Wiley AUD Module 1 Professional Responsibilities PDF

Module 1: Professional Responsibilities 77 Multiple-Choice Questions (1–54) A. Overview of the Attest Function B. AICPA Code of Professional Conduct 1. Generally...

Module 1: Professional Responsibilities 77 Multiple-Choice Questions (1–54) A. Overview of the Attest Function B. AICPA Code of Professional Conduct 1. Generally accepted auditing standards are 6. For which of the following can a member of the AICPA receive an automatic expulsion from the AICPA? a. Required procedures to be used to gather evidence to support financial statements. I. Member is convicted of a crime punishable by imprisonment b. Policies and procedures designed to provide reasonable for more than one year.. assurance that the CPA firm and its personnel comply II. Member files his own fraudulent tax return. with professional standards. III. Member files fraudulent tax return for a client knowing that it c. Pronouncements issued by the Auditing Standards Board. is fraudulent. d. Rules acknowledged by the accounting profession a. I only. because of their universal application. b. I and II only. 2. Which of the following is a conceptual difference between c. I and III only. the attestation standards and generally accepted auditing d. I, II, and III. standards? 7. Which of the following is an example of a safeguard a. The attestation standards do not apply to audits of imple­mented by the client that might mitigate a threat to historical financial statements, while the generally indepen­dence? accepted auditing standards do. a. Required continuing education for all attest engage­ b. The requirement that the practitioner be independent in ment team members. mental attitude is omitted from the attestation standards. b. An effective corporate governance structure. c. The attestation standards do not permit an attest c. Required second partner review of an attest engage­ engagement to be part of a business acquisition study ment. or a feasibility study. d. Management selection of the CPA firm. d. The attestation standards include reviews, while generally accepted auditing standards do not. 8. Which of the following is a “self review” threat to mem­ber independence? 3. Which of the following is not an attestation standard? a. An engagement team member has a spouse that serves a. Sufficient evidence shall be obtained to provide a as CFO of the attest client. reasonable basis for the conclusion that is expressed in b. A second partner review is required on all attest en­ the report. gage­ments. b. The report shall identify the subject matter on the c. An engagement team member prepares invoices for assertion being reported on and state the character of the attest client. the engagement. d. An engagement team member has a direct financial c. The work shall be adequately planned and assistants, in­terest in the attest client. if any, shall be properly supervised. d. A sufficient understanding of internal control shall be 9. According to the standards of the profession, which of the obtained to plan the engagement. following circumstances will prevent a CPA performing audit engagements from being independent? 4. Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by a. Obtaining a collateralized automobile loan from a fi­ practitioners of other professions? nan­cial institution client. b. Litigation with a client relating to billing for con­ a. Due professional care. sulting services for which the amount is imma­terial. b. Competence. c. Employment of the CPA’s spouse as a client’s di­rector c. Independence. of internal audit. d. Complex body of knowledge. d. Acting as an honorary trustee for a not-for-profit or­ 5. The Public Company Accounting Oversight Board’s gani­zation client. standards require that due care is to be exercised in the 10. The profession’s ethical standards most likely would performance of an audit. This standard is ordinarily interpreted be considered to have been violated when a CPA represents to require that specific consulting services will be performed for a a. Thorough review of the existing safeguards over stated fee and it is apparent at the time of the representation access to assets and records. that the b. Limited review of the indications of employee fraud a. Actual fee would be substantially higher. and illegal acts. b. Actual fee would be substantially lower than c. Objective review of the adequacy of the technical the fees charged by other CPAs for comparable training and proficiency of firm personnel. ser­vices. d. Critical review of the judgment exercised at every c. CPA would not be independent. level of supervision. d. Fee was a competitive bid. 78 Module 1: Professional Responsibilities 11. According to the ethical standards of the profession, 15. According to the standards of the profession, which of which of the following acts is generally prohibited? the following activities would most likely not impair a CPA’s inde­pendence? a. Issuing a modified report explaining a failure to fol­low a governmental regulatory agency’s a. Providing advisory services for a client. stan­dards when conducting an attest service for a b. Contracting with a client to supervise the client’s of­ client. fice personnel. b. Revealing confidential client information during a c. Signing a client’s checks in emergency situations. qual­ity review of a professional practice by a team d. Accepting a luxurious gift from a client. from the state CPA society. 16. Which of the following reports may be issued only by an c. Accepting a contingent fee for representing a client in accountant who is independent of a client? an examination of the client’s federal tax return by an IRS agent. a. Standard report on an examination of a financial fore­cast. d. Retaining client records after an engagement is ter­mi­ b. Report on consulting services. nated prior to completion and the client has de­manded c. Compilation report on historical financial state­ments. their return. d. Compilation report on a financial projection. 12. According to the profession’s ethical standards, which of 17. According to the requirements of the public accounting the following events may justify a departure from a Statement profession, which of the following activities may be required of the Governmental Accounting Standards Board? in exercising due care? New Evolution of a new form Consulting Obtaining legislation of business transaction with experts specialty accreditation a. No Yes a. Yes Yes b. Yes No b. Yes No c. Yes Yes c. No Yes d. No No d. No No 13. May a CPA hire for the CPA’s public accounting firm 18. Larry Sampson is a CPA and is serving as an expert a non-CPA systems analyst who specializes in developing witness in a trial concerning a corporation’s financial state­ computer systems? ments. Which of the following is(are) true? a. Yes, provided the CPA is qualified to perform each of I. Sampson’s status as an expert witness is based upon his the specialist’s tasks. specialized knowledge, experience, and training. b. Yes, provided the CPA is able to supervise the spe­ II. Sampson is required by AICPA ruling to present his posi­tion cialist and evaluate the specialist’s end product. objectively. c. No, because non-CPA professionals are not permit­ted III. Sampson may regard himself as acting as an advocate. to be associated with CPA firms in pub­lic practice. a. I only. d. No, because developing computer systems is b. I and II only. not recog­nized as a service performed by public c. I and III only. accoun­tants. d. III only. 14. During an audit Bill Adams believes that his 19. According to the ethical standards of the profession, supervisor’s position on an accounting matter, although which of the following acts is generally prohibited? consistent with the client’s desires, materially departs from GAAP—the basis followed for the client’s financial a. Purchasing a product from a third party and resell­ing statements. Bill discussed his concerns with his supervisor and it to a client. the matter is still not resolved. Following the AICPA Code of b. Writing a financial management newsletter pro­moted Professional Conduct, which of the following is least likely to and sold by a publishing company. be appropriate? c. Accepting a commission for recommending a prod­uct to an audit client. a. Bill should consider consulting with legal counsel. d. Accepting engagements obtained through the ef­forts b. Bill should determine whether there are of third parties. responsibilities to communicate the matter to third parties. 