Auditing Midterm 1

1.

1 point

Which of the following statements related to rights theory is false?

The highest order rights include the rights to life, autonomy, and human dignity.

The third order rights include social rights, such as the right to higher education, to good health care, and to earn a living.

The second order rights include rights granted by the government, such as civil rights and legal rights.

The fourth order rights include one's nonessential interests or personal tastes.

2.

1 point

Segregation of duties is best achieved in which of the following scenarios?

The internal audit department performs an independent test of transactions throughout the year and reports any errors to departmental managers.

The payroll department cannot add employees to the payroll or change pay rates without the explicit authorization of the personnel department.

Employees perform only one job, even though they might have access to other records.

The person responsible for reconciling the bank account is responsible for cash disbursements but not for cash receipts.

3.

1 point

Which of the following statements is correct regarding the setting of auditing standards in the US?

The AICPA is responsible for setting auditing standards for audits of nonpublic entities.

The PCAOB is responsible for setting auditing standards for audits of public companies.

The AICPA is responsible for setting auditing standards of both public and nonpublic entities

Both A and B are correct.

4.

1 point

Which of the following parties are involved in preparing and auditing financial statements?

Management

Audit Committee

Internal Audit Function

External Auditor

All of the Above

5.

1 point

Which of the following statements is accurate regarding the Center for Audit Quality's 2010 paper on deterring and detecting fraud in financial reporting?

It illustrates that communication among those involved in the financial reporting process is critical.

It recognizes that preventing and detecting fraud is the job of the external auditor alone.

It notes that an effective fraud risk management program can be expected to prevent virtually all frauds, especially those perpetrated by top management.

None of the above.

All of the above.

6.

1 point

Which of the following is not one of the management assertions?

Existence.

They are all management assertions.

Rights and obligations

Valuation

Completeness.

7.

1 point

Assuming that an auditor is physically examining a client's equipment, what type of audit procedure is the auditor performing?

Inspection of assets.

Observation.

Inspection of documentation.

External confirmation.

8.

1 point

Rule 201 of the AICPA Rules of conduct requires the auditor to do which of the following?

All of the above.

Undertake only those professional services that the auditor or audit firm can reasonably expect to be completed with professional competence.

Exercise due professional care in the performance of professional services.

Adequately plan and supervise the performance of professional services.

Obtain sufficient relevant data to afford a reasonable basis for conclusions in relation to professional services performed.

9.

1 point

Which of the following types of transactions did WorldCom management engage in as a part of that company's fraudulent financial reporting scheme?

All of the above.

None of the above.

Recorded bartered transactions as sales.

Used restructuring reserves from prior acquisitions to decrease expenses.

Capitalized line costs rather than expensing them.

10.

1 point

Which of the following statements is true about teh audit opinion formulation process presented in this chapter?

All of the above are true statements regarding the audit opinion formulation process.

The audit opinion formulation process is significantly different for the financial statement only audit and the integrated audit.

The audit opinion formulation process is based on the premise that management has responsibility to prepare the financial statements and maintain internal control over financial reporting.

The audit opinion formulation process is comprised of seven phases.

11.

1 point

An audit client can sue the auditor under contract law for which of the following?

All of the above.

Breach of contract.

Negligence.

Gross Negligence.

Fraud.

12.

1 point

Which of the following statements represent the appropriate directional relationships between the concepts of inherent risk, control risk, audit risk, and detection risk?

As control risk goes up, detection risk goes up.

As control risk goes up, inherent risk goes down.

As inherent risk goes up, audit risk goes up.

As inherent risk goes up, audit risk goes down.

13.

1 point

Audit committee activities and responsibilities include which of the following?

All of the above.

Reviewing management performance and determining compensation.

Approving corporate strategy.

None of the above.

Management is aggressive in its application of accounting rules.

Selecting the external audit firm.

14.

1 point

Inherent risk is present in organizations at which of the following levels?

