Audit Section 2

Question 1

Which of the following would an auditor most likely consider in evaluating the control environment of an audit client?

Answer 1

Management’s operating style.

Question 2

According to COSO, each of the following is a principle relating to the risk assessment component of internal control

Answer 2

1) The organization considers the potential for fraud in assessing risks to the achievement of objectives.
2) The organization identifies and assesses changes that could significantly impact the system of internal control.
3) The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.

Question 3

obtain and use information is applied when

Answer 3

the organization obtains or generates and uses relevant, high-quality information to support the functioning of the control. In this case, management is using the exception report (information) to support the control of monitoring overtime costs.

Question 4

Objectives of an entity include

Answer 4

1) Reliable Financial Reporting
2) Effective and Efficient Operations

Question 5

The monitoring component of internal control is

Answer 5

1) Assessing information derived from external parties.
2) Assessing the quality of control performance over time.
3) Improving controls that are not operating effectively.

Question 6

Risk assessment component of internal control

Answer 6

An auditor evaluates an entity’s risk assessment to understand how management addresses risks relevant to financial reporting

Question 7

Audit Strategy includes:

Answer 7

1) Provide a preliminary assessment of materiality and tolerable misstatement.
2) Outline reporting objectives.
3) Provide the scope of the

Question 8

Required documentation in an audit in accordance with generally accepted auditing standards?

Answer 8

An audit plan setting forth in detail the procedures necessary to accomplish the engagement’s objectives.

Question 9

Substantive procedures and tests of controls at the relevant assertion level to test a client’s

Answer 9

significant account balances, transaction classes, and disclosure items in the financial statements.

Question 10

What is substantive procedures

Answer 10

test a client’s financial statement assertions

Question 11

Test of controls is

Answer 11

audit procedure to test a client’s financial statement assertions

Question 12

Auditor most likely to rely on work done by internal auditors?

Answer 12

For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.

Question 13

When an audit specialist is used for a client audit

Answer 13

Make no reference to the specialist in the audit report.

Question 14

An auditor of a nonissuer intends to reference the work of an auditor’s external specialist in the audit report because the reference was relevant to understanding a modification to the auditor’s opinion. In this case, the auditor should indicate in the report

Answer 14

The reference to the auditor’s external specialist does not reduce the auditor’s responsibility for that opinion.

Question 15

Auditor’s use of the work of an actuary in assessing a client’s pension obligations?

Answer 15

The auditor is required to understand the objectives and scope of the actuary’s work.

Question 16

The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:

Answer 16

Allow the internal auditor to perform tests of internal controls.

Question 17

Under which of the following circumstances would an auditor be considered to be using the work of a specialist?

Answer 17

The auditor engages a lawyer to interpret the provisions of a complex contract.

Question 18

An internal auditor’s work would most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about the:

Answer 18

Existence of fixed asset additions.

Question 19

Testing the existence of contingencies, intangiable assets, related party transactions involves

Answer 19

much subjectivity, and should, therefore, be performed by the auditor.

Question 20

The work of internal auditors may affect the independent auditor’s:

Answer 20

1) Procedures performed in obtaining an understanding of the system of internal control.
2) Procedures performed in assessing the risk of material misstatement.
3) Substantive procedures performed in gathering direct evidence.

Question 21

Use in determining the auditor’s preliminary judgment about materiality?

Answer 21

The entity’s financial statements of the prior year.

Question 22

Regard to the consideration of materiality when an auditor is planning and performing a financial statement audit of an issuer?

Answer 22

When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods.

Question 23

Materiality should be reevaluated when:

Answer 23

1) There is a substantial likelihood that misstatements of amounts less than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor.
2) Materiality levels and tolerable misstatement were originally based on estimated or preliminary financial statement amounts that differ significantly from actual amounts.
3) Changes that occurred after the materiality levels were originally set are likely to affect investor’s perceptions about the company’s financial statements.

Question 24

What is being considered when establishing materiality

Answer 24

1) Both quantitative and qualitative factors are considered.
2) Materiality is based on the smallest level of misstatement for any one financial statement.
3) The auditor uses his or her professional judgment when assessing materiality.

