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Principles of Auditing > Chapters 4, 5, and 6 > Flashcards

Chapters 4, 5, and 6 Flashcards

1
Q

4-18 a

What is the meaning of the rule that requires the auditor be independent?

  1. the auditor must adopt a critical attitude during the audit
  2. The auditor’s sole obligation is to third parties
  3. The auditor may have a direct ownership interest in the client’s business if it is not material
  4. The auditor must be without bias with respect to the client under audit
A
  1. The auditor must be without bias with respect to the client under audit
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2
Q

4-18 b

Which of the following services can be offered to public company audit clients under SEC requirements and SOX?

  1. Tax services for executives involved in financial reporting
  2. Tax planning not involving tax shelters
  3. Internal audit outsourcing
  4. Bookkeeping and other accounting services
A
  1. Internal audit outsourcing
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3
Q

4-18 c

An auditor strives to achieve independence in appearance to:

  1. Comply with auditing standards related to audit performance
  2. become independent in fact
  3. maintain public confidence in the profession
  4. maintain an unbiased mental attitude
A
  1. maintain public confidence in the profession
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4
Q

4-19 a
In which one of the following situations would a CPA be in violation of the AICPA code of professional conduct in determining the audit fee?

  1. A fee based on whether a CPA’s report on the client’s financial statements results in the approval of a bank loan
  2. A fee based on the outcome of a bankruptcy proceeding
  3. a fee based on the nature of the service rendered and the CPA’s expertise instead of the actual time spent on the engagement
  4. A fee based on the fee charged by the prior auditor.
A
  1. A fee based on whether a CPA’s report on the client’s financial statements results in the approval of a bank loan
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5
Q

4-19 b

The AICPA code of professional conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the code?

  1. Disclosing confidential information in compliance with a subpoena issued by a court.
  2. Disclosing confidential information in order to properly discharge the CPA’s responsibilities in accordance with the profession’s standards
  3. Disclosing confidential information to another accountant interesting in purchasing the CPA’s practice
  4. Disclosing confidential information during an AICPA-authorized peer review.
A
  1. Disclosing confidential information to another accountant interesting in purchasing the CPA’s practice
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6
Q

4-19 c

A CPA’s retention of client records as a means of enforcing payment of an overdue audit fee is an action that is:

  1. not addressed by the AICPA code of professional conduct
  2. acceptable if sanctioned by the state laws
  3. prohibited under the AICPA rules of conduct
  4. a violation of generally accepted auditing standards
A
  1. prohibited under the AICPA rules of conduct
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7
Q

4-20 a

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

  1. adequacy of disclosure of a client’s illegal act
  2. effects of a direct financial interest in the client on the CPA’s independence
  3. Discovery of weaknesses in a client’s internal control structure
  4. Types of evidence to use in testing accounts receivable
A
  1. effects of a direct financial interest in the client on the CPA’s independence
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8
Q

4-20 b

According to the profession’s ethical standards, which of the following events may justify a departure from GAAP?

I. New legislation
II. Conflicting industry practices
III. Evolution of a new form of business transaction

  1. I and II
  2. II and III
  3. I and III
  4. I, II, and III
A
  1. I and III
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9
Q

4-20 c

Which of the following is not a provision of the SOX act of 2002?

  1. The auditor of an issuer may not provide internal audit outsourcing services for the issuer
  2. Audit documentation must be maintained for five years
  3. The lead and reviewing partners must rotate off the audit after five years
  4. Tax services must be preapproved by the audit committee
A
  1. Audit documentation must be maintained for five years
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10
Q

5-14 a

In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:

  1. is the client’s creditor who sues the accountant for negligence
  2. can prove the presence of gross negligence that amounts to a reckless disregard for the truth
  3. is the accountant’s client
  4. bases the action upon fraud
A
  1. is the client’s creditor who sues the accountant for negligence
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11
Q

5-14 b

The 1136 Tenants case was important chiefly because of its emphasis on the legal liability of the CPA when associated with:

  1. An SEC engagement
  2. an audit resulting in a disclaimer of opinion
  3. letters for underwriters
  4. unaudited financial statements
A
  1. unaudited financial statements
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12
Q

5-14 c

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on:

  1. negligence
  2. gross negligence
  3. strict liability
  4. criminal deceit
A
  1. gross negligence
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13
Q

5-15 a

Major, Major & Sharpe, CPAs, are the auditors of MacLain Technologies. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements were revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement that included the financial statements audited by Major. In the enduing lawsuit by the MacLain investors, Major will be able to avoid liability if

  1. The misstatements were caused primarily by MacLain
  2. it can be shown that at lease some of the investors did not actually read the audited financial statements
  3. it can prove due diligence in the audit of the financial statements of MacLain
  4. MacLain had expressly assumed any liability in connection with the public offering.
A
  1. it can prove due diligence in the audit of the financial statements of MacLain
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14
Q

5-15 b

Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities, Inc., to the SEC. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. The customers have instituted legal action against Donalds based on Section 10b and Rule 10b-5 of the Securities Exchange act of 1934. Which of the following is likely to be Donalds’ best defense?

