Auditing Midterm 1.2

1.

1 point

The Sarbanes-Oxley Act of 2002 has strengthened auditor independence by requiring that management of a public company

Include only independent persons on the board of directors.

Select auditors through audit committees

Report the nature of disagreements with former auditors.

Hire a different CPA firm from the one that performs the audit to perform the company’s tax work.

2.

1 point

Which of the following describes a weakness in accounts payable procedures?

The accounts payable system compares the receiving report to the vendor invoice.

The accounts payable clerk files invoices and supporting documentation after payment.

The accounts payable clerk manually verifies arithmetic on the vendor invoice.

The accounts payable manager issues purchase orders.

3.

1 point

Under the IFAC’s Code of Ethics for Professional Accountants, independence is least likely to be impaired when

The firm charges a client a contingent fee for an audit.

The firm’s overdue fees from an audit client are a small part of the firm’s total fees.

The firm provides financial services that depend for their effectiveness on a material, doubtful accounting treatment.

The firm charges an audit client a contingent fee for nonassurance service.

4.

1 point

Which of the following would not be considered an effective implementation of the monitoring component of COSO's updated Internal Control- Integrated Framework?

Management reviews current economic performance against expectations and investigates to determine causes of significant deviations from expectations.

Internal audit periodically performs an evaluation of internal controls that have been documented and tested in prior years.

The company builds in edit checks to determine whether all purchases are made from authorized vendors.

The company implements software that captures all instances in which the underlying program is designed to capture processed transactions that exceed company-authorized limits.

5.

1 point

According to the profession’s ethical standards, an auditor is considered independent in which of the following instances?

The auditor is the officially appointed stock transfer agent of a client.

The client is the only tenant in a commercial building owned by the auditor.

The auditor’s checking account, which is fully insured by a federal agency, is held a client financial institution.

The client sponsors an employee benefit plan in which the auditor participates.

6.

1 point

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Financial statement assertions.

Timing of the audit.

Costs and benefits of gathering evidence.

Financial statements as a whole.

7.

1 point

Audit plans should be designed so that

The auditor can make constructive suggestions to management.

The audit evidence gathered supports the auditor’s conclusions.

Most of the required procedures can be performed as interim work.

The risks of material misstatement are assessed at a sufficiently low level.

8.

1 point

According to the Sarbanes-Oxley Act of 2002, which of the following non-audit services can be provided by a registered public accounting firm to the client contemporaneously with the audit when preapproval is granted by audit committee action?

Actuarial services related to the audit.

Advice on financial information system design.

Internal audit outsourcing services.

Tax services.

9.

1 point

To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client’s consent?

Any surviving partner(s) on the death of a partner.

The FASB.

The IRS.

A CPA before purchasing partnership in the firm.

10.

1 point

Before accepting an audit engagement, an auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

Understanding as to the reasons for the change of auditors.

Evaluation of all matters of continuing accounting significance.

Awareness of the consistency in the application of generally accepted accounting principles between periods.

Opinion of any subsequent events occurring since the predecessor’s audit report was issued.

11.

1 point

According to SEC independence regulations,

The issuer must disclose only those fees paid to the accountant for audit work.

All audit partners must rotate every 5 years.

No partner may sell nonaudit services to the client during the audit.

Preapproval of accountants’ services may be in accord with detailed policies and procedures rather than explicit.

12.

1 point

Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?

Making inquiries of client’s management.

Reading the minutes of the board of directors’ meetings.

Reviewing an internal control questionnaire.

Performing tests of details of transactions.

13.

1 point

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

A professional skepticism approach.

A sufficiency of safeguards approach.

A risk-based approach.

An avoidance approach.

14.

1 point

Which of the following is the most serious password security problem?

Users have accounts on several systems with different passwords.

Users are assigned password when accounts are created, but they do not change them.

Users copy their passwords on note paper, which is kept in their wallets.

Users select passwords that are not listed in any online dictionary.

15.

1 point

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

A high turnover of senior management.

A strained relationship between management and the predecessor auditor

A lack of independent checks

An inability to generate cash flow from operations.

16.

1 point

A CPA is permitted to disclose confidential client information without the consent of the client to
I. Another CPA firm if the information concerns suspected tax return irregularities
II. A state CPA society voluntary peer review board

Both I and II

Neither I nor II

I only

II only.

17.

1 point

Analytical procedures used to form an overall audit conclusion generally include

Performing tests of transactions to corroborate management’s financial statement assertions.

