Exam 2 (5,6,7,19) Quizes

Question 1

What agencies/organizations govern the independence rules for audits of public companies?

Answer 1

PCAOB

Question 2

A CPA, while performing an audit, strives to achieve independence in appearance in order to

Answer 2

Maintain public confidence in the profession.

Question 3

Which of the following is not considered an act discreditable to the profession?

Answer 3

Billing an audit client an amount in excess of the originally quoted fee.

Question 4

The SEC and the Sarbanes-Oxley Act of 2002 prohibit public accounting firms from providing certain services to audit clients that are public companies. Which of the following services is not prohibited?

Answer 4

Tax preparation services.

Question 5

Without first receiving consent from the client, a CPA firm should not disclose confidential client information contained in its working papers to (a)

Answer 5

Another entity looking for benchmarking information.

Question 6

Which of the following is not a component of an effective system of quality management as defined by the AICPA’s Statement on Quality Management Standards Number 1

Answer 6

Reliability.

Question 7

Which of the following statements is false concerning PCAOB and AICPA inspections of public accounting firms?

Answer 7

The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines.

Question 8

In order to maintain independence from a public company audit client, the partner on the engagement must rotate off from the client

Answer 8

Every 5 years.

Question 9

For which of the following services is a practitioner not required to be independent?

Answer 9

A compilation of financial statements.

Question 10

Which of the following is not a covered member according to Interpretation 101-1?

Answer 10

A firm staff member in the office servicing the audit client, but who doesn’t participate in the client’s audit.

Question 11

Which of the following primary assertions is satisfied when an auditor observes the entity’s physical count of inventory?

Answer 11

Existence.

Question 12

Which of the following statements is correct with regard to the quality or appropriateness of evidential matter?

Answer 12

The auditor’s direct personal knowledge, obtained through reperformance and recalculation, is more persuasive than information obtained indirectly from independent outside sources.

Question 13

Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing?

Answer 13

Use computer assisted audit techniques to foot, or sum, the entire listing.

Question 14

One of the main objectives of performing analytical procedures during the planning phase of the audit is to identify:

Answer 14

Unusual changes that may signal possible account misstatements.

Question 15

Audit evidence can come in different forms with different degrees of reliability. Which of the following is the least reliable type of evidence?

Answer 15

Pre-numbered sales invoices.

Question 16

Which of the following presumptions is correct regarding the reliability of audit evidence?

Answer 16

An effective internal control system provides increased assurance with regard to the reliability of audit evidence.

Question 17

Which of the following is true relating to audit work paper documentation?

Answer 17

It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered.

Question 18

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is:

Answer 18

Observation.

Question 19

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is:

Answer 19

Recalculation.

Question 20

According to the text, each of the following is a main purpose for performing audit procedures except:

Answer 20

To develop recommendations for the control system.

Question 21

Auditors obtain an understanding of a nonpublic entity’s internal control for the primary purpose of:

Answer 21

Determining the nature, extent, and timing of subsequent audit procedures to be performed.

Question 22

Internal controls are designed to achieve company objectives in all of the following areas except:

Answer 22

Reduction of debt financing costs.

Question 23

Which of the following is a proper reason for not conducting tests of controls for nonpublic companies?

Answer 23

The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk.

Question 24

For nonpublic companies with preliminary control risk assessments set at high, auditors are likely to:

Answer 24

Complete little or no tests of controls (will complete substantive procedures).

Question 25

Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the entity’s internal control?

Answer 25

Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

Question 26

An auditor may need to obtain a service auditor’s report when an entity receives accounting services such as payroll from a service organization. Which of the following statements is true regarding this service audit report?

Answer 26

It should include an opinion.

Question 27

The auditor must report the following to the audit committee or others charged with governance:

Answer 27

Significant deficiencies and material weaknesses.

Question 28

A reliance strategy is chosen when the auditor:

Answer 28

Plans on conducting tests of controls AND has set the control risk at a lower level.

Question 29

The effectiveness of internal control is reduced by:

Answer 29

Human errors or mistakes.

Question 30

In order to be able to set control risk at a lower level, the auditor must do all of the following except:

Answer 30

Identify all general IT controls.

Question 31

The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 apply to

Answer 31

Most publicly-held companies.