  1. Section 10b does not apply to them.
  2. They did not intentionally certify false financial statements
  3. they were not in privily of contract with the creditors
  4. Their engagement letter specifically disclaimed any liability to any party that resulted from Markum’s fraduletn conduct.
A
  1. They did not intentionally certify false financial statements
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15
Q

6-21 a

The major reason an independent auditor gathers audit evidence is to

  1. Form an opinion on the financial statements.
  2. Detect fraud.
  3. Evaluate management.
  4. Asses risk control.
A
  1. Form an opinion on the financial statements.
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16
Q

5-15 c

A CPA audited the financial statements included in a registration statements for an issuance of securities to the public. If the financial statements contained an omission that caused a purchaser of the securities to sustain damages, the:

  1. Securities and Exchange act of 1934 applies.
  2. purchaser must prove that (s)he was damaged by the omission, but not negligence, privity, or reliance.
  3. CPA will be liable only for gross negligence.
  4. due diligence defense is not available to the CPA.
A
  1. purchaser must prove that (s)he was damaged by the omission, but not negligence, privity, or reliance.
17
Q

6-21 b

Which of the following best describes the reason why an independent auditor reports on financial statements?

  1. A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.
  2. Different interests may exist between the company preparing the statements and the persons using the statements.
  3. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.
  4. Poorly designed internal controls may be in existence.
A
  1. Different interests may exist between the company preparing the statements and the persons using the statements.
18
Q

6-21 c

Because of the risk of material misstatement, an audit should be planned and performed with an attitude of

  1. Professional skepticism.
  2. Independent integrity.
  3. Objective judgement.
  4. Impartial conversation.
A
  1. Professional skepticism.
19
Q

5-16 a

Which of the following elements is required to be proven by the plaintiff to hold an accountant liable for gross negligence but not for actual fraud?

  1. Misrepresentation of a material fact
  2. Intention to deceive
  3. Intention to induce client’s reliance on the misrepresentation
  4. Reckless action
A
  1. Reckless action
20
Q

5-16 b

One of the elements that a plaintiff must prove to hold a CPA who signs off on financial statements in a registration statement liable for misstatements in the financial statements under Section 11 of the 1933 Act is that the

  1. Plaintiff relied on the misrepresentation
  2. CPA intended to deceive
  3. Plaintiff suffered a loss
  4. CPA was negligent
A
  1. Plaintiff suffered a loss
21
Q

6-22 a

An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards?

  1. Misappropriation of an asset or groups of assets.
  2. Clerical mistakes in the accounting data underlying the financial statements.
  3. Mistakes in the application of accounting principles.
  4. Misinterpretation of facts that existed when the financial statements were prepared.
A
  1. Misappropriation of an asset or groups of assets.
22
Q

5-16 c

Under the Ultramares rule, an accountant that negligently prepares a client’s financial report will be liable to:

  1. Clients and any person or limited foreseeable class of persons who the CPA knows will be relying on the CPA’s work
  2. persons in privity of contract with the CPA and intended third parties.
  3. clients and any third party that foreseeably relied on the accountant’s report
  4. the client only
A
  1. persons in privity of contract with the CPA and intended third parties.
23
Q

6-22 b

What assurance does the auditor provide that errors and fraud that are material to the financial statements will be detected?

       Errors.               Fraud 1.        Limited.         Reasonable 2.     Reasonable.   Reasonable 3.       Limited.             Limited 4.     Reasonable.       Limited
A
  1. Errors = Reasonable. Fraud = Reasonable.
24
Q

6-24 a

The auditor’s responsibility regarding material misstatements caused by fraud is:

  1. less than the auditor’s responsibility regarding material misstatements caused by error
  2. greater than the auditor’s responsibility regarding material misstatements caused by error
  3. the same as the auditor’s responsibility regarding material misstatements caused by error
  4. either less than or greater than the auditor’s responsibility regarding material misstatements caused by error, depending on the circumstances.
A
  1. the same as the auditor’s responsibility regarding material misstatements caused by error
25
Q

6-24 b

Which of the following would not have a direct impact in determining the sufficiency of evidence gathered during an audit?

  1. The cost-benefit relationship of obtaining the audit evidence
  2. The quality of audit evidence obtained
  3. The auditor’s professional judgment
  4. The risk of material misstatement
A
  1. The cost-benefit relationship of obtaining the audit evidence
26
Q

6-22 c

Which of the following statements describe why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

  1. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
  2. Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.
  3. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
  4. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements.
A
  1. Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.
27
Q

6-24 c

When determining the auditor’s or management’s responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect?

  1. The auditor is not responsible for preventing noncompliance with laws and regulations.
  2. Management and those charged with governance are responsible for ensuring that the company’s operations are conducted in accordance with all applicable laws and regulations.
  3. The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations.
  4. The auditor is expected to detect the client’s noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself
A
  1. The auditor is expected to detect the client’s noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself
28
Q

6-23 a

An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s assertion about account balances of

  1. Existence.
  2. Completeness.
  3. Accuracy, valuation, and allocation.
  4. Rights and obligations.
A
  1. Accuracy, valuation, and allocation.
29
Q

6-23 b

An auditor will most likely review an entity’s periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management’s assertion about classes of transactions of

  1. Occurrence
  2. Classification
  3. Accuracy
  4. Completeness
A
  1. Completeness.
30
Q

6-23 c

In the audit of accounts payable, and auditor’s procedures will most likely focus primarily on management’s assertion about account balances of:

  1. existence
  2. completeness
  3. accuracy, valuation, and allocation
  4. classification
A
  1. completeness

Principles of Auditing (10 decks)

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