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Question 1 of 45 All of the following statements are true, except: A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings goal. The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues. A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level. A consistent pattern of earnings growth would eliminate the auditor's concern for fraud in revenue recognition. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls. Question 2 of 45 The most common criteria against which the auditor measures the fairness of financial statement presentation for a U.S.based company is: Auditing standards Generally accepted accounting principles Government accounting principles Generally accepted accounting standards SarbanesOxley compliance Question 3 of 45 Of the following types of audit evidence, _______________ is the least reliable. Evidence from the client's organization. Evidence derived from a wellcontrolled system. Evidence that the auditor observed directly. Original documents. Evidence from independent outside sources. Question 4 of 45 Which of the following employment positions could an auditor's spouse hold in a client without violating the independence requirements? Accounting department staff. Controller. Internal audit director. Order entry staff. Treasurer. Question 5 of 45 According to the Financial Reporting Council (FRC), when is the culture of an audit firm likely to provide a positive contribution to audit quality? When the leadership of the audit firm ensures financial considerations drive actions. When the leadership of the audit firm creates an environment where achieving efficiency is valued, invested in and rewarded. When the audit firm has multinational experience in conducting audits. When the leadership of the audit firm ensures partners and other staff have sufficient time and resources to deal with difficult issues as they arise. When the leadership of the audit firm ensures robust systems for client acceptance and continuation based on the likelihood of increased audit fees. Question 6 of 45 Which one of the following statements is true? Appropriateness deals with the quantity of evidence the auditor collects, whereas sufficiency deals with the quality of evidence the auditor collects. The client's verbal evidence is more reliable than evidence from independent outside sources. Even though all audits are different, they can all be approached in the same manner. Underlying accounting records consist of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries. Liabilities and expenses are most often tested for overstatements. The first phase in an audit is ________________. Understanding internal controls. Testing of account balances. Understanding the client. Client acceptance or client continuance. None of these answers are correct. Question 8 of 45 Which of the following statements is false? An appropriate mix of evidence for a low risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high risk client could include 60% tests of details, 20% analytics, and 20% tests of controls. A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery as revenue. The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing. When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently. Touring a company's plant offers much insight into potential audit issues. Question 9 of 45 If _________________________, this would indicate that fraud is pervasive throughout the company under audit. The company's management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales. All of these would indicate that fraud is pervasive. The company's management takes an overly aggressive approach to revenue recognition. The company's management drives luxury vehicles and takes vacations to exotic places. The company's management negotiates deals with vendors in such a manner as to pay lower prices. Question 10 of 45 If the audit client experiences a(an) _____________________, then the auditor would consider this to be an indication of a potential goingconcern problem? loss of the controller to a competitor None of these answers are correct large increase to sales in the month previous to yearend adverse key financial ratios improper reporting of internal controls by management Question 11 of 45 In order for an audit firm to perform financial statement audits for public companies, it must _____________________. Register with the U.S. General Accounting Office. Register with the American Institute of Certified Public Accountants. Register with the Internal Revenue Service. Register with the Public Company Accounting Oversight Board. Register with the Institute of Internal Auditors. Question 12 of 45 _________________ is an example of an internal risk for an organization. Changes in regulation that make the business model unsustainable. Changes in price of raw materials. Changes in the reliability of source goods. Changes in internal information technology. Increases in substitute services or products. Question 13 of 45 Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to _________________. Increase Remain the same Become more difficult to ascertain Become less difficult to ascertain Decrease Question 14 of 45 Which of the following statements are true? (There are multiple correct answers and you should choose all that are correct) Pension obligations is a longterm liability account with a high risk of material misstatement. One of the problems auditors will have in regards to complex judgments is related to evaluating a client's internal control. Complex auditing judgments often involve evaluating the client's estimates for allowance for doubtful accounts. The Iron Curtain method focuses on the materiality of current year misstatements and the reversing effect of prioryear misstatements on the income statement. It is true that the discovery of an intentional misstatement, even if immaterial, could impact the auditor's opinion on the effectiveness of the client's external controls. Question 15 of 45 _______________ describes the type of threat that occurs when management threatens to replace the audit firm because of a disagreement over an accounting issue. Management participation threat. Coercion threat. Adverse interest threat. Undue influence threat. Financial selfinterest threat. Question 16 of 45 ______________ is the audit report referred to when the auditor has no reservations about management's financial statements. A qualified report An adverse report A peer review An integrated report An unqualified report Question 17 of 45 _______________________ are most often involved in perpetrating fraudulent financial reporting. The auditors and the attorneys. The shareholders and the chief operating officer. The chief executive and chief financial officers. The controller and accounting manager. The treasurer and the board of directors. Question 18 of 45 Which of the following statements is false? A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level. Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence. Current auditing standards do not require the confirmation of receivables if accounts receivable are not material. Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties. The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing. Question 19 of 45 The best definition of a scienter is _________________________. A causal connection between a misstatement and a material loss. Fraudulent conduct in the purchase of a security. None of these choices is correct. A wrongful state of mind when making a misrepresentation. A material omission of facts. Question 20 of 45 In each of the following situations, a CPA would be considered not independent except when: A CPA has obtained a loan for investment purposes from a client. A CPA has obtained a 90day signature loan from a client. A CPA is a business partner of a client's spouse. A CPA has obtained an interestfree loan from a banking client. A CPA has obtained an auto loan from a banking client. Question 21 of 45 All of the following statements are true, except: It is true that significant changes in the competitive market and a decrease in the competitiveness of the client's products are potential indicators of goingconcern problems. It is true that a quality audit is one performed "in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles (GAAP) and (2) are not materially misstated whether due to errors or fraud." It is true that the SEC has authority to establish GAAP for all business enterprises. It is true that management will often resist a goingconcern modification because investors, lenders, and customers may lose faith in the business. It is true that some auditors may be reluctant to issue a goingconcern audit opinion because it may hasten the failure of the client company. Question 22 of 45 Select all of the following statements that are true. (There are multiple answers). It is true that the term, financial statement audit, is used to describe a systematic process of objectively obtaining evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. It is true that the auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements. It is true that internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and ineffective and inefficient operations. It is true that an individual does not need to agree to uphold the code of professional conduct in order to become licensed as a CPA. It is true that the need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information. Question 23 of 45 Which of the following statements is false? With respect to work specialization, smaller audit firms are less specialized by function. The external auditing profession includes solepractitioner firms. Audit managers are responsible for the overall conduct of each audit. The SEC has the authority to establish GAAP for companies whose stock is publicly traded. Auditors must develop industry and clientspecific knowledge. Question 24 of 45 In order for revenue recognition on a product sale to occur, the company must make sure that which of the following has been accomplished? The discount period has passed. A price is discussed based upon the customer's resale of the product. The customer is given the option to return the product at any time. The cash is realized on the sale of the product. The product is adequately delivered to the customer. Question 25 of 45 Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct? A member must adequately plan and supervise the performance of professional services. None of these answers are correct. A member must not take on an engagement that is beyond the member's professional competence. A member firm must not advertise services to competing clients. A member must exercise duties prudently and professionally. Question 26 of 45 Of the following items listed, which one would be considered the most reliable type of audit evidence? Confirmations from banks. Customer accounts receivable files. Purchase orders from vendors. None of these are reliable audit evidence Computerized general ledger. Question 27 of 45 Select all of the following statements that are true. (There are multiple correct answers and you should select all that are correct) It is true that existing professional guidance notes that auditors must make materiality assessments for purposes of (1) audit planning and (2) evidence evaluation after audit procedures are completed. It is true that an auditor needs to assess disclosures about what lines of business the company may discontinue. When the financial statements contain a material departure from GAAP that the auditor believes is justified, the justification should be included in a paragraph added before the opinion paragraph. When financial statements contain a material, unjustified departure from GAAP, a qualification should not be contained in the audit report. There are systematic processes that the auditor can use in making most of the complex judgments in the financial statements. Question 28 of 45 Please select all of the following statements that are false. (There are multiple answers and you should select all that are false) It is true that complex audit judgments and decisions often involve accounts that require subjective estimates by management. The scope paragraph of an unqualified opinion primarily gives information relating to statements and dates under audit. In the FASB hierarchy of inputs to consider for assessing fair value, quoted prices on identical items is associated with Level 1. It is true that the inventory account does not require any subjective estimates by management. It is true that the experience level of the audit team is not delineated in the audit report. Question 29 of 45 All of the following statements are false except: A free market can only exist if there is sharing of perfectly reliable information. The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud. In an audit, management is considered the "client". Transparency is a desirable, but not critical, element of effective corporate governance. Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing. Question 30 of 45 All of the following are true except: Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls. Professional skepticism by the auditor is not needed when internal controls over revenue have been tested and found to be effective. If an auditor wants to obtain evidence concerning the allowance for doubtful accounts he or she would most likely use an aged trial balance to help identify past due balances. Materiality relates to the significance or importance of an item. An incentive for fraud may exist when the granting of stock options is dependent on reaching an earnings goal. Question 31 of 45 Which of the following statements are true? (There are multiple correct answers) It is true that the PCAOB is a public board, appointed by Congress, to provide oversight of the firms that audit public companies registered with the SEC. It is true that all audit procedures must be completed before year end. It is true that the AICPA's fundamental principles and guidance for auditing standards can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results. It is true that auditing exists because users need unbiased information on which to assess management performance and make economic decisions. It is true that when the risk of material misstatement is increased, the auditor increases the extent of audit procedures and requires less evidence. Question 32 of 45 Which of the following statements are false? (There are multiple answers) It is true that the amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance. It is true that liability concepts developed through court decisions are referred to as statutory law. It is true that the auditor uses professional judgment to determine which audit procedures to perform. It is true that the auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA. It is true that materiality relates to the significance or importance of an item. Question 33 of 45 All of the following statements are false except: Inspection of tangible assets generally provides reliable evidence with the respect to the completeness of the assets, but