20. To exercise due professional care an auditor should c. Bill should document his understanding of the a. Critically review the judgment exercised by those as­ situation in the working papers. sist­ing in the audit. d. Bill should use the discreditable acts framework to b. Examine all available corroborating evidence sup­port­ determine whether his supervisor is involved in an act ing managements assertions. discreditable to the profession. c. Design the audit to detect all instances of illegal acts. d. Attain the proper balance of professional expe­rience and formal education.  Module 1: Professional Responsibilities 79 21. Kar, CPA, is a staff auditor participating in the audit c. Financial Accounting Standards Board. engage­ment of Fort, Inc. Which of the following circum­ d. General Accounting Office. stances impairs Kar’s independence? 26. The auditor with final responsibility for an a. During the period of the professional engagement, engagement and one of the assistants have a difference of Fort gives Kar tickets to a football game worth $75. opinion about the results of an auditing procedure. If the b. Kar owns stock in a corporation that Fort’s 401(k) assistant believes it is necessary to be disassociated from the plan also invests in. matter’s resolution, the CPA firm’s procedures should enable c. Kar’s friend, an employee of another local account­ing the assistant to firm, prepares Fort’s tax returns. a. Refer the disagreement to the AICPA’s Quality d. Kar’s sibling is director of internal audit at Fort. Review Committee. 22. On June 1, 20X8, a CPA obtained a $100,000 personal b. Document that member’s disagreement with loan from a financial institution client for whom the CPA the conclusions reached after appropriate provided compilation services. The loan was fully secured consultation. and considered material to the CPA’s net worth. The CPA paid c. Discuss the disagreement with the entity’s the loan in full on December 31, 20X9. On April 3, 20X9, the management or its audit committee. client asked the CPA to audit the client’s financial statements d. Report the disagreement to an impartial peer review for the year ended December 31, 20X9. Is the CPA considered monitoring team. independent with respect to the audit of the client’s December 31, 20X9 financial statements? C. Quality Control a. Yes, because the loan was fully secured. b. Yes, because the CPA was not required to be inde­ 27. The nature and extent of a CPA firm’s quality control pend­ent at the time the loan was granted. policies and procedures depend on c. No, because the CPA had a loan with the client dur­ing the period of a professional engagement. The CPA The nature of Cost-benefit d. No, because the CPA had a loan with the client dur­ing firm’s size the CPA firm’s considerations the period covered by the financial state­ments. practice 23. Which of the following statements is(are) correct regard­ing a. Yes Yes Yes a CPA employee of a CPA firm taking copies of information b. Yes Yes No con­tained in client files when the CPA leaves the firm? c. Yes No Yes I. A CPA leaving a firm may take copies of information con­ d. No Yes Yes tained 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 28. A CPA firm may communicate its quality control policies exper­tise. and procedures to its personnel in which manner(s): a. I only. b. II only. Orally Written c. Both I and II. d. Neither I nor II. a. No No b. No Yes 24. Which of the following statements is correct regarding an accountant’s working papers? c. Yes No d. Yes Yes a. The accountant owns the working papers and gener­ ally may disclose them as the accountant sees fit. b. The client owns the working papers but the accoun­tant 29. Which of the following is not an element of quality has custody of them until the accoun­tant’s bill is paid control? in full. a. Acceptance and continuance of client relationships c. The accountant owns the working papers but gener­ally and specific engagements. may not disclose them without the client’s consent or b. Human resources. a court order. c. Internal control. d. The client owns the working papers but, in the ab­ d. Monitoring. sence of the accountant’s consent, may not disclose 30. Quality control for a CPA firm, as referred to in them without a court order. Statements on Quality Control Standards, applies to 25. Which of the following is an authoritative body desig­ a. Auditing services only. nated to promulgate attestation standards? b. Auditing and management advisory services. a. Auditing Standards Board. c. Auditing and tax services. b. Governmental Accounting Standards Board. d. Auditing and accounting and review services. 80 Module 1: Professional Responsibilities 31. One of a CPA firm’s basic objectives is to provide c. All members must also currently be active in pub­lic professional services that conform with professional standards. ac­counting. Reasonable assurance of achieving this basic objective is d. A majority of members must be or have been ac­count­ provided through ing educators. a. A system of quality control. 38. The Public Company Accounting Oversight Board b. A system of peer review. (PCAOB) is not responsible for standards related to c. Continuing professional education. a. Accounting. d. Compliance with generally accepted accounting b. Attestation. principles. c. Auditing. 32. Which of the following is correct concerning PCAOB d. Quality control. guidance that uses the term “should”? 39. A PCAOB engagement that focuses on the sufficiency a. The auditor must fulfill the responsibilities. of a CPA firm’s quality control system is most likely to be b. The auditor must comply with requirements unless referred to as a(n) s/he demonstrates that alternative actions were a. Financial statement audit. sufficient to achieve the objectives of the standard. b. Inspection. c. The auditor should consider performing the procedure; c. Peer review. whether the auditor performs depends on the exercise d. Quality control of professional judgment in the circumstances. 40. Which statement below is correct concerning communi­ d. The auditor has complete discretion as to whether to cating the results of a PCAOB inspection? perform the procedure. a. The entire report issued by the PCAOB is publicly D. The Sarbanes-Oxley Act of 2002 avail­able. b. The portion of the report issued on a CPA firm’s qual­ 33. Under the Sarbanes-Oxley Act, most audit working papers ity control is not ordinarily publicly available. must be saved c. The report issued is only available to Congress. a. 5 years. d. The report is available only to PCAOB members. b. 7 years. 41. Which of the following sets of standards does the Public c. 10 years. Company Accounting Oversight Board not have the authority d. Indefinitely as there is no time limitation provided. to establish for audits of public companies? 34. Passage of the Sarbanes-Oxley Act led to the establish­ a. Auditing standards. ment of the b. Quality control standards. a. Auditing Standards Board. c. Accounting standards. b. Accounting Enforcement Releases Board. d. Independence standards. c. Public Company Accounting Oversight Board. d. Securities and Exchange Commission. F. International Standards—Ethical 35. Under Title II of the Sarbanes-Oxley Act, the auditor of an 42. In relation to the AICPA Code of Professional Conduct, issuer cannot legally perform which type of service for that issuer? the IFAC Code of Ethics for Professional Accountants a. Tax services. a. Has more outright prohibitions. b. Review of interim information. b. Has fewer outright prohibitions. c. Internal audit outsourcing services. c. Has no outright prohibitions. d. Audit of internal control over financial reporting. d. Applies only to professional accountants in busi­ness. 36. The audit partner in charge of an audit of a public com­ 43. Based on the IFAC Code of Ethics for Professional pany may only Accoun­tants, threats to independence arise from all of the following ex­cept: a. Be in charge of the audit of that one company. b. Perform the role as long as he or she also performs the a. Self-interest. “second partner review” for that audit. b. Advocacy. c. Perform that role for five consecutive years. c. The audit relationship. d. Perform the role if he or she has proper AICPA is­suer d. Intimidation. ac­creditation. 