Appendix C (6 items)

Question 1

According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?
a. The auditor is the officially appointed stock transfer agent of a client.
b. The auditor’s checking account that is fully insured by a federal agency is held at a client financial institution.
c. The client owes the auditor fees for more than two years
prior to the issuance of the audit report.
d. The client is the only tenant in a commercial building
owned by the auditor.

Answer 1

B

Question 2

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material mis- statements in an entity’s financial statements?
a. The entity’s industry is experiencing declining customer demand.
b. Employees who handle cash receipts are not bonded.
c. Bank reconciliations usually include in-transit deposits.
d. Equipment is often sold at a loss before being fully de-
preciated.

Answer 2

A

Question 3

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables.
b. Claims received from customers for goods returned may be intentionally recorded in other customers’ accounts.
c. Authorization of credit memos by personnel who re- ceive cash may permit the misappropriation of cash.
d. The failure to prepare shipping documents may cause an overstatement of inventory balances.

Answer 3

C

Question 4

In planning an audit, the auditor’s knowledge about the design of relevant controls should be used to
a. Identify the types of potential misstatements that could occur.
b. Assess the operational efficiency of internal control.
c. Determine whether controls have been circumvented by
collusion.
d. Document the assessed level of control risk.

Answer 4

A

Answer (a) is correct because such knowledge is used to (1) identify types of potential misstatements, (2) consider factors that affect the risk of material misstatements, and (3) design substantive tests.

Question 5

5. Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts?
   a. Related-party transactions, although properly disclosed, were pervasive during the year.
   b. The entity prepared several large checks payable to cash during the year.
   c. Material internal control weaknesses previously re- ported to management were not corrected.
   d. The entity was a campaign contributor to several local political candidates during the year.

Answer 5

B

Question 6

During an engagement to review the financial statements of a nonissuer (nonpublic) entity, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should
a. Issue an adverse opinion because of the departure from GAAP.
b. Express no assurance of any kind on the entity’s finan- cial statements.
c. Emphasize that the financial statements are for limited use only.
d. Disclose the departure from GAAP in a separate para- graph of the accountant’s report.

Answer 6

D

Answer (a) is incorrect because an adverse opinion may only be issued when an audit has been performed.