Question 25

If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should

Answer 25

Raise or lower the materiality level as appropriate to the situation.

Question 26

Materiality levels are generally considered in terms of

Answer 26

the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Question 27

How to Calculate Materiality

Answer 27

Overall materiality = Applicable benchmark × Applicable percentage
Overall materiality = $4,200,000 (annualized revenue = $2,100,000 × 2) × 0.01

Question 28

Inherent risk that an auditor should consider

Answer 28

Technological developments that may render inventory obsolete.

Question 29

An appropriate response to an increase in risk of material misstatement is to

Answer 29

perform testing at year-end.

Question 30

Should an auditor consider confirming the terms of a large complex sale

Answer 30

When the combined assessed level of inherent and control risk over the sale is high.

Question 31

Would heighten an auditor’s concern about the risk of material misstatements in an entity’s financial statements?

Answer 31

The entity’s industry is experiencing declining customer demand.

Question 32

In an audit of financial statements for which an auditor’s assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

Answer 32

Perform substantive procedures for all relevant assertions related to each significant class of transactions.

Question 33

As the acceptable level of detection risk decreases, an auditor may:

Answer 33

Postpone the planned timing of substantive tests from interim dates to the year-end.

Question 34

Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit?

Answer 34

The entity enters into derivative transactions as hedges.

Question 35

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed 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:

Answer 35

Decrease detection risk.

Question 36

Detection risk is inversely related to

Answer 36

the risk of material misstatement. Therefore, an increase in the risk of material misstatement would cause a decrease in allowable detection risk.

Question 37

A reduction in control risk would result in a

Answer 37

lower substantive testing sample size.

Question 38

As the acceptable level of detection risk increases, an auditor may change the:

Answer 38

Timing of substantive tests from year-end to an interim date.

Question 39

The auditor should design the audit to provide reasonable assurance of

Answer 39

detecting material errors and fraud.

Question 40

Evidence (photocopy of vendor invoices)

Answer 40

The auditor should reevaluate the risk of fraud and design alternate tests for the related transactions as the evidence (photocopy of vendor invoices) is not reliable.

Question 41

Fraud encountered during an audit engagement of a nonissuer

Answer 41

It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.

Question 42

Given the auditor’s preliminary assessment of potential control weaknesses, the auditor would be most concerned with the

Answer 42

opportunity for employees to commit fraud within the organization.

Question 43

Audit documentation is required to include a

Answer 43

description of the discussion among engagement personnel regarding the risk of material misstatement due to fraud.

Question 44

When the auditor has obtained evidence that fraud exists, it is important that the matter be brought to the attention of

Answer 44

the appropriate level of management as soon as practicable. This is true even if the matter is considered inconsequential.

Question 45

Although documentation that is lost may be a result of error (e.g., the client misplaced the document), the auditor should approach lost documentation with a

Answer 45

heightened risk that fraud may have occurred (e.g., the client intentionally destroyed the documentation).

Question 46

Missing or unavailable documents or electronic evidence may be indicative of

Answer 46

an intentional material misstatement in the entity’s financial statements (fraud).

Question 47

The average duration of unemployment is a lagging

Answer 47

Lagging economic indicators

Question 48

Lagging economic indicators tend to follow

Answer 48

economic activity if the average duration of unemployment increases, it is likely a result of employers being reluctant to hire due to economic results.

Question 49

Building permits for new residences and new unemployment claims is an example of

Answer 49

leading economic indicator. Leading indicators tend to occur before the fact or predict economic activity. A decrease in the number of new building permits is one factor that would tend to signal the economy is heading toward a downturn.

Question 50

Manufacturing and trade sales are

Answer 50

coincident indicators and occur contemporaneously with economic activity. Industrial production is another example of a coincident indicator.

Question 51

Performed during the planning phase of the audit:

Answer 51

1) Obtaining selected client financial ratios and comparing to industry averages.
2) Comparing the client’s current year’s same-store sales with budgeted amounts.
3) Comparing current year’s sales per store square foot with the prior year.

Question 52

Leading economic indicators of business cycles

Answer 52

Manufacturers’ new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers’ unfilled orders for durable goods in constant dollars.

