ACC 562 Week 5 Midterm Exam – Strayer University New

ACC/562 Week 5 Midterm Exam – Strayer

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ACC/562 Midterm Exam Chapter 1-3

TRUE/FALSE

1. 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.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

2. An audit of financial statements is a form of attestation service.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

3. Independence is an attribute necessary to perform assurance services.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

4. A bank using Milton Company’s financial statements to determine the creditworthiness of a potential loan to Milton is a good example of the need for unbiased reporting.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

5. Independence is only required for assurance service providers.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

6. A CPA automatically qualifies as an assurance provider in all areas of business.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

7. Attestation services are a subset of assurance services and always involve a report that goes to a third party.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

8. The American Institute of Certified Public Accountants has the primary authority to set auditing standards for public companies.

ANS: PTS: 1 OBJ: Public Company Auditing Standards
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

9. The audit function is unique because it exists to perform services on a “client” on behalf of shareholders, directors and other parties.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

10. Auditing is the process of attesting to assertions about economic actions and events.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

11. Auditing is the process of verifying the accuracy of the financial statements.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

12. Internal auditing only provides assurance services to clients.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

13. Auditing primarily exists because users need unbiased information on which to assess management performance and make economic decisions.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

14. The degree of confidence that users place on management’s financial statements is higher than that placed on audited financial statements because few users have direct knowledge of the company’s operations and management is the most knowledgeable about operations.

ANS: PTS: 1 OBJ: Public Company Auditing Standards
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

15. U.S. nonpublic companies will have an audit performed in accordance with generally accepted auditing standards that have been promulgated by the PCAOB.

ANS: PTS: 1 OBJ: Public Company Auditing Standards
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

16. An assertion is a statement about an action, event, condition, or performance over a specified time period.

ANS: PTS: 1 OBJ: Opinion Formation Process
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

17. Management is required to comment on the fairness of the company’s financial presentation. This reduces the auditor’s legal responsibility for the opinion rendered on the financial statements.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

18. Audited financial statements should be free from all errors and fraud.

ANS: PTS: 1 OBJ: Public Company Auditing Standards
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

19. Audited financial statements should be presented fairly according to the substance of GAAP.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

20. Audited financial statements should be presented fairly according to the substance of GAAS.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

21. A plan to converge the U.S. generally accepted auditing standards (GAAS) with the International Standards on Auditing (ISAs) was developed by the .AICPA’s Auditing Standards Board (ASB).

ANS: PTS: 1 OBJ: Public Company Auditing Standards
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

22. Attestation is confined to an audit of client financial statements.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

23. An auditor must have a good understanding of the risks associated with a client’s industry in order to ensure that the financial statements reflect the underlying substance of accounting transactions and the economic effects of such transactions.

ANS: PTS: 1 OBJ: Types of Service Providers
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

24. Public Company Accounting Oversight Board provides the criteria against which the auditor measures the fairness of financial statement presentation for public companies.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

25. Generally accepted accounting principles provide the criteria against which the auditor measures the fairness of financial statement presentation.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

26. Businesses that use independent auditors do not need the use of internal auditors.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

27. CPA certificates for auditors are issued by state boards of accountancy.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

28. Internal auditing is an objective evaluation function established within an organization.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

29. Operational audits are designed to determine if the company’s financial statements are prepared in compliance with GAAP.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

30. Governmental auditors perform operational and financial statement audits.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

31. The internal audit profession adheres exclusively to standards set by the Public Company Accounting Oversight Board.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

32. The execution of solutions to issues brought to light by internal auditors are the responsibility of management of the organization.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

33. Governmental audit standards are developed by the Public Company Accounting Oversight Board.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

34. The American Institute of CPAs sets auditing standards for non-publicly traded companies.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

35. Though often relying on the FASB, the SEC has authority to establish GAAP for publicly traded companies.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

36. The SEC has authority to establish GAAP for all business enterprises.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

37. The Public Company Accounting Oversight Board was established by the AICPA in response to Securities law.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

38. Auditors of public companies need not adhere to the requirements of statutory or regulatory organizations.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

39. When the auditor has no reservations about management’s financial statements, then the report issued is called a qualified report.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

40. Auditors need only understand the rules of accounting as the principles are outdated.

ANS: PTS: 1 OBJ: Public Company Auditing Standards
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

41. An audit is a form of an attestation service.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

42. An audit and an assurance service both require a report to a third party.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

43. The purpose of assurance services is to improve the quality of the information provided.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

44. The internal auditor is a primary provider of assurance services.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

45. The internal auditor is a primary provider of operational audits.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

MULTIPLE CHOICE

1. The need for assurance services arises for all of the following reasons EXCEPT:
a. potential bias in providing information.
b. Closeness between a user and the organization.
c. complexity of the processing systems.
d. remoteness between a user and the organization.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

2. Independent professional services that are provided on financial or other information that improve the quality of decision making are known as
a. internal auditing.
b. financial auditing.
c. assurance services.
d. attestation services.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

3. Which one of the following is not a critical component of assurance services?
a. a process on which service is provided
b. an assurance service provider
c. a user who derives value
d. a CPA

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

4. Which one of the following is not a key attribute needed to perform assurance?
a. subject matter knowledge
b. independence
c. established criteria or standards
d. accounting skills

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

5. A service that always requires that a report is provided to a third party is
a. assurance
b. attestation
c. audit
d. Both B and C.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

6. Which one of the following is not part of the attest process?
a. gathering evidence about assertions
b. proving the accuracy of the books and records
c. evaluating evidence against objective criteria
d. communicating the conclusions reached

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

7. Which of the following are part of the attest process?
a. communicating the conclusions reached to a third party
b. guaranteeing the accuracy of the books and records
c. evaluating evidence against objective criteria
d. A and C
e. B and C

