AUD1

Question 1

As a condition for accepting any engagement to be performed in accordance with SSARS, an accountant is required to do all of the following except
A Determine whether ethical requirements regarding professional competence will be satisfied
B Determine if the accountant is independent of the entity
C Determine that management acknowledges and understands its responsibility
D Determine whether the financial reporting framework is acceptable

Answer 1

B. The determination of independence is not required for all SSARS engagements. A review requires independence of the entity. Although a compilation does not require independence, it does require a determination about whether the accountant is independent because the report should be modified if independence is impaired. An engagement to prepare financial statements does not require independence nor its determination.

Question 2

According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and
A Prior to the date of the audit report
B Prior to the issuance of the audit report
C In writing
D To the audit committee chair

Answer 2

B. According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and prior to the issuance of the audit report; not the date of the audit report. (Per GAAS and sometimes per PCAOB auditing standards, the issuance of the audit report is termed the release of the audit report, as in the audit report release date. Under both sets of standards, this is when the auditor grants the entity permission to use the audit report in connection with the issuance of the entity’s financial statements.)

Unless otherwise specified, required audit committee communications can be done orally or in writing.

An auditor may communicate to only the chair of the audit committee if done in order to communicate matters in a timely manner during the audit. However, the auditor should communicate such matters to the entire audit committee prior to the issuance of the audit report.

Question 3

According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent?

A Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider
B Disclosure to a potential client of the name of a client for whom the member or member’s firm performed professional services
C Disclosure of confidential client information to the member’s liability insurance carrier in response to a potential claim
D Disclosure of confidential client information to a court or in documents in connection with a subpoena

Answer 3

A. Rule 301 states that a member in public practice will not disclose confidential information obtained in the course of the professional engagement without the consent of the client except to comply with: a validly issued and enforceable subpoena or summons; applicable laws and government regulations; professional practice review procedures under AICPA or state CPA society or Board of Accountancy authorization; or to initi­ate a complaint with the professional ethics division or trial board of the AICPA or other appropriate investigative or disciplinary body. Although answers “c” and “d” are confidential information, they fall within the exempt categories, and do not require consent. Answer “b” is not confidential, and therefore does not require consent either. Only answer “a” is both confidential and not listed as a specific exemption; thus requiring client consent.

Question 4

Which of the following rules of the AICPA Code of Professional Conduct must be observed even by a member who is a controller for a manufacturing corporation?

A Independence
B Integrity and Objectivity
C Professional Competence
D Compliance with Standards

Answer 4

B. Members in business are held to similar standards covering integrity and objectivity as members in public practice.The rules for independence, professional competence,and compliance with standards are spe­cifically pertinent to members in public practice.Members in business need not be independent.Members in business need not be competent in all aspects of their employer’s accounting and financial systems; employers may contract with public accounting firms. Management accounting often departs from compliance with generally accepted accounting principles; members in business would not perform activities requiring compliance with standards for reviews, audits, etc.

Question 5

In assessing the competence of internal auditors, an external auditor would be most likely to obtain information about the

A Influence of management on the scope of the internal auditors’ duties
B Policies limiting internal auditors from communicating with the audit committee
C Quality of the internal auditors’ working paper documentation
D Entity’s ability to continue as a going concern for a reasonable period of time

Answer 5

C.If the external auditor plans to use the work of the internal audit function in obtaining audit evidence, one of the procedures the external auditor may perform to evaluate their competence is to review their work program and working papers. Information about the influence of management on the scope of their duties and any policies limiting their communication with the audit committee bear on the assessment of their objectivity rather than their competence. Information about the entity’s ability to continue as a going concern would not provide information about their competence either. Editor Note: The external auditor is required to reperform some of the body of work of the internal audit function that the external auditor intends to use in obtaining audit evidence. Other procedures regarding the evaluation of their competence may include making inquiries of appropriate individuals within the internal audit function and/or observing procedures performed by the internal audit function.

Question 6

Related to the planning of an audit, the auditor should include in the audit documentation all of the following, except

A The overall audit strategy
B The audit plan
C Records of discussions with management related to planning activities, including the agreed upon dates for their delivery of requested data
D Any significant changes made during the audit engagement to the overall audit strategy or the audit plan and the reasons for such changes

Answer 6

C. The auditor is not required to document the discussions with management related to planning acti­vities, including the agreed upon dates for their delivery of requested data (although being proactive in this sense is encouraged in practice). The other answer alternatives include all the required documentation related to planning.

Question 7

A document in an auditor’s working papers includes the following statement:

“Because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk that some material misstatements may not be detected exists, even though the audit is properly planned and performed in accordance with US GAAS.”

The above passage is most likely from a(an)?

A Comfort letter
B Engagement letter
C Letter of audit inquiry
D Representation letter

Answer 7

B. The agreed-upon terms of the audit engagement should be documented in an audit engagement letter (or other suitable form of written agreement) and should include a statement that because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with US GAAS. The required elements of the terms of the engagement are: (1) the objective and scope of the audit; (2) the responsibilities of the auditor; (3) the responsibilities of management; (4) a statement regarding the inherent limitations of an audit (see this question’s quote); (4) identification of the applicable finan­cial reporting framework for the preparation of the financial statements; (6) reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected form and content.

Editor’s note: Get comfortable with the engagement letter by reading a sample letter in the course text (repetition is key here).

Question 8

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA’s independence with respect to the client?

A The CPA records transactions in accordance with classifications determined by management.
B The CPA prepares financial statements from a trial balance provided by management.
C The CPA posts adjusting journal entries prepared by management to the trial balance.
D The CPA authorizes client transactions and reports them to management.