Question 53

An inherent limitation to a system of internal control is the fact that

Answer 53

controls can be circumvented by management override.

Question 54

A continuous activity that an auditor would be expected to perform throughout an audit engagement

Answer 54

1) Understanding the entity and its environment
2) Assessing the risk of material misstatement
3) Considering client continuance

Question 55

An auditor would most likely perform risk-assessment procedures to evaluate

Answer 55

the design of relevant controls when obtaining an initial understanding of the system of internal control sufficient to assess the risk of material misstatement of the financial statements.

Question 56

General controls are

Answer 56

policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system.

Question 57

General controls include procedures to ensure appropriate

Answer 57

systems software acquisition

Question 58

If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:

Answer 58

The control has been implemented but is not operating effectively.

Question 59

In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line by

Answer 59

analyzing the newly identified risk and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

Question 60

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this

Answer 60

The auditor’s direct personal observation provides the most reliable evidence about whether access to the data center is being appropriately limited.

Question 61

A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the

Answer 61

Tests of controls and tests of details

Question 62

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of

Answer 62

Perform only substantive tests on inventory. Test of controls is time consuming and not necessary.

Question 63

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment.

Answer 63

Use more experienced audit team members to perform year-end testing.

Question 64

Which of the following factors should prompt an auditor to seek a larger sample size for tests of details?

Answer 64

High assessed level of control risk and high assessed level of inherent risk

Question 65

An overall response to address a high-assessed risk of material misstatement at the financial statement level of a nonissuer may include:

Answer 65

Providing more supervision of the audit team.

Question 66

An auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement by

Answer 66

By assigning more experienced staff or those with specialized skills to high-risk areas

Question 67

After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that

Answer 67

It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests

Question 68

An auditor of a nonissuer is required to give special consideration to related party transactions because they

Answer 68

Could cause the financial statements to fail to achieve fair presentation

Question 69

Related party transactions

Answer 69

should always be considered whether significant or not since it has affect on financial statements

Question 70

The auditor considers any of management’s plans that might serve to mitigate the adverse effects of particular conditions and events.

Answer 70

Increase ownership equity, to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all be considered mitigating factors.

Question 71

The auditor may accept the letter from external counsel even though

Answer 71

The CPA did not get a specific amount of loss.

Question 72

Audit procedure that an auditor would most likely perform concerning litigation, claims, and assessments

Answer 72

Discuss with management the controls adopted for evaluating and accounting for litigation, claims, and assessments

Question 73

Procedures would most likely assist an auditor in identifying related party transaction

Answer 73

Review the minutes of the meetings of the board of directors and its committees

Question 74

A client is a defendant in a patent infringement lawsuit against a major competitor. What are potential wording that is included in the attorney’s response to the auditor’s letter of inquiry

Answer 74

1) A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.
2) A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.
3) An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.

Question 75

What is not a possible response to the auditors letter from a legal firm?

Answer 75

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded. This is because lawyers are not responsible for evaluation.

Question 76

If specific information concerning a possible act of noncompliance with laws and regulations comes to the auditor’s attention

Answer 76

the auditor should apply additional audit procedures to determine whether an act of noncompliance with laws and regulations has in fact occurred

Question 77

If the entity’s financial statements adequately disclose its financial difficulties, the auditor’s report is required to include a separate section that specifically uses the phrase

Answer 77

“going concern” not “Reasonable period of time, not to exceed one year”

Question 78

In evaluating accounting estimates, one of the auditor’s responsibilities is to determine whether

Answer 78

the estimates are reasonable in the circumstances

Question 79

In an audit of a nonissuer’s defined benefit pension plan, the best procedures to effectively test that benefit payments to plan participants are paid in accordance with the plan document is by

Answer 79

Recalculating benefits for selected participants based on the plan provisions using relevant service and salary history to support the recorded benefits paid to the participants

Question 80

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions

Answer 80

Accounting records (i…, sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.).

Question 81

To determine whether transactions have been recorded (completeness assertion),

Answer 81

the auditor should trace from the source documents to the accounting records (general ledger, trial balances, etc.).

