questions

Question 1

A CPA who is not in public practice is obligated to follow which of the following rules of conduct?

a- Independence
b-Integrity and objectivity
c-contingent fees
d- commissions

Answer 1

B-Integrity and objectivity

under conduct rule 102, Integrity and objectivity, all members must maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his/her judgment to tothers when performing professional services

Question 2

Under the code of professional conduct of the CPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

a-a CPA in public practice providing tax and management advisory services
b-a CPA in public practice providing auditing and other attestation services
c-a CPA not in public practice.
d-all CPAs

Answer 2

B- According to the principles of professional conduct, Article IV-Objectivity and independence, “a member in public practice should be independent in fact and appearance when providing audit and other attestation services

Question 3

Under the AICPAs conceptual framework for independence, the member client relationship is evaluated to determine whether independence in fact and appearance is jeopardized. This is considered

a) a sufficiency of safeguards approach
b) an avoidance approach
c) a risk-based approach
d) a professional skepticism approach

Answer 3

c) The risk based approach evaluates the risk that a CPA is not indpendent or is perceived by a reasonable and informed third party with knowledge of all relevant information as not independent. That risk must be reduced to an acceptable level to establish independence. Risk is acceptable when threats are acceptable. they may be accptable because of the types of threats and their potential effect. Moreover, threats may be sufficiently mitigated or eliminated by safeguards. Threats are acceptable when it is not reasonable to expect that they will compromise professional judgment

Question 4

The concept of materiality is lease important to an auditor when considering the

a) adequacy of disclosure of a clients illegal act
b) discovery of weaknesses in a clients internal control
c) effects of a direct financial interest in the client on the CPA’s independence
d) decision whether to use positive or negative confirmations of accounts receivable

Answer 4

c- independence is impaired if a CPA has any direct financial interest in a client. Whether this direct financial interest is material is irrelevant. The test of materiality is applied however, if the financial interest is indirect.

Question 5

Under the ethical standards of the professsion, which of the following investments by a CPA in a corporate client is an indirect financial interest?

a- an investment held in a retirement plan of which the CPA is a trustee
b-an investment held in a blind trust
c-an investment held through a regulated mutual fund
d-an investment held through participation in an investment club

Answer 5

c- indpendence is impaired if, during the period of the professional engagement, a covered member had a direct or material indirect financial intereest in the client. Ownership of fund shares is direct financial interest in the fund. Underlying investments in the funder are indirect interests

Question 6

A violation of the professions ethical standards most likely whoudl have occurred when a CPA

a) expressed an unmodified opinion on the current years financial statements when fees for the prior years audit were unpaid.
b) Recommended a controller’s position description with candidate specifications to an audit client
c) purchased a CPA firm’s practice of monthly write-ups for a percentage of fees to be received over a 3 year peirod
d) made arrangements with a financial instution to collect notes issued by a client in payment of fes due for the current years audit

Answer 6

A- audit fees that are long past due take on the characteristics of a loan under conduct rule 101. Independence is imparied if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current years report date, remain unpaid when the current years report is issued. However, this ruling does not apply if the client is in bankruptcy. Moreover, long overdue fees do not preclude the CPA from performing services not requiring indpendence.

Question 7

Which of the following acts by a CPA who is not in public practice will most likely be considered a violationof the ethical standards of the profession?

a) using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA’s employer.
b) A CPA firm indicates on its letterhead that other CPA firms are correspondents rather than members of an association.
c) A member sells a newsletter bearing his/her name
d) Compiling the CPAs employers financial statements and making reference to the CPAs lack independence

Answer 7

A) A member not in public practice who uses the CPA designation in a manner implying that she is independent of the employer has committed a knowing misrepresentation of fact in violation of conduct rule 102

Question 8

auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes

a) Management’s responsibility for errors and the illegal activities of employees that may cause material misstatement.
b) Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.
c) The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor’s attention.
d) The auditor’s responsibility for determining preliminary judgments about materiality and audit risk factors.

Answer 8

C)

The understanding with the client regarding services to be performed is typically documented in an engagement letter. An engagement letter should indicate that a traditional financial statement audit is not designed to provide assurance on internal control. However, the auditor is responsible for ensuring that those charged with governance are aware of any significant deficiencies or material weaknesses in control, that come to his or her attention

Question 9

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets?

a) A large number of fixed assets with easily identifiable serial numbers.
b) A large number of bearer bonds on hand.
c) A large number of inventory items with low sales prices.
d) A large number of transactions processed in a short period of time.

