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1. The objective of the audit of GAAP-based financial statements is to
a) Make suggestions as to the form or content of the financial statements or to draft them in whole or in part
b) Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.
c) Ensure adoption of sound accounting policies and the establishment and maintenance of internal control
d) Express an opinion on the accuracy with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles
Which of the following statements best describes the distinction between the auditor's responsibilities and management's responsibilities?
a) Management has responsibility for maintaining and adopting sound accounting policies, and the auditor has responsibility for internal control.
b) Management has responsibility for the basic data underlying financial statements, and the auditor has responsibility for drafting the financial statements.
c) The auditor's responsibility is confined to the audited portion of the financial statements, and management's responsibility is confined to the unaudited portions.
d) The auditor's responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.
3. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
a) It is difficult to prepare financial statements that fairly present a company's financial position, results of operations, and cash flows without the expertise of an independent auditor.
b) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
c) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements
d) It is a customary courtesy that all share-holders receive an independent report on management's stewardship in managing the affairs of the business.
4. The evaluation of fairness in determining the appropriate opinion to express should include consideration of the qualitative aspects of the entity's accounting practices, including whether
a) There are indicators of possible bias in management's judgments
b) The accounting principles used are the most conservative available
c) Both management and those charged with governance agree with all the standards used in the reporting process
d) both the auditor and management agree with all the standards used in the reporting process.
5. If a company's external auditor expresses an unmodified opinion as a result of the audit of the company's financial statements, readers of the audit report can assume that
a) The external auditor found no fraud
b) The company is financially sound and the financial statements are accurate
c) Internal control is effective
d) Material issues about the application of accounting principles were resolved to the satisfaction of the external auditor.
A major purpose of the auditor's report on financial statements is to
a) Assure investors of the complete accuracy of the financial statements
b) Clarify for the public the nature of the auditor's responsibility and performance
c) Deter creditors from extending loans in high-risk situations
d) Describe the specific auditing procedures undertaken to gather evidence for the opinion
The securities of Ralph Corporation are listed on a regional stock exchange and registered with the Securities and Exchange Commission (SEC). The management of Ralph engages a CPA to perform an independent audit of Ralph's financial statements. The primary objective of this audit is to provide assurance to the
a) Regional stock exchange
b) Board of directors of Ralph Corporation
d) Investors in Ralph securities
8. The auditor's judgment concerning the overall fairness of the presentation of a U.S. company's financial position, results of operations, and cash flows is applied within the framework of
a) Quality control
b) Auditing standards, which include the concept of materiality
c) The auditor's assessment of control risk
d) Generally Accepted Accounting Principles
Eagle Company's financial statements contain a departure from U.S. generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is
a) Qualified and describe the departure in a separate paragraph
b) Unmodified but not mention the departure in the auditor's report
c) Qualified or adverse, depending on the materiality, and describe the departure in an other-matter paragraph.
d) Unmodified and describe the departure in an other-matter paragraph
To which of the following material asset balances should an auditor object as not in accordance with U.S. GAAP?
a) Franchise fees paid
b) Increase in goodwill resulting from annual testing
c) Acquisition cost of an Internet domain name
d) Research and development costs that will be billed to a customer at a subsequent date
A closely held manufacturing company must disclose all of the following information in audited GAAP-based financial statements except
a) Replacement cost of inventory
b) Pledged inventory
c) LIFO reserves
d) Changes in methods of accounting for inventory
Patentex developed a new secret formula that is of great value because it has resulted in a virtual monopoly. Patentex has capitalized all research and development costs associated with this formala. Greene, CPA, who is auditing this account, will probably
a) Confer with management regarding transfer of the amount from the balance sheet to the income statement
b) Confirm that the secret formula is registered and on file with the county clerk's office.
c) Confer with management regarding a change in the title of the account to goodwill
d) Confer with management regarding ownership of the secret formula
A client owning 18% of the voting stock of an investee has accounted for the investment under the equity method. The effect of using the equity method rather than the fair value method is material. In this instance,
a) The financial statements are not fairly presented.
b) A decision as to whether an 18% interest provides an ability to exercise significant influence rests with management, and the auditor should consider the equity method to be the appropriate valuation method
c) Because an interest of less than 20% implies that the investor cannot exercise significant influence over the investee, the auditor will need to obtain evidence to support a claim to the contrary
d) If the equity method is used in the published financial statements, and the auditor agrees that this method is appropriate, no disclosure that the 20% presumption was set aside is required.
If financial statements are to meet the requirements of adequate disclosure,
a) All information pertaining to the company must be disclosed in the statements or related notes, even though some of the disclosures are potentially detrimental to the company or its shareholders
b) All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed, no matter how confidential management believes the data to be
c) Statement notes should be written in very technical language to avoid misinterpretation by the reader
d) A statement note must clearly detail any deficiencies contained in the financial statements themselves
Adequate disclosure means that sufficient information is presented so that financial statements are not misleading. The decisions about adequate disclosure should reflect the needs of
a) Users with a reasonable knowledge of business
b) All readers of the financial statements
c) Experts in accounting and finance
d) Governmental regulatory agencies