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Question 1 of 45 Which of the following statements are true? (There are multiple correct answers) 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 according to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members. It is true that internal controls are the responsibility of management. 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. Question 2 of 45 Select all of the following statements that are false. (There are multiple correct answers and you must select all that are false) When auditing pension obligations, the auditor will likely use a specialist to assist the audit team. If a client has a history of negative cash flow trends and continuing losses, the audit would most likely issue an unqualified opinion with an explanatory paragraph. It is true that when evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year. It is true that a misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is unintentional. The auditor would add a paragraph after the opinion paragraph when there is a serious doubt that the client can continue as a going concern. Question 3 of 45 COSO's framework for internal control includes all of the following, except: Segregation of Duties Monitoring Risk Assessment Control Environment Control Activities Question 4 of 45 Which of the following statements are false? (There are multiple correct answers) It is true that the auditor needs to obtain absolute assurance that the financial statements are free from material misstatement. 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 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. 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. Question 5 of 45 In each of the following situations, a CPA would be considered not independent except when: A CPA has obtained an auto loan from a banking client. A CPA is a business partner of a client's spouse. A CPA has obtained an interest-free loan from a banking client. A CPA has obtained a 90-day signature loan from a client. A CPA has obtained a loan for investment purposes from a client. Question 6 of 45 The concept of the Third-Party Beneficiary Test was established by the _________________ court case. Citizens State Bank v. Timm, Schmidt, & Co. Ultramares Corp. v. Touche None of these answers are correct. Credit Alliance Corp. v. Arthur Andersen & Co. Rosenblum v. Adler Question 7 of 45 One form of _____________ is when a cross-sectional analysis of revenue recorded across multiple sales locations is performed. completeness analysis trend analysis ratio analysis correlation analysis common size analysis Question 8 of 45 Select all of the following statements that are true. (There are multiple correct answers and you should select all that are correct) When financial statements contain a material, unjustified departure from GAAP, a qualification should not be contained in the audit report. 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. There are systematic processes that the auditor can use in making most of the complex judgments in the financial statements. 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. Question 9 of 45 All of the following are incentives or pressures to commit fraud, except: Greed Pending retirement Management compensation schemes Pending stock option expirations Equity convenants Question 10 of 45 All of the following statements are false, except: Management of companies should have the ability to hire and fire the external auditor. The audit committee is a subcommittee of the board of directors comprised of independent outside directors. The SEC has authority to establish GAAP for all business enterprises. The Public Company Accounting Oversight Board was established by the AICPA in response to Securities laws. Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. Question 11 of 45 Which of the following statements is true? Internal audit is the term 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. Obtaining evidence about internal controls is the phase of the audit opinion formulation process that is most commonly thought of as auditing by the general public. The SEC and PCAOB independence rules for auditors are identical. Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. The AICPA has a peer review program that reviews and evaluates the portions of an audit firm's accounting and audit practice that are not inspected by the PCAOB. Question 12 of 45 __________________ are most often involved in perpetuating fraudulent financial reporting. The corporate secretary and accounting manager. The treasurer and the board of directors. The shareholders and the chief operating officer. The chief executive and chief financial officers. The auditors and the attorneys. Question 13 of 45 The auditors' reprocessing of transactions are designed to test which of the following assertions? Completeness Rights Accuracy Occurrence Existence Question 14 of 45 All of the following statements are true except: It is true that bondholders are one of the users of financial statements. It is true that internal controls are the responsibility of management. It is true that corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. It is true that CPA certificates for auditors are issued by state boards of accountancy. It is true that implementing an effective ethical environment is primarily the responsibility of the audit committee of the Board of Directors. Question 15 of 45 Which of the following statements is false? It is true that, regarding loss contingencies, the client's legal counsel should be instructed by the client to respond directly to the auditors. It is true that if the auditor has no reservations about management's financial statements then the auditor will issue a qualified opinion. it is true that independence is often referred to as the cornerstone of the auditing profession. During an audit, the auditor compares the total likely misstatements to each significant segment of the financial statements, such as total current assets, total noncurrent assets, total current liabilities, total noncurrent liabilities, owners' equity, and pretax income, to determine if they are, in aggregate, material to the financial statements. It is true that the total likely misstatements found during the audit are equal to the sum of known and projected misstatements. Question 16 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. 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. All of these would indicate that fraud is pervasive. The company's management takes an overly aggressive approach to revenue recognition. Question 17 of 45 What is considered a reasonable time period for evaluating the likelihood of a client continuing as a going concern? One year from the balance sheet date. None of these answers are correct. One year from the last day of field work. One year from the audit report date. Two years from the balance sheet date. Question 18 of 45 One example of a(an) ______________ is an edit test. supporting control output control processing control custody control input control Question 19 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? 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. None of these answers are correct. A basic five step process for using analytical procedures applies. Analytical procedures provide evidence on whether certain relationships make sense in light of the knowledge obtained during the audit. 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. Question 20 of 45 The extent of audit work ___________ as inherent risk increases, and other risk factors remain constant. increases decreases becomes less reliable is reduced stays the same Question 21 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 cash is realized on the sale of the product. The customer is given the option to return the product at any time. A price is discussed based upon the customer's resale of the product. The discount period has passed. The product is adequately delivered to the customer. Question 22 of 45 Which of the following statements is false? It is true that according to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members. It is true that auditing is the process of attesting to assertions about economic actions and events. It is true that the landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities. It is true that independence is often referred to as the cornerstone of the auditing profession. It is true that successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior. Question 23 of 45 Which of the following statements are false? (There are multiple correct answers) It is true that the auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate the occurrence assertion. According to auditing standards, it is true that accounts receivable confirmations are required to be used if the client's accounts