Question 82

Analytical procedures performed in the final review stage of an audit generally would include:

Answer 82

Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Question 83

Because the auditor has determined that there were few transactions impacting the Treasury Stock account during the year

Answer 83

he or she would most likely test the transaction details pertaining to this account.

Question 84

Procedures an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet by

Answer 84

Observe the consistency of the employees’ use of cash registers and tapes.

Question 85

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Answer 85

Interest expense because relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time.

Question 86

An auditor wants to determine the accuracy of a given account balance on a client’s financial statements. To test the valuation, allocation, and accuracy assertion, the auditor may perform all of the following audit procedures

Answer 86

1) Performing a recalculation of the estimates made by the client pertaining to the account balance.
2) Footing and cross-footing the account balance to supporting schedules.
3) Reconciling the supporting schedules to the account items reported in the general ledger.

Question 87

If some customers provide confirmation responses in electronic form, what is the most effective way for the auditor to improve the reliability of these electronic responses?

Answer 87

Directly contact the customer to validate identity and accuracy of information received

Question 88

Analytical procedures are most appropriate when testing which of the following types of transactions?

Answer 88

Operating expense transactions… because relationships among income statement accounts tend to be more predictable

Question 89

Unrealized gains on available-for-sale securities should properly be recorded in other comprehensive income.

Answer 89

If such gains were erroneously recorded in the income account for trading securities, this might be discovered through comparison of the current year and prior year revenues and expenses (assuming the error occurred only in the current year, and not in the prior year).

Question 90

Analytical procedure that an auditor most likely would use while auditing a company’s notes payable

Answer 90

Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.

Question 91

Analytical procedures are not required to be used as

Answer 91

a substantive test and are more likely to be used for accounts that are predictable.

Question 92

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting

Answer 92

An inspection

Question 93

Type 1 report aids the user auditor with

Answer 93

obtaining an understanding of controls at the service organization, but does not provide the user auditor with evidence that the controls are operating effectively at the service organization.

Question 94

Type 2 report

Answer 94

obtain audit evidence related to the operating effectiveness of a service organization’s controls when the risk assessment includes an expectation that the controls are operating effectively.

Question 95

DP Service Center to process its payroll. DP’s service auditor is Blue, CPA, who recently issued a SOC 1® report on DP’s internal controls. In considering whether Blue’s report is satisfactory for Green’s purposes, Green should

Answer 95

Make inquiries concerning Blue’s competence.

Question 96

When a service organization provides services that affect the initiation, execution, processing, or reporting of a user company’s transactions, those services are considered to be part of

Answer 96

user company’s information system

Question 97

Service auditor’s responsibility with regard to other information presented in a document containing management’s description of its system and the service auditor’s report

Answer 97

To read the other information in order to identity material inconsistencies or misstatements.

Question 98

Quick Service Center processes the payroll for James Industries. Adams, CPA, is Quick’s auditor, while Robinson, CPA, is the auditor for James Industries.

Answer 98

1)Issuing a report that describes the scope and nature of the procedures performed.
2) Making inquiries regarding the professional reputation of Adams, CPA.
3) Inquiring of management regarding subsequent events that might significantly affect user organizations such as James
Industries.
4)Obtaining a letter of representation from the management of Quick Service Center.

Question 99

Calculating accounts receivable balances is relevant for

Answer 99

gathering data on the service organization’s internal controls

Question 100

The SOC 1® Type 2 report provides

Answer 100

a user auditor with assurance about the design, implementation, and operating effectiveness of a service organization’s internal controls and therefore may provide evidence that would allow a reduction in the assessed level of control risk for areas of the entity’s accounting

Question 101

The SOC 1® Type 1 report provides

Answer 101

a user auditor with assurance about the design and implementation of internal controls at a service organization but does not include the testing of operating effectiveness. It may aid the user auditor in obtaining an understanding of controls but cannot be used as a basis for reducing assessed risk.

Question 102

The SOC 2® Type 1 report provides

Answer 102

assurance over the design and implementation of controls in place at a service organization related to security, availability, processing integrity, confidentiality, and privacy. As it is not specifically related to the internal control over financial reporting (SOC 1), it is not as useful to the user auditor when assessing risk of material misstatement.

