Accounting 408 Exam 1, Chapters 1, 2, 12, A, B, D Fall 2017

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1 Accounting 408 Exam 1, Chapters 1, 2, 12, A, B, D Fall 2017 Name Row I. Multiple Choice Questions. (2 points each, 100 points total) Read each question carefully and indicate the one best answer to each question by placing a mark in the appropriate space on the answer sheet. Note: The phrase unqualified opinion means unmodified opinion. 1. The attestation standards relate to expressing conclusions about subject matter or assertions about subject matter. Which of the following services are not addressed by the attestation standards? a. Agreed-upon procedures engagements. b. Reviews. c. Compilations. d. Examinations. 2. The primary reason for an audit by an independent, external audit firm is to a. Satisfy governmental regulatory requirements. b. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. c. Relieve management of responsibility for the financial statements. d. Provide increased assurance to users as to the fairness of the financial statements. 3. Who establishes generally accepted auditing standards? a. Auditing Standards Board and the Public Company Accounting Oversight Board. b. Financial Accounting Standards Board and the Governmental Accounting Standards Board. c. State Boards of Accountancy. d. Securities and Exchange Commission. 4. Users of an issuer s financial statements demand independent audits because a. Users demand assurance that fraud does not exist. b. Management may not be objective in reporting. c. Users expect auditors to correct management errors. d. Management relies on the auditor to improve internal control. 5. An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to a. Express an opinion as to the fairness of Camden s financial statements. b. Express an opinion as to the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions. c. Certify the correctness of Camden s financial statements. d. Make a 100% examination of Camden s records. 6. The authoritative body designated to promulgate standards concerning an accountant s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity s securities is the a. Financial Accounting Standards Board. b. Government Accountability Office. c. Accounting and Review Services Committee. d. Auditing Standards Board. 1

2 7. CPAs within each state have formed state societies or associations of CPAs. Which of the following statements about these associations is false? a. Most associations have their own codes of professional ethics that closely parallel the AICPA Code of Professional Conduct. b. The state societies are independent of the AICPA. c. All CPAs in the state must be members of the state association or society. d. Members of state associations may also be members of the AICPA. 8. According to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards, presumptively mandatory requirements in the auditing standards use which word? a. Must. b. Can. c. Should. d. May. 9. GAAS require the auditor to be independent. An auditor is independent if she is a. Competent. b. Independent in fact and in appearance. c. Consistent and independent in fact. d. Logical and intellectually honest. 10. It would not be appropriate for the auditor to initiate discussion with the audit committee concerning a. The extent to which the work of internal auditors will influence the scope of the audit. b. Details of the procedures that the auditor intends to apply. c. The extent to which change in the company s organization will influence the scope of the audit. d. Details of potential problems that the auditor believes might cause a qualified opinion. 11. Which of the following services, if any, may an accountant who is not independent provide? a. Compilations but not reviews. b. Reviews but not compilations. c. Both compilations and reviews. d. No services. 12. A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by a. Adhering to generally accepted auditing standards. b. Having an appropriate system of quality control. c. Joining professional societies that enforce ethical conduct. d. Maintaining an attitude of independence in its engagements. 13. Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements? a. Assisting in adjusting the books of account for a partnership. b. Reviewing interim financial information required to be filed by public companies with the SEC. c. Processing financial data for clients of other accounting firms. d. Preparing an individual s personal financial statement to be used to obtain a mortgage. 2

3 14. Which of the following presents what the effects on historical financial data might have been if a consummated transaction had occurred at an earlier date? a. Prospective financial statements. b. Pro forma financial information. c. Interim financial information. d. A financial projection. 15. Which of the following statements best describes the distinction between the auditor s responsibilities and management s responsibilities? a. Management has responsibility for maintaining and adopting sound accounting policies, and the auditor has responsibility for internal control. b. Management has responsibility for the basic data underlying financial statements, and the auditor has responsibility for drafting the financial statements. c. The auditor s responsibility is confined to the audited portion of the financial statements, and management s responsibility is confined to the unaudited portions. d. The auditor s responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management. 16. A United States auditor is aware that the report on the financial statements will be available on the Internet to parties outside the United States. In the auditor s report, how should the auditor refer to the country of origin of the accounting principles used to prepare the financial statements? a. In the auditor s responsibility section and opinion paragraph. b. In the auditor s responsibility section and management s responsibility for the financial statements paragraph. c. In the opinion paragraph only. d. In the management s responsibility for the financial statements and opinion paragraphs. 17. The auditor s report may be addressed to the company whose financial statements are being audited or to that company s a. Chief operating officer. b. President. c. Board of directors. d. Chief financial officer. 18. An auditor has been engaged by the State Bank to audit the XYZ Corporation in conjunction with a loan commitment. The report would most likely be addressed to a. The shareholders, XYZ Corporation. b. The State Bank. c. The board of directors, XYZ Corporation. d. Whom it may concern. 19. On February 13, Year 2, Fox, CPA, met with the audit committee of the Gem Corporation to review the draft of Fox s report on the company s financial statements as of and for the year ended December 31, Year 1. On February 16, Year 2, Fox completed all remaining field work and obtained sufficient appropriate evidence to support the opinion on the financial statements. On February 28, Year 2, the final report was mailed to Gem s audit committee. What date most likely would be used on Fox s report? a. December 31, Year 1. b. February 13, Year 2. c. February 16, Year 2. d. February 28, Year 2. 3

4 20. In May Year 3, an auditor reissues the auditor s report on the Year 1 financial statements at a former client s request. The Year 1 financial statements are to be presented comparatively with subsequent audited statements. They are not restated, and the auditor does not revise the wording of the report. The auditor should a. Dual-date the reissued report. b. Use the release date of the reissued report. c. Use the original report date on the reissued report. d. Use the current-period auditor s report date on the reissued report. 21. When financial statements are materially but not pervasively misstated, an auditor may express a Qualified Disclaimer of Opinion an Opinion a. Yes No b. Yes Yes c. No Yes d. No No 22. A CPA engaged to audit financial statements observes that the accounting for a certain material but not pervasive item is not in conformity with the applicable financial reporting framework, although the matter is prominently disclosed in a note to the financial statements. The CPA should a. Express an unmodified opinion but insert an emphasis-of-matter paragraph with a reference to the note. b. Disclaim an opinion. c. Not allow the accounting treatment for this item to affect the type of opinion because the misstatement was disclosed. d. Qualify the opinion because of the misstatement. 23. The client includes in the determination of net income certain material items properly classifiable as other comprehensive income (OCI). In this situation, the auditor must express a(n) a. Unmodified opinion. b. Qualified opinion. c. Adverse opinion. d. Qualified or adverse opinion. 24. If an issuer releases financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n) a. Disclaimer of opinion. b. Qualified opinion. c. Review report. d. Unmodified opinion with a separate emphasis-of-matter paragraph. 25. Which of the following actions should be taken by a CPA who has been asked to audit the financial statements of a company whose fiscal year has ended? a. Discuss with the client the possibility of an adverse opinion because of the late engagement date. b. Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion. c. Inform the client of the need to express a qualified opinion if the physical inventory has already been taken. d. Ascertain whether an understanding of internal control can be obtained and the risks of material misstatement can be assessed after completion of the audit. 4

5 26. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion? a. The auditor did not observe the entity s physical inventory and is unable to become satisfied as to its balance by other auditing procedures. b. The financial statements fail to disclose information that is required by the applicable reporting framework. c. The auditor is asked to report only on the entity s balance sheet and not on the other basic financial statements. d. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity s ability to continue as a going concern. 27. When the auditor cannot obtain sufficient appropriate evidence to determine whether certain client acts are not in compliance with laws and regulations, he would most likely express a. An unmodified opinion with an emphasis-of-matter paragraph. b. Either a qualified opinion or an adverse opinion. c. Either a disclaimer of opinion or a qualified opinion. d. Either an adverse opinion or a disclaimer of opinion. 28. A disclaimer of opinion on the financial statements that was issued because of a scope limitation on an audit differs from a compilation report on the unaudited statements of a nonissuer in that a. A compilation report offers some assurances. A disclaimer offers none. b. A compilation relates only to income statements and balance sheets. A disclaimer pertains to all financial statements presented. c. Any procedures applied in a compilation should be described in the report, but procedures applied when a disclaimer is issued should not be described. d. A compilation report states what service was performed. A disclaimer states what service was to be performed. 29. The opinion paragraph of an independent auditor s report begins, In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position... This language states a(n) a. Disclaimer of opinion. b. Unmodified opinion. c. Except for opinion. d. Qualified opinion. 30. Jaye B.Honest, CPA, was offered the engagement to audit Wicket Corporation for the year ended June 30, Year 3. She had served as a director of Wicket Corporation until June 30, Year 1, and her spouse currently owns 600 of the 10,000 outstanding shares of Wicket Corporation. Jaye disassociated from Wicket prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jaye s association or employment with Wicket. Under the AICPA Code of Professional Conduct, she should a. Accept the engagement. b. Let a partner from the same office accept and conduct the engagement. c. Refuse the engagement because she had served as a director. d. Refuse the engagement because of her spouse s stock ownership. 5

6 31. An auditor strives to achieve independence in appearance to a. Maintain public confidence in the profession. b. Become independent in fact. c. Comply with the generally accepted accounting principles. d. Maintain an unbiased mental attitude. 32. Dickins & Co., CPAs, offers to maintain on its computer certain routine accounting records for its audit client, Lake. If Lake accepts the offer and Dickins & Co. continues to function as independent auditor, Dickins & Co. is most likely to violate the rules relating to auditor s independence of which organization(s)? SEC AICPA a. Yes No b. Yes Yes c. No Yes d. No No 33. Jordan is the executive partner of Cain & Jordan, CPAs. One of its clients is a large nonprofit charitable organization. The organization has asked Jordan to be on its board of directors, which consists of a large number of the community s leaders. For Jordan to be considered independent, which of the following requirements must be met? Board Participation Audit Participation Purely Honorary by Jordan Prohibited a. Yes Yes b. No Yes c. No No d. Yes No 34. A role of the Public Company Accounting Oversight Board (PCAOB) is to be responsible for the a. issuance of statements by the FASB. b. dissemination of financial statements by issuers. c. setting of requirements to become a CPA. d. regulation of firms that audit companies registered with the SEC. 35. CPA certificates are issued by a. individual states and jurisdictions. b. the federal government. c. the SEC. d. the AICPA. 36. The audit objective that all assets, liabilities, and equity interests in the financial statements are reported at amounts that are consistent with the applicable financial reporting framework is related most closely to which of the PCAOB assertions? a. Completeness b. Existence or occurrence c. Rights and obligations d. Valuation or allocation 6

7 37. The Sarbanes-Oxley Act of 2002 prohibits or places restrictions on each of the following services if provided to an issuer audit client, except a. appraisal or valuation. b. bookkeeping. c. financial IT design and implementation. d. evaluation of internal control. 38. The engineering department at Moldcel, Inc. built a piece of equipment in the company's own shop for use in the company's operations. As part of the audit of this new item of equipment, the auditor examined all work orders, purchased materials invoices, labor cost reports, and applied overhead reports that were capitalized as part of the equipment s cost. Which of the following is the AICPA balance assertion most closely related to the auditor's testing of those documents? a. Completeness b. Cutoff c. Rights and obligations d. Valuation and allocation 39. The objective of a review of interim financial information of an issuer is to provide an accountant with a basis for reporting whether a. a reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited. b. material modifications should be made to conform with generally accepted accounting principles. c. the financial statements are presented fairly in accordance with standards of interim reporting. d. the financial statements are presented fairly in accordance with generally accepted accounting principles. 40. Which of the following statements is correct relating to a preparation of financial statements engagement when the client plans to present the financial statements to all the shareholders of the corporation? a. the accountant should prepare an engagement letter b. the accountant should use inquiry and analytical procedures c. omission of substantially all footnote disclosures is unacceptable d. a compilation report must be issued 41. Which of the following statements is false regarding a compilation? a. A compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data. b. A compilation service is performed in accordance with standards established by the AICPA. c. The financial statement information included in the compiled statements is the representation of the owners of the business. d. Compiled financial statements have not been audited or reviewed and the accountant does not express any form of assurance on them. 42. Statements on Standards for Accounting and Review Services (SSARSs) establish standards and procedures for which of the following engagements? a. Assisting in adjusting the books of account for a partnership. b. Reviewing interim financial data required to be filed with the SEC. c. Processing financial data for clients of other accounting firms. d. Compiling an individual s personal financial statement to be used to obtain a mortgage. 7

8 43. An accountant s standard report on a review of the financial statements of a nonissuer should state that the accountant a. does not express an opinion or any form of limited assurance on the financial statements. b. is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP. c. obtained reasonable assurance about whether the financial statements are free of material misstatement. d. examined evidence obtained from external sources supporting the amounts and disclosures in the financial statements. 44. Which of the following principles is most closely associated with the auditor s opinion as to the fair presentation of the entity s financial statements? a. Communications principle. b. Performance principle. c. Reporting principle. d. Responsibilities principle. 45. When an accountant submits compiled financial statements to the client, a nonissuer, the accountant s responsibility includes a. Performing analytical procedures. b. Describing the procedures performed in the report. c. Understanding internal control. d. Reading the statements for obvious material errors 46. In deciding to undertake an audit engagement, the CPA would most likely consider which generally accepted auditing principle? a. Reporting Principle b. Performance Principle c. Field Work Principle d. Responsibilities Principle 47. Accepting an engagement to examine an entity s financial projection will most likely be appropriate if the projection is intended to be used by a. All employees who work for the entity. b. Potential shareholders who request a prospectus or a registration statement. c. A bank with which the entity is negotiating for a loan. d. All shareholders of record as of the report date. 48. If an error is discovered in a financial statement account, an internal auditor is most concerned with a. correcting the financial statements. b. discovering how and why the error occurred. c. notifying the audit committee. d. determining if this error qualifies as a material weakness and would need an audit opinion modification. 49. Which of the following is not required to obtain and maintain a CIA certificate? a. complete 150 semester hours of college study b. pass an examination c. obtain required CPE hours d. meet an experience requirement 8

9 50. An audit committee of the board of directors of an organization is being established. Which of the following is normally a responsibility of the committee with regard to the internal audit activity? a. Approval of the selection and dismissal of the chief audit executive. b. Development of the annual engagement work schedule. c. Approval of engagement work programs. d. Determination of engagement observations appropriate for specific engagement communications. 9

10 Answers 1. c 2. d 3. a 4. b 5. a 6. c 7. c 8. c 9. b 10. b 11. a 12. b 13. d 14. b 15. d 16. d 17. c 18. b 19. c 20. c 21. a 22. d 23. d 24. b 25. b 26. b 27. c 28. d 29. b 30. d 31. a 32. a 33. d 34. d 35. a 36. d 37. d 38. d 39. b 40. a 41. a 42. d 43. b 44. c 45. d 46. d 47. c 48. b 49. a 50. a 10