Answer 8

The correct answer is Option (D).

Under the AICPA Code of Professional Conduct, authorization of client transactions will impair independence as it is a management function performed by the auditor.

Options (A), (B) and (C) are incorrect because these are functions that do not require an auditor to make decisions on behalf of the management. Recording transactions in accordance with classifications determined by management, preparing financial statements from a trial balance prepared by management or posting adjusting entries prepared by management to the trial balance are not decision making functions and hence do not impair the auditor’s independence.

Question 9

According to SEC regulations, each of the following non-audit services will impair an auditor’s independence, except

A Designing a management information system that aggregates source data underlying the financial statements.
B Performing an internal audit function.
C Preparing the audit client’s financial statements that are filed with the SEC.
D Preparing the audit client’s tax return

Answer 9

The correct answer is (D).

SEC rules on independence state that the accountant is not independent with respect to an audit client if the accountant is not capable of exercising objective and impartial judgment on all issues related to the accountant’s engagement. The SEC, however, permits tax services to an issuer audit client if pre-approved by the audit committee and disclosed to the SEC. Therefore, preparing the audit client’s tax return will not impair auditor independence.

Question 10

The concept of materiality would be least important to an auditor when considering the

A Adequacy of disclosure of a client’s illegal act.
B Discovery of weaknesses in a client’s internal control structure.
C Effects of a direct financial interest in the client on the CPA’s independence.
D Decision whether to use positive or negative confirmations of accounts receivable.

Answer 10

C. Independence will be considered to be impaired if during the period of the professional engagement, or at the time of expressing an opinion, the member or the member’s firm had or was committed to acquire any direct or material indirect financial interest in the enterprise . In other words, if a direct financial interest exists, materiality is not a factor.

Question 11

Which of the following would least likely appear in an auditor’s engagement letter?
A
The basis on which fees are computed and any billing arrangements
B
A request for management to acknowledge receipt of the letter and to agree to its terms, as may be evidenced by their signature on the letter and its return to the auditor
C
Reference to the expected form and content of any reports to be issued by the auditor
D
A statement that, after performing preliminary procedures, the auditor will discuss the other procedures considered necessary to complete the engagement

Answer 11

Explanation:
Answer D., the auditor would not promise to discuss the specific procedures to be performed during the audit. (However, the auditor is required to include the objective and scope of the audit in the written agree­ment to the terms of the engagement.) Answers A. and B., fees/billing arrangements and the request for man­agement’s acknowledgment of the agreement, respectively, are examples of matters that are not required to be included, but may be included. Answer C. is the only answer alternative that is required to be included in the written agreement as to the terms of an audit engagement. Such reference may include a description of the types of reports to be issued; of course, the auditor need not describe the type of opinion expected to be expressed. A related statement that circumstances may arise in which a report may differ from its expected form and content is also required. Other items, in addition to answers A. and B., that are not required, but may be referenced in an engagement letter include:

(1) elaboration of the scope of the audit, including reference to applicable legislation, regulations, US GAAS, and ethical and other pronouncements of professional bodies to which the auditor adheres; (2) the form of any other communication of results of the audit engagement; (3) arrangements regarding the planning and performance of the audit, including the composition of the audit team; (4) the expectation that management will provide written representations; (5) the agreement of manage­ment to make available to the auditor draft financial statements and any accompanying other information in a timely fashion; (6) the agreement of management to inform the auditor of events occurring or facts discovered subsequent to the date of the financial statements that may affect the financial statements; (7) arrangements concerning the involvement of other auditors or specialists; (8) arrangements concerning the involvement of internal auditors and other staff of the entity; (9) arrangements to be made with the predecessor auditor, if any, in the case of an initial audit; (10) any restriction of the auditor’s liability when not prohibited; (11) any obligations of the auditor to provide audit documentation to other parties; (12) additional services to be provided; and (13) a reference to any further agreements between the auditor and the entity.

Question 12

For recurring audits, when the auditor concludes that the terms of the preceding engagement need not be revised for the current engagement, the auditor
A
Should send a written reminder to management confirming that the terms of the preceding engagement will govern the current audit
B
Should remind management of the terms orally or in writing, but if done orally, the reminder should be documented
C
Is not required to take any action with respect to management, but should document the reason for the conclusion
D
Should resend the same engagement letter without changing the date of the letter, but it should be resigned with the current date next to the signatures

Answer 12

You answered: A. The correct answer is: B
Explanation:
The auditor may remind management of the terms of the engagement in writing or orally. A written reminder might be a letter confirming that the terms of the preceding engagement will govern the current engagement. If the reminder is oral, audit documentation may include with whom the discussion took place, when, and the significant points discussed.

Question 13

On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client’s financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client’s December 31, Year 2, financial statements?
A
Yes, because the loan was fully secured
B
Yes, because the CPA was not required to be independent at the time the loan was granted
C
No, because the CPA had a loan with the client during the period of a professional engagement
D
No, because the CPA had a loan with the client during the period covered by the financial statements

Answer 13

You answered: D. The correct answer is: B
Explanation:
Independence is impaired if a member obtains a loan from an entity that, at the time of obtaining the loan, is a client requiring independence, except for certain personal loans obtained under normal lending procedures, terms, and requirements, and kept current as to terms.

Question 14

A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, year 3. Many of the firm’s former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit?
A
The client’s CFO was the lead partner on the audit until December 31, year 1.
B
The client’s CEO was a manager on the audit until June 30, year 2.
C
The client’s controller was a staff accountant on the audit for two weeks during year 2.
D
The client’s chief accounting officer was the concurring partner on the audit until April 15, year 2.

Answer 14

The correct answer is (A).