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

8. Which one of the following is a potential problem with management’s communication of financial information that causes third parties to desire the independent auditor’s assessment of the financial statement presentation?
a. complexity of transactions affecting the financial statements
b. lack of criteria on which to base information
c. remoteness of the user from the organization
d. A and C
e. A and B

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

9. Users of the audit report can reasonably expect the audited financial statements to be
a. include complete information and contain all financial disclosures.
b. presented fairly according to the substance of GAAP.
c. free from all errors.
d. all of the above.
e. none of the above.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

10. Which one of the following is not a management expectation for independent auditors?
a. an outside source of expertise on accounting matters
b. individuals who perform tests and draw conclusions on assertions
c. a participant in management decision making
d. a provider of a written communication

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

11. Users can reasonably expect audited financial statements to be
a. complete and contain all important financial disclosures, be free from material misstatements and be presented fairly according to GAAS.
b. complete and contain all important financial disclosures, be free from material misstatements and be presented fairly according to GAAP.
c. complete, be accurate and be presented fairly according to GAAP.
d. complete and contain all important financial disclosures, be free from all misstatements and be presented fairly according to the substance of GAAS.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

12. Internal auditors may perform all of the following types of audits except
a. operational audits.
b. compliance audits.
c. computer system audits.
d. all of the above may be performed by internal auditors.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

13. An “integrated audit” includes an audit of
a. the company’s internal controls.
b. the company’s financial statements.
c. the company’s compliance with its rules and policies.
d. Both A and B.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

14. Which of the following services is the broadest and most inclusive?
a. Audit
b. Attestation
c. Assurance
d. Compliance

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

15. An expectation of the public is that the auditor will recognize that the primary users of audit assurance are
a. the clients.
b. the Public Company Accounting Oversight Board.
c. members of management.
d. third-party users.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

16. Auditing is important in a free market society because
a. the public requires CPAs functioning as divisions of regulatory bodies.
b. auditors detect all errors and fraud made by company employees.
c. it provides reliable information based upon which to judge economic performance.
d. the auditor is an amiable insurance policy for investors.
e. all of the above are true.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

17. Third-party users of the audit report expect the auditor to do all of the following except:
a. to evaluate measurements and disclosures made by management
b. to provide a biased evaluation of the financial statements
c. to determine whether financial statements are presented in accordance with GAAP
d. to gather sufficient evidence to support their opinion

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

18. CPA firms performing public financial statement audits must
a. register with the American Institute of Certified Public Accountants.
b. register with the Institute of Auditors.
c. register with the U.S. General Accounting Office.
d. register with the Public Company Accounting Oversight Board.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

19. The auditor of financial statements must make very difficult interpretations regarding authoritative literature. Additionally, the auditor must
a. consider whether the application of a generally accepted accounting principle best portrays the economic activity of the company.
b. force management to make certain decisions regarding their financial statements.
c. disregard independence in order to find the underlying truth of the evidence.
d. establish new criteria by which financial statements may be compared.

ANS: PTS: 1 OBJ: Opinion Formation Process
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

20. Results of the financial statement audit are communicated to users through a(n)
a. financial statement.
b. written management assertion.
c. audit report.
d. none of the above.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

21. Assurance services may include which of the following?
a. attesting to financial statements
b. examination of the economy and efficiency of governmental operations
c. evaluation of a division’s performance for management
d. tax preparation services
e. A, B, and C only

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

22. The criteria against which the auditor measures the fairness of financial statement presentation are known as
a. auditing standards.
b. generally accepted accounting principles.
c. generally accepted accounting standards.
d. governmental accounting principles.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

23. Management of a company is responsible for
a. hiring the auditor.
b. preparing the financial statements.
c. the audit workpapers.
d. independence and obtaining evidence.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

24. Which one of the following is an example of management expectations for independent auditors?
a. An expert providing a written communication as the product of the engagement.
b. Individuals who perform day-to-day accounting functions on behalf of the company.
c. An active participant in management decision making.
d. An internal source of expertise on financial and other matters.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

25. Which one of the following is not a provider of assurance services?
a. CPAs
b. internal auditors
c. governmental auditors
d. AICPA

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

26. The internal audit profession has emerged and has become active for all of the following reasons except:
a. management’s need for an objective appraisal of organizational or departmental performance
b. increased internal and external emphasis on effective procedures to detect or prevent fraud
c. compliance with Section 404 of the Sarbanes-Oxley Act of 2002
d. management’s need to delegate the responsibility of the financial statements

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

27. Which one of the following statements is not true about internal auditing?
a. Internal auditing is an objective evaluation function.
b. Internal auditing is established within an organization.
c. Internal auditing’s purpose is to provide assurance regarding the company’s compliance with stated policies and procedures.
d. Internal auditing is established as an independent service to regulatory bodies and creditors.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

28. An audit which has as its purpose the evaluation of the economy and efficiency with which resources are employed is known as a(n)
a. financial audit.
b. compliance audit.
c. operational audit.
d. governmental audit.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

29. The audit committee of the board of directors of a company is responsible for
a. hiring the auditor.
b. preparing the financial statements.
c. the audit workpapers.
d. independence and obtaining evidence.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

30. The AICPA remains a valuable organization because of its continuing involvement in
a. the audit standard setting process.
b. regulation and enforcement of the audit profession.
c. education and administration of the CPA exam.
d. promulgation of accounting standards.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

31. The objective of an operational audit is to
a. evaluate whether laws have been broken by management.
b. evaluate fairness of presentation of financial statements.
c. evaluate compliances with company rules and regulations.
d. evaluate the effectiveness and efficiency with which resources are employed.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

32. The primary governing board that performs quality reviews on registered CPA firms that audit public companies is the
a. PCAOB
b. GAO
c. AICPA
d. FASB

