Exam Questions - Audit Profession & Planning - Part II

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Exam Questions - Audit Profession & Planning - Part II
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2012-07-09 16:39:22
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Exam Questions - Audit Profession & Planning - Part II
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  1. When a CPA is approached to perform an 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:
    A) Whether to accept the engagement. 
    B) Whether the predecessor's opinion on internal control of the company has been unqualified. 
    C) Whether the company follows the policy of rotating its auditors.
    D) Whether the predecessor's work should be relied upon. 
    A) Whether to accept the engagement. 
    (this multiple choice question has been scrambled)
  2. The primary reason for the second communication with the predecessor auditors subsequent to acceptance of the client is:
    A) To discuss and evaluate management's integrity. 
    B) To discuss disagreements that the predecessor may have had with management communications with the audit committee. 
    C) To understand the reasons for the change of auditors. 
    D) To review the working papers related to the opening balances and the consistency of the application of generally accepted accounting principles.
    D) To review the working papers related to the opening balances and the consistency of the application of generally accepted accounting principles.
    (this multiple choice question has been scrambled)
  3. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
    A) Disagreement with management as to auditing procedures.
    B) The uncertainty inherent in applying sampling procedures. 
    C) Specialized accounting principles of the client's industry. 
    D) The competence of the client's internal audit staff. 
    A) Disagreement with management as to auditing procedures.
    (this multiple choice question has been scrambled)
  4. Which of the following matters is generally included in an auditor's engagement letter? 
    A) Management's responsibility for the entity's compliance with laws and regulations. 
    B) The factors to be considered in setting preliminary judgments about materiality. 
    C) Management and the board's joint liability for illegal acts committed by their employees. 
    D) The auditor's responsibility to search for significant internal control deficiencies.
    A) Management's responsibility for the entity's compliance with laws and regulations. 
    (this multiple choice question has been scrambled)
  5. Arrangements concerning which of the following are least likely to be included in an engagement letter? 
    A) CPA investment in the client's securities. 
    B) A predecessor auditor. 
    C) Fees and billing. 
    D) Other services to be performed in addition to the audit.
    A) CPA investment in the client's securities. 
    (this multiple choice question has been scrambled)
  6. Which of the following statements would least likely appear in the auditor's engagement letter? 
    A) During the course of the audit, we may observe opportunities for economies of scale or improved controls over your operations. 
    B) After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
    C) Fees for our services are based on our regular per diem rates, plus travel and other out-of-the-pocket expenses. 
    D) Our engagement is subject to the risk that material misstatements or fraud, if they exist, will not be detected. 
    B) After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
    (this multiple choice question has been scrambled)
  7. One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants Corp. case was that auditors were encouraged to begin using:
    A) Letters of representation 
    B) Confirmation letters 
    C) Letters of intent. 
    D) Engagement letters.
    D) Engagement letters.
    (this multiple choice question has been scrambled)
  8. A common way for a CPA firm to demonstrate its lack of duty to perform a service is by use of a(n): 
    A) Management representation letter.
    B) Confirmation letter. 
    C) Audit contract, or engagement letter. 
    D) Expert witness' testimony. 
    C) Audit contract, or engagement letter. 
    (this multiple choice question has been scrambled)
  9. The engagement letter should include all of the following except 
    A) Specialized reports to be provided. 
    B) Auditor is not responsible for the detection of fraud. 
    C) Discussion of fees.
    D) The period covered. 
    B) Auditor is not responsible for the detection of fraud. 
    (this multiple choice question has been scrambled)
  10. Jackson, CPA has been offered the job of auditing Benton and Lutz, a manufacturing company. After proper consideration was made, Jackson has decided to accept the engagement. In what form should the understanding that has been reached between the two parties be documented? 
    A) A contract should be written by the auditor and signed by both parties. 
    B) An engagement letter should be written by the auditor and furnished to the client. 
    C) A contract should be written by the client and signed by both parties. 
    D) Written documentation should be created by the auditor and furnished to the client.
    D) Written documentation should be created by the auditor and furnished to the client.
    (this multiple choice question has been scrambled)
  11. Risk assessment involves considering threats to the organization’s objectives in the areas of 
    A) Compliance with laws and regulations, operations, and performance.
    B) Marketing, financial reporting, and compliance. 
    C) Operations, financial reporting, and compliance with laws and regulations. 
    D) Financial reporting, performance, and marketing. 
    C) Operations, financial reporting, and compliance with laws and regulations. 