not necessarily about the existence of the assets. Auditors should mail third party confirmations through the client's mailroom. Tracing is a process that helps establish that recorded transactions are valid. Inspection of an asset generally provides reliable evidence about the rights and obligations assertion related to that asset. While inspecting documents, auditors should use original documents rather than copies, because copies are easy for management to falsify. Question 34 of 45 Which of the following statements are false? (There are multiple correct answers) It is true that preventive controls are designed to provide reasonable assurance that the correct program is used for processing, all transactions are processed, and the transactions update appropriate files. It is true that the auditor needs to obtain absolute assurance that the financial statements are free from material misstatement. It true that auditors make materiality assessments to help in planning the audit evidence to obtain and in evaluating the audit evidence that was obtained. It is true that the Clarity Project is an initiative of the AICPA to converge its auditing standards with those of the PCAOB. It is true that segregation of duties is considered a part of the monitoring component of the COSO framework for internal control structure. Question 35 of 45 It is true that analytical procedures help auditors assess the overall financial presentation of the financial statements. Which of the following statements is false regarding analytical procedures? By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report. Analytical procedures provide evidence on whether certain relationships make sense in light of the knowledge obtained during the audit. Auditing standards require the use of analytical procedures in the final review phase of the audit to assist in identifying ending account relationships that are unusual. A basic five step process for using analytical procedures applies. None of these answers are correct. Question 36 of 45 Select all of the following statements that are true. (There are multiple correct answers and you must select all statements that are true) External auditors are typically responsible for performing information systems and security audits. It is true that the most difficult decisions about which opinion to issue are generally centered around decisions based on the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the likelihood of the entity being a going concern. It is true that the auditor is only concerned about the aggregate internal control deficiencies when determining the appropriate opinion on internal control over financial reporting (ICFR). The primary client of the internal audit department is management and the audit committee of the Board of Directors. Internal auditors perform operational audits. Question 37 of 45 Which of the following statements are true? (There are multiple correct answers) It is true that planning materiality helps the auditor determine the extent of audit evidence needed in order to provide an opinion on the financial statements. It is true that according to the SarbanesOxley Act, the audit committee must have at least 3 independent members. It is true that in most audits, materiality is most commonly expressed as a percentage of net income. It is true that when fraud risk is great in the organization under audit, procedures applied are likely to be more extensive. It is true that internal controls are the responsibility of management. Question 38 of 45 Select all of the following statements that are true. (There are multiple correct answers and you must select all that are true) The volume of transactions affected is not one of the critical criteria in assessing identified internal control deficiencies. Violations of GAAP resulting in a qualified opinion affect the standard audit report through adding an explanatory paragraph before the opinion paragraph, and modifying the opinion paragraph to read "except for." Audits of Level 3 assets are the most straightforward as they involve an observable, active market. When assessing fair value of Level 1 assets, auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence. Qualified opinions can only be issued by auditors when there are violations of GAAP or scope limitations. Question 39 of 45 ____________ is an example of alternative procedures for the confirmation of accounts receivable. Tracing source documents to recorded amounts. Inquiry of management. Providing an estimate of the allowance for doubtful accounts to be recorded by the client. Review of subsequent collections on account by the client. None of these answers are correct. Question 40 of 45 All of the following factors will result in control risk being assessed at a lower level, except when: Controls are well designed. Management has created a culture of ethical behavior. Accounting staff are well trained and educated. The control environment is operating effectively. There is a lack of supervision of accounting personnel. Question 41 of 45 Which of the following statements are true? (There are multiple answers) It is true that when there is an uncertainty surrounding the financial statements, the auditor may still be able to give an unqualified opinion. It is true that the revenue cycle considered by auditors includes the sales process but not collections. It is true that performing a walkthrough provides an understanding of the nature of processing in important accounting applications. It is true that the audit report can be a verbal presentation to the audit committee about the client. It is true that an integrated audit report provides opinions on both financial statements and internal controls. Question 42 of 45 Which of the following is the first step in management's evaluation of internal control over financial reporting? Select and perform testing procedures to evaluate the operating effectiveness. Evaluate control deficiencies. Identify controls that mitigate financial reporting risks. Identify financial reporting risks. Document operating effectiveness. Question 43 of 45 All of the following statements are false, except: The court system acts as a deterrent to quality controls for the auditing profession. CPA certificates for auditors are issued by state boards of accountancy. Effective audit processes, by themselves, are sufficient to achieve audit quality. The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. According to Rights Theory, the highestorder rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. Question 44 of 45 __________________ should sign the management representation letter. None of these answers are correct. The controller and the auditor. The chief executive officer and the chief financial officer. The chief financial officer and the treasurer. The members of the audit committee and board of directors. Question 45 of 45 Assume that the auditor concludes that there may be a goingconcern problem. In that case, which of the following is not typically evaluated to determine the reasonableness of management's plans to overcome this problem? Management's assumptions about selling off assets and their relationship to current market prices. Management's assumptions about cost savings related to a reduction in the work force should be recomputed and evaluated to determine any hidden costs. Management's past track record related to delaying unnecessary expenditures. None of these answers are correct. Management's assumption about increasing prices or market share in relationship to current industry developments