Under the AICPA Code of Professional Conduct, a CPA firm’s independence is impaired by employment relationship if a firm employee joins the client within one year of dissociating with the firm and has significant interaction with the CPA firm engagement team.

Where the client’s CFO was the lead partner on the audit till December 31, year 1 and the firm initiated its current-year audit on January 1, year 3, the one-year cooling-off period has been completed and the firm can conduct the audit without its independence being impaired.

(B), (C) and (D) are incorrect because in all these cases, the one-year cooling-off period is not yet complete.

Question 15

Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities?
A
Audit committee
B
Secured creditors
C
Internal auditors
D
Senior management

Answer 15

The correct answer is (A).

The Audit Committee appoints the external auditors, receives their reports and communications and oversees the internal audit function of the company. The committee assists the board of directors to fulfill its corporate governance and overseeing responsibilities in relation to an entity’s financial reporting, internal control system, risk management system and internal and external audit functions. An audit committee is a sub-committee made up of members of the Board of Directors who are not officers or employees of the company looking after day to day operations.

Question 16

According to the SEC, members of an issuer’s audit committee may not
A
Establish procedures for employees to anonymously report fraud
B
Be responsible for the compensation of any registered public accounting firm employed by the registrant to provide an audit report
C
Accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board
D
Engage independent counsel as deemed necessary to carry out their duties

Answer 16

You answered: B. The correct answer is: C
Explanation:
As audit committee members are also members of the board of directors, they are restricted to receiving only the normal compensation provided to a board member. They cannot accept any additional consulting, advisory, or other compensatory fees from the registrant for services other than as a member of the board. There are no SEC rules restricting the establishment of procedures for employees to anonymously report fraud; being responsible for the compensation of any registered public accounting firm employed by the registrant to provide an audit report; or engaging independent counsel as deemed necessary to carry out their duties.

Question 17

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to
A Refer the disagreement to the AICPA’s Quality Review Committee
B Document the details of the disagreement with the conclusion reached
C Discuss the disagreement with the entity’s management or its audit committee

Answer 17

B. QC 90.14(2)(d) addresses consultation policies and procedures and recommends designating individuals as specialists to serve as authoritative sources, and defining their authority in consultative situations. A procedure to implement this objective would be to provide procedures for resolving differences of opinion between personnel and specialists and to require documentation of the considerations involved in the resolution of differences of opinion.

Question 18

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?
A All direct and indirect financial interests
B Only direct financial interests
C Only direct and material indirect financial interests
D Only material financial interests

Answer 18

C.Direct or material indirect financial interest in an audit client during the period of a professional engagement is held to impair a CPA’s independence.

Question 19

According to the standards of the profession, which of the following would be considered a part of a consulting services engagement?
I. Expressing a conclusion about the reliability of a client’s financial statements
II. Reviewing and commenting on a client-prepared business plan
A I only
B II only
C Both I and II
D Neither

Answer 19

B.According to the Statement on Standards for Consulting Services, consulting services include reviewing and commenting on a client-prepared business plan. Expressing a conclusion about the reliability of a client’s financial statements is an attest engagement, not a consulting services engagement.

Question 20

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except
A As a principal financial officer, principal accounting officer, controller, public accountant, or auditor
B Serving on at least one other issuer’s audit committee or disclosure committee of the board of directors
C Actively supervising a principal financial officer or principal accounting officer
D Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements

Answer 20

B. The Sarbanes-Oxley Act of 2002 specifies that an audit committee must contain at least one financial expert. The attributes of a financial expert on the audit committee can be acquired in a number of ways, including: serving as a principal financial officer, principal accounting officer, controller, public accountant, or auditor; actively supervising a principal financial officer or principal accounting officer; or assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

Question 21

For audit procedures related to the inspection of significant contracts or agreements, the auditor should
A Include abstracts or copies of those contracts or agreements in the audit documentation if they are needed to enable an experienced auditor to understand the work performed and conclusions reached
B Make sure that, if abstracts or copies of those contracts or agreements are added to the audit file, they are stored in a manner that preserves their confidentiality
C Retain the original document
D Include abstracts or copies of those contracts or agreements in the audit documentation

Answer 21

D. For audit procedures related to the inspection of significant contracts or agreements, the auditor should include abstracts (summaries) or copies of those contracts or agreements in the audit documentation.

The auditor should include abstracts or copies of those contracts or agreements in the audit documentation whether or not they would be needed by an experienced auditor.

The question pertains to audit procedures related to the inspection of significant contracts or agreements; not controls to maintain the confidentiality of stored audit documentation.

Retention of the originals of significant contracts or agreements by the auditor is not plausible.

Question 22

In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client’s entire board of directors. Which of the following considerations will be least relevant to this decision?
A Whether the audit committee will be able to provide further information and explanations that the auditor may require while performing the audit.
B The nature of the matters to be communicated.
C Management’s preference.
D Regulatory requirements related to audit communications with those charged with governance.

Answer 22

The correct answer is (C).

Management’s preferences are not so relevant for the auditor’s judgment on the decision to communicate with the entire board or the audit committee. The auditor has to make this decision independent of management’s preferences.

(A) is incorrect because the audit committee may be able to provide important information to the auditor during the audit.

(B) is incorrect because not all matters are relevant to those charged with governance.

(D) is incorrect because necessary regulatory requirements should be followed.

Question 23

An auditor of a non-issuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately
A Adopt an attitude of acceptance unless evidence indicates otherwise.
B Authenticate documents used as audit evidence.
C Consider the reliability of information to be used as audit evidence.
D Assess the entity’s document-retention controls before using documents as audit evidence.