    (this multiple choice question has been scrambled)
  12. To obtain an understanding of the entity and its environment, including its internal control, the auditor should perform each of the following risk assessment procedures except: 
    A) Sampling for variables. 
    B) Inquiries of management and others within the entity. 
    C) Observation and inspection. 
    D) Analytical procedures.
    A) Sampling for variables. 
    (this multiple choice question has been scrambled)
  13. In accordance with AU Section 150, the second standard of audit fieldwork is expanded from "internal control" to: 
    A) The entity and management assertions, including internal control. 
    B) The entity and its business model, including internal control. 
    C) The entity and its environment, including its internal control. 
    D) The entity, including internal control.
    C) The entity and its environment, including its internal control. 
    (this multiple choice question has been scrambled)
  14. Which of the following is the basic fundamental concept that underlies the audit process? 
    A) Materiality. 
    B) Risk. 
    C) Skepticism. 
    D) All of the above.
    B) Risk. 
    (this multiple choice question has been scrambled)
  15. Risk assessment for financial reporting is management’s process for identifying, analyzing, and responding to risks relevant to the preparation of financial statements in conformity with:
    A) PCAOB Auditing Standards. 
    B) Generally Accepted Accounting Standards. 
    C) Generally Accepted Auditing Standards 
    D) Generally Accepted Accounting Principles.
    D) Generally Accepted Accounting Principles.
    (this multiple choice question has been scrambled)
  16. An auditor is assessing the level of inherent risk in an audit engagement and finds that it is higher than expected. Which of the following results is most likely? 
    A) The desired level of control risk should be reduced.
    B) The acceptable level of audit risk should be raised. 
    C) The desired level of detection risk should be reduced. 
    D) The acceptable level of audit risk should be lowered. 
    C) The desired level of detection risk should be reduced.
    (this multiple choice question has been scrambled)
  17. The auditor seeks to obtain sufficient appropriate audit evidence by performing audit procedures. This work is designed to provide what type of basis for the opinion regarding the financial statements under audit? 
    A) Correct. 
    B) Accurate. 
    C) Justifiable.
    D) Reasonable. 
    D) Reasonable. 
    (this multiple choice question has been scrambled)
  18. Risk affecting the preparation of financial statements can arise or change due to circumstances such as: 
    A) Corporate restructurings. 
    B) Rapid growth. 
    C) Ownership and rights. 
    D) All of the above.
    D) All of the above.
  19. The auditor should use risk assessment to determine: 
    A) The nature, timing, and extent of further audit procedures to be performed.
    B) The type of opinion to issue in the audit report. 
    C) The size of the audit team. 
    D) Whether to accept an engagement. 
    A) The nature, timing, and extent of further audit procedures to be performed.
    (this multiple choice question has been scrambled)
  20. As a result of the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board (PCAOB) has been created. Which of the following is not true? 
    A) The PCAOB is a government agency. 
    B) The PCAOB comes under the oversight and enforcement authority of the SEC. 
    C) All public accounting firms that participate in the preparation of an audit report for a company that issues securities must register with the PCAOB.
    D) The PCAOB is funded by fees charged to all publicly traded companies. 
    A) The PCAOB is a government agency. 
    (this multiple choice question has been scrambled)
  21. In registering with the Public Company Accounting Oversight Board (PCAOB), a CPA firm must provide significant information. Which of the following is not a required disclosure? 
    A) A list of all accountants participating in the audit of each client that is an issuer of securities. 
    B) Information about any criminal actions pending against the firm. 
    C) A list of all audit clients.
    D) The annual fees from each client that is an issuer of securities, divided between audit and non-audit services. 
    C) A list of all audit clients.
    (this multiple choice question has been scrambled)
  22. According to the standards of the Public Company Accounting Oversight Board (PCAOB), the management of a company that issues securities must accept responsibility for the effectiveness of the company’s internal control over its financial reporting. Which of the following is not also a responsibility of the management? 
    A) Management must evaluate the actual effectiveness of internal control over the financial reporting process. 
    B) Management must provide a written plan each year for updating the internal control over the financial reporting process. 
    C) Managment must support its evaluation of internal control over the financial reporting with sufficient documented evidence. 
    D) Management must prepare a written assessment of internal control over the financial reporting process.
    B) Management must provide a written plan each year for updating the internal control over the financial reporting process. 
    (this multiple choice question has been scrambled)
  23. According to the standards of the Public Company Accounting Oversight Board (PCAOB), the auditor of a company that issues securities must audit the company’s internal control as well as its financial statements. Which of the following statements is true about the reports that result from these audits? 
