Q&A Hero

Q: A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n) A. Client representation letter. B. Letter of audit inquiry. C. Management letter. D. Engagement letter.

Q: An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes A. Management's responsibility to guarantee that there are no material misstatements due to fraud. B. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud. C. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. D. The auditor's responsibility for the fairness of the financial statements.

Q: During the initial planning phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud. B. Evaluate the reasonableness of the client's accounting estimates. C. Discuss the timing of the audit procedures with the client's management. D. Inquire of the client's attorney as to any unrecorded claims.

Q: Which of the following situations would most likely require special audit planning? A. Some items of factory and office equipment do not bear identification numbers. B. Depreciation methods used on the client's tax return differ from those used on the books. C. Assets costing less than $500 are expensed even though the expected life exceeds one year. D. Inventory is comprised of precious stones.

Q: Before accepting an engagement to audit a new client, a CPA is required to obtain A. An understanding of the prospective client's industry and business. B. The prospective client's signature on the engagement letter. C. A preliminary understanding of the prospective client's control environment. D. The prospective client's consent to make inquiries of the predecessor auditor.

Q: Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? A. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. B. Management's disregard of its responsibility to maintain an adequate control environment. C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. D. Management's refusal to permit the CPA to perform substantive procedures before the year-end.

Q: Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. The details of most recorded transactions are not available after a specified period of time. B. Internal control activities requiring segregation of duties are subject to management override. C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues.

Q: Evaluating a prospective client requires which of the following steps? A. Communicate with the SEC. B. Preplan the audit. C. Determine if the firm is independent of the client. D. Communicate with the AICPA.

Q: A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's A. Engagement letter. B. Audit working papers. C. Engagement letter and audit working papers. D. It would not be typical to allow a review of either the engagement letter or the audit working papers.

Q: An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if A. The payments violated the client's policies regarding the prevention of illegal acts. B. The client receives financial assistance from a federal government agency. C. Documentation that is necessary to prove that the bribes were paid does not exist. D. Management fails to take the appropriate remedial action.

Q: Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A. The prospective client's unwillingness to permit inquiry of its legal counsel. B. The inability to review the predecessor auditor's documentation. C. The CPA's lack of understanding of the prospective client's operations and industry. D. Indications that management has not investigated employees in key positions before hiring them.

Q: Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? A. Analysis of balance sheet accounts. B. Analysis of income statement accounts. C. All matters of continuing accounting significance. D. Facts that might bear on management integrity.

Q: 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 the predecessor's work should be utilized. B. Whether, in the predecessor's opinion, the financial statements are materially correct. C. Whether, in the predecessor's opinion, the company's internal controls have been satisfactory. D. Whether the engagement should be accepted.

Q: An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the A. Securities and Exchange Commission. B. Client's legal counsel. C. Stock exchanges where the company's stock is traded. D. Audit committee of the board of directors.

Q: Evaluating a prospective client requires which of the following steps? A. Communicate with the predecessor auditor. B. Preplan the audit. C. Establish the terms of the engagement. D. None of these.

Q: In assessing whether to accept a client for an audit engagement, a CPA should consider A. The current financial health of the prospective client. B. The integrity of management. C. The CPA's overall engagement risk. D. All of these should be considered.

Q: Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the A. Adequacy of the preplanned audit program. B. Ability to establish consistency in application of accounting principles between years. C. Apparent scope limitation. D. Integrity of management.

Q: Materiality is based only on a quantitative analysis of the financial statements.

Q: Materiality significantly impacts the auditor's decisions about how much and what kind of evidence to gather.

Q: There are five general types of audit tests.

Q: The engagement partner is typically responsible for doing the detailed audit testing.

Q: The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.

Q: The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any accounting firm employed by a public company.

Q: All companies must have an audit committee.

Q: If the internal audit function is competent and objective, the auditor may generally rely on the work of an internal audit function in certain areas to reduce the amount of external audit work in these areas.

Q: In order to properly preplan the audit, the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm.

Q: If the prospective client refuses to allow the predecessor auditor to communicate with the successor auditor, the successor auditor should have reservations about accepting the client.

Q: The Code of Professional Conduct does not allow an auditor to disclose confidential client information without the client's consent.

Q: When the prospective client has previously been audited, auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.

Q: The first phase of audit planning is risk assessment.

Q: Jane Goodperson performed an audit on the Quagmire Corporation and issued an unqualified opinion. Jane performed the audit with due professional care and in accordance with generally accepted auditing standards. Two months after the report is issued, Jane discovers on the news that the CEO of Quagmire, Johnny Best, had been stealing small amounts of inventory. The amount, however, is immaterial compared to the overall inventory of the corporation. Jane soon receives a call from Quagmire's CFO, Mark Beastly. Mark wants Jane to refund her audit fees. Mark thinks Jane did not properly perform the audit, as she did not discover this fraud. Further, he feels that now Quagmire's financial statements are not fairly stated because of Jane. How should Jane respond to this claim?

Q: What are the three PCAOB auditing standards found within the 10 GAAS (NOT the three main categories of GAAS) and why is each important?

Q: The principles underlying an audit conducted in accordance with generally accepted auditing standards are grouped into four categories. The second category is that of "personal responsibility of the auditor." Generally explain what is intended by this principle.

Q: The IAASB and the ASB have collaborated on the principles underlying an audit conducted in accordance with generally accepted auditing standards. These principles are grouped into four categories. What are the four categories?

Q: The fourth PCAOB reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others. B. An auditor from expressing different opinions on each of the basic financial statements. C. Management from reducing its final responsibility for the basic financial statements. D. Misinterpretations regarding the degree of responsibility the auditor is assuming.

Q: The three PCAOB standards of fieldwork are concerned with A. Planning and supervision and understanding the auditee's internal control system. B. Choosing evidence with due professional care. C. Adequate training to understand the auditee's internal controls system. D. Ensuring consistency in financial statements for periods presented.

Q: The fourth PCAOB standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements. The overall purpose of the fourth standard of reporting is to require that reports A. State that the examination of financial statements has been conducted in accordance with generally accepted auditing standards. B. Indicate the character of the auditor's examination and the degree of responsibility assumed by the auditor. C. Imply that the auditor is independent in fact as well as in appearance with respect to the financial statements under examination. D. Express whether the accounting principles used in preparing the financial statements have been applied consistently in the period under examination.

Q: Which of the following best describes what is meant by generally accepted auditing standards? A. Audit assertions generally determined on audit engagements. B. Acts to be performed by the auditor. C. Standards of quality for the auditor's performance. D. Procedures to be used to gather evidence to support financial statements.

Q: The four PCAOB standards of reporting are concerned with all of the following except A. The presentation of the financial statements based on GAAS. B. The presentation of the financial statements based on GAAP. C. Whether principles are consistently applied, whether all informative disclosures have been made, and the degree of responsibility the auditor is taking. D. The degree of responsibility the auditor is taking.

Q: Which of the following best describes the role of corporate governance? A. Management decides which accounting principles are the most appropriate. B. Shareholders vote to decide who should be members of the board of directors. C. Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources. D. Management often is compensated based on the company's profitability.

Q: Due professional care requires A. Auditors to plan and perform their duties with the skill and care that is commonly expected of accounting professionals. B. The examination of all available corroborating evidence. C. The exercise of error-free judgment. D. A study and review of internal controls that includes tests of controls.

Q: Which of the following statements regarding the PCAOB is incorrect? A. It is a public-sector, nonprofit corporation. B. It is overseen by the SEC. C. It sets standards for public company audits. D. It has delegated all of its standard-setting authority to the AICPA.

Q: Which of the following is not explicitly a part of the IIA's definition of internal auditing? A. Internal auditing is an objective assurance activity. B. Internal auditing is a consulting activity. C. Internal auditing should help an organization accomplish its objectives. D. Internal auditors should help external auditors complete the annual financial statement audit.

Q: Which of the following is not included in the broad category of assurance services? A. Operational audit. B. Reporting on internal control. C. Accounting or review services. D. Evaluation of the auditee's risk management framework.