44. If an audit firm discovers threats to independence with re­spect to an audit engagement, the IFAC Code of Ethics for E. Public Company Accounting Oversight Board Profes­sional Accountants indicates that the firm should 37. Which of the following is correct concerning member­ship a. Immediately resign from the engagement. on the Public Company Accounting Oversight Board? b. Notify the appropriate regulatory body. c. Document the issue. a. Only two of its members may be CPAs. d. Evaluate the significance of the threats and apply appro­ b. It is composed of nine members. priate safeguards to reduce them to an acceptable level.  Module 1: Professional Responsibilities 81 45. With respect to the acceptance of contingent fees for c. External. profes­sional services, the IFAC Code of Ethics for Profes­ d. Unusual. sional Accoun­tants indicates that the accounting firm 51. In accordance with the independence standards of the GAO a. Should not accept contingent fees. for performing audits in accordance with generally accepted b. Should establish appropriate safeguards around ac­ gov­ernment auditing standards, which of the fol­lowing is not an ceptance of a contingent fee. ex­ample of an external impairment of inde­pendence? c. Should accept contingent fees only for assurance ser­ a. Reducing the extent of audit work due to pressure vices other than audits of financial statements. from management to reduce audit fees. d. Should accept contingent fees if it is customary in the b. Selecting audit items based on the wishes of an em­ country. ployee of the organization being audited. 46. With regard to marketing professional services, the IFAC c. Bias in the items the auditors decide to select for Code of Ethics for Professional Accountants indicates that test­ing. d. Influence by management on the personnel as­signed a. Direct marketing is prohibited. to the audit. b. Marketing is allowed if lawful. c. Marketing should be honest and truthful. 52. Under the independence standards of the GAO for d. Marketing of audit services is prohibited. p­ erform­ing audits in accordance with generally accepted govern­ment auditing standards, which of the following are G. International Standards—Auditing/ over­reaching principles for determining whether a nonaudit Assurance service impairs independence? 47. What body establishes international auditing standards? I. Auditors must not perform nonaudit services that in­volve performing management functions or making management a. The Public Company Accounting Oversight Board. decisions. b. The International Federation of Accountants. II. Auditors must not audit their own work or provide c. The World Bank. non­audit services in situations in which the nonaudit d. The International Assurance Body. ser­vices are sig­nificant or material to the subject matter of the audit. 48. Which of the following is not true about international III. Auditors must not perform nonaudit services which require audit­ing standards? independence. a. International auditing standards do not require an au­ a. I only. dit of internal control. b. I and II only. b. International auditing standards do not allow refer­ence c. I, II and III. to division of responsibilities in the audit re­port. d. II and III only. c. International auditing standards require obtaining an at­torney’s letter. 53. Which of the following bodies enforce the audit require­ d. International auditing standards are based on a risk as­ ments of the Employee Retirement Security Act of 1974 sessment approach. (ERISA) with respect to employee benefit plans? 49. Which of the following is most likely to be required in an a. The Department of Labor. audit performed in conformity with international auditing stan­ b. The Department of Pension Management. dards? c. The Securities and Exchange Commission. d. The Public Company Accounting Oversight Board. a. Confirmation of accounts receivable. b. Audit report modification for a change in account­ing 54. The requirement for independence by the auditor regard­ing principles. audits of employee benefit plans apply to the plan as well as c. An opinion on internal control. d. Audit report inclusion of the location in which the a. Investment companies doing business with the plan. audi­tor practices. b. Members of the plan. c. The plan sponsor. d. The actuary firm doing services for the plan. H. Other (SEC, GAO, DOL) 50. Independence standards of the GAO for audits in accor­ dance with generally accepted government auditing stan­dards describe three types of impairments of independence. Which of the following is not one of these types of impair­ments? a. Personal. b. Organizational. 82 Module 1: Professional Responsibilities Multiple-Choice Answers and Explanations Answers 1. c __ __ 14. d __ __ 27. a __ __ 40. b __ __ 53. a __ __ 2. a __ __ 15. a __ __ 28. d __ __ 41. c __ __ 54. c __ __ 3. d __ __ 16. a __ __ 29. c __ __ 42. b __ __ 4. c __ __ 17. b __ __ 30. d __ __ 43. c __ __ 5. d __ __ 18. b __ __ 31. a __ __ 44. d __ __ 6. d __ __ 19. c __ __ 32. b __ __ 45. b __ __ 7. b __ __ 20. a __ __ 33. b __ __ 46. c __ __ 8. c __ __ 21. d __ __ 34. c __ __ 47. b __ __ 9. c __ __ 22. b __ __ 35. c __ __ 48. c __ __ 10. a __ __ 23. d __ __ 36. c __ __ 49. d __ __ 11. d __ __ 24. c __ __ 37. a __ __ 50. d __ __ 12. c __ __ 25. a __ __ 38. a __ __ 51. c __ __ 1st: __/54 = __% 13. b __ __ 26. b __ __ 39. b __ __ 52. b __ __ 2nd: __/54 = __% Explanations aspects of information about computer software). Answers (a), (b), and (c) are all incorrect because standards exist for evidence, 1. (c) The requirement is to identify the statement that reporting on the assertion or subject matter, and proper planning. best describes the meaning of generally accepted auditing stan­dards. Answer (c) is correct because generally accepted 4. (c) The requirement is to identify the characteristic auditing standards are defined as the Statements on Auditing that is most likely to be unique to the audit work of CPAs Standards issued by the Auditing Standards Board. Answer as compared to work performed by practitioners of other (a) is incorrect because while GAAS includes various required professions. Answer (c) is correct because independence and suggested procedures, their scope is broader than simply is absolutely required for the performance of audits; other required procedures relating to gathering evidence. Answer professions do not in general require such independence. (b) is incorrect because it represents a portion of the objective Answers (a), (b), and (d) are incorrect because the various of the accounting profession’s quality control standards, not professions require due professional care and competence and generally accepted auditing standards. Answer (d) is incorrect have a complex body of knowledge. because GAAS apply only to audits performed for nonissuers 5. (d) The requirement is to determine what is meant by the in the United States (e.g. PCAOB auditing standards apply PCAOB’s requirement of due care in the performance of an to issuers and international auditing standards apply to audits audit. Answer (d) is correct because due care requires critical performed under those standards.) review at every level of supervision of the work done and the 2. (a) The requirement is to identify a conceptual difference judgment exercised by those assisting in the audit. Answer (a) between the attestation standards and generally accepted auditing is incorrect because the due care standard does not directly standards. Answer (a) is correct because the attestation standards address safeguards over access to assets and records. Answer apply for performing and reporting on examination, review, and (b) is incorrect because due care does not relate to a limited agreed-upon procedures engagements (attestation engagements) review of employee fraud and illegal acts. Answer (c) is that address subject matter other than historical financial incorrect because the first general standard addresses technical statements. Answer (b) is incorrect because an independent training and proficiency as an auditor. mental attitude is required for attestation engagements. Answer 6. (d) All of these events can result in the automatic (c) is incorrect because an attest engagement may be related to expulsion of the member from the AICPA. Answer (a) is a business acquisition study or a feasibility study. Answer (d) is incorrect because although conviction of a crime is punishable incorrect because both the attestation standards and generally by imprisonment