    A) The two reports must be separate. 
    B) The two reports must be combined. 
    C) The report on internal control must be issued at least 45 days before the report on the financial statements.
    D) The two reports can be combined or can be separate. 
    D) The two reports can be combined or can be separate. 
    (this multiple choice question has been scrambled)
  24. A CPA firm is issuing separate reports based on audits of an issuing company’s internal control over financial reporting and its financial statements. Which of the following statements is true according to the standards of the Public Company Accounting Oversight Board (PCAOB)? 
    A) The report on internal control has to be dated as of the balance sheet date. 
    B) Both reports have the same date which is normally the last day of audit fieldwork. 
    C) The reports might have the same date but they will often have different dates.
    D) The report on internal control has to be dated at least 21 days prior to the date of the report on the financial statements. 
    B) Both reports have the same date which is normally the last day of audit fieldwork. 
    (this multiple choice question has been scrambled)
  25. An independent auditor is performing an audit of a company’s internal control in connection with its financial reporting under the standards of the Public Company Accounting Oversight Board (PCAOB). A control deficiency has been uncovered. What are the two possible types of control deficiencies? 
    A) Design and operations. 
    B) General and application.
    C) Current and noncurrent. 
    D) Computer and manual. 
    A) Design and operations. 
    (this multiple choice question has been scrambled)
  26. According to the standards of the Public Company Accounting Oversight Board (PCAOB), the independent auditor must audit the internal control over the financial reporting of any company that issues securities. Assume that the company provides a written assessment that internal control is effective. Assume also that the auditor uncovers a material weakness in internal control that cannot be rectified before the end of the audit work. What action should be taken by the auditor? 
    A) The auditor should resign from the engagement. 
    B) The auditor should provide a disclaimer. 
    C) The auditor should modify the report being given. 
    D) The auditor should issue an adverse opinion on the effectiveness of internal control.
    D) The auditor should issue an adverse opinion on the effectiveness of internal control.
    (this multiple choice question has been scrambled)
  27. According to the standards of the Public Company Accounting Oversight Board (PCAOB), what is the general definition of a control deficiency? 
    A) An internal control system that is not being monitored properly. 
    B) An internal control system that simply is not operating as intended. 
    C) A situation where the design or operation of an internal control does not allow employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. 
    D) A situation where an inherent limitation has been noted but no corrective action has been taken by the company or its officials.
    C) A situation where the design or operation of an internal control does not allow employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. 
    (this multiple choice question has been scrambled)
  28. For how long does the Sarbanes-Oxley Act require registered CPA firms to maintain audit documentation generated to support an audit report? 
    A) Seven years. 
    B) Ten years.
    C) Five years. 
    D) Three years. 
    A) Seven years. 
    (this multiple choice question has been scrambled)
  29. Which of the following is an effect of the Sarbanes-Oxley Act of 2002? 
    A) Reduce the accounting profession’s level of self regulation. 
    B) Reduce the circumstances in which one may file securities with the SEC.
    C) Require periodic peer reviews of large CPA firms performed by the General Accounting Office. 
    D) Eliminate SEC involvement with the sale of securities. 
    A) Reduce the accounting profession’s level of self regulation. 
    (this multiple choice question has been scrambled)
  30. According to the standards of the Public Company Accounting Oversight Board (PCAOB), the auditor of a company that issues securities must audit the company’s internal control as well as its financial statements. What is the recommended timing of these two audits? 
    A) The internal control audit should be performed first followed by the audit of the company’s financial statements. 
    B) The financial statement audit should be performed first followed by the audit of the company’s internal control. 
    C) The two audits should be integrated. 
    D) The internal control audit should be performed first unless there is an adequate reason for doing the financial statement audit first.
    C) The two audits should be integrated. 
    (this multiple choice question has been scrambled)
  31. According to the standards of the Public Company Accounting Oversight Board (PCAOB), what is the definition of a material weakness in internal control? 
    A) The discovery of a problem in either the design of internal control or its operations that is so serious that the likelihood of problem is viewed as greater than reasonably possible. 
    B) The uncovering of any aspect of internal control that requires modification before the company’s internal control can provide reasonable assurance that no material misstatements exist in the published financial statements.
    C) A significant deficiency (or a combination of significant deficiencies) in internal control that results in more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected. 
    D) A flaw in the design or operation of internal control that has allowed a material misstatement to be included in a set of financial statements. 
