21. Which of the following communications between the auditor with final responsibility for an engagement (such as the engagement partner) and the audit engagement team regarding the susceptibility of a clients financial statements to material fraud is required by AICPA Professional Standards?

a. Discussing the firms policy for allocating budgeted audit hours to detect fraud.

b. Explaining all procedures to be performed on the engagement to detect significant errors or fraudulent activity.

c. Explaining the firms strategy for managing and controlling legal liability due to fraud.

d. Discussing the need to maintain a questioning mind and to exercise professional skepticism throughout the audit.

e. Obtaining a written engagement letter to document the terms of the engagement.

22. Which of the following nonaudit services is permitted by the SEC without being seen as impairing a CPA firms independence when also serving as the auditor of a public company?

a. Some specific tax services.

b. Information system design and implementation services.

c. Human resource services (such as executive search).

d. Internal audit services.

e. Bookkeeping and general ledger maintenance.

23. An auditor is required to communicate with those charged with governance about all of the following matters, except for

a. Opportunities to improve the entitys business processes to be more profitable.

b. Material adjusting journal entries proposed by the auditors.

c. Disagreements the auditor had with management over accounting issues.

d. Instances where management requested a second opinion from another CPA firm.

e. Fraud that is not material but which involves senior management.

24. Which of the following statements is correct regarding the auditors use of a specialist?

1. Any such specialist must be an employee of the CPA firm because of independence.
2. Any such specialist must be approved in advance by management.
3. The specialist remains completely responsible for any assumptions and conclusions.
4. The auditor remains responsible for the audit opinion and the specialists work.
5. The Sarbanes-Oxley Act prohibits audit firms from using specialists.

25. When auditing a material element of a public company's financial statements, which of the following activities are required? ["Yes" means required; "No" means not required.]

Perform Risk Assessment Perform Tests of Perform Substantive

Procedures Control Procedures

a. Yes Yes Yes

b. Yes Yes No

c. Yes No Yes

d. No Yes Yes

e. No No Yes

26. Which of the following is most accurate regarding an auditors required communications about fraud-related issues?

a. Fraud having a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.

b. Any requirement to disclose fraud outside the entity is solely the responsibility of management whereas the auditor has no such responsibility.

c. Fraud that involves senior management should be reported directly by the auditor to those charged with governance whether the fraud is material or not.

d. The professional standards provide no requirements related to the communication of fraud, but auditors should use their professional judgment in that regard.

e. Fraud that involves senior management need not be communicated to anyone if that fraud is determined to be immaterial.

27. Which of the following circumstances would be most indicative of a higher likelihood of fraudulent financial reporting?

a. The clerk who is responsible for handling cash receipts is not subject to appropriate oversight by management.

b. The entitys controller feels underpaid and underappreciated.

c. There is inadequate internal control to safeguard the entitys assets.

d. The payroll clerk appears to be living beyond his means and recently bought an expensive new home.

e. The entity has been experiencing negative cash flows from its operating activities.

28. Which two risk components comprise the risk of material misstatement?

a. Inherent risk and control risk.

b. Inherent risk and detection risk.

c. Control risk and detection risk.

d. Audit risk and inherent risk.

e. Business risk and audit risk.

29. Tolerable misstatement is best described by which of the following statements?

a. The amount of misstatement that management is willing to tolerate in the financial statements.

b. Materiality used to establish a scope for the audit procedures for the individual account balance or relevant disclosures.

c. Materiality for the balance sheet as a whole.

d. The quantitative characteristics that would determine materiality at the financial statement level.

e. The qualitative characteristic s that would determine materiality at the financial statement level.

30. Which of the following statements concerning illegal acts by clients is most accurate?

a. An audit in accordance with AICPA Professional Standards includes a requirement to perform procedures designed to detect illegal acts having an indirect but material effect on the entitys financial statements.

b. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.

c. An auditor is responsible for determining that the entity is in compliance with all applicable laws and regulations that could affect the entitys financial statements.

d. An auditor considers illegal acts from the perspective of the reliability of managements representations rather than their relation to audit objectives derived from financial statement assertions.

e. An auditors responsibility to detect illegal acts that have a direct and material effect on an entitys financial statements is the same as that for errors and fraud.