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

33. Congress authorized which of the following organizations to establish generally accepted accounting principles for public companies?
a. SEC
b. APB
c. AICPA
d. FASB

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

34. The public expects auditors to
a. understand and enforce principles that best portray the spirit of FASB concepts.
b. be neutral to preparers and users of financial information.
c. recognize that the public are the primary users of audit services.
d. take more responsibility for the discovery of fraud.
e. all of the above are expectations of the public.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

35. CPAs are licensed by the
a. PCAOB.
b. AICPA.
c. state’s board of accountancy.
d. state’s society of CPAs.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

36. The Certified Internal Auditor program is administered by the
a. AICPA.
b. IIA.
c. state’s board of accountancy.
d. state’s society of CPAs.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

37. The audit agency for the U. S. Congress is the
a. SEC.
b. GAO.
c. IIA.
d. AICPA.

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

38. The organization that issued the Internal Control, Integrated Framework which serves as the primary criterion for evaluating the quality of a company’s internal control system is
a. PCAOB
b. COSO
c. AICPA
d. GAO

ANS: PTS: 1 OBJ: Professional and Regulatory Organizations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

39. Auditing is a systematic process that includes all of the following except:
a. communicating results to users
b. procuring and evaluating evidence
c. providing important managerial decisions for a client
d. comparing evidence regarding assertions to certain established criteria

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

40. As it relates to an audit, materiality is
a. not taken into consideration.
b. related only to the sufficiency of procedures performed.
c. based upon audit fees.
d. determined based upon the importance to a user of the financial statements.

ANS: PTS: 1 OBJ: Opinion Formation Process
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

41. Which of the following is not a component of assurance services?
a. information or a process on which the assurance services is provided.
b. report to a third party.
c. a user or a group of users who derive value from the service provided.
d. a service provider.

ANS: PTS: 1 OBJ: Scope of Services
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

42. Which type of auditor may perform a financial statement audit?
a. external auditor.
b. internal auditor.
c. governmental auditor.
d. Both A and C.
e. All of the above.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

43. Which type of auditor would typically perform an operational audit?
a. external auditor.
b. internal auditor.
c. governmental auditor.
d. Both B and C.
e. All of the above.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

44. What is the criteria used in an operational audit?
a. GAAP.
b. effectiveness and efficiency.
c. rules and regulations.
d. company policies.
e. Both B and C.

ANS: PTS: 1 OBJ: Internal and Governmental Auditors
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

45. What is the criteria used in a compliance audit?
a. GAAP.
b. effectiveness and efficiency.
c. rules and regulations.
d. company policies.
e. Both C and D.

ANS: PTS: 1 OBJ: Auditing Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

ESSAY

1. Attributes of assurance providers

Discuss the three or more attributes that an assurance professional must possess in order to maintain credibility. Explain the importance of these attributes to the assurance process.

ANS:

2. Users of financial statements

Identify at least three types of users of financial statements. Describe their primary use of the financial statements and how the misstatement of those statements might injure the user.

ANS:

3. Overview of Financial Statement Audit

Define auditing and discuss how its components fit into an overview of a financial statement audit.

ANS:

4. Professional and regulatory organizations

Identify at least four professional or regulatory organizations. Explain how and why they assist and/or monitor the audit and assurance profession.

ANS:

5. Internal and external auditors

Compare and contrast the work of an internal and an independent external auditor.

ANS:

6. Objectives of different audit types

Compare and contrast the objectives of financial, compliance, operational and governmental audits. Include in your answer who performs each type of audit.

ANS:

7. Regulatory and professional bodies

Write the full name of the following regulatory and professional acronyms and describe the function of each entity:

PCAOB

AICPA

SEC

IIA

FASB

ANS:

8. Requirements of auditors in public accounting

Recent landscape changes in accounting and auditing developed from corporate fraud and, arguably, auditor failure. In order to continually lead and adapt to the dynamics of regulation, principles based accounting practices and auditing standards, what types of skills and traits are auditors required to possess?

ANS:

9. The need for assurance services

Identify three reasons for the rise of assurance services.

ANS:

10. Attestation versus assurance

Distinguish between attestation services and assurance services.

ANS:

Chapter 2: Corporate Governance and Audits

TRUE/FALSE

1. The objective of financial reporting is to provide useful information to interested users.

ANS: PTS: 1
OBJ: Corporate Governance Defined and Parties Involved
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

2. Financial transparency relates to how well resources are protected and managed by the company and its management.

ANS: PTS: 1
OBJ: Corporate Governance Defined and Parties Involved
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

3. Corporate governance is a process by which the owners, but not the creditors, exert control over the resources of the enterprise.

ANS: PTS: 1
OBJ: Corporate Governance Defined and Parties Involved
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

4. Management can influence who sits on the board and the audit committee as well as other governance controls that might be put into place.

ANS: PTS: 1
OBJ: Corporate Governance Defined and Parties Involved
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

5. A commission sponsored by the New York Stock Exchange issued a report in 2010 indicating that successful governance depends heavily upon honest, competent, and industrious managers.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

6. The board’s fundamental objective should be to build a system of internal controls that will ensure the financial statements are free from all error.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

7. An important aspect of governance is the independent judgment of boards about what is in the best interests of the company and its shareholders.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

8. The external auditor has the primary responsibility for creating a culture of performance with integrity and ethical behavior within the client’s organization.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

9. Since the board is responsible to protect the interest of the shareholders, independence is not a necessary attribute for board members.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

10. Companies must strike the right balance in the appointment of independent and non-independent directors to ensure an appropriate range and mix of expertise, diversity, and knowledge on the board.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

11. It is effective for a board to take a “check the box” mentality when implementing and complying with governance mandates and best practices.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

12. The first decade of the twenty-first century has seen more changes in corporate governance than at any time since the Great Depression.