for more than one year leads to automatic accepted auditing standards include reviews. expulsion, it is not the only listed event that leads to automatic 3. (d) The requirement is to identify the reply which is expulsion. An­swers (b) and (c) are incor­rect because all three not an attestation standard. Answer (d) is correct because can result in automatic expulsion from the AICPA. the attestation standards do not include a requirement that a 7. (b) Answer (b) is correct because an effective corporate sufficient understanding of internal control be obtained to plan governance structure (e.g., an active audit committee), if the engagement. There is no internal control standard because implemented by a client, may mitigate a threat to CPA the concept of internal control may not be relevant to certain independence through appropriate decision making, oversight, assertions on which a CPA may be engaged to report (e.g., and communications regarding services provided by the CPA  Module 1: Professional Responsibilities 83 firm. Answer (a) is incorrect because it is a safe­guard that is may be hired, and because developing computer systems is implemented by regulation or the CPA firm. Answer (c) is recognized as a service per­formed by public ac­countants. incorrect because it is a safeguard that is re­quired by regulation 14. (d) The requirement is to determine which reply is or the CPA firm. Answer (d) is incorrect because a safeguard not a responsibility when an accountant concludes that of independence would be a situation in which those charged a difference of opinion with a supervisor exists relating with corporate governance, not management, select the CPA to a significant accounting matter. Answer (d) is correct firm; management fulfilling that role may be viewed as a threat because the profession does not have a “discreditable acts rather than a safeguard. framework” to be used in such a manner. Answers (a), 8. (c) Answer (c) is correct because the team member would (b) and (c) are incorrect because the Code of Professional be reviewing his or her own work. Answer (a) is incorrect Conduct requires that accountants consider consulting legal because this is an example of a familiarity threat. Answer (b) is counsel (answer (b)), determining other communication incorrect because this is an example of a safe­guard to threats to responsibilities (answer (b)), and documenting his independence. Answer (d) is incorrect because this represents understanding (answer (c)). Bill should also consider a financial self-interest threat to in­dependence. whether additional requirements exist under his firm’s internal policies. 9. (c) The AICPA’s Code of Professional Conduct Independence Rule states that, a spouse may be em­ployed by a 15. (a) The requirement is to determine the activity that client if s/he does not exert significant influence over the con­ would most likely not impair a CPA’s independence. Ac­ tents of the client’s financial statements. This is a key position counting and consulting services do not normally impair as defined by the Code. independence because the member’s role is advisory in na­ ture. An­swers (b) and (c) are incorrect because management 10. (a) According to the Integrity and Objectivity Rule of the functions are being performed. An­swer (d) is incorrect because Code of Profes­sional Conduct, in performing any professional accepting a luxurious gift im­pairs a CPA’s independence. service, a member shall maintain objectivity and integrity, avoid con­flicts of interest, and not knowingly misrepresent 16. (a) The requirement is to identify the type of report facts. An­swer (a) is correct as this would be knowingly that may be issued only by an independent accountant. misrepre­senting the facts. Answers (b) and (d) are incorrect as An­swer (a) is correct because the attestation standards these are not in­tentional misstatements. Answer (c) is incorrect require independence for the performance of all attestation because while one must remain objective while performing engagements. An attestation engagement is one in which consult­ing services, independence is not re­quired unless the the accountant expresses a con­clusion about the reliability CPA also performs attest services for that client. of assertions which are the re­sponsibility of another party. A standard report on an ex­amination of a financial forecast 11. (d) The requirement is to determine which act is requires the auditor to express an opinion, which requires an gener­ally prohibited. Answer (d) is correct because when accountant to be inde­pendent. Answer (b) is incorrect because an engagement is terminated prior to completion, the Acts CS 100 indicates that consulting services are fundamentally Discreditable Rule states that a member is required to return dif­ferent from the attestation function, and therefore do not only client records. Answer (a) is incorrect because issuing a require indepen­dence of the accountant. Answers (c) and (d) modified report explaining a failure to follow a governmental are incor­rect because AR 100 indicates that an accountant who regulatory agency’s stan­dards when conducting an attest is not in­dependent is not precluded from issuing a report on a service is not prohibited. Answer (c) is incorrect because com­pila­tion of financial statements. accepting a contingent fee is allowable when representing a client in an examination by a revenue agent of the client’s 17. (b) The Code of Professional Conduct requires federal or state income tax re­turn. Answer (b) is incorrect be­ a member to dis­charge professional responsibilities cause revealing confidential client information during a quality with competence and diligence. Yet, the competence review of a professional practice by a team from the state CPA requirement accepts that there are limitations to a member’s society is not prohibited. capabilities—in such cases consultation or referral may be required when a professional engagement exceeds the 12. (c) According to Code of Profes­sional Conduct, CPAs personal competence of a member or a members firm. are allowed to depart from a GASB Statement only when Accordingly it may be required to consult with experts in results of the Standard would be mis­leading. Exam­ples of exercising due care. Obtaining a specialty credential is not possible circumstances justifying de­parture are new legis­lation required under the due diligence principle. and a new form of business transaction. 18. (b) The Integrity and Objectivity Rule of the AICPA 13. (b) The requirement is to determine whether a CPA may Code of Professional Conduct requires that when a CPA is hire a non-CPA systems analyst and, if so, under what condi­ acting as an expert witness, s/he should not act as an advocate tions. Answer (b) is correct because the Code of Professional but should give his/her position based on objectivity. The Conduct allows such a situa­tion when the CPA is qualified to expert witness does this based on special­ized knowledge, supervise and evaluate the work of the specialist. Answer (a) training, and experience. is incorrect because the CPA need not be qualified to perform the spe­cialist’s tasks. Answer (c) is incorrect because non-CPA 19. (c) The requirement is to determine which act is gener­ally professionals are permitted to be associated with CPA firms in prohibited. Answer (c) is correct because “a member in pub­lic public practice. Answer (d) is in­correct because nonpro­fessionals practice shall not for a commission rec­ommend or refer to a 84 Module 1: Professional Responsibilities client any product or service, or for a commission recommend Accounting and Review Services Commit­tee, and the Man­ or refer any product or service to be supplied by a client, or agement Consulting Services Executive Committee have been receive a commission when the member or the member’s firm au­thorized to promulgate attestation standards. perform for that client: (1) an audit of a financial statement; or 26. (b) The requirement is to determine the proper method (2) a compi­lation of a fi­nancial statement when the member for handling a difference of opinion between auditors expects that a third party will use the financial statement and concerning interpretation of the results of an auditing the member’s compilation report does not disclose a lack of procedure. Answer (b) is correct because the quality control independence; or (3) an examination of