receivable balances are immaterial. The accounts receivable aging schedule is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate. It is true that "clearly trivial" and "not material" are terms that can be used interchangeably. It is true that auditors and management should agree on what is considered material. Question 24 of 45 Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002? Ensuring financial statements and disclosures are accurate. Establish a corporate code of conduct. All of these are management responsibilities. Certify the accuracy of financial statements. Designing internal controls. Question 25 of 45 Which of the following statements are false? (There are multiple answers and you must choose all the ones that are false) It is true that an auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate evidence. U.S. GAAP requires a three-step process to determine the impairment of goodwill. It is true that when circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures, a disclaimer of opinion will be rendered. The repeatability of a process is not a factor to consider when assessing an internal control deficiency. Materiality applies to both interim financial statements and annual financial statements. Question 26 of 45 All of the following statements are true, except: Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees. Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness. Contingent fees are prohibited for tax professionals when preparing tax returns for clients Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits Question 27 of 45 The process of vouching helps establish that ___________________. None of these answers are correct. Transactions are presented properly. Transactions are valid. Transactions are complete. Transactions have been recorded. Question 28 of 45 Directional testing involves testing transactions or balances primarily for which type of error? Overstatement. Either overstatement nor understatement. Understatement. Either overstatement or understatement. None of these are correct. Question 29 of 45 Which of the following statements is true? The five major components of an organization's internal control are: the control environment, risk assessment, control activities, information and communication, and monitoring. The Center for Audit Quality has the primary authority to set auditing standards. Controls to monitor results of operations are considered to be transaction controls. In an audit, management is considered the "client". The Center for Audit Quality was started by the International Federation of Accountants. Question 30 of 45 Which of the following statements is false? Audit documentation should include the initials or electronic signature in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work. Analytical procedures are a type of substantive evidence. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence. The client's verbal evidence is more reliable than evidence from independent outside sources. The relevance of audit evidence depends on the audit assertion being tested. Question 31 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. Audits of Level 3 assets are the most straightforward as they involve an observable, active market. 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." 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 32 of 45 Select all of the following statements that are true. (There are multiple answers) It is true that walkthroughs and inquiries are often used to obtain an understanding of internal controls. It is true that complex audit judgments and decisions often involve accounts that require subjective estimates by management. It is true that auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided. It is true that the audit report is modified to five paragraphs as a result of another audit firm performing part of the financial statement audit. It is true that audit evidence consists of both information that corroborates management's assertions and information that contradicts such assertions. Question 33 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. Identify controls that mitigate financial reporting risks. Document operating effectiveness. Evaluate control deficiencies. Identify financial reporting risks. Question 34 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) Internal auditors perform operational audits. The primary client of the internal audit department is management and the audit committee of the Board of Directors. 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). 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. External auditors are typically responsible for performing information systems and security audits. Question 35 of 45 The Utilitarian Theory requires all of the following actions, except: Identify the potential impact of actions on each affected party. Identify the potential problem. Identify the rights of the affected parties. None of these answers is correct. Identify the desirability of each action. Question 36 of 45 Select all of the following statements that are true. (There are multiple answers). 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. 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 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 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. Question 37 of 45 All of the following are valid purposes for the management representation letter, except: It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses. It implies that the auditor is responsible for the design of the internal controls. It reminds management of its responsibility for the financial statements. None of these answers are correct. It decreases the possibility of misunderstanding concerning the matters that are the subject of the representations. Question 38 of 45 If ______________________, the CPA would still be considered independent. A CPA's father was a salesman at the CPA's audit client and now a major portion of the father's pension fund is invested in the audit client. A CPA's cousin works as a web-site designer at the audit client. A CPA's son works summers at the audit client and has earned 10 shares of stock in the audit client. A CPA's brother is the Vice-President of Sales at the CPA's audit client. The CPA would not be considered independent in any of these situations. Question 39 of 45 Which of the following statements are true? (There are multiple answers) It is true that an integrated audit report provides opinions on both financial statements and internal controls. 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 audit report can be a verbal presentation to the audit committee about the client. 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. Question 40 of 45 Which one of the following statements is true? It is true that an audit opinion is a guarantee that the business is a going concern. It is true that events or transactions occurring after the balance sheet date and before the audit report date, can be useful in identifying and evaluating the reasonableness of estimates. It is true that the going-concern evaluation must be based on separate procedures that test the client's ability to continue as a going concern. It is true that the court system acts as a deterrent to quality controls for the auditing profession. It is true that effective audit processes, by themselves, are sufficient to achieve audit quality. Question 41 of 45 As the risk of material misstatement increases, detection risk will _____________. decrease severely increase none of these answers are correct stay the same see a medium increase Question 42 of 45 All of the following are threats to an auditor's independence, except: Political association threat Management participation threat Advocacy threat Financial self-interest threat Self-review threat Question 43 of 45 Of the following types of audit evidence, _______________ is the least reliable. Evidence from independent outside sources. Evidence derived from a well-controlled system. Original documents. Evidence that the auditor observed directly. Evidence from the client's organization. Question 44 of 45 Which term describes the type of threat which occurs when top management threatens to replace the audit firm because of a disagreement over an accounting issue? Financial self-interest threat Competitive threat Undue influence threat Management participation threat Adverse interest threat Question 45 of 45 Which of the following statements is correct concerning the risk of material misstatement? Risk of material misstatement is controllable by the client. Risk of material misstatement must be assessed in non-quantitative terms. None of these statements are correct. Risk of material misstatement arises because audit procedures have been misapplied. Risk of material misstatement can be controlled and changed by the auditor