Answer 23

The correct answer is (C).

An auditor is required to conduct an audit with an attitude of professional skepticism. This refers to an attitude that includes a questioning mind (being alert to conditions that may indicate possible misstatement due to fraud or error) and a critical assessment of audit evidence. Hence an auditor of a non-issuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately consider the reliability of information to be used as audit evidence.

Question 24

Which of the following statements is correct about actions taken after the documentation completion date?
A An auditor must not make any amendments to audit documentation before the end of the specified retention period.
B An auditor must not make any additions to audit documentation before the end of the specified retention period.
C An auditor must not make any changes to audit documentation before the end of the specified retention period.
D The auditor must not make any deletions to audit documentation before the end of the specified retention period.

Answer 24

The correct answer is (D).

The documentation has to be retained for at least 5 years from report release date as per SAS rules for non-issuers and for at least 7 years as per PCAOB rules for issuers. After the documentation completion date, the auditor should not delete or discard audit documentation until the specified retention period expires.

Question 25

Which of the following individuals would be considered a predecessor auditor?
A A client’s accounting employee who audits the company’s branches, subsidiaries, or other outlying locations from the company’s home office.
B A client’s accounting employee responsible for the preparation of the company’s financial statements.
C An independent CPA who was engaged to perform, but did not complete an audit of financial statements.
D An independent CPA who is considering accepting an engagement to audit financial statements.

Answer 25

The correct answer is (C).

An auditor who conducted the audit of a client in the past period but is no longer an auditor is a predecessor auditor. An independent CPA who was engaged to perform, but did not complete an audit of financial statements, is a predecessor auditor by definition.

A client’s accounting employee who audits the company’s branches, subsidiaries, or other outlying locations from the company’s home office: Member of Client’s Internal Audit Team.
A client’s accounting employee responsible for the preparation of the company’s financial statements: Member of Client’s Accounting and Financial Reporting Team.
An independent CPA who is considering accepting an engagement to audit financial statements: Potential Auditor.

Question 26

Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on a public company’s financial statements?
# Conformity with GAAP Adequacy of disclosure
A Implicitly Implicitly
B Explicitly Explicitly
C Implicitly Explicitly
D Explicitly Implicitly

Answer 26

D. An unqualified opinion states explicitly that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with US GAAP.

Adequacy of disclosure, per the third standard of reporting, is not explicitly mentioned, i.e., is implicit, unless it is found to be inadequate.

Question 27

Which of the following statements best describes an auditor’s responsibility for detecting errors and fraud?
A An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.
B An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework.
C An auditor is not responsible for detecting errors and fraud unless the application of US GAAS would result in such detection.
D An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that would cause the financial statements to be materially misstated.

Answer 27

D. An auditor conducting an audit in accordance with US GAAS has a responsibility to plan and perform the audit to obtain reasonable assurance that the financial statements as a whole are free of material misstatement, whether caused by fraud or error.

Question 28

All of the following are likely to be examples of an unreasonable justification for a request to change the terms of an audit engagement to a lower level of assurance prior to the completion of an audit except
A The auditor is unable to obtain sufficient appropriate audit evidence regarding receivables.
B An audit is no longer needed to meet the requirements of membership in a trade organization the entity plans to join.
C Management refuses to give the auditor permission to communicate with the entity’s external legal counsel.
D Management does not want to provide requested written representations.

Answer 28

B. When an audit is no longer needed to meet the membership requirements of a trade organization is an example of a change in circumstances that affects management’s requirements and may be considered a reasonable basis for requesting a change in the audit engagement. The auditor is required to consider the justifi­cation given for the request, particularly the implications of a restriction on the scope of the audit engagement. A change request may not be considered reasonable if the change appears to relate to information that is incor­rect, incomplete, or otherwise unsatisfactory. Under these circumstances, if management asks for the audit engagement to be changed to a lower level of assurance to avoid a qualified opinion or a disclaimer of opinion, such a request for a change in engagement may not be considered reasonable.

Question 29

The profession’s ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be performed for a stated fee, and it is apparent at the time of the representation that the
A Actual fee would be substantially higher
B Actual fee would be substantially lower than the fees charged by other CPAs for comparable services
C CPA would not be independent
D Fee was a competitive bid

Answer 29

ET 502-2 provides,“ Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest and are prohibited.”A prohibited activity is one that contains a representation that specific professional services in current or future periods will be performed for a stated fee,estimated fee,or fee range when it is likely at the time of representation that such fees would be substantially increased and the pro­spective client was not advised of such likelihood.

Question 30

During an audit conducted in accordance with US GAAS, an auditor should depart from a relevant presumptively mandatory requirement only when
A A required specific procedure is conditional and the condition does not exist.
B The difficulty, time, or cost of a required specific procedure outweighs the benefit of applying it.
C The auditor documents the justification that an alternative procedure is sufficient to achieve the objectives of the required specific procedure.
D A required specific procedure would be ineffective in achieving the intent of the requirement.

Answer 30

Answer d., the need for the auditor to depart from a relevant presumptively mandatory requirement is expected to arise only when the requirement is for a specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be ineffective in achieving the intent of the requirement. In such rare circumstances, the auditor should perform alternative audit procedures to achieve the intent of that requirement.

Regarding incorrect answer a., US GAAS do not call for compliance with a requirement that is not relevant in the circumstances of the audit. The question states that the specific requirement is relevant, so a description of the criteria for an irrelevant requirement (incorrect answer a.) is not responsive to the question. Editor note: The auditor should comply with each requirement of a section unless, in the circumstances of the audit, the entire section is not relevant; or the requirement is not relevant because it is conditional and the condition does not exist.