prospective financial standards allow such documentation of the considerations information.” An­swer (a) is incorrect because a member may involved in the resolution of differences of opinion. Answer purchase a product and resell it to a client. Any profit on sale (a) is incorrect because the AICPA does not, in general, rule on would not constitute a commission. disagreements of this nature. Answer (c) is incorrect because 20. (a) The principle of due care requires the member to the disagreement relates to an auditing procedure and therefore observe the profession’s technical and ethical standards, strive in most such circumstances the entity’s management or its continually to improve competence and the quality of services, audit committee will have no particular expertise. Answer (d) and discharge responsibility to the best of the member’s ability. is incorrect because the disagreement need not necessarily be Answer (b) is incorrect as the auditor is not required to examine reported to a peer review “monitoring” team. all corroborating evidence support­ing management’s assertions, but rather to examine evidence on a scope basis based on his/ 27. (a) The requirement is to determine the factors that her consideration of material­ity and level of risk assessed. An­ affect the nature and extent of a CPA firm’s quality control swer (c) is incorrect as the auditor should be aware of the possi­ policies and procedures. Answer (a) is correct because the bility of illegal acts, but an audit provides no assurance that all nature and extent of a firm’s quality control policies and or any illegal acts will be detected. Answer (d) is not the best procedures depend on a number of factors, including its size, an­swer because competence is derived from both education the degree of operating autonomy allowed to its personnel and and experience. The principle of due care requires the member practice offices, the nature of its practice, its organization, and to strive to improve competence, however, attaining the proper appropriate cost-benefit considerations. balance of professional experience and formal education is not 28. (d) The requirement is to identify the manners in a criterion for exercising due care. which a CPA firm may communicate its quality control 21. (d) The fact that a close relative of Kar works for Fort policies and procedures to its personnel. Answer (d) is correct impairs Kar’s independence. Answer (a) is incorrect because because the requirements relating to quality control standard the gift is of a token amount which does not impair Kar’s documentation state that either orally or written are acceptable. indepen­dence. Answer (b) is incorrect because a joint financial Answers (a), (b) and (c) all include one or more inappropriate invest­ment must be material to impair indepen­dence, and this “no” replies. would generally not occur with respect to a retirement plan. 29. (c) The requirement is to identify the reply that is not Answer (c) is incorrect because preparation of the client’s tax one of the elements of quality control. Answer (c) is correct return is not a service that impairs inde­pendence. because there is no quality control element on internal control. 22. (b) Independence was not required at the time the loan Acceptance of client relationships and specific engagements was obtained, and because it is fully secured it is grandfathered (a), human resources (b), and monitoring (d) are all elements of by the Code of Professional Conduct. Answer (a) is incorrect quality control. In addition, the following also are elements because if the CPA is required to be independent, a mortgage of quality control: leadership responsibilities for engagement loan would not be permitted even if it was fully secured. performance, quality within the firm, and relevant ethical Answer (c) is incorrect because the CPA was not required to requirements. be indepen­dent of the client. Answer (d) is incorrect because 30. (d) The requirement is to determine the types of services the CPA was not required to be independent of the client. to which Statements on Quality Control Standards apply. 23. (d) Both of the statements are incorrect; either would Answer (d) is correct because the standards explicitly limit violate the Confidential Client Information Rule. Answer (a) application to auditing and accounting and review services. is incorrect because statement I also is incorrect. Answer (b) is Although the quality control standards may be applied to other incorrect because statement II also is incor­rect. Answer (c) is segments of a firm’s practice (e.g., management advisory incorrect because statements I and II are both incorrect. services and tax), the standards do not require it. 24. (c) Information in the CPA’s working papers is confi­ 31. (a) The requirement is to determine how a CPA firm dential and may not be disclosed except with the client’s obtains reasonable assurance of providing professional consent or by court order. Answer (a) is incorrect because services that conform with professional standards. Answer (a) disclosure of the information would generally vi­olate the is correct because a system of quality control is designed to Confidential Client Information Rule. Answers (b) and (d) are provide a CPA firm with reasonable assurance of meeting its incorrect because the CPA owns the working papers. responsibility to provide professional services that conform with professional standards. Answer (b) is incorrect because 25. (a) The requirement is to identify the listed authorita­tive a peer review provides information on whether a CPA firm is body designated to promulgate attestation stan­dards. An­swer following an appropriate system of quality control. Answer (c) (a) is correct because only the Auditing Stan­dards Board, the is incorrect because it is less complete than answer (a) since  Module 1: Professional Responsibilities 85 continuing professional education helps achieve the specific may be currently active in public accounting. An­swer (d) is quality control element of professional development. Answer incorrect because there is no rule that a majority of members (d) is incorrect because the financial statements comply with must be or must have been ac­counting educa­tors. generally accepted accounting principles, not the professional 38. (a) The requirement is to identify the type of stan­dards services provided by the CPA firm. for which the PCAOB is not responsible. Answer (a) is cor­rect 32. (b) The requirement is to identify the correct statement because the PCAOB has no responsibility for promulgating or concerning PCAOB guidance that uses the term “should.” adopting accounting standards. Answer (b) is incorrect be­cause Answer (a) is correct because the term “should” means that the the PCAOB does have responsibility for attestation stan­dards auditor must comply with the requirements unless he or she can relating to public companies. Answer (c) is incorrect be­cause demonstrate that alternative actions were sufficient to achieve the PCAOB does have responsibility for auditing standards the objectives of the standards. Answer (a) is incorrect because relating to public companies. Answer (d) is incorrect because terms such as “must,” “shall,” and “is required to” are used to the PCAOB does have responsibility for quality control stan­ indicate that the auditor must fulfill the responsibilities. Answer dards relating to public companies. (c) is incorrect because terms such as “may,” “might,” and 39. (b) The requirement is to identify a PCAOB engage­ “could” are used when the auditor should consider performing ment that focuses on a selected quality control issue. An­swer the audit procedure. Answer (d) is incorrect because no (b) is correct because Section 104 of the Sarbanes-Oxley particular terms are used for the situation in which the auditor requires that the PCAOBs evaluate the sufficiency of a CPA has complete discretion whether to perform the procedure. firm’s quality control system as a part of an inspection. 33. (b) The requirement is to determine how long audit Answer (a) is incorrect because a fi­nancial statement audit working papers must be saved under the requirements of the focuses on the fairness of presenta­tion of financial state­ments. Sarbanes-Oxley Act. Answer (b) is correct, 7 years. An­swers Answer (c) is incorrect because peer reviews ordinarily (a), (c), and (d) are incorrect because a 7-year limit exists for relate to AICPA and state oversight of CPA firms. Answer most working papers. (d) is incor­rect because there is no engagement referred to as quality control. 