CAAP Audit Class Quiz 2

Question 1

Which of the following statements is true with respect to the PCAOB and SEC’s concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?

The auditor is not independent.
The auditor cannot audit the financial statements since a lack of integrity exists.
The auditor is independent if he or she is able to maintain a level of professional detachment.
The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements.

Answer 1

The auditor is not independent.

Question 2

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?

Independence.
Non compliance with GAAP.
Confidentiality.
Integrity.

Answer 2

Independence.

Question 3

Which of the following is not a broad category of threat to auditor independence?

Undue Influence.
Safeguards implemented by the client.
Financial self interest.
Familiarity.

Answer 3

Safeguards implemented by the client.

Question 4

Contingency fee based pricing of accounting services is:

Always strictly prohibited in public accounting practice.
Never restricted in public accounting practice.
Considered an act discreditable to the profession.
Prohibited for clients for whom attestation services are provided.

Answer 4

Prohibited for clients for whom attestation services are provided.

Question 5

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding to an inquiry made by:

The trial board of the AICPA.
A CPA-shareholder of the client corporation.
An AICPA voluntary quality review body.
An investigative body of a state CPA society.

Answer 5

A CPA-shareholder of the client corporation.

Question 6

When a Statement Auditing Standards uses the word “should” relating to a requirement, it means that the auditor:

May choose to change responsibilities relating to various professional standards that remain under consideration.
Should comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards.
Should consider whether to follow the advice based on the exercise of professional judgment in the circumstances.
Should fulfill the responsibilities under all circumstances.

Answer 6

Should comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards.

Question 7

The Auditing Standards Board’s guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in:

The 10 Generally Accepted Auditing Standards.
The Code of Professional Conduct.
Principles Underlying an Audit Conducted in Accordance with GAAS.
Accounting Series Releases.

Answer 7

Principles Underlying an Audit Conducted in Accordance with GAAS.

Question 8

The most reliable form of documentary evidence generally is considered to be documents created by the client.

True or False?

Answer 8

False

Question 9

When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level.

True or False?

Answer 9

True

Question 10

Further audit procedures include:

Risk Assessment Procedures		Test of Controls
A)		Yes							Yes
B)		Yes							No
C)		No							Yes
D)		No							No

Answer 10

Risk Assessment Procedures Test of Controls

C) No Yes

Question 11

Which of the following is not an assertion relating to classes of transactions?

Classification.
Sufficiency.
Cutoff.
Accuracy.

Answer 11

Sufficiency.

Question 12

Which of the following is not a financial statement assertion relating to account balances?

Existence.
Rights and obligations.
Completeness
Recorded value and discounts.

Answer 12

Recorded value and discounts.

Question 13

What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances?

Qualified.
Estimation.
Routine.
Nonroutine.

Answer 13

Estimation.

Question 14

Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.

True or False?

Answer 14

False

Question 15

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.

True or False?

Answer 15

True

Question 16

To best test existence, an auditor would sample from the:

Source documents to the general ledger.
General ledger to the financial statements.
Source documents to journals.
General ledger to source documents.

Answer 16

General ledger to source documents.

Question 17

Which of the following is not one of the assertions made by management about an account balance?

Rights and obligations.
Relevance.
Valuation.
Existence.

Answer 17

Relevance.

Question 18

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:

Account risk.
Detection risk.
Inherent risk.
Control risk.

Answer 18

Inherent risk.

Question 19

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement?

Substantive Tests of Details		Substantive Analytical Procedures
A)		Yes							Yes
B)		Yes							No
C)		No							Yes
D)		No							No

Answer 19

Substantive Tests of Details Substantive Analytical Procedures
A) Yes Yes

Question 20

The risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

Detection risk.
Inherent risk.
Account risk.
Control risk.

Answer 20

Detection risk.

Question 21

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:

The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance sheet.
The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the client's financial statements.
The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.
An amount that cannot be quantitatively stated since it depends on the nature of the item.

Answer 21

The auditors’ preliminary estimate of the smallest amount of misstatement that would be material to any one of the client’s financial statements.

Question 22

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?

Valuation.
Rights and obligations.
Legality.
Completeness.

Answer 22

Legality.

Question 23

Determining that receivables are presented at net-realizable value is most directly related to which management assertion?

Rights.
Presentation and disclosure.
Existence.
Valuation.

Answer 23

Valuation.

Question 24

Which statement is correct relating to a potential successor auditor’s responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?

The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.
The successor auditors have no responsibility to contact the predecessor auditors.
The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.
The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact.

Answer 24

The successor auditors should obtain permission from the prospective client to contact the predecessor auditors.

Question 25

When planning an audit, an auditor should:

Conclude whether changes in compliance with prescribed control procedures justifies reliance on them.
Make preliminary judgments about materiality levels for audit purposes.
Prepare a preliminary draft of the management representation letter.
Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.

Answer 25

Make preliminary judgments about materiality levels for audit purposes.

Question 26

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the:

Adequacy of the preplanned audit program.
Integrity of management.
Ability to establish consistency in application of accounting principles between years.
Apparent scope limitation.

Answer 26

Integrity of management.

Question 27

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of:

An assessment of internal control.
Analytical procedures.
Tests of transactions and balances.
Specialized audit programs.

Answer 27

Analytical procedures.

Question 28

Control risk is

the risk that auditors will not be able to complete the audit on a timely basis.
the probability that a material misstatement could occur and not be detected by auditors' procedures.
the risk that auditors will not properly control the staff on the audit engagement.
the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.

Answer 28

the probability that a material misstatement could not be prevented or detected by the entity’s internal control policies and procedures.

Question 29

Which of the following presumptions does not relate to the reliability of audit evidence?

The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.
Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.

Answer 29

The auditors’ opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

Question 30

Dara & Co. Audit Hill Corporation. Ellie is the engagement partner on the audit with an office in Buffalo Grove. Which of the following would NOT be considered a covered member?

Adam, who is a tax partner and provided 50 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst
Ben, a partner in Dara & Company, with an office in Buffalo Grove
Julie, a partner in Dara & Company, with an office in Elmhurst
Jason, who is a member of the attest engagement team with an office in Elmhurst

Answer 30

Julie, a partner in Dara & Company, with an office in Elmhurst

Question 31

Ben Big is a partner in the Cleveland office of the national accounting firm of Price Brickhouse. He owns 1,000 shares of common stock in Public, Inc., an audit client of the firm. This amount is not material to his personal investments. The Public, Inc. audit is done out of the New York office. Ben Big has not informed the firm that he owns the shares because he is not on the audit and it is not done out of the Cleveland office.

Required:
The situation above involves a possible violation of the AICPA’s Code of Professional Conduct. State the rule in question and explain why or why not there is a violation of the code. You need not refer to the rule number, but should clearly describe the rule in question.

Answer 31

The rule in question is Rule 101: Independence. Ben Big has not violated this rule because he is not considered a covered member. Partners are only covered members if they are in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement. Only covered members and their immediate families are prohibited from having a direct financial interest in the client.