assign personnel with particular skill to areas of high risk.
d.
Obtain increased evidence about the appropriateness of management's
selection of accounting principles.
Which of the following circumstances would an auditor most likely consider a risk factor
relating to misstatements arising from fraudulent financial reporting?
Selected
Answer:
d.
Management is interested in maintaining the entity's earnings trend by using
aggressive accounting practices.
Answers:
a.
Several members of management have recently purchased additional shares
of the entity's stock.
b.
Several members of the board of directors have recently sold shares of the
entity's stock.
c.
The entity distributes financial forecasts to financial analysts that predict
conservative operating results.
d.
Management is interested in maintaining the entity's earnings trend by using
aggressive accounting practices.

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Independence standards are required for audits of public companies, but not for audits of private

If materiality increases, so will the sample size.

It is management's responsibility to seek available independent aid in the appraisal of

The conformance of the financial statements with generally accepted accounting

The Public Company Accounting Oversight Board's role is to

Sanction auditors who fail to follow GAAS.

Public Company Accounting Oversight Board.

Auditing Standards Board.

None of the abovethe auditor cannot lack independence.

The criteria of audit planning and evidence-gathering.

Objectivity as an auditor as verified by proper supervision.

An opinion by the auditor.

An objective measure of compliance.

The company's management.

The Securities and Exchange Commission.

Management of the company.

Securities and Exchange Commission.

Limited liability partnerships.

Limited liability corporations.

An "in-charge" auditor typically holds the rank of

Manufacturers' assertions about product quality.

Make recommendations for improving performance.

Report on the entity's relative success in attaining profit maximization.

External auditors are referred to as "external" because

They are paid by parties outside of the audited entity.

They are not employees of the entity being audited.

Their offices are not at the entity's place of business.

Concern for the public interest.

Detecting or deterring fraudulent activity.

Identifying the causes of an entity's financial difficulties.

Whether the CPA should undertake an audit engagement.

Who bears ultimate responsibility for the financial statements?

Management of the organization.

The three PCAOB general standards are concerned with

Due professional care.

Both adequate training and independence, and due professional care.

Education and experience in auditing.

Supervision and review skills.

Defining the minimum standards of performance for an auditor.

Exercise professional skepticism during the audit.

The comparability of financial statements between periods is not materially affected

The efficiency of operations.

Accounting or review services.

Evaluation of the client's risk management framework.

It has delegated all of its standard-setting authority to the AICPA.

Due professional care requires

Which of the following best describes the role of corporate governance?

Management often is compensated based on the company's profitability.

The presentation of the financial statements based on GAAS.

Standards of quality for the auditor's performance.

Procedures to be used to gather evidence to support financial statements.

Misinterpretations regarding the degree of responsibility the auditor is assuming.

The independence and objectivity of CPAs increase the public trust.

AICPA (Auditing Standards Board).

Expresses a conclusion about an assertion.

Provides management consulting advice.

acquisition study or a feasibility study.

Management accepts responsibility for the effectiveness of internal control.

The establishment and maintenance of the internal controls is the responsibility of

All of the conditions above are necessary.

All of the above.

Pro forma financial statements.

Accepting an engagement to examine an entity's financial projections would most likely be