1 Accounting 408 Name Exam 1, Chapters 1, 2, 12, A, B, D Fall 2016 Section Row I. Multiple Choice Questions. (2 points each, 100 points total) Read each questions carefully and indicate the one best answer to each question by placing a mark in the appropriate space on the answer sheet. 1. 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. 2. The right to practice as a CPA is given by which of the following organizations? a. State Boards of Accountancy b. AICPA c. SEC d. General Accounting Office 3. 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 4. Which of the following is the most important reason independent auditors report on management's financial statements? a. Fraud may exist, and it is required to be detected by independent auditors. b. The management that prepares the statements and the persons who use the statements may have conflicting interests. c. Misstated account balances may be corrected as the result of the independent audit work. d. The management that prepares the statements may have a poorly designed system of internal control. 5. An integrated audit performed in accordance with the PCAOB Standards requires that auditors report on the: Management Discussion Financial Statements Internal Control & Analysis (MD & A) a. Yes Yes No b. Yes No Yes c. No Yes Yes d. No No No
2 6. 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. 7. 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. 8. 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. An independent auditor most likely will consider the responsibilities principle of generally accepted auditing standards to determine a. the nature, timing, and extent of audit procedures to be used in gathering evidence. b. requirements for a sufficient understanding of the client's internal control. c. the nature of an audit report qualification. d. whether the CPA is qualified to undertake an audit of a particular company. 10. An auditor will issue an adverse opinion when a. a severe scope limitation has been imposed by the client. b. the financial statements contain a pervasive deviation from GAAP. c. the company's ability to continue as a going concern is subject to substantial doubt. d. a severe scope limitation has been imposed by circumstances beyond the ability of the client to control. 11. Which of the following procedures should be applied when an independent CPA conducts a review of interim financial information of an issuer? a. Verify key account balances with third parties. b. Conduct analytical procedures. c. Confirm accounts payable directly with vendors. d. Perform cutoff tests for cash receipts and disbursements and obtain a confirmation from client's bank. 12. 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
3 13. Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure? a. " except for the departure from auditing standards generally accepted in the United States of America described in the basis for qualified opinion paragraph... " b. " with the foregoing explanation of these omitted disclosures described in the basis for qualified opinion paragraph... " c. " except for the omission of the information described in the basis for qualified opinion paragraph... " d. " as described in the basis for qualified opinion paragraph, the financial statements do not present fairly in all material respects... " 14. Audit evidence is usually considered sufficient when a. it is relevant and reliable. b. there is enough quantity to afford a reasonable basis for an opinion on financial statements. c. it has the qualities of being relevant, objective, and free from unknown bias. d. it has been obtained directly by the auditor. 15. In a compilation engagement a. the accountant must be independent of the client. b. managers or owners may choose to omit all the footnote disclosures. c. financial statements must be presented in accordance with generally accepted accounting principles. d. the accountant provides negative assurance. 16. Which of the following procedures would not be performed in a review of a nonissuer's financial statements? a. Inquire about the accounting system and bookkeeping procedures. b. Perform analytical procedures to identify relationships and individual items that appear unusual. c. Obtain the client's bank statement directly from the bank. d. Read the financial statements for indications that they conform to the applicable financial reporting framework. 17. Which of the following statements is false regarding a compilation? a. a compilation service is performed in accordance with standards established by the AICPA b. the financial statement information included in the compiled statements is the representation of the owners of the business c. a compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data d. compiled financial statements have not been audited or reviewed and the accountant does not express any form of assurance on them 18. A CPA has gathered sufficient appropriate evidence for her to form an opinion on a nonissuer's financial statements based on her audit, but has determined that an unmodified report would not be appropriate to issue. Which of the following reports would she consider issuing? a Adverse or disclaimer. b. Qualified or disclaimer. c. Qualified or adverse. d. Qualified, disclaimer, or adverse.
4 19. The predecessor auditor reissued a prior-period report on financial statements at the request of the client without revising the original opinion. On the reissued report the predecessor auditor should a. Delete the date of the report. b. Use the date when contacted by the client for this service. c. Use the reissue date. d. Use the original date of the report. 20. Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor? a. Operational audit b. Internal audit c. Compliance audit d. Financial audit 21. The responsibilities principle of GAAS does not include a. competence and capabilities as an auditor. b. ethical requirements. c. professional judgment. d. planning and supervision. 22. Audit tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of a. Presentation. b. Completeness. c. Rights. d. Existence. 23. Which of the following audit reports is usually not issued in a governmental audit? a. report on internal control b. report on financial statements c. report on procedures and findings d. report on compliance with laws and regulations 24. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate basis for qualified opinion paragraph and modify the Management s Opinion Responsibility Paragraph Paragraph a. Yes Yes b. Yes No c. No Yes d. No No
5 25. Which of the following statements is true about a review service for a nonissuer conducted in accordance with the SSARSs? a. the service is performed in accordance with Generally Accepted Auditing Standards (GAAS) b. management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework c. a review service is substantially greater in scope than a compilation, and the opinion expressed on the financial statements expresses reasonable assurance d. the accountant is not required to be independent of the client whose financial statements are being reviewed 26. Which of the following conceptual differences between attestation standards followed in conducting an examination service and generally accepted auditing standards followed in conducting a financial statement audit is a true statement? a. There are no requirements related to gathering and evaluation of evidence included in the attestation standards. b. A requirement that the practitioner be independent is not required under attestation standards. c. Attestation standards provide a framework for the attest function beyond historical financial statements. d. Attestation standards do not permit an attestation engagement to examine prospective "what-if" financial statements. 27. The use of an adverse opinion indicates a. the auditor is very uncertain with respect to an item and cannot form an opinion on the fairness of presentation of the financial statements as a whole. b. the auditor is uncertain with respect to an isolated item that is material but not so material that the auditor cannot form an opinion on the fairness of presentation of the financial statements as a whole. c. the auditor has observed a departure from generally accepted accounting principles that has a potential effect upon the fairness of presentation of financial statements but the departure is not material enough to justify a qualified opinion. d. the auditor has observed a departure from generally accepted accounting principles that is so material that a qualified opinion is not justified. 28. In all agreed-upon procedures engagements, the practitioner a. must follow the SASs. b. restricts the report to specified users. c. gives an unmodified, qualified, adverse, or disclaimer report depending on the findings. d. issues either a type 1 report or a type 2 report. 29. Complying with relevant ethical requirements is encompassed in which of the following fundamental principles of GAAS? a. Reporting principle. b. Field work principle. c. Performance principle. d. Responsibilities principle.
6 30. Which of the following statements is correct about the appropriateness of audit evidence? a. To be appropriate, audit evidence must be either relevant or reliable, but need not be both. b. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements. c. Auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. d. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained. 31. Which of the following best demonstrates the concept of professional skepticism? a. Avoiding any situation that would give an outside observer any reason to question an auditor's independence. b. Focusing on items that have a more significant quantitative effect on the entity's financial statements. c. Critically assessing verbal evidence received from the entity's management. d. Evaluating potential financial interests held by auditors in the client. 32. It is preferable that the Chief Audit Executive (head of the internal audit department of a company) report directly to the a. CEO b. CFO c. controller d. chair of the audit committee 33. 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. 34. When an auditor of financial statements has substantial doubt about an entity s ability to continue as a going concern because of the probable discontinuance of certain operations, the auditor most likely would express a qualified opinion if a. the effects of the adverse financial conditions likely will cause a bankruptcy filing. b. information about the entity s ability to continue as a going concern is not disclosed. c. management has no plans to reduce or delay future expenditures. d. negative trends and recurring operating losses appear to be irreversible. 35. The standard unmodified audit report issued on a full set of GAAP basis financial statements refers to GAAS and GAAP in which paragraphs? a. GAAS: Auditor s Responsibility only; GAAP: Management s Responsibility and Opinion b. GAAS: Introductory only; GAAP: Auditor s Responsibility and Opinion c. GAAS: Auditor s Responsibility only; GAAP: Opinion only d. GAAS: Introductory and Auditor s Responsibility; GAAP: Management s Responsibility and Opinion
7 36. An accountant is engaged to compile a nonissuer's financial statements. However, the financial statements omit substantially all disclosures required by the applicable financial reporting framework. In this case, which of the following procedures should the accountant carry out? a. indicate in the footnotes to the financial statements or on the face of the financial statements that no assurance is provided because the accountant is not independent of the business b. indicate in the compilation report that the financial statements omit the disclosures required by the financial reporting framework, and if they were included, they might influence users conclusions c. indicate in the compilation report that the financial statements are not compiled in accordance with Statements on Standards for Accounting and Review Services d. indicate in the footnotes that the financial statements are special purpose framework statements and are not comparable to those of prior periods 37. A basis for qualified opinion paragraph relating to a material scope limitation in the audit of the financial statements of a nonissuer should be a. placed after the opinion paragraph. b. placed prior to the opinion paragraph. c. placed either before or after the opinion based on the auditor s judgment of the level of materiality. d. excluded from the audit report because a modification for a scope limitation does not include a basis for qualified opinion paragraph. 38. Which of the following is not required to become a certified internal auditor (CIA)? a. exhibit high moral and professional character b. pass an examination c. be within 90% completion of 150 semester hours of college credit d. meet an experience requirement 39. In order to perform a review of interim financial information for an issuer, the auditor must have a. audited or be in the process of auditing the entity s latest financial statements. b. tested the entity s internal controls to determine that financial information is reliable. c. sent confirmation to third-parties concerning significant related-party transactions. d. gathered sufficient appropriate evidence to serve as the basis for reasonable assurance. 40. Auditors of an entity that utilizes a service organization can gain an understanding of the effectiveness of internal controls at that service organization by a. reviewing the engagement with the service organization. b. inquiry with management of the service organization. c. reviewing a type 2 report on internal controls provided by the service organization s service auditors. d. reviewing a type 1 report on internal controls provided by the service organization s service auditors. 41. Statements on Standards for Accounting and Review Services provide standards for services on a. audited financial statements of public companies. b. unaudited financial statements of public companies. c. unaudited financial statements of nonpublic companies. d. audited financial statements of nonpublic companies.
8 42. Viorel Ţurcanu, CPA, was appointed as an honorary director to the Chişinau Performing Arts Society, a nonprofit organization that raises money to support the local symphony, ballet, and theater. The position allows for no voting rights or participation in decision making. Viorel is a partner in the CPA firm office that conducts the annual audit of the Chişinau Performing Arts Society. Does this situation constitute a violation of the AICPA Code of Professional Conduct? a. violation b. no violation 43. Andrei worked as an accountant for several years for Moldovagaz until April 15, 2015, when he was hired by Neider & Şelaru, CPAs as a staff accountant. In May, 2015, Moldovagaz retained Neider & Şelaru to conduct the audit of Moldovagaz s financial statements for the year ended December 31, 2015. Neider & Şelaru plan to not assign Andrei to the engagement team for the Moldovagaz audit. Does this situation constitutes a violation of the AICPA Code of Professional Conduct? a. violation b. no violation 44. Dara & Co. CPAs audit Hill Corporation. Ellie, with an office in Buffalo Grove, is the engagement partner on the Hill audit. Which of the following would not be considered a covered member? a. Jackson, who is a member of the attest engagement team with an office in Elmhurst. b. Addison, who is a tax partner and provided 29 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst. c. Gabriel, a partner in Dara & Co. CPAs, with an office in Buffalo Grove. d. Erin, a partner in Dara & Co. CPAs, with an office in Elmhurst. 45. Julie is Nancy s daughter. Julie is a CPA auditing the manufacturing company where Nancy works. Julie s independence is impaired if a. Nancy owns 300 shares of the company's stock (the company has 400 million shares of stock outstanding with a current market value of $3 per share). b. Nancy is the CFO. c. Nancy is the advertising manager. d. Independence is impaired in all of the situations listed above. 46. CPA Krogstad is the managing partner of the Omaha office of an audit firm. He is responsible for the Omaha practice in all areas of audit, tax, and consulting, but he does not serve as a field audit partner or a review partner on any engagements. CPA Ward, with an office in Omaha, is the partner in charge of the Dodger, Inc. audit (an issuer). The audit firm's independence is impaired if a. Krogstad owns Dodger common stock. b. Krogstad's brother owns 10 shares of Dodger common stock. c. Ward's sister-in-law is a sales representative for Dodger with a territory in Iowa. d. CPA Felix, an audit senior and not assigned to the Dodger engagement team, works out of the Kansas City office of the firm. Felix s wife is the controller of Dodger.
9 For questions 47 through 50, indicate the type of audit opinion that would be required. Assume any amount is material on an overall basis, but not pervasive (super material) unless specifically stated. 47. Mike, CPA, the auditor of NOLA, Inc. encountered a scope limitation (not imposed by NOLA). Mike was not able to gather sufficient appropriate evidence related to this scope limitation by other procedures. a. standard unmodified opinion b. unmodified opinion with an emphasis-of-matter paragraph c. qualified opinion d. adverse opinion e. disclaimer of opinion 48. Marshall, CPA, conducted the audit of Cleveland Mfg. Co. At the time of the audit, Marshall and Jim jointly own a company created to market products of Cleveland Mfg. Co. Jim is owner of 40% of Cleveland's stock and Marshall owns the remainder. a. standard unmodified opinion b. unmodified opinion with an emphasis-of-matter paragraph c. qualified opinion d. adverse opinion e. disclaimer of opinion 49. Steve, CPA, the auditor of TGGM Motors discovers a material departure from GAAP in TGGM s financial statements. a. standard unmodified opinion b. unmodified opinion with an emphasis-of-matter paragraph c. qualified opinion d. adverse opinion e. disclaimer of opinion 50. Nancy, CPA, conducted the audit of Big Sky Company. Big Sky changed their method of accounting for a significant amount of their inventory which has a pervasive effect on the financial statements. Nancy believed that the new inventory accounting method violates GAAP. a. standard unmodified opinion b. unmodified opinion with an emphasis-of-matter paragraph c. qualified opinion d. adverse opinion e. disclaimer of opinion
10 ANSWERS Que. No. Answer 1 A 2 A 3 D 4 B 5 A 6 D 7 D 8 A 9 D 10 B 11 B 12 D 13 C 14 B 15 B 16 C 17 C 18 C 19 D 20 C 21 D 22 B 23 C 24 B 25 B 26 C 27 D 28 B 29 D 30 C 31 C 32 D 33 D 34 B 35 A 36 B 37 B 38 C 39 A 40 C 41 C 42 B 43 B 44 D 45 B 46 A 47 C 48 E 49 C 50 D