All of the above.

At the assertion level.

At the financial statement level in terms of business risk relating to operations.

At the financial statement level in terms of financial reporting.

15.

1 point

Which one of the following best describes the attest process?

Assembling and filing tax returns and related supplemental information

Ensuring that the books and records are completely accurate

Gathering evidence about specific and known assertions

Assisting management in the successful operations of the company

16.

1 point

Which of the following best represents fraudulent financial reporting?

The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

The transfer agent issues 40,000 shares of the company's stock to a friend without authorization of the board of directors

The controller of the company inappropriately records January sales in December so that year-end results will meet analysts' expectations.

17.

1 point

Which management assertion addresses whether the components of the financial statements are properly classified, described, and disclosed?

Rights and obligations

Existence

Completeness

None of the above address whether the components of the financial statements are properly classified, described, and disclosed.

Presentation and disclosure

18.

1 point

Which of the following factors is not a driver of audit quality as discussed by the FRC?

Audit firm culture

Reliability and usefulness of audit reporting

Skills and personal qualities of client management

Factors outside the control of auditors

19.

1 point

Which of the following statements is false regarding brainstorming?

Participants are encouraged to provide more ideas rather than fewer, with the intent to generate a variety of possible risk assessment scenarios that can be explored during the conduct of the audit.

Brainstorming is a group discussion designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in an organization.

All of the above are true.

To facilitate the generation and evaluation of quality ideas during the brainstorming session, a typical practice during brainstorming is to invite criticism and value judgments about ideas generated.

Brainstorming predominantly occurs during the early planning phases of the audit.

20.

1 point

Which of the following is included as part of the AICPA's principles governing an audit?

An audit has inherent limitations such that an auditor cannot provide absolute assurance about whether the financial statements are free of misstatement.

Auditors need to obtain a high level of assurance that the financial statements are free of all misstatements.

Auditors need to maintain professional skepticism only on audits where there is a high risk of material misstatement.

All of the above are included as part of the AICPA's principles of governing an audit.

21.

1 point

Which of the following statements is correct regarding the Public Company Accounting Oversight Board (PCAOB)?

All of the above.

None of the above.

The PCAOB is a nonprofit corporation, not an agency of the US government.

The PCAOB will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to the interests of investors and the public.

The PCAOB has the authority to set standards related to public company audit reports and to conduct inspections of registered external audit firms.

22.

1 point

Which of the following statements is true regarding the concept of control risk?

All of the above are true.

Control risk relates to the susceptibility of an assertion to a misstatement, due to either error or fraud, before consideration of any related controls.

Some organizations have zero control risk because they have made a significant commitment to the effective design and operation of controls.

When control risk is high, the auditor is concerned that a misstatement may not be prevented, or that if a misstatement exists in the organization's financial statements that it will not be detected, and therefore corrected by management.

23.

1 point

Assume for Client X that inherent risk is assessed at 30%, control risk is assessed at 100%, audit risk is 5%, and detection risk is therefore determined to be 17%. Assume for Client Z that inherent risk is assessed at 100%, control risk is assessed 100%, audit risk is 1%, and detection risk is therefore determined to be 1%. What is true about the amount of audit work that will need to be conducted?

Client Z will require more audit work than Client X.

Client X will require more audit work than Client Z.

The auditor will most likely resign from the Client Z audit because the inherent risk and control risk are so high.

Both clients will require a similar amount of audit work.

24.

1 point

Assume that the auditor sets audit risk at a low level, equal to 1%. What is the appropriate interpretation of this level of audit risk?

The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated.

The auditor is 99% confident that the audit procedures will detect a material misstatement.

The auditor is 99% confident that the audit opinion is correct.

The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement.

25.

1 point

In terms of technical knowledge and expertise, which of the following should external auditors do?

Understand accounting and auditing authoritative literature

Develop industry and client specific knowledge

Develop and apply computer skills

All of the above

None of the above

26.

