b

An independent audit adds value to the communication of financial information

because the audit

a. Confirms the exact accuracy of management's financial representations.

b. Lends credibility to the financial statements.
c. Guarantees that financial data are fairly presented.
d. Assures the readers of financial statements that any fraudulent activity has been
corrected
B
Which of the following best describes the reason why an independent auditor is
often retained to report on financial statements?

a. Management fraud may exist, and it is more likely to be detected by independent

auditors than by internal auditors.

b. Different interests may exist between the entity preparing the statements and the
persons using the statements, and thus outside assurance is needed to enhance the
credibility of the statements.

c. A misstatement of account balances may exist, and all misstatements are

generally corrected as a result of the independent auditor's work.

d. An entity may have a poorly designed internal control system

C
Which of the following best describes relationships among auditing, attest, and
assurance services?

a. Attest is a type of auditing service.

b. Auditing and attest services represent two distinctly different types of services—
there is no overlap.

c. Auditing is a type of assurance service.

d. Assurance is a type of attest service

C
Which of the following statements relating to attest and assurance services is not
correct?

a. Independence is an important attribute of assurance service providers.

b. Assurance services can be performed to improve the quality or context of

information for decision makers.
c. Financial statement auditing is a form of attest service but it is not an assurance
service.

d. In performing an attest service, the CPA determines the correspondence of the

subject matter (or an assertion about the subject matter) against criteria that are
suitable and available to users
C
For what primary purpose does the auditor obtain an understanding of the entity and
its environment?

a. To determine the audit fee.

b. To decide which facts about the entity to include in the audit report.

c. To plan the audit and determine the nature, timing, and extent of audit procedures
to be performed.

d. To limit audit risk to an appropriately high level

C
Which of the following statements best describes the role of materiality in a financial
statement audit?

a. Materiality refers to the "material" from which audit evidence is developed.

b. The higher the level at which the auditor assesses materiality, the greater the
amount of evidence the auditor must gather.

c. The lower the level at which the auditor assesses materiality, the greater the
amount of evidence the auditor must gather.

d. The level of materiality has no bearing on the amount of evidence the auditor
must gather
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a
Which of the following is the most important reason for an auditor to gain an
understanding of an audit client's system of internal control over financial reporting?

a. understanding a client's system of internal control can help the auditor assess risk
and identify areas where financial statement misstatements might be more likely

b. understanding a client's system of internal controls can help the auditor make
valuable recommendations to management at the end of the engagement
c. understanding a client's system of internal control can help the auditor sell
consulting services to the client

d. understanding a client's system of internal control is not a required part of the

audit process
D
Preliminary engagement activities include

a. understanding the client and the client's industry

b. determining audit engagement team requirements

c. ensuring the independence of the audit team and audit firm

d. all of the above

D
Which of the following statements best describes what is meant by an unqualified
audit opinion?

a. issuance of an unqualified auditor's report indicates that in the auditor's opinion

the client's financial statements are not fairly enough presented in accordance with
agreed-upon criteria to qualify for a clean option

b. issuance of an unqualified auditor's report indicates that the auditor is not qualified
to express an opinion

c. issuance of an unqualified auditor's report indicates that the auditor is expressing

different opinions on each of the basic financial statements regarding whether the
client's financial statements are fairly presented in accordance with agreed upon
criteria

d. issuance of a standard unqualified auditor's report indicates that in the auditor's

opinion the client's financial statements are fairly presented in accordance with
agreed-upon criteria, with no need for the inclusion of the qualifying phrases
D
The auditing standards that are used to guide the conduct of the audit are

a. implicitly referred to in the opening paragraph of the auditor's standard report

b. explicitly referred to in the opening paragraph of the auditor's standard report

c. implicitly referred to in the scope paragraph of the auditor's standard report

d. explicitly referred to in the scope paragraph of the auditor's standard report

e. implicitly referred to in the opinion paragraph of the auditor's standard report

f. explicitly referred to in the opinion paragraph of the auditor's standard report

B
A client has used an inappropriate method of accounting for its pension liability on
the balance sheet. The resulting misstatement is material, but the auditor does not
consider its effect to e pervasive. The auditor is unable to convince the client to alter
its accounting treatment. The rest of the financial statements are fairly stated in the
auditor's opinion. Which kind of audit report should the auditor issue under these
circumstances?

a. standard unqualified opinion

b. qualified opinion due to departure from GAAP
c. adverse opinion
d. no opinion at all

YO

Unit 2
Which of the following is not a part of the role of internal auditors?
providing reports on the reliability of financial statements to investors and creditors
Operational auditing is oriented primarily toward
future improvements to accomplish the goals of management
Which of the following would be considered an assurance service engagement?
Expressing an opinion about the reliability of a client's financial statements. (1 only)
Which of the following best places the events of the last decade in proper
sequence?
increased consulting services to audit clients, Enron and other scandals, Sarbanes-
Oxley Act, prohibition of most consulting work for audit clients, establishment of
PCAOB
Which of the following statements best describes management's and the external
auditor's respective levels of responsibility for a public company's financial
statements?
Management has the primary responsibility to ensure that the company's financial
statements are prepared in accordance with GAAP, and the auditor provides
reasonable assurance that the statements are free of material misstatement.
Which of the following best describes the relationship between business objectives,
strategies, processes, controls, and transactions?
To achieve its objectives, a business formulates strategies and implements
processes, which are carries out through business transactions. The entity's
information and internal control systems must be designed to ensure that the
transactions are properly executed, captured, and processed.
The Public Company Accounting Oversight Board
is a quasi-governmental organization that has legal authority to set auditing
standards for audits of public companies
Which of the following is correct regarding the types of audits over which the ASB
and the PCAOB, respectively, have standard-setting authority in the US?
ASB: nonpublic company audits
PCAOB: public company audits
Which of the following best describes the general character of the three generally
accepted auditing standards classified as standards of field work?
criteria for auditing planning and evidence gathering

unit 3
Before accepting an audit engagement, a successor auditor should make specific
inquiries of the predecessor auditor regarding the predecessor's
understanding as to the reasons for the change of auditors.
A written understanding between the auditor and the entity concerning the auditor's
responsibility for fraud is usually set forth in a(n)
engagement letter.
If the independent auditors decide that it is efficient to consider how the work
performed by the internal auditors may affect the nature, timing, and extent of audit
procedures, they should assess the internal auditors'
competence and objectivity
During the initial planning phase of an audit, a CPA most likely would
discuss the timing of the audit procedures with the entity's management.
As generally conceived, the audit committee of a publicly held company should be
made up of
members of the board of directors who are not officers or employees.
When planning an audit, an auditor should
determine overall materiality for audit purposes.
Which of these statements concerning illegal acts by clients is correct?
An auditor's responsibility to detect illegal acts that have a direct and material effect
on the financial statements is the same as that for errors and fraud.
The engagement partner and manager review the work of engagement team
members to evaluate which of the following?
-The work was performed and documented.
-The objectives of the procedures were achieved.
-The results of the work support the conclusions reached.
Tolerable misstatement is
materiality used to establish a scope for the audit procedures for the individual
account balance or disclosures.
Which of the following would an auditor most likely use in determining overall
materiality when planning the audit?
The entity's income before taxes for the period-to-date (e.g., 6 months).
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of an audit procedure with the client's management
Prior to commencing field work, an auditor usually discusses the general audit
strategy with the client's management. Which of the following details do
management and the auditor usually agree upon at this time?
The schedules and analyses that the client's staff should prepare
An auditor's engagement letter should include
Management's acknowledgement of its responsibility for maintaining effective
internal control
The element of the audit planning process most likely to be agreed upon with the
client before implementation of the audit strategy is the determination of the
Timing of inventory observation procedures to be performed
Which of the following statements is true regarding an auditor's communications with
a predecessor auditor prior to engagement acceptance?
Inquiries addressing specific matters are required; or example, the predecessor's
understanding for the reasons for the change in auditors.
Part of an auditor's process of establishing whether the preconditions for an audit
are present, involves obtaining management's acknowledgment of its responsibility
for all of the following except
Providing the auditor with access to key persons within the entity who have been
authorized by management or those charged with governance to be involved in the
audit
Which of the following factors most likely would cause a CPA not to accept a new
audit engagement?
The propective client's unwillingness to permit inquiry of its legal cousel
Which of the following is not a factor a CPA firm should take into consideration when
deciding whether to undertake or continue client relationships and engagements?
The possibility of the existence of related parties
Which of the following factors most likely would lead a CPA to conclude that a
potential audit engagement should be rejected?
It is unlikely that sufficient appropriate audit evidence is available to support an
opinion on the financial statements.
Which of the following factors would a CPA ordinarily consider in the planning stage
of an audit engagement?

I. Financial sttement accounts likely to contain a misstatement.

II. Conditions that require extension of audit tests

Both I and II
 Unit 4
Which of the following concepts are pervasive in the application of generally
accepted auditing standards, particularly the standards of field work and reporting?
Materiality and audit risk.
The existence of audit risk is recognized by the statement in the auditor's standard
report that the auditor
Obtains reasonable assurance about whether the financial statements are free of
material misstatement.
Risk of material misstatement refers to a combination of which two "client"
components of the audit risk model?
Inherent risk and control risk.
As lower acceptable levels of both audit risk and materiality are established, the
auditor should plan more work on individual accounts to
Find smaller errors.
When is a duty to disclose fraud to parties other than the client's senior management
and its audit committee most likely to exist?
In response to inquiries from a successor auditor
Which of the following characteristics most likely would heighten an auditor's
concern about the risk of intentional manipulation of financial statements?
Management places substantial emphasis on meeting earnings projections.
Which of the following is a misappropriation of assets?
An employee of a consumer electronics store steals 12 CD players.
Auditing standards require auditors to make certain inquiries of management
regarding fraud. Which of the following inquiries is required?
Whether management has any knowledge of fraud that has been perpetrated on or
within the entity
Which of the following is an example of fraudulent financial reporting?
Company management falsifies the inventory count, thereby overstating ending
inventory and understating cost of sales.
Which of the following is correct concerning required auditor communications about
fraud?
Fraud that involves senior management should be reported directly by the auditor to
the audit committee regardless of the amount involved.
A client fails to discover employee fraud on a timely basis because bank accounts
are not reconciled monthly.
Control
Cash is more susceptible to theft than an inventory of coal.
Inherent
Confirmation of receivables by an auditor fails to detect a material misstatement
Detection
Disbursements have occurred without proper approval
Control
There is inadequate segregation of duties.
Control
A necessary substantive audit procedure is omitted.
Detection
Notes receivable are susceptible to material misstatement, assuming there are no
related internal controls.
Inherent
Technological developments make a major product obsolete.
Inherent
The client is very close to violating debt covenants
Inherent
XYZ Company, a client, lacks sufficient working capital to continue operations.
Inherent
Client No. Audit Risk Risk of Material Misstatement Detection Risk
1 Low Moderate
2 Very low High
3 Low Low
4 Very low Moderate
lkj
Omissions of amounts or disclosures is considered a(n) ________.
error
In _______, the financial statements are intentionally misleading.
fraud
______is another term for misappropriation of assets.
fraud
Mistakes in data processing can easily result in _______.
errors
Financial statements can be misstated due to errors, ______, or noncompliance with
laws or regulations.
fraud

unit 5
Which of the following procedures would an auditor most likely rely on to verify
management's assertion of completeness?
a.) Observing the entity's distribution of payroll checks.
b.) Confirming a sample of recorded receivables by direct communication with the
debtors.
c.) Comparing a sample of shipping documents to related sales invoices.
d.) Reviewing standard bank confirmations for indications of cash manipulations.
c.) Comparing a sample of shipping documents to related sales invoices.
In testing the existence assertion for an asset, an auditor ordinarily works from the
a.) Potentially unrecorded items to the financial statements.
b.) Financial statements to the potentially unrecorded items.
c.) Supporting documents to the accounting records.
d.) Accounting records to the supporting documents.
d.) Accounting records to the supporting documents.
Which of the following statements concerning audit evidence is correct?
a.) A entity's general ledger may be sufficient audit evidence to support the financial
statements.
b.) The measure of the reliability of audit evidence lies in the auditor's judgment.
c.) The difficulty and expense of obtaining audit evidence concerning an account
balance are a valid basis for omitting the test.
d.) To be appropriate, audit evidence should be either persuasive or relevant but
need not be both.
b.) The measure of the reliability of audit evidence lies in the auditor's judgment.
Which of the following procedures would provide the most reliable audit evidence?
a.) Observation of procedures performed by the entity's personnel on the entity's trial
balance.
b.) Inquiries of the entity's internal accounting staff.
c.) Inspection of prenumbered entity purchase orders filed in the vouchers payable
department.
d.) Inspection of bank statements obtained directly from the entity's financial
institution.
d.) Inspection of bank statements obtained directly from the entity's financial
institution.
Which of the following types of audit evidence is the least reliable?
a.) Bank statements obtained from the entity.
b.) Prenumbered purchase order forms prepared by the entity.
c.) Correspondence from the entity's attorney about litigation.
d.) Test counts of inventory performed by the auditor.
b.) Prenumbered purchase order forms prepared by the entity.
Audit evidence can come in different forms with different degrees of reliability. Which
of the following is the most persuasive type of evidence?
a.) Bank statements obtained from the entity.
b.) Prenumbered entity sales invoices.
c.) Vendors' invoices included in the entity's files.
d.) Computations made by the auditor.
d.) Computations made by the auditor.
An auditor would be least likely to use confirmations in connection with the
examination of
a.) Long-term debt.
b.) Inventory held in a third-party warehouse.
c.) Stockholders' equity.
d.) Refundable income taxes.
d.) Refundable income taxes.
The assurance bucket is filled with all of the following types of evidence except
a.) Tests of details.
b.) Substantive analytical procedures.
c.) The audit report.
d.) Test of controls.
c.) The audit report.
The primary objective of final analytical procedures is to
a.) Satisfy doubts when questions arise about an entity's ability to continue in
existence.
b.) Assist the auditor in assessing the validity of the conclusions reached.
c.) Identify areas that represent specific risks relevant to the audit.
d.) Obtain evidence from details tested to corroborate particular assertions.
b.) Assist the auditor in assessing the validity of the conclusions reached.
The substantive analytical procedure known as trend analysis is best described by
a.) Development of a model to form an expectation using financial data, nonfinancial
data, or both to test account balances or changes in account balances between
accounting periods.
b.) The comparison, across time or to a benchmark, of relationships between
financial statement accounts or between an account and nonfinancial data.
c.) The comparison of common-size financial statements over time.
d.) The examination of changes in an account over time.
d.) The examination of changes in an account over time.
The current file of the auditor's working papers should generally include
a.) A copy of the financial statements.
b.) A flowchart of the accounting system.
c.) Organization charts.
d.) Copies of bond and note indentures.
a.) A copy of the financial statements.
The permanent file section of the working papers that is kept for each audit client
most likely contains
a.) Review notes pertaining to questions and comments regarding the audit work
performed.
b.) Narrative descriptions of the entity's accounting system and control procedures.
c.) Correspondence with the entity's legal counsel concerning pending litigation.
d.) A schedule of time spent on the engagement by each individual auditor.
b.) Narrative descriptions of the entity's accounting system and control procedures.
An audit document that reflects the major components of an amount reported in the
financial statements is referred to as a(n)
a.) Lead schedule.
b.) Working trial balance.
c.) Audit control account.
d.) Supporting schedule.
a.) Lead schedule.

Unit 6
An auditor's primary consideration regarding an entity's internal controls is whether
they ...
A) Prevent management override
B) Relate to the control environment
C) Reflect management's philosophy and operating style
D) Affect the financial statement assertions
Affect the financial statement assertions.
Which of the following statements about internal control is correct?
A. A properly maintained internal control system reasonably ensures that collusion
among employees cannot occur.
B. The establishment and maintenance of internal control is an important
responsibility of the internal auditor.
C. An exceptionally strong internal control system is enough for the auditor to
eliminate substantive procedures on a significant account balance.
D. The cost-benefit relationship is a primary criterion that should be considered in
designing an internal control system.
The cost-benefit relationship is a primary criterion that should be considered in
designing an internal control system.
Internal control is a process designed to provide reasonable assurance regarding
the achievement of which objective?
A) Effectiveness and efficiency of operations
B) Reliability of financial reporting
C) Compliance with applicable laws and regulations
D) All of the above are correct
All of the above are correct.
Monitoring is a major component of the COSO Internal Control- Integrated
Framework. Which of the following is not correct in how the company can implement
the monitoring component?
A. Monitoring can be an ongoing process.
B. Monitoring can be conducted as a separate evaluation.
C. Monitoring and other audit work conducted by internal audit staff can reduce
external audit costs.
D. The independent auditor can serve as part of the entity's control environment and
continuous monitoring
The independent auditor can serve as part of the entity's control environment and
continuous monitoring.
After obtaining an understanding of an entity's internal control system, an auditor
may set control risk at the maximum level for some assertions because he or she
A. Believes the internal controls are unlikely to be effective.
B. Determines that the pertinent internal control components are not well
documented.
C. Performs tests of controls to restrict detection risk to an acceptable level.
D. Identifies internal controls that are likely to prevent material misstatements.
Believes the internal controls are unlikely to be effective.
Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal controls.
B. Analytical procedures to verify the design on internal controls.
C. Substantive procedures to restrict detection risk for significant transaction
classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk.
Substantive procedures to restrict detection risk for significant transaction classes.
Assessing control risk below maximum involves all of the following except
A. Identifying specific controls to rely on
B. Concluding that controls are ineffective
C. Performing tests of controls
D. Analyzing the achieved level of control risk after performing tests of controls.
Concluding that controls are ineffective
Which of the following audit techniques would most likely provide an auditor with the
most assurance about the effectiveness of the operation of control?
A. Inquiry of client personnel.
B. Reperformance of the control by the auditor.
C. Observation of client personnel.
D. Walkthrough.
Reperformance of the control by the auditor.
The highest quality and most reliable audit evidence that segregation of duties is
properly implemented is obtained by
A. Inspection of documents prepared by a third party, but which contain the initials of
those applying client controls.
B. Observation by the auditor of the employees performing control activities.
C. Inspection of a flowchart of duties performed and available personnel.
D. Making inquiries of employees who apply control activities.
Observation by the auditor of the employees performing control activities.
Reports by the service organization's auditor typically
A. Provide reasonable assurance that their financial statements are free of material
misstatements
B. Ensure that the client will not have any misstatements in areas related to the
service organization's activities
C. Ensure that the client is billed correctly
D. Assess whether the service organization's controls are suitably designed and
operating effectively.
Assess whether the service organization's controls are suitably designed and
operating effectively
Significant deficiencies are matters that come to an auditor's attention that should be
communicated to an entity's audit committee because they represent
A. Disclosures of information that significantly contradict the auditor's going concern
assumption.
B. Material fraud or illegal acts perpetrated by high-level management.
C. Significant deficiencies in the design or operation of the internal control.
D. Manipulation of falsification of accounting records or documents from which
financial statements are prepared.
Significant deficiencies in the design or operation of the internal control.

Unit 7
19. A control deviation caused by an employee performing a control procedure that
he or she is not authorized to perform is always considered a
deficiency in operation
20. Which of the following is not a factor that might affect the likelihood that a control
deficiency could result in a misstatement in an account balance?
the financial statement amounts exposed to the deficiency
21. Entity-level controls can have a pervasive effect on the entity's ability to meet the
control criteria. Which one of the following is not an entity-level control?
controls to monitor the inventory taking process.
22. Which of the following controls would most likely be tested during an interim
period?
controls that operate on a continuous basis
23. If the financial reporting risks for a location are low and the entity has good
entity-level controls, management may rely on which of the following for their
assessment.
documentation and test controls over specific risk
24. Auditing Standard 5 requires an auditor to perform a walkthrough as part of the
internal control audit. A walkthrough requires an auditor to
trace a transaction from each major class of transactions from origination though the
company's information system until it is reflected in the company's financial reports.
25. When auditors report on the effectiveness of internal control "as of" a specific
date and obtain evidence about the operating effectiveness of controls at an interim
date, which of the following items would be the least helpful in evaluating the
additional evidence to gather for the remaining period?
the walkthrough of the control system conducted at interim.
26. AnnaLisa, an auditor for N.M. Neal & Associates, is prevented by the
management of Lileah Company from auditing controls over inventory. Lileah is a
public company. Management explains that controls over inventory were recently
implemented by a highly regarded public accounting firm that the company hired as
a consultant and insists that it is a waste of time for AnnaLisa to evaluate these
controls. Inventory is a material account, but procedures performed as part of the
financial statement audit indicate the account is fairly stated. AnnaLisa found no
material weakness in any other area of the client's internal control relating to
financial reporting. What kind or report should AnnaLisa issue on the effectiveness
of Lileah's internal controls?
a disclaimer of opinion
27. In auditing a public company client, Natalie, and auditor for N. M. Neal &
Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely
to result in financial misstatements that are material. One of the deficiencies is
reasonably likely to result in misstatements that are not material but significant.
What type of audit report should Natalie issue?
an unqualified report
28. In auditing ICFR for a public company client, Emily finds that the company has a
significant subsidiary located in a foreign country. Emily's accounting firm has no
offices in that country, and the company has thus engaged another reputable firm to
conduct the audit of internal control for the subsidiary. The other auditor's report
indicates that there are no material weaknesses in the foreign subsidiary's ICFR.
What should Emily do?
accept the other auditor's opinion after evaluating the auditor's work, and make
reference to the other auditor's report in her audit opinion.
29. Which of the following statements concerning control deficiencies is true?
the auditor should communicate to management, in writing, all control deficiencies in
internal control identified during the audit.
30. Significant deficiencies and material weaknesses must be communicated to an
entity's audit committee because they represent
significant deficiencies in the design or operation of internal control
31. Which of the following most likely represents a weakness in internal control of an
IT system?
the systems analyst reviews output and controls the distribution of the output from
the IT department
32. A primary advantage of using generalize audit software packages to audit the
financial statements of a client that uses an IT system is that the auditor may
access information stored on computed files while having a limited understanding of
the client's hardware and software features.
Management responsibilities
- issue internal control report
- maintain adequate IC
- evaluate effectiveness
compliance to complete ICFR audit
1. assume responsibility for effectiveness
2. evaluate effectiveness with suitable criteria
3. support evaluation with evidence/documentation
4. present written agreement of effectiveness
Auditor responsibilities
- audit and report on ICFR effectiveness
- conduct integrated audit
ICFR
process to provide reasonable assurance over reliability of FR and FS prep in
accordance w GAAP
ICFR control procedures
1. maintenance of records that fairly present asset info
2. provide reasonable assurance that transactions are in accordance w GAAP
3. provide reasonable assurance of prevention/timely detection of unauthorized
asset handling
control deficiency
control design/operation prevents MGMT/employees from detecting/preventing
misstatements via normal operations in a timely basis
- report to mgmt (unqualified opinion)
significant deficiency
less severe than a material weakness but important enough to gain FR oversight's
attention
- report to audit committee and mgmt (unqualified opinion)
material weakness
ICFR deficiency where there's reasonable assurance that a MM is not
detected/prevented on a timely basis
- report externally to audit committee and mgmt (adverse opinion)
likelihood
reasonably possible / probably vs. remote
magnitude
material (MW)
not material, but significant (SD)
not material or significant (CD)
MGMT assessment process
top-down/risk-based (COSO)
1. identify FR risks/controls
2. evaluate operating effectiveness of IFCR
3. consider locations to include in evaluation
documentation
MGMT must develop to support effectiveness evaluation
- many forms
- includes policy manuals, process models, flow charts, job descriptions, docs &
forms
routine transactions
recurring financial, in normal course of business (sales, AP)
non-routine transactions
periodic (physical inventory, tax return, SEC reporting)
estimation
balances based on mgmt judgment (reserves, accruals, impairment decisions)
timing of testing
must test controls throughout year
controls for non-routine transactions
some occur after year end
first 9 months
can occur at interim
4th quarter transactions
can be tested after year end
sample size
varies based on frequency of process and audit risk
must be principal source of evidence
auditor's own work
integrated audit
combo of IC and FS audits
control testing impacts
planned substantive procedures
-- results considered when evaluating IC
ICFR audit planning
consider:
- risk assessment and risk of fraud
- scaling audit
- using others' work
to determine extent of using others' work
1. evaluate nature of controls
2. evaluate competence/objectivity
3. test some work to evaluate quality & effectiveness
(more risk associated with control being tested = more work for external control)
test and evaluate operating effectiveness
nature - inquiry, inspect docs, observe, reperformance
timing - interim vs. as of
extent - nature of control, frequency of operation, importance of control
evaluating identified control deficiencies
if deficiency prevents auditor from reasonable assurance that material transactions
are recorded properly = treat as indicator of material weakness
indications of material weakness
- MGMT identifies fraud
- restate previous FS to correct MM
- find MM in current period (ICFR didn't )
- ineffective oversight of external FR and ICFR
remediation
correct material weakness in ICFR
- must be sufficient time to test effectiveness of control if correct MW before as of
date (failure to do so = adverse opinion)
written representation
-auditor must obtain from MGMT
- failure to obtain = limits scope, prevents unqualified opinion
auditor documentation reqs
document IC audit processes, procedures, judgments, results
opinions
unqualified - IC designed and operating effectively
disclaim - serious scope limitation
adverse - MW identified
scope limitation reports
minor effect = unqualified
severe limitation = disclaim or withdraw
auditor communications
must tell mgmt and AC of all SD & MW
- before issue report
- tell mgmt of CDs
- tell AC of communication of CDs to MGMT
An advantage of statistical sampling over nonstatistical sampling is that statistical
aampling helps an auditor to
Measure the sufficiency of the evidential matter obtained
Samples to test internal controls are intended to provide a basis for a auditor to
conclude whether
The controls are operating efficiently
When assessing the tolerable deviation rate the auditor should consider that while
deviations from control procedures increase the risk of material misstatements such
deviations do not necessarily result in misstatements. This explains why
A recorded disbursement that does not show evidence of required approval may
nevertheless be a transaction that it properly authorized and recorded
Which of the following combinations results on the greatest decrease in sample size
in an attribute sample for a test of controls?
Tolerable deviation rate increase and both others decrease
In the evaluation of this sample the auditor decided to increase the level of the
preliminary assessment of control risk because the
Computer upper deviation rate (7%) was more than the percentage of errors in the
sample
Based on the info above the planned allowance for sampling risk was
4.5%
Which of the following statements is correct concerning statistical sampling in test of
controls?
There is an inverse relationship between the sample size and the tolerable deviation
rate
What is an auditors evaluation of a statistical sample for attributes when a test of 50
documents results in three deviations if the tolerable deviation rate is seven percent
the expected population deviation rate is five percent and the allowance for the
sampling risk is 2 percent?
The planned assessed level of control risk should be modified because the sample
deviation rate plus the allowance for sampling risk exceeds the tolerable deviation
rate
As a result of sampling procedures applied as tests of controls an auditor incorrectly
assesses control risk lower than appropriate. The most likely explanation for this
situation is that
The deviation rate in the auditors sample is less than the tolerable deviation rate but
the deviation rate in the population exceeds the tolerable deviation rate

YOU

Unit 9
Variable sampling
Which of the following sampling methods would be used to estimate a numeric
measurement of a population, such as a dollar value?
Smaller amount of tolerable misstatement
A number of factors influence the sample size for substantive test of details of an
account balance. All other factors being equal, which of the following would lead to a
larger sample size?
Expected misstatement and tolerable misstatement
Which of the following sample planning factors would influence the sample size for a
substantive test of details for a specific account?
Effectiveness of the audit
The risk of incorrect acceptance relates to the:
The auditor controls the risk of incorrect acceptance by specifying the desired
confidence level for the sampling plan
Which of the following statements concerning monetary-unit sampling is correct?
Increases in tolerable misstatements - decrease sample size. Increase in assessed
level of control risk - increase sample size
How would increases in tolerable misstatement and assessed level of control risk
affect the sample size in a substantive test of details?
Classical variables sampling
An auditor is performing substantive procedures of pricing and extensions of
perpetual inventory balances consisting of a large number of items. Past experience
indicates that there may be numerous pricing and extension errors. Which of the
following statistical sampling approaches is most appropriate?
An auditor needs to estimate the dollar amount of the standard deviation of the
population in order to use classical variables sampling
Which of the following statements concerning the auditor's use of statistical sampling
is correct?
The acceptable level of risk
In classical variables sampling, which of the following must be known in order to
estimate the appropriate sample size required to meet the auditor's needs in a given
situation?
Inclusion of zero and negative balances generally does not require special design
considerations
Which of the following would most likely be an advantage in using classical variables
sampling rather than monetary-unit sampling?

Unit 10
For the control activities to be effective, employees maintaining the accounts
receivable subsidiary ledger should not also approve ...
Write-offs of customer accounts.
Which of the following controls is most likely to help ensure that all credit revenue
transactions of an entity are recorded?
The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.
Which of the following internal controls would be most likely to deter the lapping of
collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable
ledger.
Cash receipts from sales on account have been misappropriated. Which of the
following acts would conceal this defalcation and be least likely to be detected by an
auditor?
Understating the sales journal.
If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2013
compared to only 5.6 times in 2014, it is possible that there were ...
Fictitious sales in 2014.
If the number of days' sales in accounts receivable (365 days/receivables turnover)
decreases significantly, which of the following assertions for accounts receivable
most likely is violated?
Completeness.
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Which of the following is most likely to be detected by an auditor's review of an
entity's sales cutoff?
Unrecorded sales for the year.
Negative confirmation of accounts receivable is less effective than positive
confirmation of accounts receivable because ...
The auditor cannot infer that all nonrespondents have verified their account
information.
The negative request form of accounts receivable confirmation is useful particularly
when ...
The Assessed Level of Control Risk Relating to Receivables Is : Low;
The Number of Small Balances Is: High; and
Consideration by the Recipient Is: Likely.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most
likely reviews the entity's aging of receivables to support management's financial
statement assertion of ...
Valuation and allocation.
Which of the following actions would best conceal the theft of cash collections from
sales on account?
Understating the sales journal amounts.
To determine whether the entity's internal control operated effectively to minimize
the likelihood of failing to bill a customer for a shipment of goods, the auditor should
begin by selecting a sample of transactions from the population represented by the
...
Bill of lading (shipping report) file.
Which of the following is not a factor that an auditor would consider when assessing
the inherent risk associated with sales transactions?
The nature of the credit authorization process.
Tracing bills of lading (shipping reports) to sales invoices as a test of controls related
to the sales and collection process provides evidence that ...
Customers were billed for goods shipped to them.
Customers are more likely to complain to the entity if which of the following
assertions for cash receipts is violated?
Completeness.
Which of the following would not be considered a test in the area of accounts
receivable that relates to the existence assertion?
Trace the record of shipping to inclusion in the accounts receivable subsidiary
ledger.
Which of the following comparisons would be most useful to an auditor in evaluating
the overall results of an entity's sales efforts?
Current year bad debts expense as a percentage of accounts receivable to the
same value for the prior year.
An auditor's purpose in reviewing credit ratings of customers with delinquent
accounts receivable is most likely to obtain evidence concerning management's
assertions relating to
Valuation or allocation.
Which of the following procedures would an auditor most likely perform related to
year-end accounts receivable confirmations when the auditor does not receive
replies even after second requests?
Inspect related shipping records and sales invoices documenting the merchandise
sold to customers.
The negative request form of an accounts receivable confirmation is particularly
useful when
Number of Small Account Balances is: Many;
Assessed level of CR Related to Receivables is: Low; and
Consideration by the Recipient is: Likely.
According to SAB 101, which of the following is not a criterion for revenue
recognition?
Cash is received.
Which of the following is not a key segregation of duties in the revenue process?
The accounts receivable function should be segregated from the invoice preparation
function.
Which of the following is the population the auditor is most likely to draw from in
order to test the cutoff assertion for revenue?
Shipping documents.
Which of the following is not a typical procedure performed related to other non-
trade receivables?
Write-off of receivables from officers against their bonus pay as those arrangements
are inappropriate.
If tolerable misstatement for the accounts receivable balance is $75,000 and the
aggregate factual misstatement found by the auditor is $82,000, the auditor is most
likely to ...
Request that the entity adjust its accounts receivable balance by $82,000.

Unit 11
In a properly designed accounts payable system, a voucher is prepared after the
invoice, purchase order, requisition, and receiving report are verified. The next step
in the system is

Cancellation of the supporting documents.

Entry of the check amount in the check register.

Entering of the voucher into the voucher register.

Approval of the voucher for payment

Entering of the voucher into the voucher register.
When goods are received, the receiving clerk should match the goods with

The purchase order and the requisition form.

The vendor invoice and the purchase order.

The vendor shipping document and the purchase order.

The vendor invoice and the vendor shipping document.

The vendor shipping document and the purchase order
Internal control is strengthened when the quantity of merchandise ordered is omitted
from the copy of the purchase order sent to the

Department that initiated the requisition.

Receiving department.

Purchasing agent.
Accounts payable department
Receiving Department
Which of the following control activities is not usually performed in the accounts
payable department?

Matching the vendor's invoice with the related receiving report.

Approving vouchers for payment by having an authorized employee sign the

vouchers.

Indicating the asset and expense accounts to be debited.

Accounting for unused prenumbered purchase orders and receiving reports.

Accounting for unused prenumbered purchase orders and receiving reports
In a properly designed purchasing process, the same employee most likely would
match vendors' invoices with receiving reports and also

Post the detailed accounts payable records.

Recompute the calculations on vendors' invoices.

Reconcile the accounts payroll ledger.

Cancel vendors' invoices after payment

Recompute the calculations on vendors' invoices.
For effective internal control purposes, which of the following individuals should be
responsible for mailing signed checks?

Receptionist.

Treasurer.

Accounts payable clerk.

Payroll clerk
Treasurer
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To determine whether accounts payable are complete, an auditor performs a test to
verify that all merchandise received is recorded. The population of documents for
this test consists of all

Vendor invoices.

Purchase orders.

Receiving reports.

Canceled checks.
Receiving Reports
Which of the following audit procedures is best for identifying unrecorded trade
accounts payable?

Examination of unusual relationships between monthly accounts payable balances

and recorded cash payments.

Reconciliation of vendors' statements to the file of receiving reports to identify items

received just prior to the balance sheet date.

Investigation of payables recorded just prior to and just subsequent to the balance
sheet date to determine whether they are supported by receiving reports.

Review of cash disbursements recorded subsequent to the balance sheet date to

determine whether the related payables apply to the prior period.
Review of cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to the prior period
Purchase cutoff procedures should be designed to test whether all inventory

Purchased and received before the end of the year was paid for.
Ordered before the end of the year was received.

Purchased and received before the end of the year was recorded.

Owned by the company is in the possession of the company at the end of the year.
Purchased and received before the end of the year was recorded
Which of the following procedures is least likely to be performed before the balance
sheet date?

Test of internal control over cash.

Confirmation of receivables.

Search for unrecorded liabilities.

Observation of inventory
Search for unrecorded liabilities.
When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely would be

Vendors with whom the entity has previously done business.

Amounts recorded in the accounts payable subsidiary ledger.

Payees of checks drawn in the month after year-end.

Invoices filed in the entity's open invoice file.

Vendors with whom the entity has previously done business.

completeness d
Assets, liabilities, and recorded transactions have been valued in accordance with
GAAP.
cutoff d
accounting for revenue, expenses and other transactions in the proper period
existence and occurrence d
Assets and liabilities included in the accounts exist and recorded transactions are
valid and have actually occurred. -Is it there??
presentation and disclosure d
All accounts are presented in the appropriate place and all information required has
been disclosed in the statements and footnotes.
rights and obligations d
Assets and liabilities included in the accounts exist and recorded transactions are
valid and have actually occurred. -Is it there??
valuation or allocation d
Assets, liabilities and recorded transactions have been valued in accordance with
GAAP.
The objective in an auditor's review of credit rating of a client's customers is to
obtain evidence related to management assertions about
Valuation and allocation
When auditing merchandise inventory at year-end, the auditor performs audit
procedures to ensure that all goods purchased before y-e are received before a
physical inventory count
Cutoff
When auditing merchandise inventory at y-e, the auditor performs procedures to
obtain evidence that no goods held on consignment are included in the client's
ending inventory balance
Rights and Obligations
When an auditor reviews additions to the equipment (FA) account to make sure that
repair and maintenance expenses are not understates
Existance
During the audit of a company's cash balance on a company with operations in only
one country
Existence
Cutoff tests are designed to detect valid sales that occurred before the y-e but have
been recorded in the subsequent year
Completeness
In auditing the accrued liabilities account on the balance sheet, an auditor's
procedures most likely focus in
Completeness
During an audit of an entity's stockholders' equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements
or state law. This audit procedure most likely is intended to verify management's
assertion of
Presentation and Disclosure
Inquiries of warehouse personnel concerning possible obsolete or slow moving
inventory items provide assurance about the ASB balance assertion of
Valuation
The auditors walked through the warehouse looking for obsolete inventory.
Valuation
The auditors compared invoices received from suppliers with the cost of inventory
listed in the inventory accounts.
Accuracy
3. The auditors reviewed purchase orders to determine if any inventory was on
consignment.
Rights and obligations
The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or
other costs had been included in inventory costs.
Existence
The auditors selected items from the inventory and reviewed inventory records to
ensure these items were included in those records.
Completeness

Arens unit 1
Which of the following best describes why an independent auditor is asked to
express an opinion on the fair presentation of financial statements?
1. It is difficult to prepare financial statements that fairly present a company's
financial position, operations, and cash flows without the expertise of an
independent auditor.
2. It is management's responsibility to seek available independent aid in the
appraisal of the financial information shown in its financial statements.
3. The opinion of an independent party is needed because a company may not be
objective with respect to its own financial statements.
4. It is a customary courtesy that all stockholders of a company receive an
independent report on management's stewardship of the affairs of the business.
Answer: 3.
Which of the following professional services is an attestation engagement?
1. A consulting service engagement to provide computer-processing advice to a
client.
2. An engagement to report on compliance with statutory requirements.
3. An income tax engagement to prepare federal and state tax returns.
4. The preparation of financial statements from a client's financial records.
Answer: 2.
Which of the following attributes is likely to be unique to the audit work of CPAs as
compared to the work performed by practitioners of other professions?
1. Independence
2. Competence
3. Due professional care
4. Complex body of knowledge
Answer: 1.
Operational audits generally have been conducted by internal auditors and
governmental audit agencies but may be performed by CPAs. A primary purpose of
an operational audit is to provide:
1. A means of assurance that internal accounting controls are functioning as
planned.
2. A measure of management performance in meeting organizational goals.
3. The results of internal examinations of financial and accounting matters to a
company's top-level management.
4. Aid to the independent auditor, who is conducting the audit of the financial
statements.
Answer: 2.
Which of the following best describes an operational audit?
1. It requires the constant review by internal auditors of the administrative controls
as they relate to the operations of the company.
2. It concentrates on implementing financial and accounting control in a newly
organized company.
3. It focuses on verifying the fair presentation of a company's results of operations.
4. It concentrates on seeking aspects of operations in which waste could be reduced
by the introduction of controls.
Answer: 4.
Compliance auditing often extends beyond audits leading to the expression of
opinions on the fairness of financial presentation and includes audits of efficiency,
economy, effectiveness, as well as:
1. Accuracy
2. Adherence to specific rules and procedures
3. Evaluation
4. Internal control
Answer: 2.
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Which of the following is considered an assurance engagement?
1. Bookkeeping
2. Preparation
3. Compilation
4. Audit
Answer: 4.
Which of the following engagements is most likely to be considered an operational
audit?
1. The auditor evaluates the organization's efficiency in processing payments
2. The auditor examines the information presented in an entity's financial statements
to determine whether the financial statements are presented fairly in accordance
with the applicable financial reporting framework
3. The auditor determines whether the organization is following provisions of laws
and regulations
4. The auditor assists the client in preparation of financial statements
Answer: 1.
In a financial statement audit, the auditor obtains a reasonable level of assurance
about whether the financial statements are free of material misstatement in order to
express an opinion. In order to obtain reasonable assurance, the auditor must:
1. have prior experience in the industry in which the audit client operates
2. examine all documents available that support the financial statements
3. obtain sufficient audit evidence
4. test controls around significant transaction cycles
Answer: 3.
In the auditing process
A) the types and amounts of evidence remain constant from audit to audit.
B) the criteria for evaluating information will not vary depending on the information
being audited.
C) the audit report communicates the auditor's findings to users.
D) records are gathered by the auditor to determine whether the audited information
is stated in accordance with SEC standards.
Answer: C
Which of the following is considered audit evidence?
A)
Oral statements made by management: Y
Written Communications: N
Auditor Observation: N

B)
Oral statements made by management: N
Written Communications: Y
Auditor Observation: Y

C)
Oral statements made by management: Y
Written Communications: Y
Auditor Observation: Y

D)
Oral statements made by management: N
Written Communications: N
Auditor Observation: Y
Answer: C.
Which of the following can be used as a criteria for evaluating information being
audited?
A) International Financial Reporting Standards (IFRS)
B) Generally Accepted Accounting Principles (GAAP)
C) Internal Revenue Code (IRC)
D) all of the above
Answer: D.
Recording, classifying, and summarizing economic events in a logical manner for
the purpose of providing financial information for decision making is commonly
called
A) finance.
B) auditing.
C) accounting.
D) economics.
Answer: C.
An accountant
A) must possess expertise in the accumulation of audit evidence.
B) must decide the number and types of items to test.
C) must have an understanding of the principles and rules that provide the basis for
preparing the accounting information.
D) must be a CPA.
Answer: C.
When auditing accounting data, auditors focus on
A) determining whether recorded information properly reflects the economic events
that occurred during the accounting period.
B) determining if fraud has occurred.
C) determining if taxable income has been calculated correctly.
D) analyzing the financial information to be sure that it complies with government
requirements.
Answer: A.
The trait that distinguishes auditors from accountants is the
A) auditor's ability to interpret accounting principles generally accepted in the United
States.
B) auditor's education beyond the bachelor's degree.
C) auditor's ability to interpret FASB Statements.
D) auditor's expertise in the accumulation and interpretation of audit evidence.
Answer: D.
________ risk reflects the possibility that the information upon which the business
decision was made was inaccurate.
A) Client acceptance
B) Information
C) Business
D) Control
Answer: B.
The possibility that a business may not be able to repay a bank loan because of an
economic downturn is referred to as
A) materiality risk.
B) information risk.
C) interest rate risk.
D) business risk.
Answer: D.
True or False: Auditing can have a significant effect on both information risk and
business risk.
Answer: False
A correct relationship among the auditor, the client, and the external users is
A) management of a public company hires the independent auditor.
B) the audit committee of a private company hires the independent auditor.
C) the client provides capital to the external users.
D) the external users can rely upon the auditor's report to reduce information risk.
Answer: D.
The most common way for users to obtain reliable information is to
A) have an internal audit.
B) have an independent audit.
C) verify all information individually.
D) verify the information with management.
Answer: B.
External users of the financial statements
A) value the auditor's report because of the auditor's independence from the client.
B) look to the auditor's report as an indication of the statements' reliability.
C) use the audited information on the assumption that it is reasonably complete,
accurate, and unbiased.
D) all of the above.
Answer: D.
In the audit of historical financial statements, management asserts that the financial
statements are fairly stated in accordance with what standards?
A) regulatory accounting principles
B) applicable international accounting standards
C) applicable U.S. accounting standards
D) B and C
Answer: D.
Any service that requires a CPA firm to issue a report about the reliability of an
assertion that is made by another party is a(n)
A) accounting and bookkeeping service.
B) attestation service.
C) assurance service.
D) tax service.
Answer: B.
Three common types of attestation services are
A) audits of historical financial statements, reviews of historical financial statements,
and audits of internal control over financial reporting.
B) audits of historical financial information, verifications of historical financial
information, and attestations regarding internal controls.
C) reviews of historical financial information, verifications of future financial
information, and attestations regarding internal controls.
D) audits of historical financial information, reviews of controls related to
investments, and verifications of historical financial information.
Answer: A.
Which of the following services provides the lowest level of assurance on a financial
statement?
A) review
B) audit
C) Neither service provides assurance on financial statements.
D) Each service provides the same level of assurance on financial statements.
Answer: A.
Which of the following is an accurate statement regarding assurance services?
A) Assurance services must be performed by a CPA.
B) An attestation service is not a type of assurance service.
C) Assurance services improve the quality of information for decision makers.
D) Assurance services can only be performed on financial data.
Answer: C.
Audits
A) are an assurance service, but not an attestation service.
B) are designed to provide absolute assurance that the financial statements are free
of material misstatement.
C) are required for publicly traded companies in the United States.
D) do not require the auditor to express their opinion in a written report.
Answer: C.
A high, but not absolute, level of assurance is called
A) probable assurance.
B) reasonable assurance.
C) limited assurance.
D) incomplete assurance.
Answer: B.
Which of the following is an accurate statement regarding the various types of other
assurance services?
A) Assurance services must be about the reliability of another party's assertion
about compliance with specified criteria.
B) Other assurance services must meet the definition of an attestation service.
C) The primary purpose of a management consulting engagement is to improve the
quality of information.
D) The market for other forms of assurance services is open to non-CPA
competitors.
Answer: D.
One objective of an operational audit is to
A) determine whether the financial statements fairly present the entity's operations.
B) determine if the auditee is in compliance with GAAP.
C) make recommendations for improving performance.
D) report on the entity's relative success in attaining profit maximization.
Answer: C.
An examination of part of an organization's procedures and methods for the purpose
of evaluating efficiency and effectiveness is what type of audit?
A) operational audit
B) compliance audit
C) financial statement audit
D) production audit
Answer: A.
An audit to determine whether an entity is following specific procedures or rules set
down by some higher authority is classified as a(n)
A) audit of financial statements.
B) compliance audit.
C) operational audit.
D) production audit.
Answer: B.
Which one of the following is more difficult to evaluate objectively?
A) presentation of financial statements in accordance with generally accepted
accounting principles
B) compliance with government regulations
C) efficiency and effectiveness of operations
D) All three of the above are equally difficult.
Answer: C.
Which of the following audits can be regarded as generally being a compliance
audit?
A) IRS agents' examinations of taxpayer returns
B) GAO auditor's evaluation of the computer operations of governmental units
C) an internal auditor's review of a company's payroll authorization procedures
D) a CPA firm's audit of a public company
Answer: A.
Which of the following are required to have a written report regarding the assertion
of another party?
A)
Financial Statement Audit: Y
Operational Audit: Y
Compliance Audit: Y
Attestation Engagement: Y
Assurance Engagement: Y

B)
Financial Statement Audit: Y
Operational Audit: Y
Compliance Audit: Y
Attestation Engagement: Y
Assurance Engagement: N

C)
Financial Statement Audit: Y
Operational Audit: Y
Compliance Audit: Y
Attestation Engagement: N
Assurance Engagement: N

D)
Financial Statement Audit: N
Operational Audit: N
Compliance Audit: N
Attestation Engagement: Y
Assurance Engagement: Y
Answer: B.
In a financial statement audit, the auditor
A) gathers evidence to determine whether the statements contain material errors or
other misstatements.
B) must have a thorough understanding of the entity and its environment.
C) determines whether the financial statements are stated in accordance with
specified criteria.
D) all of the above.
Answer: D.
Internal auditors
A) must be independent of the entity that employs them.
B) generally report to the accounting department.
C) are employed by all types of organizations.
D) must be CPAs.
Answer: C.
Which type of auditor audits the financial information prepared by various federal
government agencies before it is submitted to Congress?
A) internal auditor
B) revenue agent
C) independent auditor
D) GAO auditor
Answer: D.
The three requirements for becoming a CPA include all but which of the following?
A) uniform CPA examination requirement
B) education requirements
C) character requirements
D) experience requirement
Answer: C.
The use of the Certified Public Accountant title is regulated by
A) the federal government.
B) state law through the licensing departments of each state.
C) the American Institute of Certified Public Accountants through the licensing
departments of the tax and auditing committees.
D) the Securities and Exchange Commission.
 Arens unit 2
Which of the following best describes what is meant by U.S. auditing standards?

1. Acts to be performed by the auditor

2. Measures of the quality of the auditor's performance
3. Procedures to be used to gather evidence to support financial statements
4. Audit objectives generally determined on audit engagements
2. Measures of the quality of the auditor's performance
The Responsibilities principle underlying AICPA auditing standards includes a
requirement that

1. the audit be adequately planned and supervised.

2. the auditor's report state whether or not the financial statements conform to
generally accepted accounting principles.
3. professional judgment be exercised by the auditor.
4. informative disclosures in the financial statements be reasonably adequate.
3. professional judgment be exercised by the auditor.
What is the general character of the responsibilities characterized by the
Performance principles?

1. The competence, independence, and professional care of persons performing the

audit
2. Criteria for the content of the auditor's report on financial statements and related
footnote disclosures
3. The criteria of audit planning and evidence gathering
4. The need to maintain an independence in mental attitude in all matters pertaining
to the audit
3. The criteria of audit planning and evidence gathering
The nature and extent of a CPA firm's quality control policies and procedures
depend on:

A. The CPA Firm's Size

B. The Nature of the CPA Firm's Practice
C. Cost-benefit considerations

1. A. Yes B. Yes C. yes

2. A. Yes B. Yes C. No
3. A. Yes B. No C. Yes
4. A. No B. Yes C. Yes
1. A. Yes B. Yes C. yes
Which of the following are elements of a CPA firm's quality control that should be
considered in establishing its quality control policies and procedures?
A. Human Resources
B. Monitoring
C. Engagement Performance

1. A. Yes B. Yes C. No
2. A. Yes B. Yes C. Yes
3. A. No B. Yes C. Yes
4. A. Yes B. No C. Yes
2. A. Yes B. Yes C. Yes
One of a CPA firm's basic objectives is to provide professional services that conform
with professional standards. Reasonable assurance of achieving this objective is
provided through

1. a system of quality control.

2. a system of peer review.
3. continuing professional education.
4. compliance with generally accepted reporting standards.
1.a system of quality control.
An auditor of an entity subject to the rules of the SEC must conduct the financial
statement audit in accordance with

1. PCAOB standards.
2. Statements on Standards for Accounting and Review Services.
3. International Auditing Standards.
4. Generally Accepted Government Auditing Standards.
1. PCAOB standards.
Which of the following provides authoritative guidance for the auditor of a nonpublic
company?

1. An article in the Journal of Accountancy that discusses new audit requirements

2. Information obtained from continuing professional education programs
3. Publication from state CPA societies that provides questions and answers on
frequently asked audit questions
4. Statements on Auditing Standards
4. Statements on Auditing Standards
The Public Company Accounting Oversight Board (PCAOB) has the duty to

1. select the public accounting firm for the issuer's annual audit.
2. establish rules related to the preparation of audit reports for nonissuers.
3. conduct investigations concerning registered public accounting firms.
4. conduct disciplinary proceedings for nonpublic accounting firms.
3. conduct investigations concerning registered public accounting firms.

YOU
 Arens unit 3
Which of the following best describes why an independent auditor is asked to
express an opinion on the fair presentation of financial statements?
The opinion of an independent party is needed because a company may not be
objective with respect to its own financial statements
Independent auditing can best be described as
A discipline that attests to the results of accounting and other functional operations
and data
Which of the following professional services is an attestation engagement
An engagement to report on compliance with statutory requirements
Which of the following attributes is likely to be unique to the audit work of CPAs as
compared to the work performed by practitioners of other professions?
Independence
International Standards on Auditing are established by the:
International Auditing and Assurance Standards Board
Which of the following best describes what is meant by U.S. generally accepted
auditing standards?
Measures of the quality of the auditor's performance
The general group of U.S. generally accepted auditing standards includes a
requirement that:
Due professional care be exercised by the auditor
What is the general character of the three generally accepted auditing standards
classified as standards of field work?
The criteria of audit planning and evidence gathering
A CPA firm is reasonably assured of meeting its responsibility to provide services
that conform with professional standards by:
Having an appropriate system of quality control
The nature and extent of a CPA firm's quality control policies and procedures
depend on:
The firm's size, the nature of the firm's practice and cost benefit consideration
Which of the following are elements of a CPA firm's quality control that should be
considered in establishing its quality control policies and procedures?
Human resources, monitoring, and engagement performance
One purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to:
Provide reasonable assurance that the integrity of the client is considered
Which of the following statements about a combined report on the financial
statements and internal control over financial reporting is correct?
The report includes additional paragraphs for the definition and limitations on
internal control
The date of the CPA's opinion on the financial statements of the client should be the
date of
Completion of all important audit procedures
If a principal auditor decides to refer in his or her report to the audit of another
auditor, he or she is required to disclose the
Portion of the financial statements audited by the other auditor
An entity changed from the straight-line method to the declining-balance method of
depreciation for all newly acquired assets. This change has no material effect on the
current year's financial statements but is reasonably certain to have a substantial
effect in later years. If the change is disclosed in the notes to the financial
statements, the auditor should issue a report with an
Unqualified opinion
When the financial statements are fairly stated but the auditor concludes there is
substantial doubt whether the client can continue in existence, the audtor should
issue an
Unqualified opinion with an explanatory paragraph
The introductory paragraph of an auditor's report contains the following "We did
Indicate a division of the responsibility
The annual audit of Midwestern manufacturing revealed that sales were accidently
being recorded as revenue when the goods were ordered, instead of when they
were shipped. Assuming the amount in question is material and the client is
unwilling to correct the error, the CPA should
A qualified "except for" opinion or adverse opinion
Under which of the following circumstances would a disclaimer of opinion not be
appropriate?
Management does not provide reasonable justification for a change in accounting
principles
The opinion paragraphs of a CPA's report states: "In our opinion, except for the
effects of not capitalizing certain lease obligations, as discussed in the preceding
paragraph the financial statements present fairly," in all material respects...This
paragraph expresses a
Qualified opinion
e six core ethical values described by the Josephson Institute are:
1. Trustworthiness
2. Respect
3. Responsibility
4. Fairness
5. Caring
6. Citizenship

There are many other potential sources of ethical values, including laws and
regulations, church doctrines, codes of professional ethics, and individual
organizations' codes of conduct.
An ethical dilemma is
a situation that a person faces in which a decision must be made about the
appropriate behavior. There are many possible ethical dilemmas that one can face,
such as finding a wallet containing money or dealing with a supervisor who asks you
to work hours without recording them.
An ethical dilemma can be resolved using the six-step approach outlined on p. 80 of
the text. The six steps are:
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected by the outcome of the dilemma and how each person
or group is affected.
4. Identify the alternatives available to the person who must resolve the dilemma.
5. Identify the likely consequence of each alternative.
6. Decide the appropriate action.
There is a special need for ethical behavior by professionals to
maintain public confidence in the profession, and in the services provided by
members of that profession. The ethical requirements for CPAs are similar to the
ethical requirements of other professions. All professionals are expected to be
competent, perform services with due professional care, and recognize their
responsibility to clients. The major difference between other professional groups and
CPAs is independence. Because CPAs have a responsibility to financial statement
users, it is essential that auditors be independent in fact and appearance. Most other
professionals, such as attorneys, are expected to be an advocate for their clients.
The four parts of the Code of Professional Conduct
1. Principles of Professional Conduct
2. Rules of conduct
3. Interpretation of the rules of conduct
4. Ethical rulings
Principles of Professional Conduct
Provide ideal standards of ethical conduct and help practitioners understand the
ideal conduct of a CPA. (Not enforceable)
Rules of conduct
Provide minimum standards of ethical conduct stated as specific rules. (Enforceable)
Interpretation of the rules of conduct
Provide formal interpretations of the rules of conduct to answer questions that
frequently arise about the rules of conduct. (Not Enforceable, but a practitioner must
justify departure)
Ethical rulings
Provide more detailed guidance to practitioners about interpretation of the rules of
conduct for less commonly raised questions. (Not Enforceable, but a practitioner
must justify departure)
Why is an auditor's independence so essential
Independence in auditing means taking an unbiased viewpoint. Users of financial
statements would be unlikely to rely on the statements if they believed auditors were
biased in issuing audit opinions.
Independence of mind (will not affect) vs. Independence in appearance)
Independence of mind exists when the auditor is actually able to maintain an
unbiased attitude throughout the audit, whereas independence in appearance is
dependent on others' interpretation of this independence and hence their faith in the
auditor.
Activities which may not affect independence of mind, but which are likely to affect
independence in appearance are: (Notice that the first two are violations of the Code
of Professional Conduct.)

1. Ownership of a financial interest in the audited client.

2. Directorship or officer of an audit client.
3. Performance of management advisory or bookkeeping or accounting services and
audits for the same company.
4. Dependence upon a client for a large percentage of audit fees.
5. Engagement of the CPA and payment of audit fees by management.
Auditors of public companies are prohibited from performing the following nonaudit
services:
1. Bookkeeping and other accounting services
2. Financial information systems design and implementation
3. Appraisal or valuation services
4. Actuarial services
5. Internal audit outsourcing
6. Management or human resource functions
7. Broker or dealer or investment adviser, or investment banker services
8. Legal and expert services unrelated to the audit
9. Any other service that the PCAOB determines by regulation is impermissible
A CPA firm has several options when it decides it is not competent to perform an
audit:
1. Withdraw from the engagement.
2. Obtain the expertise through continuing education and self-studies.
3. Hire someone who has the expertise.
4. Work on a consulting basis with another CPA firm.
A fee based upon the amount of time it takes to complete is not a violation of Rule
302.
Rule 302 on contingent fees states that professional services for clients receiving
assertion opinions shall not be offered or rendered under an agreement whereby no
fee will be charged unless a specific finding or result is attained, or where the fee is
otherwise contingent upon the findings or results of such services. The purpose of
the rule is to prevent sacrificing the quality of audits because of the pressure felt by
the auditor in producing the required audit outcome. An example would be the fee
being dependent upon the issuance of an unqualified opinion or the obtaining of a
loan by a client.
The following are exceptions to the confidentiality requirement for the CPA's audit
files:
1. The confidentiality requirement cannot interfere with the member's obligation to
follow auditing standards or generally accepted accounting principles.
2. A member must comply with a validly issued subpoena or summons enforceable
by order of a court.
3. A review of a member's professional practice under AICPA or state CPA society
or state Board of Accountancy authorization is permitted.
4. A member must respond to any inquiry made by the ethics division or trial board
of the Institute or a duly constituted investigative or disciplinary body of a state CPA
society or Board of Accountancy.
What is the meaning of the auditing standards that requires the auditor be
independent?
The auditor must be without bias with respect to the client under audit.
The Conceptual Framework for AICPA Independence Standards
adopts a risk-based approach to analysis of independence matters.
An auditor strives to achieve independence in appearance to
maintain public confidence in the profession
In which on of the following situations would a CPA be in violation of the AICPA
Code of Professional Conduct in determining the audit fee?
A fee based on whether the CPA's report on the client's financial statements results
in the approval of a bank loan.
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. In which one of the following situations would
disclosure by a CPA be in violation of the code?
Disclosing confidential information to another accountant interested in purchasing
the CPA's practice.
A CPA's retention of client records as a means of enforcing payment of an overdue
audit fee in an action that is
prohibited under the AICPA rules of conduct.
Independence is essential for an auditor because
users of financial statements expect an unbiased viewpoint in the CPA's attestation
to the fairness of the financial statements. If users believe that auditors are not
independent, the value of the audit function is eliminated.
Independence in appearance is how
independent the auditor appears to outsiders, such as users of financial statements.
Independence of mind refers to whether the auditor has maintained an attitude of
independence throughout the engagement. For example, an auditor could possibly
maintain an attitude of independence of mind (also described as independence in
fact) even though he or she held shares of stock in a company and performed the
audit (the auditor would have violated Rule 101). However, the auditor would not
likely be independent in appearance in such a situation. Both independence in
appearance and of mind are essential and the Code of Professional Conduct
concerns both.
The AICPA Code of Professional Conduct prohibits
if the person owning the stock or having a spouse employed as the CFO is a
member of the engagement team or is a partner in the office of the partner primarily
responsible for the audit engagement.
The SEC prohibits
adjusting entries were so extensive that they are, in essence, bookkeeping services.
The SEC also prohibits
the valuation services in if they are one of the nine nonaudit services prohibited by
the SEC. Because the Sarbanes-Oxley Act requires that the audit committee select
the auditor, is now also a violation of SEC rules.
Trustworthiness
includes honesty, integrity, reliability, and loyalty. Honesty requires a good faith
intent to convey the truth.
Integrity means that the person acts according to conscience, regardless of the
situation. Reliability means making all reasonable efforts to fulfill commitments.
Loyalty is a responsibility to promote and protect the interest of certain people and
organizations.
Respect
includes notions such as civility, courtesy. decency, dignity, autonomy, tolerance,
and acceptance. A respectful person treat other with consideration and accepts
individual differences and beliefs without prejudice.
Responsibility
means being accountable for one's actions and exercising restraint. Responsibility
also means pursuing excellence, self-restraint, and leading by example, including
perseverance and engaging in continuous improvement.
Fairness
and justice include issues of equality, process. Fair treatment means that similar
situations are handled consistently.
Caring
means being genuinely concerned for the welfare of others and includes acting
altruistically and showing benevolence.
Citizenship
includes obeying laws and performing one's fair share to make society work,
including such activities as voting, serving on juries, conserving resources, and
giving more than one takes.
Ways the Profession and Society Encourage CPA's to Conduct Themselves as a
High Level
Conduct of CPA firm personnel:
1. CPA exam
2. Auditing Standards and Interpretations
3. Continuing education requirements
4. Legal liability
5. AICPA Practice and quality centers
6. Code of Professional Conduct (Private)
7. PCAOB and SEC (Public)
8. Peer review
9. Quality control
Audit committee
selected members of a client's board of directors whose responsibilities include
helping auditors to remain independent of management.
Confidential client information
client information that may not be disclosed without the specific consent of the client
except under authoritative professional or legal investigation.
Direct financial interest
the ownership of stock or other equity shares by members of their immediate family
Independence in appearance
the auditor's ability to maintain an unbiased viewpoint in the eyes of others.
Independence of mind
the auditor's state of mind that enables an unbiased viewpoint in the performance of
professional services; also described as "independence in fact"
Indirect financial interest
a close, but not direct, ownership relationship between the auditor and the client; an
example is the ownership of stock by a member's grandparent
Privileged information
client information that the professional cannot be legally required to provide;
information that an accountant obtains from a client is confidential but not privileged.
Code of Professional Conduct
1. Principles
2. Rules of conduct
3. Interpretations of the rules of conduct
4. Ethical rulings

Chapter 5 Homework and Lecture

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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.

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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.

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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.

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.

14 c. DMO Enterprises, Inc., engaged the accounting firm of Martin, Seals, &
Anderson to perform its annual audit. The firm performed the audit in a competent,
nonnegligent manner and billed DMO for $48,000, the agreed fee. Shortly after
delivery of the audited financial statements, Hightower, the assistant controller,
disappeared, taking with him $82,000 of DMO's funds. It was then discovered that
Hightower had been engaged in a highly sophisticated, novel defalcation scheme
during the past year. He had previously embezzled $105,000 of DMO funds. DMO
has refused to pay the accounting firm's fee and is seeking to recover the $187,000
that was stolen by Hightower. Which of the following is most likely true?

(1) The accountants cannot recover their fee and are liable for $187,000.

(2) DMO is entitled to rescind the audit contract and thus is not liable for the $48,000
fee, but it cannot recover damages.

(3) The accountants are entitled to collect their fee and are not liable for $187,000.

(4) DMO is entitled to recover the $82,000 defalcation and is not liable for the
$48,000 fee.

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 unmodified 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 ensuing 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 least 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.

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 privity of contract with the creditors.

(4) Their engagement letter specifically disclaimed any liability to any party that
resulted from Markum's fraudulent conduct.

15 c. Which is the true statement concerning an auditor's statutory legal liability?

(1) The Securities Act of 1933 broadened the auditor's liability relative to common
law and the Securities Exchange Act of 1934 narrowed it.

(2) Criminal liability only arises under state law.

(3) The auditor may limit exposure to liability by destroying documents that might
suggest an improper act.

(4) The auditor has a greater burden of defense under the Securities Act of 1933
than the Securities Exchange Act of 1934.
4

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

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.

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.

Ordinary Negligence

Absence of reasonable care that can be expected of a person in a set of

circumstances. For auditors, it is in terms of what other competent auditors would
have done in the same situation

Gross negligence

Lack of even slight care, tantamount to reckless behavior, that can be expected of a
person. Some states do not distinguish between ordinary and gross negligence.

Constructive Fraud

Existence of extreme or unusual negligence even though there was no intent to

deceive or do harm. Constructive fraud is also termed recklessness. Recklessness
in the case of an audit is present if the auditor knew an adequate audit was not done
but still issued an opinion, even though there was no intention of deceiving
statement users

Fraud

Occurs when a misstatement is made and there is both the knowledge of its falsity
and the intent to deceive.

Breach of contract

Failure of one or both parties in a contract to fulfill the requirements of the contract.
An example is the failure of a CPA firm to deliver a tax return on the agreed-upon
date. Parties who have a relationship that is established by a contract are said to
have privity of contract

Third-party beneficiary

A third party who does not have privity of contract but is known to the contracting
parties and is intended to have certain rights and benefits under the contract. A
common example is a bank that has a large loan outstanding at the balance sheet
date and requires an audit as a part of its loan agreement. While the contract for the
audit engagement is between the client and the audit firm, both parties are aware
the bank will be relying on the audited financial statements

Common Law
Laws that have been developed through court decisions rather than through
government statutes.

Statutory Law

Laws that have been passed by the U.S. Congress and other governmental units.
The Securities Acts of 1933 and 1934 and Sarbanes-Oxley Act of 2002 are
important statutory laws affecting auditors

Joint and several liability

The assessment against a defendant of the full loss suffered by a plaintiff,

regardless of the extent to which other parties shared in the wrongdoing. For
example, if management intentionally misstates financial statements, an auditor can
be assessed the entire loss to shareholders if the company is bankrupt and
management is unable to pay

Separate, proportionate

___ and ___ liability - The assessment against a defendant of that portion of the
damage caused by the defendant's negligence. For example, if the courts determine
that an auditor's negligence in conducting an audit was the cause of 30% of a loss to
a defendant, only 30% of the aggregate damage will be assessed to the CPA firm.

Liability to clients

___ ___ ___ - Client sues auditor for not discovering a material fraud during the
audit.

Liability to third parties

___ ___ ___ ___ under common law - Bank sues auditor for not discovering that a
borrower 's financial statements are materially misstated.

Civil liability

___ ___ under federal securities laws- Combined group of stockholders sues auditor
for not discovering materially misstated financial statements.

Criminal liability

Federal government prosecutes auditor for knowingly issuing an incorrect audit

report.
Clients

___ suing us is the number one source of law suits. They sue us under common law
and it's usually a contract dispute.

court

Common law is law derived from ___ decisions. It is constantly changing.

ordinary negligence

The primary beneificiary can sue you for as little as ___ ___ under common law.

primary beneficiary

It's a party that is relying on the financial statements.

engagement

You establish a primary beneficiary relationship through an ___ letter.

easier

It is ___ to prove negligence than gross negligence or fraud.

Credit Alliance

The New York State Court of Appeals upheld the basic concept of privity established
by Ultramares and stated that to be liable, (1) an auditor must know and intend that
the work product would be used by the third party for a specific purpose, and (2) the
knowledge and intent must be evidenced by the auditor's conduct.

foreseeable

The broadest interpretation of the rights of third party beneficiaries is to use the
concept of ___ users. Anybody that auditor should have foreseen as a user of the
financial statements, i.e. stockholders. ( Mississippi and Wisconsin)

torts

Most states fall into Restatement of ___. Identifiable group that relied on the
auditor's work.

limited
The Restatement Rule is
that foreseen users must be members of a reasonably ___ and identifiable group of
users
who have relied on the CPA's work, such as creditors, even though those persons
were
not specifically known to the CPA at the time the work was done.

lawsuits

3 of 4 defenses that we have used have been successfuly used to fight off these
Third-party ____: lack of duty to perform the service, nonnegligent performance, and
absence of causal connection

securities laws

The second source of lawsuits is suing under the federal ___ ___.

560

Code Section ___

Subsequent event and subsequent discovered facts

sue

The Securities act of 1933 - How do we as auditors get involved with a lawsuit under
this law? It deals with the Financial Statements that we are associated with including
the registration statement. The initial purchasers can ___ us under this act.. The
burden of proof is on the auditor because all you have to do is point out material
misstatement. We are guilty until proven innocent.

Subsequent

___ procedures all the way to the date of the registration statement.

subsequent

Two types of subsequent events:

1.) ___ event - on the date of the balance sheet date: 12/31/16, plane crashes on
12/29/17.
2.) things that were subsequently discovered after the balance sheet date, requires
footnote disclosure. Need to follow GAAP.

Three

___ distinct periods.

1.) Period between balance sheet date and the date on the audit report.

2.) Date of audit report and date issued to the public

3.) FS and audit report are being used.

Subsequent events are events that occur in period __

2, 3

Subsequent discovered facts are facts that become known after the date of the audit
report, that have they been known, would had caused a different audit report. Facts
discovered in period __ and __.

Requirements

___ in period 1 we are responsible to find all subsequent events requiring

adjustment or disclosure in the financial statements.

not required

We are ___ ___ to perform any procedures in period 2, but if we become aware of
relevant events, we need to act. May need to revise the financial statements. We
can extend the subsequent events to a later date or add a second date.

925

Code section 925

Filings With the U.S. Securities and Exchange

Commission Under the Securities Act of 1933

1934
under ___ 10k has to be filed annually. Deals with period filings.

Scienter

____ - commission of an act with

knowledge or intent to deceive. knowingly intends to defraud. The smoking gun
standard.. One shade less than full proof.

...

Ultramares doctrine

Ordinary negligence is insufficent grounds for third parties that lack privity of contract
unless they are primary beneficiaries.

Requires plaintiff to be a foreseen user

...

Prudent person concept

Auditor expected to exercise due care

Standard is what a prudent person would do

Generally relies on expert witnesses

Good faith and integrity, not infalliability

Prudent auditor will not generally be held liable.

Imprudent auditor will

Ordinary negligence, Gross Negligence, Constructive fraud, fraud

What are the four types of negligence?

Torts

___ result in larger settlements

breach
Tort is any civil wrong other than ___.

lack of duty, nonnegligent performance, contributory negligence, absense of causal

connection

Four defenses for auditors in client cases:

1.) ___ ___ ___

2.) ___ ___
3.) ___ ___
4.) ___ ___ ___ ___

lack of duty, nonnegligent performance, absense of causal connection

Defenses against 3rd parties?

engagement, review

1136 Tenants - established liability where agreement is unclear

Led to ___ letters

Led to development of ___ standards

...

Securities act of 1933

Deals with registrations and prospectuses

First line of defense, therefore stringent on auditors

Auditor is liable for contents of statements until date of registration

Burden of proof is on auditor

Claimant must only prove that he purchased securities and that the statements were
false

Auditor's only defense is due diligence

...

Securities and Exchange act of 1934

Focuses on annual reports

Burden of proof is on claimant and is higher

Claimant must prove reliance

Hochfelder case: requires intent to deceive, as noted in the Act

However, recklessness is often viewed as intentional

Poor judgment is not proof of fraud

Arens ch 6
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 misstatements 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
(2) Different interests may exist between the company preparing the statements and
the persons using the statements.
Because of the risk of material misstatement, an audit should be planned and
performed with an attitude of
(1) objective judgment.
(2) independent integrity.
(3) professional skepticism.
(4) impartial conservatism.
(3) professional skepticism.
The major reason an independent auditor gathers audit evidence is to
(1) form an opinion of the financial statements.
(2) detect fraud.
(3) evaluated management.
(4) assess control risk
(1) form an opinion of the financial statements.
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 group 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
(1) Misappropriation of an asset or group of assets
What assurance does the auditor provide that errors and fraud that are material to
the financial statements will be detected?
(1) Errors: limited, Fraud: negative
(2) Errors: reasonable, Fraud: reasonable
(3) Errors: limited, Fraud: limited
(4) Errors: reasonable, Fraud: limited
(2) Errors: reasonable, Fraud: reasonable
Which of the following statements describes why a properly designed and executed
audit may not detect a material misstatement in the financial statements resulting
from fraud?
(1) Audit procedures that are effective for detecting unintentional misstatements may
be ineffective for an intentional misstatement that is concealed through collusion
(2) An audit is designed to provide reasonable of detecting material errors, but there
is no similar responsibility concerning fraud.
(3) The factors considered in assessing control risk indicated an increased risk of
intentional misstatements, but only a low risk of unintentional misstatements.
(4) The auditor did not consider factors influencing audit risk for account balances
that have effects pervasive to the financial statements taken as a whole.
(1) Audit procedures that are effective for detecting unintentional misstatements may
be ineffective for an intentional misstatement that is concealed through collusion
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An auditor reviews aged accounts receivable to assess likelihood of collection to
support management's assertions about account balances of
(1) existence
(2) completeness
(3) valuation and allocation.
(4) rights and obligations
(4) rights and obligations
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) completeness.
(3) accuracy.
(4) classification
(2) completeness
In the audit of accounts payable, an auditor's procedures will most likely focus
primarily on management's assertion about account balances of
(1) existence
(2) completeness
(3) valuation and allocation.
(4) classification and understandability
(2) completeness
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
(3) the same as the auditor's responsibility regarding material misstatements caused
by error
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.
(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.
While auditing a client's accounting estimates used for their specific elements and
accounts, the auditor has certain responsibilities. Which of the following is not a
required audit procedure that the auditor would perform when evaluating a client's
accounting estimate?
(1) Verify that all material accounting estimates have been developed.
(2) Ensure that the accounting estimates used are properly disclosed in accordance
with GAAP.
(3) Determine if the accounting estimates used are consistent with those of the
client's primary competitors.
(4) Evaluate the degree of uncertainty that is associated with the client's accounting
estimates
(3) Determine if the accounting estimates used are consistent with those of the
client's primary competitors.

YOU

Unit 7 arens
Which of the following types of documentary evidence should the auditor consider to
be the most reliable?
A. Sales invoice issued by the client and supported by a delivery receipt from an
outside trucker
B. Confirmation of an account payable balance mailed by and returned directly to
the auditor
C. A check issued by the company and bearing the payee's endorsement, that is
included with the bank statements mailed directly o the auditor
D. an audit schedule prepared by the client's controller and reviewed by the client's
treasurer
B
Audit evidence can come in different forms with different degrees of persuasiveness.
Which of the following is the least persuasive type of evidence?
A. Vendor invoice
B. Bank statement obtained from client
C. Computations made by auditor
D. Prenumbered sales invoices
D
Which of the following presumptions is correct about the reliability of audit evidence?
A. Info obtained indirectly form outside sources is the most reliable audit evidence.
B. To be reliable, audit evidence should be convincing rather than merely persuasive
C. Reliability of audit evidence refers to the amount of corroborative evidence
obtained
D. Effective internal control provides more assurance about reliability of audit
evidence
D
For all audits of financial statements made in accordance with auditing standards,
the use of analytical procedures is required to some extent: (1): planning stage, (2):
substantive test, (3): completion stage
A. Yes, No, Yes
B. No, ,Yes, No
C. No, Yes, Yes
D. Yes, Yes, Yes
A
Which of the following situations has the best chance of being detected within a CPA
compares the 2016 revenues and expenses with the prior year and investigates all
changes exceeding a fixed percent?
A. Increase in property tax rates not recognized in company's 2016 accrual
B. Cashier began lapping accounts receivable in 2016
C. Worsening economic conditions, the 2016 provisions for uncollectible accounts
was inadequate
D. Company changed its capitalization policy for small tools in 2016
D
Which of the following would not be considered to be an analytical procedure?
A. estimating payroll expense by multiplying the number of employees by the
average hourly wage rate and the total hours worked
B. Projecting error rate by comparing the results of a statistical sample with the
actual population characteristics
C. Computing accounts receivable turnover by dividing credit sales by average net
receivables
D. Developing the expected current year sales based on the sales trend of the prior
five
B
Which of the following is not a primary purpose of audit documentation?
A. coordinate the audit
B. assist in preparation of audit report
C. Support financial statements
D. Provide evidence of audit work performed
C
During an audit engagement, pertinent data are compiled and included in the audit
files. The audit files primarily are considered to be
A. Client-owned record of conclusions reached by auditors who performed the
engagement
B. Evidence supporting financial statements
C. Support for auditor
s representations as to compliance with auditing standards
C. Record to be used as a basis for the following year's engagement
C
Although the quality, type, and content of audit documentation will vary with the
circumstances, audit documentation generally will include the:
A. copies of those client records examined by the auditor during the course of the
engagement
B. Evaluation of the efficiency and competence of the audit staff assistants by the
partner responsible for the audit
C. Auditors comments concerning the efficiency and competence of client's
management personnel
D. Auditing procedures followed and testing performed in obtaining an audit
D
According to the PCAOB, audit standards, audit documentation must be retained for:
A. 1
B. 3
C. 5
D. 7
7 years
Which of the following types of audit evidence is generally the most reliable:
A. bank statement
B. bank confirmation
C. analytical procedures
D. Inquiries made of audit committee
B
An auditor most likely would apply analytical procedures in the overall review stage
of an audit to:
A. identify unusual or unexpected balances that were not previously identified
B. obtain an understanding of high-risk areas
C. evaluate the design and implementation of internal control
D. identify related party transactions that may not have been previously identified
A

Unit 9
which of the following types of documentary evidence should the auditor consider to
be most reliable?
Confirmation of an account payable balance mailed by and returned directly to the
auditor.
which of the following statements concerning audit evidence is true?
The measures of the quantity and quality of audit evidence lies in the auditors
judgment.
audit evidence can come in different forms with different degrees of persuasiveness.
which of the following is the least persuasive type of evidence.
Pre-numbered sales invoices
which of the following presumptions is correct about the reliability of audit evidence?
Effective internal control provides more assurance about the reliability of the audit
evidence.
Which of the following is not a primary purpose of audit documentation?
To support the financial statements.
During an audit engagement, pertinent data are complied and included in the audit
files. the audit files primarily are considered to be
Support for the auditor's representations as to compliance with auditing standards.
Although the quantity, type, and content of audit documentation will vary with the
circumstances, audit documentation generally will include the
auditing procedures followed and the testing performed in obtaining audit evidence.
which of the following is an effective audit planning procedure that helps prevent
misunderstanding and inefficient use of audit personnel?
Arrange a preliminary conference with the client to discuss audit objectives, fees,
timing and other information.
which of the following circumstances would most likely cause an auditor to suspect
that material misstatements exist in the financial statements?
Differences between reconciliations of control accounts and subsidiary records are
not investigated.
which of the following will most likely indicate the existence of related parties?
Borrowing money at a rate significantly below the market rate.
which of the following is least likely to be included in the auditors engagement letter?
Details about the preliminary audit strategy.
When approached to perform and audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the
predecessor may be able to provide the successor with information that will assist
the successor in determining whether.
the engagement should be accepted.
A successor would most likely make specific inquiries of the predecessor auditor
regarding
disagreements with management as to auditing procedures.
Audit report must be titled and the title must include
Independent
The purpose of the introductory paragraph in the standard unqualified report is
to identify the financial statements audited and the dates and time periods covered
by the report.
the scope paragraph of the standard unqualified audit report states that audit is
designed to
obtain reasonable assurance whether the statements are free of material
misstatement.
What are General Accepted Auditing Standards
1. adequate technical training and proficiency
2. independence in mental attitude
3. due professional care.
The addressee of the audit report is
addressed to the company, its stockholders
CPA firms choose which organizational structure
LLC..
what is the intent of standards of field work.
1.proper planing and supervision
2. sufficient understanding of the entity, its environment and its internal control.
3.sufficient appropriate audit evidence
the audit report date indicates
This date indicates the last day of the auditor's responsibility for the review of
significant events that occurred after the date of the financial statements.
What are related party transactions
A related party is as an affiliated company, principal owner of the client company, or
any other party with which the client deals with .
Material related party transactions must be disclosed in the financial statements by
management. Therefore, the auditor must identify related parties and make a
reasonable effort to determine that all material related party transactions have been
properly disclosed in the financial statements.
what is the purpose and content of an engagement letter
An engagement letter is a written contract between the CPA and the client, stating
both parties' understanding of the professional relationship. The letter allocates, the
responsibilities of the engagement for the CPA and the client.
what are major evidence decisions made on an every day audit.
1.Which audit procedures to use
2.What sample size to select for a given procedure.
3.Which items to select from the population.
4.When to perform the procedure
which of the following does not increase the need for sufficient appropriate
evidence?
a decrease in the assessed inherent risk
As lower acceptable levels of both audit risk and materiality are established the
auditor should plan more work on individual accounts to
find smaller misstatements
based on evidence gathered and evaluated, an auditor decides to increase the level
of control risk from that originally planned. to achieve an overall level that is
substantially the same as the planned audit risk level, the auditor
decrease detection risk
which of the following is statements is correct concerning the concept of materiality?
materiality is a matter of professional judgment.
In considering materiality for planning purposes, an auditor believes that
misstatements aggregating $10,000 will have a material effect on an entity's income
statement, but that misstatements will have to aggregate $20,000 to materiality
affect the balance sheet. ordinarily, it is appropriate to design audit procedures that
are expected to detect misstatements that aggregate
$10,000
A client decides no to record an auditors proposed adjustments that collected are
not material and wants the auditor to issue the report based on the
the financial statements are free from material
Some account balances such as those for pensions and leases , are the result of
complex calculations. the susceptibility to material misstatements in these types of
accounts is defined as
inherent risk
As the acceptable level of detection risk decreases, the auditor may do one or more
of the following except change the
assurances provided by audit procedures to a lower level
inherent risk and control differ from planned detection risk in that they
exist independently of the financial statements audit.