Chapter Exam (Chapters 1-3)

Question 1

In determining the primary responsibility of the external auditor for an audit of a company’s financial statements, the auditor owes primary allegiance to the management of the client because the auditor is hired and paid by management. T or F?

Answer 1

FALSE

Question 2

The generally accepted auditing standards of field work include a requirement that the auditors obtain sufficient appropriate audit evidence. T or F?

Answer 2

TRUE

Question 3

The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

a. Illegal act has material financial statement implications
b. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements
c. Illegal act has received widespread publicity
d. Management fails to take appropriate corrective action

Answer 3

d

Question 4

Clerical mistakes in the processing of transactions

Determine if the following is an indication of an Error, Fraud or Noncompliance.

Answer 4

ERROR

Question 5

Purchasing at prices significantly above or below market price

Determine if the following is an indication of an Error, Fraud or Noncompliance.

Answer 5

NONCOMPLIANCE

Question 6

Missing documents

Determine if the following is an indication of an Error, Fraud or Noncompliance.

Answer 6

FRAUD

Question 7

Disrespecting or Harassing other employees or customers

Determine if the following is an indication of an Error, Fraud or Noncompliance.

Answer 7

NONCOMPLIANCE

Question 8

Misapplication of accounting policies

Determine if the following is an indication of an Error, Fraud or Noncompliance

Answer 8

ERROR

Question 9

Failure to wear the necessary personal protective equipment (PPE) when undertaking specific tasks

Determine if the following is an indication of an Error, Fraud or Noncompliance

Answer 9

NONCOMPLIANCE

Question 10

Negative cash flows from operations

Determine if the following is an indication of an Error, Fraud or Noncompliance

Answer 10

FRAUD

Question 11

Unauthorized alteration of computer files

Determine if the following is an indication of an Error, Fraud or Noncompliance

Answer 11

FRAUD

Question 12

Omission of an entry to record a bank transfer to cover a cash shortage

Determine if the following is an indication of an Error, Fraud or Noncompliance

Answer 12

FRAUD

Question 13

Payments without proper documentation

Determine if the following is an indication of an Error, Fraud or Noncompliance

Answer 13

NONCOMPLIANCE

Question 14

Material misstatements may emanate from inadequacy of accounting records. T or F?

Answer 14

FALSE

Question 15

The audit committee has the primary responsibility for the fairness of the representations made in the financial statements. T or F?

Answer 15

FALSE

Question 16

The reason for an independent auditor in gathering evidence is to detect fraud. T or F?

Answer 16

FALSE

Question 17

A typical objective of an operational audit is to determine whether an entity’s specific operating units are functioning efficiently and effectively. T or F?

Answer 17

TRUE

Question 18

Which of the following statements best describes an auditor’s responsibility to detect errors
or fraud?

a. An auditor should assess the risk that errors and fraud may cause the financial statements to contain
material misstatements and should design the audit to provide reasonable assurance of detecting errors
and fraud that are material to the financial statements.
b. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions
identify conditions causing a reasonably prudent auditor to suspect that the financial statements were
materially misstated.
c. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit
does not constitute a guarantee.
d. An auditor is responsible to detect material errors, but has no responsibility to detect material fraud that are
concealed through employee collusion or management override of the internal control structure.

Answer 18

a

Question 19

The primary factor that distinguishes errors from fraud is
a. Whether the misstatement is perpetrated by an employee or by a member of management
b. Whether the misstatement is concealed
c. Whether the underlying cause of misstatement relates to misapplication of accounting principles or to clerical
processing
d. Whether the underlying cause of misstatement is intentional or unintentional

Answer 19

d

Question 20

The standard of due audit care requires the auditor to
a. Make perfect judgement decisions in all cases
b. Ensure that the financial statements are free from error
c. Apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a decision
d. Possess skills clearly above the average for the profession

Answer 20

c

Question 21

Which of the following is one of the elements of quality control and procedures?

a. Engagement performance
b. Supervision
c. Assurance of proper levels of association
d. Due professional care

Answer 21

a

Question 22

While performing audit services for their clients, professional accountants have a duty to provide a level of care which is

a. Reasonable
b. Greater than average
c. Superior
d. Guaranteed to be free from error

Answer 22

a

Question 23

An audit should be designed to provide reasonable assurance of detecting all illegal acts. T or F?

Answer 23

FALSE

Question 24

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the:

a. Management of the company
b. Partner assigned to the audit engagement
c. Securities and Exchange Commission
d. Auditor in charge of the fieldwork

Answer 24

a

Question 25

Which of the following responsibilities rests with the management of an entity?

(i) Selecting and adopting the appropriate accounting policies
(ii) Ensuring the financial statements of the entity are fairly presented
(iii) Preparing sustainability reports
(iv) Establishing and maintaining an effective internal control systems

a. (ii) and (iv)
b. (i), (ii) and (iv)
c. (i), (iii) and (iv)
d. (i) and (ii)

Answer 25

b

Question 26

Although external auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity. T or F?

Answer 26

FALSE

Question 27

If the client refuses to accept an audit report that is qualified due to noncompliance with laws and regulations, the auditor should withdraw from the engagement and indicate the reasons to the SEC or other regulatory body in writing. T or F?

Answer 27

FALSE

Question 28

The generally accepted auditing standards include a requirement that the CPAs:

a. Exercise due professional care in the performance of the examination and the preparation of the report
b. Not accept as audit clients companies that compete directly with one another
c. Assume responsibility for any losses to the client from fraud which existed during the audit but was not
detected by the auditors
d. Follow accounting principles adopted by SEC

Answer 28

a

Question 29

If an illegal act is discovered during the audit of a publicly held company, the auditors should first:

a. Report the act to high level personnel within the client’s organization and to the audit committee
b. Intensify the examination to identify all illegal acts
c. Notify the regulatory authorities
d. Determine who was responsible for the illegal act

Answer 29

a

Question 30

The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests with the external auditor. T or F?

Answer 30

FALSE

Question 31

Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions?

a. Complex body of knowledge
b. Competence
c. Due professional care
d. Independence

Answer 31

d

Question 32

Professional skepticism requires auditors to possess an intelligent mind. T or F?

Answer 32

FALSE

Questioning mind