ANS: PTS: 1
OBJ: Events of the Past Decade and Governance Failures
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

13. Governance failures over the past decade were primarily limited to the United States.

ANS: PTS: 1
OBJ: Events of the Past Decade and Governance Failures
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

14. Board of directors that did not spend sufficient time or have sufficient expertise to perform duties led to corporate governance failures.

ANS: PTS: 1
OBJ: Events of the Past Decade and Governance Failures
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

15. The audit committee is a subcommittee of the board of directors comprised of independent outside directors.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

16. The auditor must communicate significant audit adjustments to the audit committee.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

17. Any major disagreement the auditor has with management should be discussed with the audit committee.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

18. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control.

ANS: PTS: 1
OBJ: Corporate Governance Defined and Parties Involved
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

19. The Sarbanes-Oxley Act prohibits auditors from performing consulting services for their audit clients.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

20. The Public Company Accounting Oversight Board (PCAOB) set standards for audits of private and public companies.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

21. An auditor is required to communicate new accounting principles adopted by the organization to the audit committee.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

22. Audit committees are motivated to make sure the auditors do their job, because poor performance on the part of the auditors will directly reflect on the performance of the audit committee members.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

23. The Sarbanes-Oxley Act makes the audit committee the client of the external audit firm.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

24. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 replaces the requirements of the Sarbanes-Oxley Act of 2002 for financial sector companies.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

25. The Public Company Accounting Oversight Board has five members, all of which must be CPAs.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

26. The Public Company Accounting Oversight Board has the power of performing inspection of public accounting firms to determine their performance and check for improvements if any.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

27. In order to safeguard independence of the firm, partners and managers of public accounting firms must go through a cooling off period prior to taking a high level position of employment with a public client company.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

28. The Sarbanes-Oxley Act includes provisions requiring the auditor and the management to certify the financial statements and its disclosures and quality of internal controls.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

29. The Sarbanes-Oxley Act requires that public companies report on internal financial controls.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

30. The Sarbanes-Oxley Act requires partners or managers significantly participating in audits to rotate off the engagement every five years.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

31. The audit committee must be composed of outsiders such as the organization’s attorney and audit partner.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

32. The nominating committee is a standing committee of the board of directors whose purpose is to oversee the accounting and financial reporting processes of the company and the financial statement audits.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

33. When operating effectively the audit committee may replace the processes performed by the external auditors.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

34. The audit committee will receive feedback from both the internal and external auditors on a number of issues including the quality of internal controls over financial reporting.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

35. For public companies, the audit committee must be composed of outside directors who are also all financial experts.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

36. The audit committee relies on the internal and external auditors to develop and communicate objective information needed by the audit committee to effectively perform its oversight functions.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

37. The audit committee typically would not review the Management Discussion and Analysis section of the annual report filed with the SEC since that section of the report is the responsibility of management and includes forward looking statements.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

38. A survey of audit committee members conducted by KPMG in 2010 indicated that, on average, companies hold 12 audit committee meetings annually.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

39. Management of companies should have the ability to hire and fire the external auditor.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

40. The audit committee should have the authority to hire and fire the external auditors.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

41. The purpose of the audit committee is to oversee all aspects of the financial reporting process, including preparation and filing of financial statements, internal control over financial reporting, and related risks.

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

42. At least half of the members of an audit committee should be composed of independent directors.

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

43. The audit committee is responsible for ensuring that management designs and implements sound internal control, which is essential for reliable financial reporting for any organization.

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

44. The chief (internal) audit executive should have direct reporting access to the audit committee, and the committee should oversee the activities and budget of the internal audit function.

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

45. The audit committee should meet in separate executive sessions with management, the external auditor, the internal auditor, legal counsel, and other advisors.

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

46. The board should not consider limiting the number of years an individual can serve on the audit committee since the more an audit committee member understands the company the more effective that member will be able to perform the required duties.

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

47. Recent academic research shows that companies with good corporate governance have higher return on equity than other companies.

ANS: PTS: 1
OBJ: Relationship Between Corporate Governance and the Audit
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

48. According to SAS 61, auditors are required to inform the audit committee of any significant audit adjustments discovered during the engagement.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

49. The audit committee must be assured that the auditor is free of any restrictions and has not been influenced by management during the course of the audit.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

50. The Public Company Accounting Oversight Board obtains its authority to set audit standards for public companies from the U.S. Congress.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

51. The American Institute of Certified Public Accountants no longer retains the right to set audit standards for public companies as the Securities Exchange Commission has relinquished such power.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

MULTIPLE CHOICE

1. Corporate governance is a process by which the owners and creditors of an organization
a. exert control.
b. require accountability.
c. exert control and require accountability.
d. neither exert control nor require accountability.

ANS: PTS: 1 OBJ: Corporate Governance Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

2. Stockholders require accountability from management for:
a. financial performance
b. financial transparency
c. quality of internal controls
d. all of the above

ANS: PTS: 1 OBJ: Corporate Governance Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

3. The responsibility for operating an enterprise is delegated to the:
a. auditor.
b. audit committee.
c. management.
d. board of directors.