Answer 9

b)

Large purchases of bank checks or bonds payable to bearer are often an indication of illegal or suspicious activity. Bearer instruments are negotiable by delivery alone, that is, without a signature. They are equivalent to cash. Thus, the holder has anonymity. They can be used to evade taxes or conceal business transactions.

Question 10

Which of the following must an auditor document with respect to the consideration of fraud in a financial statement audit?

a) Reasons for not identifying improper revenue recognition as a fraud risk.
b) Reasons for not identifying management override as a fraud risk.
c) Reasons for not identifying collusion as a fraud risk.
d) Instances of the auditor’s exercise of professional skepticism during the consideration of fraud.

Answer 10

a)

The auditor presumes the existence of a risk of material misstatement due to fraud related to revenue recognition. If the auditor concludes that the presumption is overcome in the circumstances of the engagement, the auditor should document the reasons for the conclusion (AU-C 240).

Question 11

An auditor’s engagement letter most likely would include a statement that

a) Limits the auditor’s responsibility to detect fraud and error.
b) Lists potential significant deficiencies in internal control discovered during the prior-year’s audit.
c) Describes the auditor’s responsibility to evaluate going-concern issues.
d) Explains the analytical procedures that the auditor expects to apply.

Answer 11

a)

The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise. Because of the inherent limitations of the audit and of internal control, the risk of not detecting some material misstatements, whether due to fraud or error, is unavoidable. This risk exists even if the audit is in accordance with GAAS.

Question 12

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to

a) Decrease the extent of auditing procedures to be applied to the class of transactions.
b) Perform the planned auditing procedures closer to the balance sheet date.
c) Apply the planned substantive procedures prior to the balance sheet date.
d) Increase the assessed level of control risk for relevant financial statement assertions.

Answer 12

b)

the audit plan to obtain greater assurance from substantive testing by (1) selecting a more effective audit procedure, (2) applying procedures nearer to year-end, or (3) increasing the extent of particular tests. The reduction in materiality requires greater assurance from substantive testing.

Question 13

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

a) The responsibilities of the auditor.
b) The preliminary judgment about materiality.
c) The contingency fee structure.
d) The expected opinion to be issued.

Answer 13

a)
The auditor should establish an understanding with the client through a written communication regarding the services to be performed. The objectives and limitations of the audit as well as the responsibilities of the auditor and management should be described in a contract stated in an engagement letter.

Question 14

Which of the following matters generally is included in an auditor’s engagement letter?

a) Management’s responsibility for the entity’s compliance with laws and regulations.
b) The auditor’s acceptance of the responsibility to search for significant internal control deficiencies.
c) The factors to be considered in setting preliminary judgments about materiality.
d) Management’s vicarious liability for illegal acts committed by its employees.

Answer 14

a)

The primary purpose of an engagement letter is to provide written record of the agreement with the client as to the services to be provided by the auditor. The terms of the engagement should be documented in an engagement letter that states the following: (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) the financial reporting framework, and (5) the expected form and content of audit reports. Management’s responsibility for compliance with laws and regulations applicable to its activities should be included in the agreement.

Question 15

Analytical procedures performed to assist the auditor to form an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that

a) Internal control activities are not operating effectively.
b) The communication with the audit committee should be revised.
c) Inquiries of management are required.
d) Irregularities exist among the relevant account balances.

Answer 15

c)

When analytical procedures reveal inconsistent fluctuations or relationships or significant differences, the auditor should investigate the results. Thus, the auditor should (1) make inquires of management, (2) corroborate the responses with other audit evidence, and (3) perform other necessary procedures.

Question 16

When one auditor succeeds another, the auditor should request the

a) Predecessor auditor to update the prior year’s report to the date of the change of auditors.
b) Client to instruct its lawyer to send a letter of audit inquiry concerning the status of the prior year’s litigation, claims, and assessments.
c) Predecessor auditor to submit a list of internal control related matters noted in an audit but have not been corrected.
d) Client to authorize the predecessor auditor to allow a review of the predecessor auditor’s audit documentation.

Answer 16

d)

Conduct Rule 301, Confidential Client Information, protects the confidentiality of client information. Hence, the auditor should seek the client’s specific consent for the predecessor auditor to respond fully to the auditor’s inquiries. The auditor should communicate with the predecessor to determine whether to accept the engagement (AU-C 210). If the engagement is accepted, the audit may be facilitated by making specific inquiries of the predecessor and by reviewing the predecessor’s audit documentation. The auditor also should request the client to authorize this review.