Regarding incorrect answer b., the need for the audit to be conducted within a reasonable period of time so as to achieve a balance between benefit and cost is one of the factors that create inherent limitations in an audit. However, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.

Regarding incorrect answer c., the auditor must document the justification for the departure and how the alternative audit procedure(s) performed were sufficient to achieve the intent of that requirement; however, this documentation requirement is not the criteria for a justified departure from a relevant presumptively mandatory requirement.

Question 31

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice?
A    Engagement performance.
B    Risk analysis.
C    Safeguarding of assets.
D    Information processing.

Answer 31

The correct answer is (A).

Elements of a System of Quality control include the following:

Tone at the top (leadership responsibilities for quality within the firm)
Ethical Requirements (independence)
Acceptance & continuance of client relationships and specific engagements
Human Resources
Monitoring
Engagement performance

Question 32

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to
A Provide reasonable assurance that personnel is adequately trained to fulfill their responsibilities.
B Minimize the likelihood of associating with clients whose management lacks integrity.
C Document the matters that are required to be communicated to the audit committee.
D Enhance the auditor’s understanding of the client’s business and its industry.

Answer 32

The correct answer is (B).

A system of quality control is in a CPA firm to meet its responsibilities to offer professional services that conform to professional standards. The primary reason quality control policies are used in a CPA firm is to minimize the likelihood of associating with clients whose management lacks integrity.

Quality control policies and procedures within the CPA firm would not provide reasonable assurance that the personnel is adequately trained to fulfill their responsibilities in order to decide to accept or continue a client relationship, document the matters that are required to be communicated to the audit committee, or enhance the auditor’s understanding of the client’s business and its industry.

Question 33

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA’s independence with respect to the client?
A The CPA records transactions in accordance with classifications determined by management.
B The CPA prepares financial statements from a trial balance provided by management.
C The CPA posts adjusting journal entries prepared by management to the trial balance.
D The CPA authorizes client transactions and reports them to management.

Answer 33

The correct answer is Option (D).

Under the AICPA Code of Professional Conduct, authorization of client transactions will impair independence as it is a management function performed by the auditor.

Options (A), (B) and (C) are incorrect because these are functions that do not require an auditor to make decisions on behalf of the management. Recording transactions in accordance with classifications determined by management, preparing financial statements from a trial balance prepared by management or posting adjusting entries prepared by management to the trial balance are not decision making functions and hence do not impair the auditor’s independence.

Question 34

Which of the following fee arrangements generally would not be permitted under the ethical standards of the profession?
A A referral fee paid by a CPA to obtain a client
B A commission for compiling a client’s internal-use financial statements
C A contingent fee for preparing a client’s income tax return
D A contingent fee for representing a client in tax court

Answer 34

A contingent fee for preparing a client’s income tax return would not be permitted under the ethical standards of the profession. However, a contingent fee for representing a client in tax court would be permitted under the ethical standards, because the tax authority initiated the proceedings. A member who accepts or pays a referral fee in relation to a client must disclose such acceptance or payment to the client. A member is prohibited from recommending or referring, for a commission, any product or service to a client when that member or member’s firm performs a financial statement compilation where the member might reasonably expect that a third party will use the statement. Since the financial statement compilation was for internal-use only, it would be permitted under the ethical standards.

Question 35

Which of the following is not a factor a CPA firm should take into consideration when deciding whether to undertake or continue client relationships and engagements?
A The possibility of the existence of related party transactions
B The client’s integrity
C The firm’s ability to perform the engagement
D The firm’s ability to comply with legal and ethical requirements

Answer 35

The standards require that a firm’s quality control policies and procedures regarding the acceptance and continuance of clients and engagements take answers b., c., and d. into consideration. In the absence of evidence to the contrary, related party transactions should not be assumed to be outside of the ordinary course of business. The auditor is concerned with complying with GAAS to identify related party transactions and determining that they are accounted for and disclosed according to GAAP.

Question 36

Which of the following statements is most accurate regarding audit documentation requirements?
A The auditor should document findings that could result in a modification of the auditor’s report.
B If different audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should not be included in the working papers.
C If an oral explanation serves as sufficient support for the work the auditor performed, the explanation should be documented in the working papers.
D If the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed.

Answer 36

The correct answer is (A).

Audit documentation should document findings that could result in a modification of the auditor’s report. Audit documentation refers to ‘working papers’ or ‘audit file’ developed during the audit. It is a principal record of audit procedures performed, evidence obtained, exceptions found and conclusions reached. For each audit performed, there should be a specific permanent audit file (documentation with continuing interest from year to year) and the current audit file (documentation applicable to the year under audit). The current file should include significant audit findings, actions taken and conclusions reached. This should include findings that could result in the modification of auditor’s report. Thus, the auditor should document findings that could result in a modification of the auditor’s report in the current file.

(B) is incorrect because audit working papers provide evidence that sufficient information was obtained by an auditor to support his or her opinion regarding the underlying financial statements. Different audit procedures performed due to lack of responsiveness should be accurately documented.

(C) is incorrect because It is a misconception that an oral explanation can substitute for written documentation to meet requirements. Written documentation is absolutely necessary. An oral explanation is a supplement to actual written documentation but not sufficient in itself.

(D) is incorrect because the original assessment would not be removed.

Question 37

Which of the following activities is not an element of a CPA firm’s quality control system to be considered in establishing quality control policies and procedures?
A Deciding whether to accept or continue a client relationship.
B Selecting personnel for advancement who have the necessary qualifications.
C Assessing a client’s ability to establish effective internal controls.
D Monitoring the effectiveness of professional development activities.

Answer 37

The correct answer is (C).