Question 103

The SOC 2® Type 2 report provides

Answer 103

assurance over the design, implementation, and operating effectiveness of controls in place at a service organization related to security, availability, processing integrity, confidentiality, and privacy. As it is not specifically related to the internal control over financial reporting (SOC 1), it is not as useful to the user auditor when assessing risk of material misstatement.

Question 104

CPA should include in his or her report

Answer 104

a description of the scope and nature of the procedures performed.

Question 105

An accountant is most likely required to follow Statements on Standards for Accounting and Review Services (SSARS) when the accountant has:

Answer 105

Used the information in a general ledger to prepare financial statements outside of an accounting software system.

Question 106

preparation engagement

Answer 106

Using information in the general ledger to prepare financial statements outside an accounting software system

Question 107

SSARS

Answer 107

apply when an accountant prepares, compiles, or reviews financial statements.

Question 108

A compilation of financial statements in accordance with Statements on Standards for Accounting and Review Services is limited to presenting

Answer 108

Information in the form of financial statements that is the representation of management

Question 109

SSARS requires

Answer 109

compiled financial statements to be accompanied by a compilation report

Question 110

SSARS applies to the

Answer 110

preparation of financial statements that are presented “alongside” the entity’s tax return.

Question 111

Statements on Standards for Accounting and Review Services (SSARS) establish standards and procedures for an engagement to

Answer 111

compile an individual’s personal financial statements to be used to obtain a mortgage.

Question 112

SSARS has to do with

Answer 112

Compiling financial statements
generated through the use of computer software but not drafting financial statement notes for the client because it doesnt count as preparation

Question 113

The accounting and review services committee is the authoritative body designated to

Answer 113

promote standards concerning an accountant’s association with unaudited financial statements of a nonissuer

Question 114

An accountant performing a compilation or review of the financial statements of a nonissuer should

Answer 114

Be able to justify departures from SSARS

Question 115

To comply with SSARS

Answer 115

1) Prepare trial balance
2) Prepare standard monthly journal entries

Question 116

Preparing written personal financial plans are excluded from

Answer 116

SSARS requirements.

Question 117

GAGAS, address the topics of

Answer 117

serving the public interest, integrity, objectivity, proper use of government information, resources and positions, and professional behavior.

Question 118

Professional behavior includes

Answer 118

an auditor’s honest effort in the performance of professional services in accordance with the relevant technical and professional standards.

Question 119

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization

Answer 119

Is removed from political pressures to conduct audits objectively, without fear of political reprisal

Question 120

The Generally Accepted Government Auditing Standards Framework for Independence identifies an inappropriate influence on auditor judgment or behavior caused by a financial or other interest as a

Answer 120

Self-interest threat

Question 121

A critical component of the determination of whether providing a nonaudit service would create a threat to independence is

Answer 121

consideration of management’s ability to effectively oversee the nonaudit service to be performed.

Question 122

Developing program policies impairs a CPA’s independence because

Answer 122

the CPA is acting in a management capacity.

Question 123

If an auditor were to assume management responsibilities for an audited entity, the management participation threat created would be

Answer 123

so significant that no safeguards could reduce the threat to an acceptable level.

Question 124

According to the U.S. Department of Labor, an auditor of an employee benefit plan would be considered independent if

Answer 124

An actuary associated with the auditor’s firm renders services to the plan

Question 125

Independence would not be impaired when

Answer 125

a member of the auditor’s firm was a voting trustee of the plan in a prior year but has since disassociated from the plan and did not participate in auditing the financial statements of the plan.

Question 126

The DOL requires

Answer 126

auditor independence when auditing and providing an opinion on the financial information submitted annually to the DOL

Question 127

Management Participation Threat

Answer 127

The assumption of accounting duties and taking possession of the books and records

Question 128

The Sarbanes-Oxley Act of 2002 requires that the officers of a corporation make any number of representations that will accompany their quarterly and annual financial statements including

Answer 128

Internal control is the responsibility of the signing officers.

Question 129

The Public Company Accounting Oversight Board consists of:

Answer 129

exactly two CPAs and three non-CPAs.