Gathering evidence concerning account balances that have not changed from the prior year.

Retesting controls that appeared to be ineffective during the assessment of control risk.

Considering unusual or unexpected account balances that were not previously identified.

18.

1 point

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?

The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.

An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material misstatement due to fraud.

The auditor didn’t consider factors influencing audit risk for account balances that have effects pervasive to financial statements taken as a whole.

Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

19.

1 point

An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support of managements financial statement assertion of

Occurrence

Valuation

Completeness

Rights and Obligations

20.

1 point

According to the profession’s ethical standards, which of the following events may justify a departure from an established accounting principle?
New Legislation; Evolution of a New form of Business Transaction

No; Yes

Yes; No

Yes; Yes

No; No

21.

1 point

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

A CPA firm indicates on its letterhead that other CPA firms are correspondents rather than members of an association.

Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA’s employer.

A member sells a newsletter bearing his or her name.

Compiling the CPA’s employer’s financial statements and making reference to the CPA’s lack of independence.

22.

1 point

In an audit of financial statements, an auditor’s primary consideration regarding an internal control is whether the control

Provides adequate safeguards over access to assets.

Reflects management’s philosophy and operating style.

Relates to operational objectives.

Affects management’s financial statement assertions.

23.

1 point

When obtaining an understanding of an entity’s internal control, an auditor should concentrate on their substance rather than their form because

The controls may be so inappropriate that no reliance is expected by the auditor.

The controls may be operating effectively but may not be documented.

Management may establish appropriate controls but not enforce compliance with them.

Management may implement controls whose costs exceed their benefits.

24.

1 point

As part of understanding internal control relevant to the audit of a non issue, an auditor does not need to

Obtain knowledge about the operating effectiveness of internal control.

Consider factors that affect the risks of material misstatement.

Identify the risks of material misstatement.

Determine whether controls have been implemented.

25.

1 point

Which of the following is the most accurate statement related to the monitoring component of COSO's updated Internal Control-Integrated Framework?

Monitoring includes automated edit checks to determine whether all purchases are made from authorized vendors.

Monitoring is a process that is relevant only to the control activities component of COSO's updated Internal Control-Integrated Framework.

Monitoring is a process that provides feedback on the effectiveness of each component of internal control.

Separate evaluations are more timely than ongoing evaluations in identifying control deficiencies.

26.

1 point

While performing an audit of the financial statements of a company for the year ended December 31, Year 1, the auditor notes that the company’s sales increased substantially in December, Year 1, with a corresponding decrease in January, Year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor’s initial indication about the potential for fraud in sales revenue?

There is a broad indication of misappropriation of assets.

There is an indication of embezzling receipts.

There is a broad indication of financial reporting fraud.

There is an indication of theft of the entity’s assets.

27.

1 point

Which of the following would be considered an effective implementation of the information and communication component of COSO's updated Internal Control-Integrated Framework?

The organization has a whistle-blower function that allows parties internal and external to the organization to communicate concerns about possible inappropriate action in the organization's operations.

All of the above

The organization has a robust process for assessing risks internal and external to the organization.

The organization builds in edit checks to determine whether all purchases are made from authorized vendors.

The organization has one-way communication with parties external to the organization.

28.

1 point

In a retail cash sales environment, which of the following controls is often absent?

Competent personnel.

Separation of functions.

Asset access limited to authorized personnel.

Supervision.

29.

1 point

Which of the following statements is (are) true regarding a CPA employees of a CPA firm taking copies of information contained in client files when a CPA leaves the firm?
I. A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client.
II. A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise.

Both I and II.

I only.

Neither I nor II.

II only.

30.

1 point

What is the primary objective of the fraud brainstorming session?

Determine audit risk and materiality.

Determine whether the planned procedures in the audit plan will satisfy the general audit objectives.

Assess the potential for material misstatement due to fraud.

Identify whether analytical procedures should be applied to the revenue accounts.

31.

1 point

A violation of the profession’s ethical standards most likely would have occurred when a CPA

Expressed an unmodified opinion on the current year’s financial statements when fees for the prior year’s audit were unpaid.

Recommended a controller’s position description with candidate specifications to an audit client.

Made arrangements with a financial institution to collect notes issued by a client in payment of fees due for the current year’s audit.

Purchased a CPA firm’s practice of monthly write-ups for a percentage of fees to be received over a 3-year period.

32.