A system of quality control in a CPA firm is there to meet its responsibilities to offer professional services that conform to professional standards.

Elements of a system of quality control include the following:

Tone at the top (leadership responsibilities for the quality within the firm)
Ethical requirements (independence)
Acceptance & continuance of client relationships and specific engagements (deciding whether to accept or continue a client relationship)
Human Resources: selecting personnel for advancement who have the necessary qualifications
Monitoring: monitoring the effectiveness of professional development activities
Engagement performance
Assessing a client’s ability to establish effective internal controls is not one of the elements of a CPA firm’s quality control system.

Question 38

According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested?
A Client-provided records, even if fees are due to the CPA for the engagement and are unpaid.
B Client-provided records requested for a second time because the client misplaced the first set of records.
C Supporting records prepared by the CPA consisting of adjusting, closing, combining, or consolidating entries prior to the completion of the engagement.
D The CPA’s working papers consisting of analyses and schedules prepared by the client at the CPA’s request

Answer 38

The correct answer is (A).

Under the Acts Discreditable Rule, client-provided records must be returned after a client request without exception even if fees are due. Client-provided records are the client’s accounting or other records and are the client’s property, including hardcopy and electronic reproductions, that were provided to the member by, or for, the client.

Question 39

Generally accepted government auditing standards use which of the following terms to describe a profes­sional requirement to comply with a standard or provide a special explanation for not doing so?
A    Explanatory requirement
B    Conditional requirement
C    Unconditional requirement
D    Presumptively mandatory requirement

Answer 39

Generally accepted government auditing standards (GAGAS) identify professional requirements with specific language (consistent with GAAS) to indicate the degree of responsibility imposed on auditors and audit organizations. The two categories of requirements are: unconditional requirements and presumptively mandatory requirements. Auditors and audit organizations must comply with an unconditional requirement in all cases where such requirement is relevant. Auditors and audit organizations must comply with a presumptively manda­tory requirement in all cases where such a requirement is relevant except in rare circumstances. In rare circum­stances, auditors and audit organizations may determine it necessary to depart from a relevant presumptively mandatory requirement. If, in rare circumstances, auditors judge it necessary to depart from a relevant presump­tively mandatory requirement, they must document their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement.

Question 40

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following?
A Representations from the company’s external auditors that the company has effective internal control over operations
B Management representations that the company’s external auditors have examined its internal control over compliance with laws and regulations
C Reasonable assurances that fraud will be identified before the issuance of the company’s annual report
D Management’s assessment of the effectiveness of internal control over financial reporting

Answer 40

Each required annual report of an issuer must contain an internal control report stating it is the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It must also contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Each public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by management of the issuer.

Question 41

Which of the following bodies promulgates standards for audits of federal financial assistance recipients?
A Governmental Accounting Standards Board
B Financial Accounting Standards Board
C Governmental Auditing Standards Board
D Government Accountability Office

Answer 41

D. The standards for audits of federally assisted programs may be found in the publication of the US Government Accountability Office (GAO) entitled Government Auditing Standards. The Governmental Account­ing Standards Board (GASB) establishes financial accounting principles for state and local government entities. The Financial Accounting Standards Board (FASB) establishes GAAP. The Governmental Auditing Standards Board does not exist.

Question 42

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession?
A A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA.
B A CPA signs a document containing immaterial false and misleading information, or permits or directs another CPA to do so.
C A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it.
D A CPA fails to give a client copies of the CPA’s workpapers related to a completed and issued work product upon the client’s request because the client has not paid fees payable to the CPA for the work product.

Answer 42

A. Requesting recent Uniform CPA Examination questions without written authorization from the AICPA is expressly prohibited as a discreditable act by Rule 501. The Code concerns itself with material information. There may be circumstances that certain government auditing requirements are inapplicable; by disclosing why government auditing requirements were not followed, the CPA has informed the report user of the omission. The workpapers belong to the CPA; the Code permits a CPA to withhold copies of workpapers from a client regardless of whether related fees were paid.

Question 43

In recognition of the possibility that a material misstatement due to fraud could exist, the auditor should maintain professional skepticism
A Investigating further to corroborate responses to inquiries of management and those charged with governance
B Investigating further if conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document have been modified but not disclosed to the auditor
C Unless the auditor’s past experience places the honesty and integrity of the entity’s management and those charged with governance above reproach
D More so in the response to assessed risks of material misstatement due to fraud at the assertion level rather than at the financial statement level

Answer 43

B. If conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document have been modified but not disclosed to the auditor, the auditor should investigate further. (Unless the auditor has reason to believe the contrary, the auditor may accept records and documents as genuine.)

Regarding incorrect answer A., management is often in the best position to perpetrate fraud. Accordingly, when evaluating management’s responses to inquiries with professional skepticism, the auditor may judge it necessary to corroborate responses to inquiries with other information, but it is not required. However, when responses to inquiries of management, those charged with governance, or others are inconsis­tent or otherwise unsatisfactory (for example, vague or implausible), the auditor is, of course, required to further investigate the inconsistencies or unsatisfactory responses.

Regarding incorrect answer C., the auditor neither assumes that management is dishonest nor assumes unquestioned honesty. The auditor should maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s man­agement and those charged with governance. The auditor cannot be expected to disregard positive past experi­ence; nevertheless, such a belief does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less than persuasive audit evidence when obtaining reasonable assurance.

Regarding incorrect answer D., the exercise of professional skepticism is more directly related to determining overall responses to address the assessed risks of material misstatement due to fraud required at the financial statement level than to responses at the assertion level. The responses at the financial statement level generally include the consideration of how the overall conduct of the audit can reflect increased professional skepticism through, for example, increased sensitivity in the selection of the nature and extent of documentation to be exa­mined in support of material transactions; or recognition of the need to corroborate management explanations or representations concerning material matters.