ANS: PTS: 1 OBJ: Corporate Governance Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

4. Section 304 of the Sarbanes-Oxley Act requires executives to forfeit any bonus or incentive-based pay or profits (including stock options) from the sale of stock received in the twelve months prior to an earnings restatement. This is often referred to as:
a. claw back provision
b. give back provision
c. restatement provision
d. fraud provision

ANS: PTS: 1 OBJ: Corporate Governance Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

5. Governance demands accountability back through the system to the:
a. shareholders
b. audit committee
c. management
d. all of the above

ANS: PTS: 1 OBJ: Corporate Governance Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

6. The audit client of the CPA firm is:
a. management.
b. the SEC.
c. the audit committee.
d. the stockholders.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

7. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted in response to the financial crisis of 2008 and 2009 and included the following corporate governance requirement(s):
a. Mandates enhanced stock exchange listing standards on compensation committee independence
b. Requires the external auditors report to the audit committee
c. Mandates that at least one member of the audit committee be a financial expert
d. All of the above

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

8. The audit committee has oversight responsibilities for:
a. outside reporting.

b. internal auditing.
c. external auditing.
d. all of the above.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

9. Which of the following should be communicated by the auditor to the audit committee?
a. auditor’s responsibilities under GAAP.
b. all significant audit adjustments.
c. significant accounting policies.
d. all are required communications.

ANS: PTS: 1
OBJ: Audit Firm and Audit Committee Communications
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

10. Which one of the following will provide auditing standards of public companies?
a. GAO
b. AICPA
c. GAAP
d. PCAOB

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

11. The PCAOB has the authority to do all of the following except:
a. perform peer reviews on public accounting firms
b. establish quality control standards for auditors of public companies
c. take responsibility for an organization’s financial statements
d. set audit standards

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

12. Management of an organization has the responsibility for all of the following except:
a. accounting principles used in financial reporting
b. engagement of a qualified auditor
c. internal control over financial reporting
d. financial statements and disclosures

ANS: PTS: 1
OBJ: Corporate Governance Defined and Parties Involved
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

13. A commission sponsored by the New York Stock Exchange issued a report in 2010 indicating that successful governance depends heavily upon:
a. honest managers
b. competent managers
c. industrious managers
d. all of the above

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

14. The board’s fundamental objective should be to:
a. ensure the financial statements are free from all error
b. ensure management’s interests are properly reflected in the strategy of the company
c. build long-term sustainable growth in shareholder value for the corporation
d. none of the above

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

15. The corporate governance responsibilities of management include:
a. establishing risk management processes
b. establishing proper internal controls
c. requiring high ethical standards
d. all of the above

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

16. The Sarbanes-Oxley Act of 2002 requires management of public companies to:
a. certify the accuracy of financial statements.
b. establish a corporate code of conduct.
c. take accountability for restated earnings.
d. all of the above

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

17. All of the following groups have responsibility for ensuring proper corporate governance except:
a. stockholders
b. board of directors
c. regulatory agencies
d. all of the above have responsibility

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

18. Governance failures over the past decade related to the stockholders included all of the following except:
a. focus on short-term prices
b. failure to perform long-term growth analysis
c. abdication of most responsibilities to management and analysts as long as stock price increased
d. all of the above are failures

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

19. Governance failures over the past decade related to the external auditor included all of the following except:
a. failure of the external audio to implement proper internal controls in the financial systems of their clients
b. promotion of personnel based on ability to sell non-audit products
c. replacement of direct tests of accounting balances with inquiries, risk analysis, and analytics
d. all of the above are failures

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

20. Which group is responsible for ensuring that the organization is run according to the organization’s charter and that there is proper accountability?
a. regulatory agencies such as the SEC
b. external auditors
c. board of directors
d. internal auditors

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

21. Specific activities performed by regulatory agencies such as the SEC include the following except:
a. reviewing of filings
b. interacting with the FASB in setting accounting standards
c. auditing the financial statements to express an opinion
d. all of the above are performed

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

22. Specific activities performed by external auditors include(s):
a. preparation of client financial statements in conformity with GAAP
b. services such as audit, tax or consulting

c. creating and specifying independence standards
d. all of the above are performed

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

23. Specific activities performed by management include the following except:
a. formulating strategy and risk management
b. implementing effective internal controls
c. hiring of the external auditors
d. all of the above are performed

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

24. The Public Oversight Board issued a report citing concerns with the audit process. These concerns included all of the following except:
a. analytical procedures were being used inappropriately to replace direct tests of account balances
b. audit documentation, especially related to the planning of the audit, was not in compliance with professional standards
c. auditors were ignoring warning signals of fraud and other problems
d. all of the above were cited

ANS: PTS: 1 OBJ: Events of Past Decade and Governance Failures
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

25. An audit committee must be comprised of outside directors and at least one outside financial expert. Which of the following is considered an outside director?
a. A director who is not a member of management and has no other relationship to the organization.
b. A consultant to the organization who works as an honorary member of the board.
c. A director who is also a member of management and has no other relationship to the company.
d. A director who is a CPA and CIO of an affiliated organization.

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

26. Which of the following members of the board of directors of McKeever Corporation is most qualified serve on McKeever’s audit committee?
a. Jon Adams, internal auditor of McKeever Corporation
b. Megan Wiley, attorney to McKeever Corporation
c. Karen Jones, consultant to McKeever Corporation
d. None of the above should serve on the audit committee of McKeever Corporation

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

27. The audit committee’s primary responsibilities related to the financial reporting process include:
a. providing oversight of the accounting and financial reporting processes
b. appointing, compensating, and overseeing the external auditor
c. ensuring that the board establishes a whistleblower program
d. all of the above

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

28. It is expected that the external auditor report the following to the audit committee except:
a. critical accounting policies and practices used by management
b. materiality methodology and thresholds used by the auditor
c. material alternative GAAP treatments that have been discussed with management
d. material written communications between the auditor and management

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

29. Which of the following board of directors of Robbins Corporation should not serve on the audit committee?
a. John Williams, professor at the University of Kalamazoo
b. Tyrone Marks, treasurer of Robbins Corporation
c. Stacy Bobbitt, member of the board of directors of the First National Bank and Trust
d. Jill Cemoss, chairman of the board of Big Brothers and Sisters, a non-profit organization

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

30. The audit committee’s major areas of responsibility include all of the following except:
a. oversight of the internal control system
b. oversight of the internal audit function and external auditor
c. preparation of financial statements
d. establishment and oversight of a whistleblower process

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

31. The audit committee should have:
a. at least one financial expert
b. members with very similar backgrounds and perspectives to avoid conflict

c. at least one independent director
d. all of the above

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

32. External auditors should expect the audit committees at their clients to ask them relevant and probing questions. Some of the relevant questions that audit committee members should ask the external auditor include all of the following except:
a. What are the most significant risks to financial reporting at this company?
b. What level of assurance do your procedures provide with respect to the annual financial statements?
c. How do you calculate materiality and what is your materiality threshold for the engagement?
d. How do you assess the competence of company personnel engaged in financial reporting and related processes?

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

33. The audit committee should perform the following in relation to the management of the external auditor except:
a. hiring
b. firing (if appropriate)
c. determining the audit fee
d. all of the above should be performed

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

34. The audit committee should disclose the processes it uses in discharging its responsibilities, including all of the following except:
a. the number of meetings each year
b. how the committee oversees the internal audit function
c. committee activities performed to assess the risk of fraudulent financial reporting
d. the committee’s role in its direct implementation of internal controls

ANS: PTS: 1 OBJ: Principles of Effective Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

35. The Sarbanes-Oxley Act of 2002 requires which of the following?
a. Only the largest four accounting firms may audit public companies.
b. Smaller public companies that cannot afford to become compliant with the act must delist and become pink sheet companies.
c. All publicly held companies will provide a report on internal control over financial reporting.

d. Chief financial officers of public companies must be CPAs.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

36. The PCAOB has broad powers affecting the audit profession, including:
a. Requiring all public accounting firms that audit any U.S. company to register with the PCAOB
b. Setting auditing standards for auditors of public companies
c. Performing inspections of all public accounting firms in the AICPA to determine their performance
d. all of the above

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

37. The Public Company Accounting Oversight Board was established by:
a. an act of Congress.
b. the Securities and Exchange Commission.
c. the Public Oversight Board.
d. the self-governing association of certified public accountants.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

38. Brooklyn Mercantile, Inc., a public company, receives audit services from Gregory and Elder, LLC. Brooklyn may engage Gregory and Elder to perform corporate tax returns only if:
a. Gregory and Elder is registered with the PCAOB.
b. Gregory and Elder is independent of Brooklyn for tax purposes.
c. tax services by Gregory and Elder are approved by Brooklyn’s audit committee.
d. the PCAOB approves such “non-audit” services in writing.

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

39. Audit committees are required to have what person in its composition?
a. A CPA
b. A public regulator
c. A financial expert
d. An attorney-at-law

ANS: PTS: 1 OBJ: Responsibilities of Audit Committees
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

40. According to the Sarbanes-Oxley Act of 2002, how often must audit managers and partners rotate off an engagement of a public company?
a. Each busy season
b. When independence is in question
c. Every five years
d. Managers and partners are not required to rotate off of public client engagements

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

41. Which of the following are the CEO and CFO of a public company prohibited from performing under the Sarbanes-Oxley Act of 2002?
a. Certification of financial statements
b. Disclosure of off-balance sheet transactions
c. Reporting on internal control over financial reporting
d. Selecting the external auditors

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

42. The organization that will continue to set auditing standards for firms auditing private companies is the
a. FASB
b. GAO
c. SEC
d. AICPA

ANS: PTS: 1 OBJ: Recent Governance and Disclosure Regulations
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

43. The AICPA is an organization that is
a. historically self-regulated.
b. regulated by the federal government.
c. regulated the state governments.
d. a new organization established by an act of congress in 2002.

ANS: PTS: 1 OBJ: Corporate Governance Defined
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

44. A proper system of corporate governance is one that demands
a. decision making by auditors in place of management.
b. accountability back through the system to the shareholders.
c. internal audit representation on the board of directors.
d. audit planning to obtain competent and sufficient audit evidence.

ANS: PTS: 1 OBJ: Principles of Effective Corporate Governance
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

45. The auditor may properly address the risk associated with an organization that does not demonstrate a commitment to good governance in the all of the following ways except:
a. not accepting the client
b. performing more audit work to better manage the financial risk to the auditor
c. charging a higher audit fee without performing increased audit work to compensate the auditor for the risk
d. all of the above are proper are proper

ANS: PTS: 1
OBJ: Relationship Between Corporate Governance and the Audit
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

46. Companies with good governance generally have the following characteristic(s):
a. are less likely to engage in “financial engineering”
b. take the requirements of good internal control over financial reporting seriously
c. make a commitment to financial competencies needed
d. all of the above

ANS: PTS: 1
OBJ: Relationship Between Corporate Governance and the Audit
NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

ESSAY

1. The role of the auditor and the audit committee

Describe the relationship between the external auditor and the audit committee of the company receiving audit services.

ANS:

2. Characteristics of an effective audit committee

List and discuss at least four attributes of an effective audit committee that provides important oversight functions.

ANS:

3. Discuss what corporate governance is and briefly describe an overview of the corporate governance process.

ANS:

4. Discuss some of the more significant provisions of the Sarbanes-Oxley Act of 2002.

ANS:

Chapter 3: Judgmental and Ethical Decision-Making Frameworks and Associated
Professional Standards

TRUE/FALSE

1. When making complex, difficult, and important decisions audit professionals typically do not benefit from a structured approach to their decision-making because they need to remain open-minded.

ANS: PTS: 1 OBJ: General Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

2. Professional judgment involves applying relevant professional knowledge and experience to unique and potentially uncertain facts and circumstances in order to reach a conclusion or make a decision.

ANS: PTS: 1 OBJ: General Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

3. As accounting standards become less rules-based and more principles-based, the role of professional judgement in decision-making will become less important.