Q: An internal auditor is likely to be more concerned with _________________ than the external auditor. A. Internal administrative procedures B. Cost accounting procedures C. The efficiency of operations D. Internal control

Q: The objective of the second PCAOB Standard of Reporting is to provide assurance that A. There are no variations in the format and presentation of financial statements. B. Substantially different transactions and events are not accounted for on an identical basis. C. The auditor is consulted before material changes are made in the application of accounting principles. D. The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed.

Q: Due professional care requires auditors to A. Obtain independent, third party (non-auditee) documentation as evidence for all information presented in the financial statements. B. Exercise professional skepticism during the audit. C. Disregard any evidence generated by the auditee during the audit. D. Find every error contained in the financial statements prepared by management.

Q: The AICPA's Statements on Auditing Standards can be described as A. Providing very specific guidance about the specific activities an auditor must perform on each engagement. B. Similar to financial accounting standards in that they are developed by the government. C. Defining the minimum standards of performance for an auditor. D. Providing assurance that an auditor will not issue an incorrect opinion.

Q: The main difference between SAS and AU is A. They are the same except that SAS are organized chronologically and the AU are organized by topical area. B. SAS are issued by the ASB and AU are issued by the PCAOB. C. SAS are issued by the PCAOB and AU are issued by the ASB. D. SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP.

Q: The first PCAOB general standard recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper A. Business and finance courses. B. Quality control and peer review. C. Education and experience in auditing. D. Supervision and review skills.

Q: The three PCAOB general standards are concerned with A. Adequate training and proficiency of the auditor, proper planning and supervision, and due professional care. B. Adequate training and independence. C. Due professional care. D. Independence, adequate training and due professional care.

Q: Who bears ultimate responsibility for the financial statements? A. Management of the organization, equally with the external auditor that audits the statements. B. Management and the shareholders of the organization. C. The external auditor that audits the statements. D. Management of the organization.

Q: A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in determining A. The nature of the CPA's report qualification. B. The scope of the CPA's auditing procedures. C. Requirements for the review of the entity and its environment. D. Whether the CPA should undertake an audit engagement.

Q: Which of the following is NOT a requirement of the Sarbanes-Oxley Act? A. Audit firms cannot provide most types of nonaudit services to their public company auditees. B. Audit firms are required to rotate audit partners off audit engagements every five years for public company audits. C. Firms that audit public companies are subject to inspection by the PCAOB. D. A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.

Q: What is the general character of the work conducted in performing a forensic audit for a company? A. Providing assurance that the financial statements are not materially misstated. B. Detecting or deterring fraudulent activity. C. Offering an opinion on the reliability of the specific assertions made by management. D. Identifying the causes of an entity's financial difficulties.

Q: Which is not an attribute of an external auditor? A. Independence. B. Auditee advocacy. C. Objectivity. D. Concern for the public interest.

Q: External auditors are referred to as "external" because A. They report to users outside of the audited entity. B. They are paid by parties outside of the audited entity. C. They are not employees of the entity being audited. D. Their offices are not at the entity's place of business.

Q: Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and A. Monetary stimulus. B. Evaluation. C. Accuracy. D. Compliance.

Q: A typical objective of an operational audit is for the auditor to A. Determine whether the financial statements present fairly the entity's operations. B. Evaluate the feasibility of attaining the entity's operational objectives. C. Make recommendations for improving performance. D. Report on the entity's relative success in attaining profit maximization.

Q: Forensic audits include all of the following except A. Criminal investigations. B. Manufacturers' assertions about product quality. C. Employee fraud. D. Management fraud.

Q: Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance? A. The risk that financial statements are misstated because of fraud. B. The risk that financial statements are misstated because of error or fraud. C. Whether management has systems in place to evaluate and effectively manage the entity's business risks. D. Developing client acceptance and continuance practices that minimize the likelihood of lawsuits against the auditor.

Q: An "in-charge" auditor typically holds the rank of A. Associate. B. Senior. C. Manager. D. Partner.

Q: Typically, an external auditor first gets supervisory experience at what level of authority? A. Associate. B. Senior. C. Manager. D. Partner.