Question 44

An accountant can perform, with preapproval of the audit committee of the board of directors, which of the following nonaudit services during the audit of an issuer?
A    Bookkeeping services
B    Human resource services
C    Tax planning services
D    Internal audit outsourcing services

Answer 44

Tax-planning services is an acceptable nonaudit service that an accountant can perform, with preapproval of the audit committee of the board of directors, during the audit of an issuer.

Question 45

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?
A Performing an audit of a financial statement
B Performing a review of a financial statement
C Performing an examination of prospective financial information
D Seeking a private letter ruling

Answer 45

D. In some cases, contingent fees in certain tax matters are permitted. A contingent fee would be permitted when a member represents a client in an examination by a revenue agent of the client’s tax return, or when a member represents a client with obtaining a private letter ruling.

Question 46

Which of the following statements is true regarding an auditor’s communications with a predecessor auditor prior to engagement acceptance?
A Inquiries addressing specific matters are required, for example, the predecessor’s understanding about the reasons for the change in auditors.
B US GAAS provides a list of matters that may be subject to the auditor’s inquiry of the predecessor auditor.
C If management refuses to authorize the predecessor auditor to respond, or limits the response, the auditor should not accept the engagement.
D If the predecessor auditor provides no response or a limited response, the auditor should not accept the engagement.

Answer 46

B. Matters subject to the auditor’s inquiry of the predecessor auditor prior to engagement acceptance may include: (1) information that might bear on the integrity of management; (2) disagreements with manage­ment about accounting policies, auditing procedures, or other similarly significant matters; (3) communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity; (4) communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control; (5) the predecessor auditor’s understanding about the reasons for the change of auditors.

Regarding incorrect answer A., specific inquiries are not required. Regarding incorrect answer C., if management refuses to authorize the predecessor auditor to respond, or limits the response, the auditor should inquire about the reasons and consider the implications of that refusal in deciding whether to accept the engagement. The auditor is not automatically precluded from accepting the engagement. Regarding incorrect answer D., if the predecessor auditor provides no response or a limited response, the auditor should evaluate the predecessor auditor’s response, or consider the implications, in determining whether to accept the engagement. Again, the auditor is not automatically precluded from accepting the engagement.

Question 47

US GAAS require the auditor to include the justification for a departure from a relevant presumptively mandatory requirement in the audit documentation. What language indicates a presumptively mandatory requirement?
A    Must
B    Could
C    May consider
D    Should

Answer 47

D. US GAAS use the word should to indicate a presumptively mandatory requirement. If US GAAS include a procedure that the auditor should consider, the consideration of the procedure is a presumptively mandatory requirement, while carrying out the procedure is not. (Whether the auditor performs the procedure is based upon the outcome of the auditor’s consideration and the auditor’s professional judgment.)

Regarding incorrect answer A., US GAAS use the word must to indicate an unconditional requirement; not a presumptively mandatory requirement.

Regarding incorrect answers B. and C., the words could, may, and might are used to describe procedures included in the application and other explanatory material of a standard. Although such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of that section.

Question 48

The overall objectives of the auditor, in conducting an audit of financial statements in accordance with US GAAS, include all of the following except
A To report on the financial statements
B To adequately plan the work and properly supervise any assistants
C To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error
D To communicate as required by US GAAS, in accordance with the auditor’s findings

Answer 48

B. To adequately plan the work and properly supervise any assistants is not part of the overall objectives of the auditor. The overall objectives of the auditor, in conducting an audit of financial statements, are to (1) obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and (2) report on the financial statements, and communicate as required by US GAAS, in accordance with the auditor’s findings.

Question 49

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?
A A distinguishing mark of a profession is its acceptance of responsibility to the public.
B A requirement for a profession is to establish ethical standards that stress primary responsibility to clients and colleagues.
C Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
D Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.

Answer 49

A. The AICPA’s Code of Professional Conduct states that a distinguishing mark of a profession is its acceptance of responsibility to the general public.

Question 50

For recurring audits, the auditor should assess whether circumstances require the terms of the audit engagement to be revised. Factors that may make this appropriate include all of the following except
A
A change in senior management
B
A change in the financial reporting framework
C
change in the composition of the audit team
D
A change in legal or regulatory requirements

Answer 50

C. In and of itself, a change in personnel of the audit team should not affect the terms of an audit engagement. Additional factors that may make it appropriate to revise the terms of the audit engagement include any indication that management misunderstands the objective and scope of the audit; any revised or special terms of the audit engagement; a significant change in ownership; a significant change in the nature or size of the entity’s business; and a change in other reporting requirements. If the terms of the audit engagement are changed, the auditor and management should agree on and document the new terms of the engagement in an engagement letter or other suitable form of written agreement. Editor’s note: If you didn’t know the answer to this question conceptually, just take a look at the answer choices and you’ll see a pattern; three of these choices relate to factors that are external to the auditor, while there is only one answer choice related directly to the auditor and the engagement team. These types of outliers are key hints to getting the correct answer for these types of questions.

Question 51

In which of the following situations would a CPA’s independence be considered to be impaired?