Question 32

The role of the registered independent auditing firm relative to its clients’ internal controls under the Sarbanes-Oxley Act of 2002 is to

Answer 32

Express an opinion on the effectiveness of the entity’s internal control.

Question 33

Which of the following steps or procedures is least likely to be performed as part of management’s assessment of the effectiveness of internal controls?

Answer 33

Engaging the external auditors to conduct cutoff tests.

Question 34

Which of the following statements is false concerning the audit requirements of the Sarbanes-Oxley Act of 2002 and the PCAOB’s auditing standard related to internal controls?

Answer 34

The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor’s assessment.

Question 35

Which of the following types of audit reports would not be appropriate for an auditor to issue on the effectiveness of an entity’s internal controls?

Answer 35

Qualified [a significant deficiency exists].

Question 36

With regard to entities that have locations or business units that are judged to have financial reporting risks, the auditor

Answer 36

Must first determine whether those risks are adequately addressed by entity-level controls.

Question 37

Generalized audit software (GAS) would likely be used in the audit of accounts receivable for all of the following except:

Answer 37

Identifying weaknesses in the documentation of entity controls.

Question 38

All of the following factors should be considered by the auditor when deciding on the extent of controls testing except:

Answer 38

The time the auditor has to test controls before a report must be issued (Nature, Frequency, Importance).

Question 39

Place in order:
1. Identify significant accounts and disclosures and their relevant assertions.
2. Select controls to test.
3. Understand likely sources of misstatement.
4. Identify entity level controls.

Answer 39

4, 1, 3, 2.

Question 40

“Remediation” refers to

Answer 40

Corrective actions taken by management to eliminate a material weakness.

Question 41

A CPA is aware that a sole proprietor client has “skimmed” unrecorded cash receipts and thus not reported them to the Internal Revenue Service. If the CPA signs the entity’s tax return as a CPA after preparing the return, he/she would be violating which AICPA Rule of Conduct?

Answer 41

Rule 1.100—Integrity and Objectivity

Question 42

A violation of the profession’s ethical standards is most likely to occur when a CPA

Answer 42

Issues an unqualified opinion on an entity’s financial statements when fees for the prior year audit have not been paid in full.

Question 43

A CPA firm should establish monitoring procedures to provide reasonable assurance that the policies and procedures over each of the other elements of quality control are suitably designed and are being applied effectively. To achieve this goal, the firm would most likely establish procedures for

Answer 43

Reviewing engagement audit documentation and reports.

Question 44

Which of the following is not one of the SEC’s three basic principles of auditor objectivity and independence?

Answer 44

An auditor should not enter into contingent fee arrangements.

Question 45

Choose the pairing which is correctly matched.

Answer 45

General standards; Due professional care.

Question 46

Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue?

Answer 46

Completeness.

Question 47

Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following?

Answer 47

Accounts Receivable.

Question 48

Which of the following items is generally not included as part of audit documentation?

Answer 48

Client review notation.

Question 49

Audit documentation provides the principal support for which of the following?

Answer 49

All of the above.

Question 50

Which of the following is true regarding audit evidence?

Answer 50

Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported.

Question 51

Which of the following is not one of the five major components of internal control?

Answer 51

Human resource background checks.

Question 52

Which of the following statements regarding auditor documentation of the entity’s internal control is correct?

Answer 52

No one particular form of documentation is necessary, and the extent of documentation may vary.

Question 53

Which of the following is not considered a general control?

Answer 53

Reconciliation of payroll record count with the number of active employees.

Question 54

Understanding each of the components of internal control provides knowledge about:

Answer 54

The design of tests of controls AND factors that affect the risk of material misstatement.

Question 55

The auditor may document the achieved level of control risk using all of the following except:

Answer 55

Flowcharts.

Question 56

The two dimensions of control deficiencies are

Answer 56

likelihood of occurrence and magnitude.

Question 57

Which of the following statements best describes how the requirements under Sarbanes-Oxley changed the auditor’s responsibility for issuing an opinion in connection with the audits of most public companies?

Answer 57

CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements.

Question 58

Which of the following statements is false regarding the use of the test data approach in the evaluation of an accounting system?

Answer 58

The test data should consist of only valid conditions.

Question 59

Which of the following is not a requirement for management under Section 404 of the Sarbanes-Oxley Act of 2002?

Answer 59

Guarantee effectiveness of the entity’s ICFR.