1 point

Which of the following are considered control environment elements?
Detection Risk; Commitment to Competence

Yes; Yes

No; Yes

No; No

Yes; No

33.

1 point

According to the PCAOB, an accounting firm is most likely to be independent of its audit client if

The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed.

The firm’s audit professional implemented the client’s internal control over financial reporting.

A reasonable investor would conclude that it is not objective and impartial.

The firm’s audit professional is responsible for internal control over financial reporting.

34.

1 point

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

Contingent fees

Independence

Commissions

Integrity and objectivity

35.

1 point

The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

Knowledge necessary for audit planning.

A basis for modifying tests of controls.

Evidence to use in assessing inherent risk.

An evaluation of the consistency of application of management’s policies.

36.

1 point

Which of the following best describes an auditor’s responsibility to detect errors and fraud?

An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.

An auditor is responsible to detect material errors, but has no responsibility to detect fraud that is concealed through employee collusion or management override of internal control.

An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee.

37.

1 point

In a well-designed internal control system, the same employee may be permitted to

Mail signed checks and also cancel supporting documents.

Approve vouchers for payment and also have access to unused purchase orders.

Prepare receiving reports and also approve purchase orders.

Mail signed checks and also prepare bank reconciliations.

38.

1 point

According to the ethical standards of the profession, which of the following acts is generally prohibited?

Purchasing a product from a third party and reselling it to a client.

Accepting a commission for recommending a product to a client.

Accepting engagements obtained through the efforts of third parties.

Writing a financial management newsletter promoted and sold by a publishing company.

39.

1 point

A basic premise underlying analytical procedures is that

Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

These procedures cannot replace tests of balances and transactions.

Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements.

The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.

40.

1 point

During the initial planning phase of an audit, a CPA most likely would

Discuss the timing of the audit procedures with the client’s management.

Inquire of the client’s attorney as to whether any unrecorded claims are probable of assertion.

Evaluate the reasonableness of the client’s accounting estimates.

Identify specific internal control activities that are likely to prevent fraud.

41.

1 point

Because of the risk of material misstatement due to fraud, an audit of financial statement in accordance with generally accepted auditing standards should be planned an performed with an attitude of

Objective judgment

Integrity.

Professional skepticism.

Impartial conservatism

42.

1 point

Which of the following would most likely be the result of ineffective internal control in the revenue cycle?

Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables.

Fraud in recording transactions in the subsidiary accounts could result in a delay in goods shipped.

Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.

Omission of shipping documents could go undetected, causing an understatement of inventory.

43.

1 point

According to the PCAOB, , an accounting firm’s independence is least likely to be impaired if the firm

Provides a service to the audit client for a contingent fee.

Has an audit client that employees a former firm professional.

Provides tax services to a person in a financial reporting oversight role at the audit client.

Receives a commission from the audit client.

44.

1 point

Which one of the following components of internal control over financial reporting sets the tone for the organization?

Control risk assessment.

Monitoring.

Information and Communication.

Control environment.

45.

1 point

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

A CPA in public practice providing tax and management advisory services.

A CPA not in public practice.

A CPA in public practice providing auditing and other attestation services.

All CPAs.

46.

1 point

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Objectivity of audit committee members.

Turnover of personnel in the accounting department.

Management’s plans to repurchase stock.

Square footage of selling space.

47.

1 point

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

Decision whether to use positive or negative or negative confirmations of accounts receivable.

Effects of a direct financial interest in the client on the CPA’s independence.

Discovery of weaknesses in a client’s internal control.

Adequacy of disclosure of a client’s illegal act.

48.

1 point

According to the standards of the profession, which of the following activities may be required in exercising due professional care?
Consulting with experts; Obtaining Specialty Accreditation

No; Yes

Yes; No

No; No

Yes; Yes

49.

1 point

Which of the following is not part of management's fraud risk assessment process?

The assessment considers ways the fraud could occur.

Fraud risk assessments serve as an important basis for determining the control activities needed to mitigate fraud risks.

The assessment considers the role of the external auditor in preventing fraud.

The assessment considers pressures that might lead to fraud in the financial statements.

50.

1 point

Which of the following controls most likely could prevent computer personnel from modifying programs to bypass programmed controls?

Physical security of computer facilities in limiting access to computer equipment.

Participation of user department personnel in designing and approving new systems.

Periodic Management review of computer utilization reports and systems documentation.

Separation of duties for computer programming and computer operations.