I. The CPA maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.
II. The CPA has a direct financial interest in an audit client, but the interest is maintained in a blind trust.
III. The CPA owns a commercial building and leases it to an audit client. The lease qualifies as a capital lease.
A
I and II
B
II and III
C
I and III
D
I, II and III

Answer 51

B. A CPA’s independence would not be considered to be impaired by her/his maintaining a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.Independence is considered impaired if a CPA has a direct financial interest, or a material indirect financial interest in a client, whether or not it is placed in a blind trust (ET 191-68).Independence generally is considered impaired if a lease meets the criteria of a capital lease as defined by GAAP and independence is not considered impaired if a lease meets the criteria of an operating leaseas long as the terms and conditions are comparable with other leases of a similar nature and all amounts are paid in accordance with the terms of the lease.

Editor’s note: If you knew that having a FDIC checking account at a financial institution’s client would not impair independence, you could eliminate a, c, and d as answer choices .

Question 52

An audit in accordance with US GAAS is conducted on the premise that
A
Users of financial statements understand the inherent limitations of an audit.
B
Estimated amounts in the financial statements are reasonable.
C
Management and, when appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit.
D
Those charged with governance understand their role according to US GAAS.

Answer 52

Answer c., an audit in accordance with US GAAS is conducted on the premise that management and, when appropriate, those charged with governance have acknowledged [and understand] certain responsibilities that are fundamental to the conduct of the audit, i.e., responsibility (1) for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; (2) for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; and (3) to provide the auditor with access to all information of which management and, when appropriate, those charged with governance are aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters; additional information that the auditor may request from management and, when appropriate, those charged with governance for the purpose of the audit; and unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Editor note: Because of the significance of the premise to the conduct of an audit, the auditor is required to obtain the agreement of management and, when appropriate, those charged with governance, that they acknowledge and understand that they have these responsibilities as a precondition for accepting the audit engagement.

Regarding incorrect answer a., users of financial statements should be expected to understand some of the inherent limitations of an audit, but not all of the limitations; but more important, an audit is not conducted on any premise based on users’ understanding.

Regarding incorrect answer b., the acknowledgment by management of their responsibility for the fair presentation of the financial statements includes the responsibility for making accounting estimates that are reasonable, but the auditor does not accept that the estimates are reasonable as a premise for the audit.

Regarding incorrect answer d., US GAAS does not impose responsibilities on management or those charged with governance nor does it override laws and regulations that govern their responsibilities; thus, their roles are not dictated by US GAAS.

Question 53

Which of the following statements best describes an auditor’s responsibility for detecting errors and fraud?
A
An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.
B
An auditor should plan the audit to detect errors and fraud that are caused by departures from the applicable financial reporting framework.
C
An auditor is not responsible for detecting errors and fraud unless the application of US GAAS would result in such detection.
D
An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that would cause the financial statements to be materially misstated.

Answer 53

D. An auditor conducting an audit in accordance with US GAAS has a responsibility to plan and perform the audit to obtain reasonable assurance that the financial statements as a whole are free of material misstatement, whether caused by fraud or error.

Question 54

According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent?
A
Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider
B
Disclosure to a potential client of the name of a client for whom the member or member’s firm performed professional services
C
Disclosure of confidential client information to the member’s liability insurance carrier in response to a potential claim
D
Disclosure of confidential client information to a court or in documents in connection with a subpoena

Answer 54

A. Rule 301 states that a member in public practice will not disclose confidential information obtained in the course of the professional engagement without the consent of the client except to comply with: a validly issued and enforceable subpoena or summons; applicable laws and government regulations; professional practice review procedures under AICPA or state CPA society or Board of Accountancy authorization; or to initi­ate a complaint with the professional ethics division or trial board of the AICPA or other appropriate investigative or disciplinary body. Although answers “c” and “d” are confidential information, they fall within the exempt categories, and do not require consent. Answer “b” is not confidential, and therefore does not require consent either. Only answer “a” is both confidential and not listed as a specific exemption; thus requiring client consent.

Question 55

According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?
A
Preparing client financial statements based on information in a trial balance
B
Processing payroll for a client’s signature based on client record keeping
C
Participating in the hiring or termination of a client’s employees
D
Assisting a client in drafting a stock-offering document or memorandum

Answer 55

C. In general, any situation that involves management duties tends to impair independence. Examples of non-attest services that the code of conduct lists as impairing a member’s independence include employee search and supervising client employees (i.e., hiring and firing client employees). Services that do not replace management’s judgments with the auditor’s judgments may be permissible—such as preparing financial statements based on a trial balance prepared by the client, processing payroll for a client’s signature based on client records, and assisting in drafting a stock-offering document.

Question 56

An engagement quality review and concurring approval of issuance are required for engagements (conducted pursuant to the standards of the PCAOB) to perform audits and for engagements to
A
Prepare tax returns
B
Prepare prospective financial statements
C
Provide consulting services
D
Review interim financial information

Answer 56

D. An engagement quality review and concurring approval of issuance are required for each audit engagement and for each engagement to review interim financial information conducted pursuant to the standards of the Public Company Accounting Oversight Board (PCAOB).

Question 57

During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits?
A
The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented.
B
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.
C
The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading.
D
The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading

Answer 57

B. During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits?
A
The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented.
B
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.
C
The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading.
D
The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading

Question 58

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
A
A system of quality control
B
A system of peer review
C
Continuing professional education
D
Compliance with generally accepted reporting standards

Answer 58

A. A system of quality control should provide the firm with reasonable assurance that its personnel comply with professional standards and applicable regulatory and legal requirements, and that the reports issued are appropriate in the circumstances. A peer review provides information on whether a CPA firm is following an appropriate quality control system and would not by itself provide reasonable assurance that a CPA firm is providing professional services that conform with professional standards. Continuing professional education is only one of the policies and procedures concerned with the human resources element of quality control. Compliance with generally accepted reporting standards is only one part of the basic objective of providing professional services that conform with professional standards.