ANS: PTS: 1 OBJ: General Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

4. Individual state boards of accountancy and state societies of CPAs have mostly adopted Rules of Conduct established by the AICPA.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

5. Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

6. It is not required for an individual to uphold the code of professional conduct in order to become licensed as a CPA.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

7. One issue that may threaten independence is that of the time pressure placed on the auditor when an audit is under bid.

ANS: PTS: 1 OBJ: Major Threats to Independence
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

8. The Sarbanes-Oxley Act of 2002 amends the Securities and Exchange Act of 1934 and places prohibitions on certain consulting services by auditors for their audit clients.

ANS: PTS: 1
OBJ: The Sarbanes-Oxley Act of 2002 as a Reaction to Ethical Lapses
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

9. An auditor of a public client may perform internal audit outsourcing services for a client because such services may overlap with external audit functions.

ANS: PTS: 1 OBJ: Independence Rules of the SEC and the PCAOB
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

10. An auditor of a public client may assist a client in designing and implementing its enterprise resource planning system in order to ensure that controls over the system exist prior to the audit.

ANS: PTS: 1 OBJ: Independence Rules of the SEC and the PCAOB
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

11. The SEC is concerned with situations between an auditor and a public company that allow the auditor to act as management of the client.

ANS: PTS: 1 OBJ: Independence Rules of the SEC and the PCAOB
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

12. The Code of Professional Conduct was adopted by the AICPA membership to provide guidance and rules to only its members in public practice.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

13. The AICPA Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

14. Confidentiality is the cornerstone of the auditing profession.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

15. The AICPA independence rules only apply for attestation clients.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

16. The AICPA’s Code of Professional Conduct defines direct ownership as an investment of one percent or more of a client’s organization.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

17. Direct ownership includes ownership by the CPA plus any spouse or dependent member of his or her household or any partnerships to which the CPA belongs.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

18. Direct ownership in a client’s business must be material to the CPA’s investment portfolio in order to violate the independence rule.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

19. Information shared by a client to the auditor is protected under privileged communication laws, therefore, it cannot be subpoenaed by a court of law to be used against the client.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

20. Contingent fees are prohibited for tax professionals when preparing tax returns for clients

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

21. Contingent fees are prohibited for any client for which the auditor performs attestation services.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

22. Commissions and referral fees are allowed to audit firms as long as the fees are disclosed to the client’s board and audit committee.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

23. The first step in the ethical framework is to identify the ethical issue(s).

ANS: PTS: 1 OBJ: A General Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

24. The highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges.

ANS: PTS: 1 OBJ: Ethical Theories
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

25. CPAs are no longer able to practice as a sole proprietorship.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

26. An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with the immediate security interests of others.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

27. An ethical problem occurs when an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

28. An ethical dilemma occurs when there are conflicting moral duties or obligations.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

29. An ethical problem is the same as an ethical dilemma.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

30. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

31. There is a hierarchy of rights to consider when applying rights theory.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

32. Only covered members as defined by the AICPA are required to comply with its independence rules.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

33. A covered member under the AICPA’s rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and all professional staff in the office of the engagement.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

34. Under the AICPA Code of Professional Conduct, rules take precedent over principals. The principals need to only be considered when a rule is apparent.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

35. Rule 101 on integrity and objectivity only applies to covered members as defined by the AICPA.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

36. The AICPA may revoke a member’s CPA license for violations of its Code of Professional Conduct.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

37. If a member owns several shares of stock of a company during the first few months of the fiscal year under audit and then sells the shares before accepting the engagement, the firm does not violate the independence rules of the AICPA.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

38. A contingency fee is where no fee will be charged unless a specified finding or result is attained.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

39. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical problems or dilemmas.

ANS: PTS: 1 OBJ: Ethical Theories
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

40. The Sarbanes Oxley Act requires management to pre-approve any non-audit service by the auditor, including tax services not specifically prohibited.

ANS: PTS: 1
OBJ: The Sarbanes-Oxley Act of 2002 as a Reaction to Ethical Lapses
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

41. Major threats to the independence of the auditor includes compensation schemes, familiarity with the client and time pressures.

ANS: PTS: 1 OBJ: Major Threats to Independence
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

42. Loans between the auditor and the client are permitted in some circumstances.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

43. The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

44. An auditor that exercises adequate professional skepticism will be less likely to overlook unusual circumstances, to over-generalize from limited audit evidence, or to use inappropriate assumptions in determining the nature, timing, and extent of audit procedures.

ANS: PTS: 1 OBJ: Professional Skepticism
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

45. Professional skepticism is important because without it auditors are susceptible to accepting weak or inaccurate audit evidence.

ANS: PTS: 1 OBJ: Professional Skepticism
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

46. Audit committees should consider all factors that might affect the independence of the external auditor and should not approve nonaudit services that they believe might impair independence.

ANS: PTS: 1 OBJ: Audit Committee Responsibilities
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

MULTIPLE CHOICE

1. When using a general framework for making high-quality professional decisions, the auditor would typically take all of the following steps except which one of the following:
a. the auditor structures the problem.
b. the auditor assesses the consequences of the potential alternatives.
c. the auditor assesses the risk of potentially losing the client and the impact of the lost fee on the firm.
d. all of the above are steps that would be taken.

ANS: PTS: 1 OBJ: General Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

2. Audit committees should consider all factors that might affect the independence of which of the following:
a. chief executive officer
b. chief financial officer
c. external auditors
d. all of the above.