Question 130

How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight
Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB

Answer 130

More than 100 audits

Question 131

Organizations was established by the Sarbanes-Oxley Act of 2002 to control the auditing profession is

Answer 131

PCAOB to oversee public company and broker/dealer audits.

Question 132

A CPA firm must do which of the following before it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)

Answer 132

Register with the Public Company Accounting Oversight Board

Question 133

Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following

Answer 133

1) Process, review, and approve the registration of public accounting firms that audit issuers.
2) Inspect and review selected audit engagements of registered public accounting firms.
3) Establish auditing, quality control, and independence standards for audits of issuers.

Question 134

The U.S. Department of Justice, not the PCAOB, has the legal authority to

Answer 134

prosecute suspected criminal violations by registered public accounting firms. (However, the PCAOB has the right to impose civil monetary penalties.)

Question 135

A registered public accounting firm is conducting an audit of an issuer. Which of the following services may the auditor provide to the client while maintaining independence?

Answer 135

Preparing an organizational chart of the accounting department. They are prohibited from bookkeeping, appraisal, valuation, or actuarial services, or management functions.

Question 136

An auditor of an issuer is permitted to provide

Answer 136

factual accounts in testimony explaining positions taken during the performance of any services provided to the client. This does not impair the auditor’s independence.

Question 137

Reviewing Partner must rotate off audit every

Answer 137

5 years

Question 138

Lead Partner must rotate off audit every

Answer 138

7 years

Question 139

Audit committee of an issuer is responsible for

Answer 139

1. Preapproving all audit and nonaudit services provided by the company’s auditor.
2. Establishing procedures for the receipt, retention, and treatment of complaints received by the company regarding accounting, internal control, and auditing matters.
3. The appointment, compensation, and oversight of the work of the registered public accounting firm employed by the company.

Question 140

The evaluation of and reporting on the effectiveness of a company’s internal controls is the job of the

Answer 140

accounting firm employed by the company to perform the audit. The audit committee is not responsible for this function

Question 141

Experience with internal accounting controls is criteria for

Answer 141

audit committee financial expert

Question 142

According to the Sarbanes-Oxley Act of 2002, an issuer must disclose whether or not it has adopted a code of ethics for

Answer 142

The issuer’s senior financial officers, but not for other employees of the issuer.

Question 143

Section 404 of the Sarbanes-Oxley Act of 2002 requires the company’s external auditors to attest to, and report on

Answer 143

the internal control assessment made by management of the issuer

Question 144

According to the COSO, the presence of a written code of conduct provides for a control environment that can

Answer 144

Encourage teamwork in the pursuit of an entity’s objectives

Question 145

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

Answer 145

1. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor
2. Actively supervising a principal financial officer or principal accounting officer
3. Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements

Question 146

A CPA in charge of the external audit of a nonissuer received an unexpected inheritance that includes 100 shares of the audit client’s common stock.

Answer 146

The CPA must sell or donate the stock within 30 days after receipt of ownership rights. Also a spouse must sell or donate the stock within 30 days as well.

Question 147

An auditor’s independence is not impaired if

Answer 147

the auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation.

Question 148

The firm recommends a human resources software system to the issuer and receives a commission from the software vendor.

Answer 148

Independence would be impaired in this circumstance because the auditor has indirectly earned a financial benefit because of actions taken by the client based on the recommendation of the auditor. Direct or material indirect business relationships between a firm and an audit client impairs independence.

Question 149

Auditor independence is impaired if

Answer 149

certain non-audit services are provided during the audit including bookkeeping and other services related to the accounting records or financial statements of the audit client. This would include the preparation of the client’s footnote disclosures, which are a part of the overall financial statements of the client.

Question 150

The tax service of reviewing a proposed transaction and informing the client of the tax consequences may be provided

Answer 150

jointly with the audit of an issuer’s financial statements without impairing independence.

Question 151

The provision of services involving contingent fee arrangements impairs

Answer 151

Example that impairs the auditor’s independence

Question 152

Sarbanes-Oxley Act of 2002 says

Answer 152

1) The auditor must discuss with the audit committee the potential effects of the proposed tax services on the firm’s
independence.
2) The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees.