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

1 Accounting 408 Exam 1, Chapters 1, 2, 12, A, B, D Spring 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. The phrase unqualified opinion means unmodified opinion. 1. The proper organizational role of internal auditing is to a. assist the external auditor in order to reduce external audit fees. b. perform studies to assist in the attainment of more efficient operations. c. serve as the investigative arm of the board. d. serve as an independent, objective assurance and consulting activity that adds value to operations. 2. Of the following, which is the major objective of The Institute of Internal Auditors (The IIA)? a. Cultivate, promote, and disseminate information concerning internal auditing and related subjects. b. Oversee the activities of internal auditors. c. Promulgate standards that must be followed by all corporations. d. Investigate accusations that Certified Internal Auditors have violated The Institute of Internal Auditors Code of Ethics. 3. If an error is discovered in a financial statement account, an internal auditor is most concerned with a. correcting the financial statements. b. notifying the audit committee. c. determining if this error qualifies as a material weakness and would need an opinion modification. d. discovering how and why the error occurred. 4. Which of the following is not required to hold and maintain a CIA certificate? a. complete 150 semester hours of college study b. pass an examination c. hold a college degree d. meet an experience requirement 5. Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance? a. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. b. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. c. A distinguishing mark of a profession is its acceptance of responsibility to the public. d. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues. 6. 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 auditing standards of field work. d. maintain an unbiased mental attitude. 1

7. 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. 8. A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA s dependent minor child. The trust securities were not material to the CPA but were material to the child s personal net worth. Is the independence of the CPA considered to be impaired with respect to the client? a., because the stock is considered a direct financial interest and, consequently, materiality is not a factor. b., because the stock is considered an indirect financial interest that is material to the CPA s child. c., because the CPA is not considered to have a direct financial interest in the client. d., because the CPA is not considered to have a material indirect financial interest in the client. 9. The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee was a. fixed by a public authority. b. based on a price quotation submitted in competitive bidding. c. based on the results of judicial proceedings in a tax matter. d. payable after a specified finding was attained in a review of financial statements. 10. 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. a compilation report must be issued b. omission of substantially all footnote disclosures is unacceptable c. the accountant should use inquiry and analytical procedures d. the accountant should prepare an engagement letter 11. 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. 2 2

3 12. A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when a. b. c. d. Assisting in Adjusting the Books of Account Consulting on Accounting Matters 13. 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. services. 14. Assurance services are best described as a. services designed for the improvement of operations, resulting in better outcomes. b. independent professional services that improve the quality of information, or its context, for decision makers. c. the assembly of financial statements based on assumptions of a responsible party. d. services designed to express a positive opinion on historical financial statements based on the results of an audit. 15. Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer s financial statements? a. The accountant is independent with respect to the entity. b. The statements have not been audited. c. A compilation consists principally of inquiries and analytical procedures. d. The accountant does not express any assurance on the financial statements. 16. 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, on a test basis, supporting the amounts and disclosures in the financial statements. 17. Which of the following situations would preclude an accountant from issuing a review report on a company s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)? a. The owner of a company is the accountant s father. b. The accountant was engaged to review only the balance sheet. c. Land has been recorded at appraisal value instead of historical cost. d. Finished-goods inventory does not include any overhead amounts. 3

18. Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a review of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the 4 a. b. c. d. Additional Audit Effort Necessary to Complete the Audit Reason Given for Tech's Request 19. 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. 20. The other information in a document containing audited financial statements and the auditor s report on them may be relevant to an independent auditor. With respect to other information, the a. auditor s responsibility is to read the other information to identify any material inconsistencies with the statements. b. auditor is obligated to perform auditing procedures to corroborate other information contained in a document. c. auditor need not be concerned with the other information. d. auditor must include the other information in the report. 21. The objective of the traditional audit of financial statements is to a. make suggestions as to the form or content of the financial statements or to draft them in whole or in part. b. express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles. c. ensure adoption of sound accounting policies and the establishment and maintenance of internal control. d. express an opinion on the accuracy with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles. 22. 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. 4

5 23. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? a. It is difficult to prepare financial statements that fairly present a company s financial position, results of operations, and cash flows without the expertise of an independent auditor. b. It is management s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. c. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. d. It is a customary courtesy that all shareholders receive an independent report on management s stewardship in managing the affairs of the business. 24. If a company s external auditor expresses an unqualified opinion as a result of the audit of the company s financial statements, readers of the audit report can assume that a. the external auditor found no fraud. b. the company is financially sound and the financial statements are accurate. c. internal control is effective. d. all material disagreements between the company and the external auditor about the application of accounting principles were resolved to the satisfaction of the external auditor. 25. Late in December, Tech Products Company sold available-for-sale securities that had appreciated in value and then repurchased them the same day. The sale and purchase transactions resulted in a large gain. Without the gain, the company would have reported a loss for the year. Which statement with respect to the auditor is true? a. If the sale and repurchase are disclosed, an unqualified opinion should be expressed. b. The repurchase transaction is a sham and the auditor should insist upon a reversal or express an adverse opinion. c. The auditor should withdraw from the engagement and refuse to be associated with the company. d. A disclaimer of opinion should be expressed. 26. 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. 27. The date of the audit report is important because a. the auditor cannot date the report earlier than the date on which sufficient appropriate evidence to support the opinion has been obtained. b. the auditor bills time to the client up to and including the audit report date, and the statement to the client should reflect this date. c. auditing standards require all audits to be performed on a timely basis. d. it should coincide with the date of the financial statements. 5