34. (c) The requirement is to identify the organization estab­lished by the Sarbanes-Oxley Act. Answer (c) is cor­ 40. (b) The requirement is to identify the correct state­ rect because SOX did establish the Public Company Ac­ ment concerning communication of the results of a PCAOB counting Oversight Board. Answer (a) is incorrect because inspec­tion. Answer (b) is correct since the portion of the the Auditing Standards Board is the AICPA’s auditing stan­ report issued on a CPA firm’s quality control is not ordinar­ily dards setting or­ganization. Answer (b) is incorrect because publicly avail­able. Answer (a) is incorrect because the portion there is no organiza­tion titled the Accounting Enforcement of the report on a CPA firm’s quality control is not ordinarily Releases Board. Answer (d) is incorrect because the Securi­ made available. Answer (c) is incorrect because most of ties and Exchange Commis­sion was established in 1934 by the the report (other than the portion on the CPA firm’s quality Securities Exchange Act. control) is publicly avail­able. Answer (d) is incorrect because most of the report (other than the portion on the CPA firm’s 35. (c) The requirement is to identify the type of service quality control) is publicly avail­able. an auditor of an issuer cannot legally perform under Title II of the Sarbanes-Oxley Act. Answer (c) is correct because the 41. (c) The requirement is to determine the set of standards auditor may not provide internal audit outsourcing ser­vices to that the PCAOB does not have authority to establish. Answer the issuer. Answer (a) is incorrect because tax ser­vices may (c) is correct because the FASB establishes accounting be performed. Answer (b) is incorrect because a review of standards for both public and nonpublic companies. Answer interim information is required to be performed. Answer (d) (a) is incorrect because the PCAOB has authority to issue is incorrect because, for large companies, the audit of internal auditing standards. Answer (b) is incorrect because the control over financial re­porting is required as a part of the PCAOB has the authority to issue quality control standards. integrated audit. Answer (d) is incorrect because the PCAOB has the authority to issue independence standards. 36. (c) The requirement is to identify a limitation for the audit partner in charge of an audit of a public company. Answer 42. (b) The requirement is to identify the characteristic that (c) is correct as the partner may only be in charge for five con­ differs between the two sets of ethical standards. An­swer (b) is secutive years. Answer (a) is incorrect since there is no such correct because the IFAC Code has fewer out­right prohibitions restriction. Answer (b) is incorrect because another partner than the AICPA Code. Answers (a) and (c) are incorrect must perform the second partner review function. Answer (d) is be­cause the IFAC Code has fewer outright prohibitions. incorrect because the AICPA has no such ac­creditation. Answer (d) is incorrect because the IFAC Code applies to all professional accountants. 37. (a) The requirement is to identify the correct state­ment concerning membership on the Public Company Ac­counting 43. (c) The requirement is to identify the item that is not a Oversight Board. Answer (a) is correct because the five- threat to independence. Answer (c) is correct because the audit member board may have no more than two CPA mem­bers. relationship, in itself, is not a threat to independence. Answers Answer (b) is incorrect because the PCAOB is com­posed of (a), (b), and (d) are incorrect because they all represent types five members. An­swer (c) is incorrect because no members of threats to independence. 86 Module 1: Professional Responsibilities 44. (d) The requirement is to identify the appropriate course audit reports based on international auditing standards must of action when threats to independence are discov­ered. Answer include the loca­tion in which the auditor practices (i.e., the (d) is correct because the firm should evaluate the sig­nificance city and country). Answer (a) is incorrect because whether of the threats and apply safeguards, if neces­sary, to re­duce accounts receivable are confirmed is based on the auditor’s them to an acceptable level. Answer (a) is incorrect be­cause consideration of the assessed risk of material misstatement the firm would only resign if appropriate safeguards could not and how the audit evidence will, from other planned audit reduce the threats to an acceptable level, or it is required based procedures, reduce that risk. Answer (b) is incorrect be­cause on a prohibition. Answer (b) is incorrect because the firm audit report modification for a change in accounting principles would not notify a regulatory body at this point. Answer (c) is is not required under international auditing stand­ards. Answer incorrect because the firm would document the issue, but only (c) is incorrect because an opinion on inter­nal control is not after it is resolved. required under international auditing stan­dards. 45. (b) The requirement is to identify what the IFAC Code 50. (d) The requirement is to identify the impairment that of Ethics for Professional Accountants provides with respect to is not one of the three types of impairments described in the contingent fees. Answer (b) is correct because the IFAC Code GAO standards. Answer (d) is correct because an un­usual indicates that if the contingent fee presents a threat to apply im­pairment is not one of the types of impairments described fun­damental principles, the firm should es­tablish appropriate in the GAO standards. Answers (a), (b), and (c) are incorrect safe­guards. Answer (a) is incorrect be­cause a contingent fee because they are the three types of impairments described in may be accepted if threats can be reduced to an acceptable the GAO standards. level. An­swers (c) and (d) are in­correct because the IFAC Code 51. (c) The requirement is to identify the example that does does not contain these provi­sions. not represent an external impairment of independence. Answer 46. (c) The requirement is to identify the IFAC Code (c) is correct because this item is an example of a personal im­ provi­sion regarding marketing. Answer (c) is correct be­ pairment of independence. Answers (a), (b) and (d) are incor­ cause the IFAC Code indicates the marketing must be honest rect because they are all examples of external impairments of and truthful. Answers (a) and (d) are incorrect because no independence. particular form of marketing is prohibited. Answer (b) is 52. (b) The requirement is to identify the overreaching incorrect because mar­keting must be honest and truthful as principles for identifying whether nonaudit services impair well as legal. inde­pendence. Answer (b) is correct because I and II are the 47. (b) The requirement is to identify the body that estab­ two principles. Answer (a) is incorrect because II is also an lishes international auditing standards. Answer (b) is correct over­reaching principle. Answer (c) is incorrect because III is because the International Auditing and Assurance Standards not an overreaching principle. Answer (d) is incorrect because Board of the International Federation of Accoun­tants I is an overreaching principle and III is not. establishes international auditing standards. Answer (a) is 53. (a) The requirement is to identify the body that en­ incorrect because the Public Company Accounting Oversight forces the audit requirements of ERISA. Answer (a) is cor­rect Board establishes standards for the audit of public companies because the Department of Labor is responsible for en­forcing in the US. Answers (c) and (d) are incorrect be­cause these the audit requirements. Answer (b) is incorrect because the bodies do not establish auditing standards. De­partment of Pension Management does not ex­ist. Answers 48. (c) The requirement is to identify the item that is not (c) and (d) are incorrect because the SEC and the PCAOB deal true about international auditing standards. Answer (c) is with auditing requirements for entities with publicly traded cor­rect because international auditing standards require securities (issuers). ob­taining an attorney’s letter only if the auditors assess a 54. (c) The requirement is to identify the party that inde­ risk of material misstatement. Answers (a), (b) and (d) are pendence standards also apply to when performing an audit incor­rect because they are all true about international auditing of an employee benefit plan. Answer (c) is correct because the standards. De­partment of Labor rules also apply to inde­pendence from 49. (d) The requirement is to identify the most likely re­ the plan and the plan sponsor. Answers (a), (b) and (d) are quirement in an audit performed in conformity with inter­ incor­rect because the independence standards do not apply to national auditing standards. Answer (d) is correct because these parties. 114 Module 2: Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks Multiple-Choice Questions (1–115) A.1. Financial Statement Assertions 7. Inherent risk and control risk differ from detection risk in that they 1. Financial statement assertions are established for account balances, a. Arise from the misapplication of auditing procedures. b. May be assessed in either quantitative or Classes of transactions Disclosures nonquantitative terms. a. Yes Yes c. Exist independently of the financial statement audit. b. Yes No d. Can be changed at the auditor’s discretion. c. No Yes 8. On the basis of the audit evidence gathered and evaluated, d. No No an auditor decides to increase the assessed level of control risk 2. Which of the following is not a financial statement from that originally planned. To achieve an overall audit risk assertion relating to account balances? level that is substantially the same as the planned audit risk level, the auditor would a. Completeness. b. Existence. a. Decrease substantive testing. c. Rights and obligations. b. Decrease detection risk. d. Valuation and competence. c. Increase inherent risk. d. Increase materiality levels. A.2. Audit Risk 9. Relationship between control risk and detection risk is ordinarily 3. As the acceptable level of detection risk decreases, an auditor may a. Parallel. b. Inverse. a. Reduce substantive testing by relying on the c. Direct. assessments of inherent risk and control risk. d. Equal. b. Postpone the planned timing of substantive tests from interim dates to the year-end. A.3. Materiality c. Eliminate the assessed level of inherent risk from consideration as a planning factor. 10. Which of the following would an auditor most likely d. Lower the assessed level of control risk from the use in determining the auditor’s preliminary judgment about maximum level to below the maximum. materiality? 4. The risk that an auditor will conclude, based on substantive a. The anticipated sample size of the planned substantive tests, that a material misstatement does not exist in an account tests. balance when, in fact, such misstatement does exist is b. The entity’s annualized interim financial statements. referred to as c. The results of the internal control questionnaire. d. The contents of the management representation letter. a. Sampling risk. b. Detection risk. 11. Which of the following statements is not correct about c. Nonsampling risk. materiality? d. Inherent risk. a. The concept of materiality recognizes that some 5. As the acceptable level of detection risk decreases, the matters are important for fair presentation of financial assurance directly provided from statements in conformity with GAAP, while other matters are not important. a. Substantive tests should increase. b. An auditor considers materiality for planning b. Substantive tests should decrease. purposes in terms of the largest aggregate level of c. Tests of controls should increase. misstatements that could be material to any one of the d. Tests of controls should decrease. financial statements. 6. Which of the following audit risk components may be c. Materiality judgments are made in light of assessed in nonquantitative terms? surrounding circumstances and necessarily involve both quantitative and qualitative judgments. Control risk Detection risk Inherent risk d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable a. Yes Yes No person who will rely on the financial statements. b. Yes No Yes c. Yes Yes Yes 12. Which of the following is a function of the risks of d. No Yes Yes material misstatement and detection risk? a. Internal control. b. Corroborating evidence.  Module 2: Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks 115 c. Quality control. 18. Which of the following best describes what is meant by d. Audit risk. the term “fraud risk factor?” 13. Which of the following is correct concerning performance a. Factors whose presence indicates that the risk of fraud materiality on an audit? is high. b. Factors whose presence often have been observed in a. It will ordinarily be less than financial statement circumstances where frauds have occurred. materiality. c. Factors whose presence requires modification of b. It should be established at beginning of an audit and planned audit procedures. not be revised thereafter. d. Material weaknesses identified during an audit. c. It should be established at separate amounts for the various financial statements. 19. Which of the following is correct concerning d. It need not be documented in the working papers. requirements about auditor communications about fraud? a. Fraud that involves senior management should be 14. Which of the following would an auditor most likely reported directly to the audit committee regardless of use in determining the auditor’s preliminary judgment about the amount involved. materiality? b. Fraud with a material effect on the financial a. The results of the initial assessment of control risk. statements should be reported directly by the auditor b. The anticipated sample size for planned substantive tests. to the Securities and Exchange Commission. c. The entity’s financial statements of the prior year. c. Fraud with a material effect on the financial d. The assertions that are embodied in the financial statements should ordinarily be disclosed by the statements. auditor through use of an “emphasis of a matter” paragraph added to the audit report. 15. Holding other planning considerations equal, a decrease d. The auditor has no responsibility to disclose fraud in the amount of misstatement in a class of transactions that an outside the entity under any circumstances. auditor could tolerate most likely would cause the auditor to a. Apply the planned substantive tests prior to the 20. When performing a financial statement audit, auditors are balance sheet date. required to explicitly assess the risk of material misstatement b. Perform the planned auditing procedures closer to the due to balance sheet date. a. Errors. c. Increase the assessed level of control risk for relevant b. Fraud. financial statement assertions. c. Illegal acts. d. Decrease the extent of auditing procedures to be d. Business risk. applied to the class of transactions. 21. Audits of financial statements are designed to obtain 16. When issuing an unmodified opinion, the auditor who assurance of detecting misstatement due to evaluates the audit findings should be satisfied that the a. Amount of known misstatement is documented in the Fraudulent Misappropriation management representation letter. Errors financial reporting of assets b. Estimate of the total likely misstatement is less than a a. Yes Yes Yes material amount. b. Yes Yes No c. Amount of known misstatement is acknowledged and c. Yes No Yes recorded by the client. d. No Yes No d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client. 22. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the A.4. Errors and Fraud following except 17. Which of the following is an example of fraudulent a. Employee collusion. financial reporting? b. Falsified documentation. c. Need to apply professional judgment in evaluating a. Company management changes inventory count tags fraud risk factors. and overstates ending inventory, while understating d. Professional skepticism. cost of goods sold. b. The treasurer diverts customer payments to his 23. An attitude that includes a questioning mind and a critical personal due, concealing his actions by debiting an assessment of audit evidence is referred to as expense account, thus overstating expenses. a. Due professional care. c. An employee steals inventory and the “shrinkage” is b. Professional skepticism. recorded in cost of goods sold. c. Reasonable assurance. d. An employee steals small tools from the company d. Supervision. and neglects to return them; the cost is reported as a miscellaneous operating expense. 116 Module 2: Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks 24. Professional skepticism requires that an auditor assume 30. Which of the following characteristics most likely that management is would heighten an auditor’s concern about the risk of intentional manipulation of financial statements? a. Honest, in the absence of fraud risk factors. b. Dishonest until completion of audit tests. a. Turnover of senior accounting personnel is low. c. Neither honest nor dishonest. b. Insiders recently purchased additional shares of the d. Offering reasonable assurance of honesty. entity’s stock. c. Management places substantial emphasis on meeting 25. The most difficult type of misstatement to detect is fraud earnings projections. based on d. The rate of change in the entity’s industry is slow. a. The overrecording of transactions. 31. Which of the following statements reflects an auditor’s b. The nonrecording of transactions. responsibility for detecting misstatements due to errors and c. Recorded transactions in subsidiaries. fraud? d. Related-party receivables. a. An auditor is responsible for detecting employee 26. When considering fraud risk factors relating to errors and simple fraud, but not for discovering management’s characteristics, which of the following is least fraud involving employee collusion or management likely to indicate a risk of possible misstatement due to fraud? override. a. Failure to correct known significant deficiency on a b. An auditor should plan the audit to detect timely basis. misstatements due to errors and fraud that are caused b. Nonfinancial management’s preoccupation with the by departures from GAAP. selection of accounting principles. c. An auditor is not responsible for detecting c. Significant portion of management’s compensation misstatements due to errors and fraud unless represented by bonuses based upon achieving unduly the application of GAAS would result in such aggressive operating results. detection. d. Use of unusually conservative accounting practices. d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due 27. Which of the following conditions identified during to errors and fraud that are material to the financial fieldwork of an audit is most likely to affect the auditor’s statements. assessment of the risk of misstatement due to fraud? 32. Disclosure of fraud to parties other than a client’s senior a. Checks for significant amounts outstanding at year- management and its audit committee or board of directors end. ordinarily is not part of an auditor’s responsibility. However, b. Computer generated documents. to which of the following outside parties may a duty to c. Missing documents. disclose fraud exist? d. Year-end adjusting journal entries. 28. Which of the following is most likely to be a response to To a the auditor’s assessment that the risk of material misstatement To the government due to fraud for the existence of inventory is high? SEC when To a successor funding agency a. Observe test counts of inventory at certain locations the client auditor when the from which the on an unannounced basis. reports an successor makes client receives b. Perform analytical procedures rather than taking test auditor appropriate financial counts. change inquiries assistance c. Request that inventories be counted prior to year-end. a. Yes Yes No d. Request that inventory counts at the various locations b. Yes No Yes be counted on different dates so as to allow the same c. No Yes Yes auditor to be present at every count. d. Yes Yes Yes 29. Which of the following is most likely to be an example of fraud? 33. Under Statements on Auditing Standards, which of the a. Defalcations occurring due to invalid electronic following would be classified as an error? approvals. a. Misappropriation of assets for the benefit of b. Mistakes in the application of accounting principles. management. c. Mistakes in processing data. b. Misinterpretation by management of facts that existed d. Unreasonable accounting estimates arising from when the financial statements were prepared. oversight.  Module 2: Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks 117 c. Preparation of records by employees to cover a c. Commence a fraud examination. fraudulent scheme. d. Contact regulatory authorities. d. Intentional omission of the recording of a transaction 39. Which of the following statements is correct relating to to benefit a third party. the auditor’s consideration of fraud? 34. What assurance does the auditor provide that misstatements a. The auditor’s interest in fraud consideration relates to due to errors, fraud, and direct effect illegal acts that are material fraudulent acts that cause a material misstatement of to the financial statements will be detected? financial statements. Direct effect b. A primary factor that distinguishes fraud from error Errors Fraud of illegal acts is that fraud is always intentional, while errors are generally, but not always, intentional. a. Limited Negative Limited c. Fraud always involves a pressure or incentive to b. Limited Limited Reasonable commit fraud, and a misappropriation of assets. c. Reasonable Limited Limited d. While an auditor should be aware of the possibility of d. Reasonable Reasonable Reasonable fraud, management, and not the auditor, is responsible for detecting fraud. 35. Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted 40. Which of the following factors or conditions is an auditor auditing standards should be planned and performed with an least likely to plan an audit to discover? attitude of a. Financial pressures affecting employees. a. Objective judgment. b. High turnover of senior management. b. Independent integrity. c. Inadequate monitoring of significant controls. c. Professional skepticism. d. Inability to generate positive cash flows from operations. d. Impartial conservatism. 41. At which stage(s) of the audit may fraud risk factors be 36. Which of the following most accurately summarizes what identified? is meant by the term “material misstatement?” Obtaining Conducting a. Fraud and direct-effect illegal acts. Planning understanding fieldwork b. Fraud involving senior management and material a. Yes Yes Yes fraud. b. Yes Yes No c. Material error, material fraud, and certain illegal c. Yes No No acts. d. No Yes Yes d. Material error and material illegal acts. 37. Which of the following statements best describes 42. Management’s attitude toward aggressive financial the auditor’s responsibility to detect conditions relating to reporting and its emphasis on meeting projected profit goals financial stress of employees or adverse relationships between most likely would significantly influence an entity’s control a company and its employees? environment when a. The auditor is required to plan the audit to detect these a. External policies established by parties outside the conditions on all audits. entity affect its accounting practices. b. These conditions relate to fraudulent financial b. Management is dominated by one individual who is reporting, and an auditor is required to plan the audit also a shareholder. to detect these conditions when the client is exposed c. Internal auditors have direct access to the board of to a risk of misappropriation of assets. directors and the entity’s management. c. The auditor is required to plan the audit to detect d. The audit committee is active in overseeing the these conditions whenever they may result in entity’s financial reporting policies. misstatements. 43. Which of the following is least likely to be required on an d. The auditor is not required to plan the audit to audit? discover these conditions, but should consider them if he or she becomes aware of them during the audit. a. Test appropriateness of journal entries and adjustment. b. Review accounting estimates for biases. 38. When the auditor believes a misstatement is or may be c. Evaluate the business rationale for significant unusual the result of fraud but that the effect of the misstatement is not transactions. material to the financial statements, which of the following d. Make a legal determination of whether fraud has steps is required? occurred. a. Consider the implications for other aspects of the 44. Which of the following is most likely to be an overall audit. response to fraud risks identified in an audit? b. Resign from the audit.