    C) A significant deficiency (or a combination of significant deficiencies) in internal control that results in more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected. 
    (this multiple choice question has been scrambled)
  32. The CPA firm of Jeter and Cano is auditing the financial statements produced by Beckett Corporation. The shares of Beckett are publicly-traded on the New York Stock Exchange. What group is in charge of setting the auditing rules that Jeter and Cano must follow in performing this audit? 
    A) The Auditing Standards Board (ASB) 
    B) The Financial Accounting Standards Board (FASB)
    C) The Public Company Accounting Oversight Board (PCAOB) 
    D) The American Institute of Certified Public Accountants (AICPA) 
    C) The Public Company Accounting Oversight Board (PCAOB) 
    (this multiple choice question has been scrambled)
  33. Barbara Brown's CPA firm is the auditor of B&B Corporation, a large publicly traded company in the United States.  Barbara's firm is therefore prohibited from performing all of the following services to the client except:
    A) Tax advisory services 
    B) Design services for the firm's accounting information system
    C) Valuation services to support litigation of the firm that is unrelated to the audit 
    D) Actuarial services on the firm's defined benefit pension plan 
    A) Tax advisory services 
    (this multiple choice question has been scrambled)
  34. Sally Sloan is a partner at Sissy and Socks, CPAs, an auditor of public companies, subject to the oversight of the Public Company Accounting Oversight Board (PCAOB).  Space Skates is a publicly-traded company and Sloan has worked on that engagement in recent years.   Which of the following statements is true? 
    A) Sally must be rotated off of the audit of Space Skates' financial statements after being the reviewing audit partner for the last five years 
    B) Sissy and Socks, CPAs, must rotate off of the audit of Space Skates' financial statements after seven years, to allow a new public accounting firm to take over the audit 
    C) Sally must be rotated to a new audit client after being lead audit partner over Space Skates' financial statement audit for the last three years. 
    D) All of the above
    A) Sally must be rotated off of the audit of Space Skates' financial statements after being the reviewing audit partner for the last five years 
    (this multiple choice question has been scrambled)
  35. London Company has just employed Edith Evans as its Controller and Chief Accounting Officer.  Edith was formerly employed by Titan & Ich, CPAs.  Titan & Ich is the independent auditor for the London Company.   Which of the following statements is false?  
    A) If Edith was an audit partner in Titan & Ich's only office, but was not associated in the audit, Titan & Ich can audit London Co. without a waiting period. 
    B) If Edith most recently participated in the London Co. audit 18 months prior to the date of the initiation of the current year audit, Titan & Ich can continue to audit London in the current year. 
    C) If Edith participated in the London Co. audit, Titan & Ich must wait three years before auditing the firm 
    D) None of the above answers is false.
    C) If Edith participated in the London Co. audit, Titan & Ich must wait three years before auditing the firm 
    (this multiple choice question has been scrambled)
  36. Brittney Spires has participated in public company audits for over twenty five years and now serves as the reviewing partner for several key audits performed by her firm.  Which of the following statements is FALSE about the reviewing partner?   
    A) During her review, Brittney will focus on evaluating the engagement team's judgments and related conclusions during the audit 
    B) The reviewing partner is not required to possess the level of knowledge and competence related to accounting, auditing, and financial reporting that would be required to serve as the audit partner on the audit under review 
    C) Brittney may provide concurring approval of issuance of the audit report only if she is not aware of a significant engagement deficiency after conducting her review in accordance with professional standards
    D) Brittney ‘s firm may only allow clients to use the audit report after she provides the concurring approval of issuance 
    B) The reviewing partner is not required to possess the level of knowledge and competence related to accounting, auditing, and financial reporting that would be required to serve as the audit partner on the audit under review 
    (this multiple choice question has been scrambled)
  37. The engagement of an audit of a United Kingdom public company that is listed in the United States and whose financial statements will be filed with the SEC is likely to be conducted under which of the following? 
    A) PCAOB Auditing Standards. 
    B) Statement of Financial Accounting Standards.
    C) Generally Accepted Auditing Standards. 
    D) International Standards on Auditing. 
    A) PCAOB Auditing Standards. 
    (this multiple choice question has been scrambled)
  38. The engagement of an audit of a U.S. company that is a subsidiary of a Japanese company that will be used for reporting by the parent company in Japan is likely to be conducted under which of the following? 
    A) International Standards on Auditing. 
    B) PCAOB Auditing Standards. 