Question 17

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that

a) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
b) Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year.
c) The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions.
d) Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

Answer 17

a)

realized gains from increases in the value of available-for-sale securities should be recorded directly in other comprehensive income (a component of equity). Unrealized gains from increases in the value of trading securities should be included in income. Thus, a more-than-10% increase in income could have been caused by improper accounting for available-for-sale securities.

Question 18

When an auditor becomes aware of a possible act of noncompliance with laws or regulations, the auditor should obtain an understanding of the nature of the act to

a) Consider whether other similar acts have occurred.
b) Recommend remedial actions to those charged with governance.
c) Determine the reliability of management’s representations.
d) Evaluate the effect on the financial statements.

Answer 18

d)

When the auditor becomes aware of information concerning possible noncompliance with laws or regulations, the auditor should obtain (1) an understanding of the nature of the act and the circumstances in which it occurred and (2) further information to evaluate the effect on the financial statements.

Question 19

Which of the following is a false statement about materiality?

a) The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
b) An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.
c) An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
d) Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

Answer 19

C)

Materiality is defined for planning purposes at three levels. Materiality for the financial statements as a whole is determined when designing the overall audit strategy. Materiality is also set for specific account balances, transaction classes, or disclosures. In certain cases, these amounts could influence users. Performance materiality is less than that for the statements as a whole or for specific balances, etc. Performance materiality is an adjustment for (1) individually immaterial misstatements and (2) possible uncorrected misstatements. But materiality for planning purposes ordinarily is not set for one financial statement. When designing audit procedures to be applied at the balance, transaction class, or disclosure level, the auditor plans to obtain reasonable assurance of detecting misstatements that, when aggregated with misstatements in other balances, etc., could be material to the statements as a whole.

Question 20

Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?

a) An overly complex organizational structure involving unusual lines of authority.
b) Financial management’s participation in the initial selection of accounting principles.
c) Low growth and profitability as compared with other entities in the same industry.
d) Large amounts of liquid assets that are easily convertible into cash.

Answer 20

a)

Certain risk factors are related to misstatements arising from fraudulent reporting. One of the risk factors relating to the opportunity to commit fraud is an overly complex organizational structure involving numerous or unusual legal entities or managerial lines of authority.

Question 21

Under the Private Securities Litigation Reform Act of 1995, Baker, CPA, reported certain noncompliance with laws and regulations to Supermart’s board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the noncompliance had a material effect on Supermart’s financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to

a) Resign from the audit engagement within 10 business days.
b) Withhold an audit opinion until Supermart takes appropriate remedial action.
c) Notify the shareholders that the financial statements are materially misstated.
d) Deliver a report concerning the noncompliance to the SEC within 1 business day.

Answer 21

d)

Disclosure of noncompliance with laws and regulations to outside parties is not normally the auditor’s responsibility. However, under the Private Securities Litigation Reform Act of 1995, accountants must report noncompliance to the appropriate level of management and the audit committee unless it is clearly inconsequential. If senior management and the board fail to take action on reported material noncompliance, and this failure will result in a departure from a standard report or resignation from the audit, the accountants should report their conclusions to the board immediately. The board must then, within 1 business day, notify the SEC. If the accountants do not receive a copy of the notice within the 1-day period, they must furnish the SEC with a copy of their report within 1 business day.

Question 22

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

a) Recalculate the prior year’s accruals and deferrals.
b) Perform cutoff tests of cash receipts and disbursements.
c) Make inquiries of the client’s lawyer concerning pending litigation.
d) Compare financial information with nonfinancial operating data.

Answer 22

d)

Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. They should be used to some extent for risk assessment purposes in planning all financial audits.

Question 23

Inherent risk and control risk differ from detection risk in that they

a) May be assessed in either quantitative or nonquantitative terms.
b) Can be changed at the auditor’s discretion.
c) Arise from the misapplication of auditing procedures.
d) Exist independently of the financial statement audit.

Answer 23

d)

Inherent risk is the susceptibility of a relevant assertion to a material misstatement before considering related controls. Control risk is the risk that internal control will not timely prevent, or detect and correct, a material misstatement of a relevant assertion that could occur. Inherent risk and control risk are the entity’s risks. They exist independently of the audit and cannot be changed by the auditor. GAAS ordinarily do not refer to inherent risk and control risk separately but instead to a combined assessment of the risks of material misstatement. This assessment may change as more evidence is collected, but the entity’s risks do not. Detection risk is the risk that the auditor’s procedures performed to reduce audit risk to an acceptably low level will not detect a material misstatement that exists in a relevant assertion. It can be changed at the auditor’s discretion by altering the nature, timing, or extent of the audit procedures.