28. A CPA engaged to audit financial statements observes that the accounting for a certain material item is not in conformity with GAAP, although the departure is prominently disclosed in a note to the financial statements. The CPA should a. express an unqualified opinion but insert a separate paragraph emphasizing the matter by 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 departure from GAAP was disclosed. d. qualify the opinion because of the departure from GAAP. 29. During the course of an audit of the financial statements of Excellent Corporation, Smart, CPA, discovered that the company vice-president had misrepresented one of the company s products before the Food and Drug Administration by falsifying test results. Unasserted claims, material in amount, loom in the near future. Management refuses to permit the inclusion of a liability for such claims even though it is probable that they will be asserted and the amount of loss can be reasonably estimated. Smart should issue a report with a(n) a. explanatory paragraph and either an adverse opinion or a qualified opinion. b. qualified opinion and an explanatory paragraph but should not consider expressing an adverse opinion. c. qualified opinion and no explanatory paragraph. d. unqualified opinion and an explanatory paragraph. 30. Which action 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 an adequate audit and expression of an unqualified opinion. c. Inform the client of the need to issue a qualified opinion if the physical inventory has already been taken. d. Ascertain whether an understanding of internal control can be obtained and control risk can be assessed after completion of the field work. 31. In which of the following situations will an auditor ordinarily choose between expressing a qualified opinion or 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 generally accepted accounting principles. 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 statements cause the auditor to have substantial doubt about the entity s ability to continue as a going concern. 32. The opinion paragraph of an independent auditor s report begins, In our opinion, based upon our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position... This language states a(n) a. disclaimer of opinion. b. unqualified opinion. c. except for opinion. d. qualified opinion. 6 6

7 33. The following explanatory paragraph was included in an auditor s report to indicate a lack of consistency: As discussed in note T to the financial statements, the company changed its method of computing depreciation in Year 1. How should the auditor report on this matter if the auditor concurred with the change? a. b. c. d. Type of Opinion Unqualified Unqualified Qualified Qualified Location of Explanatory Paragraph Before opinion paragraph After opinion paragraph Before opinion paragraph After opinion paragraph 34. An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to a. make a 100% examination of Camden s records. 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. express an opinion as to the fairness of Camden s financial statements. 35. tes that are included with financial statements are the responsibility of the a. internal auditor. b. company s management. c. Securities and Exchange Commission. d. independent auditor. 36. Who establishes generally accepted auditing standards? a. Auditing Standards Board and the Public Company Accounting Oversight Board. b. Financial Accounting Standards Board. c. State Boards of Accountancy. d. Securities and Exchange Commission. 37. A firm of independent auditors must establish and follow quality control policies and procedures because these standards a. are necessary to meet increasing requirements of auditors liability insurers. b. provide assurance that clients maintain quality reporting systems. c. include formal filing of records of such policies and procedures. d. give reasonable assurance that the firm as a whole will conform with applicable auditing standards. 38. Which of the following categories of fundamental audit principles is most closely related to gathering audit evidence? a. Performance principle. b. Reporting principle. c. Risk assurance principle. d. Responsibilities principle. 7

8 39. 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 40. 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. 41. The primary reason for an audit by an independent, external audit firm is to a. relieve management of responsibility for the financial statements. b. satisfy governmental regulatory requirements. c. provide increased assurance to users as to the fairness of the financial statements. d. guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. 42. Audit committees have been identified as a major factor in promoting independence in both internal and external auditors. Which of the following is the most important limitation on the effectiveness of audit committees? a. Audit committees are composed of independent directors. However, those directors may have close personal and professional friendships with management. b. Audit committee members are compensated by the organization and thus favor a shareholder s view. c. Audit committees devote most of their efforts to external audit concerns and do not pay much attention to internal auditing and the overall control environment. d. Audit committee members do not normally have degrees in the accounting or auditing fields. 43. Each state has the power to Issue CPA Suspend CPA Revoke CPA Certificates Certificates Certificates a. b. c. d. 44. CPA certificates are issued by a. individual states and jurisdictions. b. the federal government. c. the SEC. d. the AICPA. 8

9 45. Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as a. a professional activity that measures and communicates financial and business data. b. a regulatory function that prevents the issuance of improper financial information. c. an activity whose purpose is to search for fraud. d. a discipline that attests to financial information presented by management. 46. Users of an issuer s financial statements demand independent audits because a. users expect auditors to correct management errors. b. management relies on the auditor to improve internal control. c. management may not be objective in reporting. d. users demand assurance that fraud does not exist. 47. 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. 48. Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)? a. They are guides intended to set forth auditing procedures applicable to a variety of situations. b. They are procedural outlines intended to narrow the areas of inconsistency and divergence of auditor opinion. c. They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment. d. They are generally accepted auditing standards. 49. 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. 50. The audit objective that all the accounts in the financial statements represent actual assets, liabilities, revenues, and expenses is related most closely to which of the PCAOB assertions? a. Existence or occurrence b. Rights and obligations c. Completeness d. Presentation and disclosure 9

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