1. Beckler & Associates, CPAs, examined and issued an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen’s net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen’s default. Which of the following must Mac prove in order to recover?
I. Beckler did not conduct the audit with the appropriate level of professional care.
II. Mac relied on the financial statements.
A) Both I one and II.
2.Delta Life Insurance Company prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. Wall, CPA, is Delta’s auditor. If Wall discovers that the statements are not suitably titled, Wall should:
A) disclose any reservations in an explanatory paragraph and qualify the opinion.
3.When component auditors are involved in the audit of group financial statements, the group auditors are required to
A) consider the independence and professional reputation of the component auditors in deciding how to utilize their work.
4. When auditors are engaged to examine an entity’s financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not
A) modify the Auditor’s Responsibilities for the Audit of the Financial Statements Section to identify the basis for the disclaimer.
5.Documentation of an Audit Data Analytic (ADA) should be sufficient enough such that
A) an experienced auditor, with no prior connection to the engagement, could understand the conclusions reached and significant judgments made.
6. Under the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, auditors may be liable if they acted
A) without good faith.
7. Select the appropriate case to which each is most closely related.
Concluded that auditors had a duty to inform clients of instances of fraud, even if hired for write-up work.
A) 1136 Tenants’ Corporation v. Max Rothenberg & Company.
8. Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming:
A) it was a primary beneficiary.
9. According to Sarbanes–Oxley, accountants performing an audit or review must maintain all engagement documentation for a period of
A) 7 years.
10. In end-user computing environments, the processing control procedures would ordinarily not include
A) online editing and sight verification.
11. Subsequent events occur between the__________ and the__________.
A) date of the financial statements; date of the auditors’ report
12. A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on
A)the fair presentation of the financial statements in conformity with GAAP.
13. Which of the following would not be an objective of a fraud investigation?
A) Determine the amount of restitution that should be received from the perpetrators.
14. Computer operations controls are typically implemented for files and data used in processing. The major objectives of these controls include each of the following except for
A) ensure restricted access to the computing environment.
15. The IIA Performance Standards do not include the standard for:
A) compliance with policies, plans, procedures, laws, and regulations.
16. When a predecessor auditor has examined the prior years’ financial statements presented in comparative format, the current auditors’ report should
A) reference the predecessor auditors’ report in an other-matter paragraph.
17. Auditors will issue an adverse opinion when
A) a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified
18. Select the appropriate case to which each is most closely related.
Third parties cannot rely on reviewed financial statements to the same extent as they can on audited financial statements.
A) Iselin v. Landau
19. To prevail in an action brought under common law, the plaintiff must show all of the following except:
A) auditors knew the financial statements contained a material misstatement.
20. Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity’s financial statements in
A) the Basis for Adverse Opinion Section.
21. In which of the following circumstances would a qualified opinion not be appropriate?
A) The auditors lack independence with respect to the audited entity.
22. Select the appropriate term to which it is most likely related. Each term is associated with only one statement.
We discussed the following recommendation for streamlining the receiving department document flow with Ms. Phyllis Cook, receiving department supervisor.
A) Management letter.
23. Auditors should notbe liable to any party if they perform services that met the standards of:
A) due care.
24. When reporting on financial statements that include only summarized totals of account balances, the auditors’ conclusion should state whether the information in the summary financial statements
A) is fairly stated, in all material respects, in relation to the complete financial statements.
25. When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is
A) qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.
26. The state Department of Education needs to have audits for various reasons. Select the appropriate type of engagement or practice that would most likely be performed. Answers may be used more than once.
To know if hiring practices in various school districts meet state law
A) Compliance audit
27. The GAO Government Auditing Standards requirements for written reports in financial statement audits do not include:
A)a report of any significant accomplishments and management improvements.
28. Which of the following procedures is not used in auditors’ examination of litigation, claims, and assessments?
A) Performing analytical procedures.
29. Management letters are not a means of
A) satisfying professional requirements to communicate matters related to the client’s internal control.
30. Select the appropriate case to which each is most closely related.
Established a three point test for auditor liability, including that auditors demonstrate some action to acknowledge the existence of the third party and the third party’s intent to rely on the opinion and financial statements.
A) Credit Alliance v. Arthur Andersen.
31. When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the
| Auditor’s Responsibilities for the Audit of the Financial Statements Section | Notes to the Financial Statements | |
|---|---|---|
| A. | Yes | Yes |
| B. | Yes | No |
| C. | No | Yes |
| D. | No | No |
A) Option C
32. Which of the following is NOT included in the Integrity and Objectivity Rule?
A) prudent assessment of facts
33. Select the appropriate term to which it is most likely related. Each term is associated with only one statement.
Includes statements regarding auditors’ judgment of the quality of the client’s accounting principles.
A) Communication with individuals charged with governance.
34. A typical objective for internal auditors in the company’s sustainability program is for the auditor to:
A) assist management in establishing measurements for achieving company objectives.
35. If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(an)
A) subsequently discovered fact.
36. The primary source of information auditors use to obtain information about litigation, claims, and assessments is the
A) client’s management.
37. Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity’s ability to continue as a going concern?
A) Failure to meet forecasted earnings per share.
38. In a report on compliance with contractual agreements conducted in conjunction with an audit of the financial statements, the auditors’ report would include all of the following except:
A) An opinion on the entity’s compliance with contractual agreements.
39. The General Standards Rule requires a member to comply with standards and interpretations. Which of the following is not a standard covered by this rule?
A) independence
40. Engagements to express an opinion on an account, element, or item of a financial statements:
A) Would limit the opinion expressed to the specific account, element, or item that serves as the focus of the engagement.
41. Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the
A) audit report release date.
42. Computer controls that are pervasive and apply to all applications of a computerized processing system are referred to as
A) general controls.
43. Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors’ work did not identify any issues affecting the group auditors’ report?
A) Disclaim an opinion on the portion of the financial statements examined by the component auditors.
44. The work of internal auditors may affect the independent auditor’s:
A) procedures performed in obtaining an understanding of the internal control structure and in assessing the risk of material misstatement and substantive tests performed in gathering direct evidence.
45. When auditors lack independence, which of the following is true about the report on the entity’s financial statements that should be issued?
A) The auditors should disclaim an opinion and should state specifically that they are not independent.
46. Why is it important that the organization establishes systems development and documentation standards?
A) These standards ensure that the program controls and documentation included in recently developed programs is adequate.
47. Which party should request a letter regarding litigation, claims, and assessments from the client’s attorney?
A) Client
48. Green, CPA, was engaged to audit the financial statements of Essex company. after its fiscal year had ended. The timing of Green’s appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green’s auditors’ report most likely contained a(n)
A) unmodified opinion.
49. What agency has the ultimate authority in defining independence for public companies?
A) the SEC
50. To which group can a CPA provide audit documentation without being subpoenaed and without the client’s consent?
A) another CPA firm performing a peer review