    C) Statement of Financial Accounting Standards.
    D) Generally Accepted Auditing Standards. 
    A) International Standards on Auditing. 
    (this multiple choice question has been scrambled)
  39. Auditing standards in the United States now allow an auditor to perform an audit of financial statements of the U.S. in accordance with which of the following? 
    A) Both Generally Accepted Auditing Standards and Generally Accepted Accounting Principles.
    B) Both Generally Accepted Auditing Standards and COSO Standards. 
    C) Both Generally Accepted Auditing Standards and International Standards on Auditing. 
    D) Both Generally Accepted Auditing Standards and Statement of Financial Accounting Standards. 
    C) Both Generally Accepted Auditing Standards and International Standards on Auditing. 
    (this multiple choice question has been scrambled)
  40. The engagement of an audit of a U.S. private company that has publicly traded debt is likely to be conducted under 
    A) Statement of Financial Accounting Standards.
    B) PCAOB Auditing Standards. 
    C) International Standards on Auditing. 
    D) Generally Accepted Auditing Standards. 
    B) PCAOB Auditing Standards. 
    (this multiple choice question has been scrambled)
  41. The engagement of an audit of an Italian private company with no public debt is likely to be conducted under 
    A) Statement of Financial Accounting Standards.
    B) International Standards on Auditing. 
    C) PCAOB Auditing Standards. 
    D) Generally Accepted Auditing Standards 
    B) International Standards on Auditing. 
    (this multiple choice question has been scrambled)
  42. A CPA firm is planning to do an audit of a reporting entity located in a foreign country and the firm is required to follow the rules established by international auditing standards.   What authoritative body establishes those standards? 
    A) The Public Oversight Board of Europe and Asia 
    B) The Auditing Standards Group of the World Bank 
    C) The International Auditing and Assurance Standards Board
    D) The Auditing Development Board of the United Nations 
    C) The International Auditing and Assurance Standards Board
    (this multiple choice question has been scrambled)
  43. The International Ethics Standards Board for Accountants (IAESB) operates within the International Federation of Accountants (IFAC).  It produces ethical standards to be used by accountants around the world.  Which of these statements reflects the rules created by the IAESB in connection with the acceptance of contingent fees? 
    A) The professional accountant should never accept a contingent fee. 
    B) The professional accountant should make sure that necessary safeguards are in effect in connection with contingent fees. 
    C) The professional accountant should only accept contingent fees for tax engagements.
    D) The professional accountant should only accept contingent fees for audit engagements. 
    B) The professional accountant should make sure that necessary safeguards are in effect in connection with contingent fees. 
    (this multiple choice question has been scrambled)
  44. Which of the following is not included in the International Federation of Accountants (IFAC) Code's conceptual framework as a threat to the fundamental principles that accountants should not compromise?  
    A) Self-interest threat 
    B) Familiarity threat 
    C) Financial-interest threat 
    D) Intimidation threat
    C) Financial-interest threat
    (this multiple choice question has been scrambled)
  45. Marmaduke is attempting to streamline his preparation for a job interview with Heathcliff & Garfield, CPAs.  He is debating whether to familiarize himself with the International Federation of Accountants (IFAC) Code of Ethics.  In which of the following situations should Marmaduke study the independence guidelines of the IFAC Code of Ethics?  
    A) A larger firm, Bert & Ernst, wishes Heathcliff & Garfield to become part of their network of international accounting firms and, to do so, H & G must be prepared to audit international firms 
    B) Heathcliff & Garfield has announced it will begin auditing the financial statements of a large Japanese company seeking to expand into the U.S. 
    C) Heathcliff & Garfield's largest audit client has just been purchased by a German firm 
    D) All of the above
    D) All of the above
  46. Lois is the controller at Lane Petrol, a European firm, and is considered by the International Federation of Accountants (IFAC) to be a Professional Accountant in Business (PAB).  The CEO, Kent Clark, recently called Lois into his office and asked her to recognize a material amount of revenue for products that have neither been shipped to nor ordered by a customer.  As a PAB, under the IFAC Code of Ethics, which of the following should Lois do?    
    A) Has no duty to accurately report information 
    B) Is responsible for the furthering of the company's interests by any means necessary 
    C) Should consider safeguards to reduce this threat, such as formal dispute resolution or legal advice 
    D) All of the above
    C) Should consider safeguards to reduce this threat, such as formal dispute resolution or legal advice
    (this multiple choice question has been scrambled)

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