1 point

The broadest level of services is provided by

Attestations

Assurance services

Audits

Operational audits

27.

1 point

Which of the following are the responsibilities of the external auditor in auditing financial statements?

Maintaining internal controls and preparing financial reports

Providing internal assurance on internal control and financial reports

Providing internal oversight of the reporting process

All of the above

None of the above

28.

1 point

The quality of an organization's internal controls affects which of the following?

All of the above.

Reliability of financial data.

Ability of management to make good decisions.

Ability of the organization to remain in business.

Approach used by the auditor in auditing the financial statements.

29.

1 point

The shareholders of a bank sue Karen Frank, CPA, for malpractice due to an audit failure that preceded the bank's financial failure. The jury determines that Frank is 40 percent at fault and that management is 60 percent at fault. The bank has no financial resources, nor does its management. Under joint and several liability, Frank will pay what percentage of the damages?

40

100

50

None of the above.

30.

1 point

What is the primary difference between fraud and errors in financial statement reporting?

The materiality of the misstatement

The intent to decieve

The level of management involved

The type of transaction effected

31.

1 point

Which of the following is a common rationalization for fraudulent financial reporting?

This is a one-time transaction and it will allow the company to get through the current financial crisis, but we'll never do it again.

We are only borrowing the money, we will pay it back next year.

Executives at other companies are getting paid more than we are, so we deserve the money.

The accounting rules don't make sense for our company, and they make our financial results look weaker than necessary, so we have a good reason to record revenue using a non-GAAP method.

A and D.

32.

1 point

Which of the following statements is true regarding analytical techniques?

Ratio analysis takes advantage of economic relationships between two or more accounts.

Ratio and trend analysis are generally carried out through a comparison of client data with expectations based on industry data, prior-period data, and expectations developed from industry trends, client budgets, and so on.

Developing expectations is the first step in performing analytical procedures.

All of the above are true.

33.

1 point

Utilitarianism does not require which of the following when a person considers how to resolve an ethical dilemma?

Identification of the potential problem and courses of action.

Identification of the potential direct or indirect impact of actions on each affected party who has an interest in the outcome.

Identification of the motivation of the person facing the ethical dilemma.

Assessment of the desirability of each action for each affected party.

34.

1 point

Which of the following creates an opportunity for fraud to be committed in an organization?

Commitments tied to debt covenants

Poor internal control

Management is aggressive in its application of accounting rules

Management demands financial success

35.

1 point

Which of the following characteristics would lead the auditor to assess inherent risk relating to financial reporting at the higher level?

The company has a history of exactly meeting analyst estimates.

The account balance represents an asset that is relatively easily stolen.

The controls over the account balance are weak.

The company is in an industry that is mature and declining.

36.

1 point

Which of the following organizations is the primary organization that performs inspections of registered external audit firms that audit public companies?

FASB

PCAOB

AICPA

CAQ

37.

1 point

Which one of the following represents a control deficiency?

A control that operates as designed.

A control that provides reasonable, but not absolute assurance, about the reliability of financial reporting.

A missing control that is required for achieving objectives.

An immaterial individual misstatement in internal control

38.

1 point

Which of the following is not a reason that audit firms continue to experience high levels of litigation?

Contingent fee compensation for audit firms.

Class action lawsuits.

A misunderstanding by some users that an unqualified audit opinion represents an insurance policy against investment losses.

Joint and several liability statutes.

39.

1 point

Which of the following is a reason that the auditor uses an accounting cycle approach when performing an audit?

The accounting cycle approach allows the auditor to focus exclusively on either the balance sheet or income statement.

The auditor needs to be able to provide an opinion related to each accounting cycle.

The accounting cycles provide a convenient way to break the audit up into manageable pieces.

COSO internal control components are based on the accounting cycles.

40.

1 point

The auditor discovers that there is a key control deficiency over sales contracts and that some contracts near the end of the are not properly reviewed by management. Which of the following would be the best way for the auditor to respond to the control deficiency identified?

Expand the testing over the control with a larger sample from the last quarter of the year.

Wait to assess whether the deficiency is a material weakness or significant deficiency based on the actual number of errors or misstatements found in the related account balances.

All of the above.

Expand the sample size for substantive testing and review of contracts during the latter part of the year to determine if revenue is appropriately identified.

41.

1 point

Strict client acceptance/continuance guidelines should be established by external auditors to screen out which of the following type of clients?

Those that are in financial and/or organizational difficulty

Those that constitute a disproportionate percentage of the audit firm's total practice

Those that are disreputable

Those that offer an unreasonably low fee for the auditor's service

All of the above

42.

1 point

What are the components of internal control per COSO's updated Internal Control Framework?

Risk assessment, control structure, backup facilities, responsibility accounting, and natural laws.

Organizational structure, management philosophy, planning, risk assessment, and control activities.

Legal environment of the firm, management philosophy, organizational structure, control activities, and control assessment.

Control environment, risk assessment, control activities, information and communication, and monitoring.

43.

1 point

The following describes a situation in which an auditor has to determine the most appropriate standards to follow. The audited company is headquartered in Paris but has substantial operations with the United States(60% of all operations) and has securities registered with the SEC and is traded on the NYSE. The company uses International Financial Reporting Standards (IFRS) for its accounting framework. What would be the most appropriate set of auditing standards to follow?

PCAOB

Only the AICPA standards would be appropriate

Either IAASB or AICPA

Either PCAOB or AICPA

44.

1 point

Which of the following factors does not create a demand for external audit services?

Potential bias by management in providing information

Requirement of the Center for Audit Quality

Complexity of the accounting processing systems

Remoteness between a user and the organization

45.

1 point

Which of the following statements are true?

Unless an independent audit can provide assurance that financial information has not been materially misstated because of fraud, it has little if any value to society.

Repeated revelations of accounting scandals and audit failures related to undetected frauds have seriously damaged public confidence in external auditors.

A strong ethical tone at the top of an organization that permeates corporate culture is essential in preventing fraud.

All of the above.

None of the above.

46.

1 point

Which of the following statements is true regarding the concept of materiality?

Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it possible that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

A fact is material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Both a and c are correct.

Both b and c are correct.

47.

1 point

The Sarbanes-Oxley Act enacted which of the following provisions as a response to a growing number of frauds?

The PCAOB was established, and it has the power to conduct inspections of audits for external audit firms that audit more than 100 publicly traded companies in a given year.

All of the above.

None of the above.

Annual reports must state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and management must have the company's internal audit function attest to the accuracy of the annual reports.

The lead audit partner and reviewing partner must rotate off the audit of a publicly traded company at least every 10 years.

48.

1 point

Which of the following is not required as part of the field-work standards?

All of the above are required by fieldwork standards.

An audit should be properly planned and supervised.

Auditors should develop an understanding of the client's controls.

Auditors should obtain sufficient appropriate audit evidence by performing audit procedures to provide a reasonable basis for the audit opinion being provided.

49.

1 point

Which of the following expectations can users of the audit report reasonably expect with regards to the audited financial statements?

The financial statements include all financial disclosures desired by users.

All of the above are reasonable expectations.

The financial statements are free from all errors.

None of the above are reasonable expectations.

The financial statements are presented fairly according to the substance of GAAP.

50.

1 point

Which of the following statements is false regarding the nature, timing, and extent of risk responses?

When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year end, on an unannounced basis, and includes some element of unpredictability in the timing of procedures.

The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance.

The extent of risk response refers to the sufficiency of evidence that is necessary given the client's assessed risks, materiality, and the acceptable level of audit risk .

The timing of risk response refers to when audit procedures are conducted and whether those procedures are conducted at announced or predicted times.