ANS: PTS: 1 OBJ: General Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

3. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley’s five-year-old daughter owns shares of stock in McBurgers Corporation, then Pulley is considered to have what type of interest in McBurgers Corporation?
a. immaterial indirect interest in McBurgers Corporation.
b. material indirect interest in the McBurgers Corporation.
c. a loophole for claiming independence from McBurgers Corporation.
d. direct interest in McBurgers Corporation.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

4. Brenda Hursch, an auditor, would be considered independent for purposes of an audit of Microship Company even though her spouse worked for Microship Company in which of the following positions?
a. controller.
b. treasurer.
c. order entry staff.
d. none of the above, all roles would impair independence

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

5. A CPA firm is not considered independent when it performs which of the following services for a publicly traded audit client?
a. tax return preparation as approved by the board of directors
b. basic accounting recordkeeping and financial statement preparation
c. accounting information system design and implementation
d. both B and C
e. none of the above

ANS: PTS: 1 OBJ: Independence Rules of the SEC and the PCAOB
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

6. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, Julie’s independence would be considered
a. impaired because Julie has a direct financial interest in FNBW.
b. impaired because Julie has a material indirect financial interest in FNBW.
c. not impaired because Julie has an immaterial indirect financial interest in FNBW.
d. not impaired because Julie is permitted to take normal loans from FNBW.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

7. Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month. According to the AICPA, Julie is considered a covered member for FNBW independence purposes because of which of the following conditions?
a. she will be working on the engagement.
b. she has a direct financial interest in FNBW.
c. she graduated in the same area as the client is operating.
d. she has an immaterial direct financial interest in FNBW.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

8. In determining the types of activities, engagements and interactions an auditor should have with a client, the CPA and the audit firm must do which of the following?
a. only assess the relationships of clients that pay audit fees that are material to their firm.
b. assess all of their relationships with every client to ensure that independence is intact.
c. focus on client satisfaction above all other considerations.
d. realize that ethics are only guidelines and a matter of personal judgment.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

9. Which of the following represents a situation in which an auditor is independent of the client?
a. The auditor is paid by the client organization rather than the SEC.
b. The auditor takes a personal loan from the president of the company.
c. The auditor’s dependent son holds 25 shares of the client’s common stock.
d. The auditor has not received payment for the previous audit services.

ANS: PTS: 1 OBJ: Major Threats to Independence
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

10. Members of the AICPA are required to act with integrity and objectivity for which of the following engagements?
a. tax preparation
b. financial statement review services
c. financial statement audits
d. all engagements

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

11. Which one of the following is an example of a conflict of interest for a CPA?
a. performing tax services and a compilation engagement for a client
b. serving as legal counsel and an auditor for a client
c. providing an audit on internal financial controls and financial statements for a client
d. being employed as a chief financial officer while serving as a member of the board of directors for the same company

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

12. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct?
a. a member must not take on an engagement that is beyond the member’s professional competence
b. a member must exercise duties prudently and professionally
c. a member must adequately plan and supervise the performance of professional services
d. a member firm must not advertise services to competing clients

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

13. Rule 201 of the General Standards of the Code of Professional Conduct defines professional competence in which of the following ways?
a. sufficient collegiate and continuing professional education.
b. accepting only those engagements that the firm’s members can competently perform.
c. adequate planning and supervision of professional performance.
d. none of the above.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

14. A member of the AICPA must safeguard the confidentiality of client information. Auditors, however, must disclose information to non-clients for the following reasons except to:
a. discuss information relating to inadequate disclosure in an audit report.
b. comply with a validly issued and enforceable subpoena or summons.
c. accommodate the review of client audit workpapers under AICPA, PCAOB, or State Board of Accountancy authority.
d. explain to members of the press the financial viability of a client.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

15. A CPA firm is considered independent when it performs which of the following services for a publicly traded audit client?
a. Serving as a member of the client’s board of directors.
b. Determining which accounting policies will be adopted by the client as approved by the board of directors.
c. Accounting information system design and implementation as approved by the board of directors.
d. Tax return preparation as approved by the board of directors.

ANS: PTS: 1 OBJ: Independence Rules of the SEC and the PCAOB
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

16. A CPA may only practice public accounting in which of the following forms?
a. a partnership.
b. a professional corporation.
c. a sole proprietorship.
d. an organization permitted by state law or regulation.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

17. William Tyler, CPA, may not accept a commission for recommending a product or service to which type of client?
a. a tax client.
b. an attestation client.
c. a financial-planning client.
d. a management-services client.
e. all of the above.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

18. Information about a client that cannot be subpoenaed by a court of law is referred to as what type of information?
a. confidential information.
b. privileged communication.
c. contingent information.
d. audit communication

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

19. Which of the following describes a situation in which moral duties or obligations conflict and one action is not necessarily the correct action?
a. an ethical dilemma.
b. an ethical problem.

c. an ethical theory.
d. none of the above.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

20. Which of the following describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest?
a. an ethical dilemma.
b. an ethical problem.
c. an ethical theory.
d. none of the above.

ANS: PTS: 1 OBJ: An Ethical Decision-Making Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

21. Which of the following is included in the AICPA Code of Professional Conduct?
a. Principles, Rules of Conduct and Ethics Rulings.
b. Rules of Conduct, Interpretations and Principles.
c. Principles, Rules of Conduct and Ethics Rulings.
d. Principles, Rules of Conduct, Interpretations and Ethics Rulings.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

22. The AICPA Principles of Professional Conduct include which of the following?
a. public interest, objectivity and independence.
b. due professional care and supervision.
c. scope and nature of services and adequate training.
d. integrity and confidentiality

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

23. In which of the following situations would a CPA not be considered independent?
a. where a CPA has obtained an auto loan from a banking client in the current year.
b. where a CPA has obtained an automobile lease term from a client in the current year.
c. where a CPA has obtained a $4,000 retainer for services from a banking client in the current year.
d. where a CPA has obtained a home mortgage loan from a client in the current year.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

24. In which of the following situations would a CPA not be considered independent?
a. where a CPA has obtained an auto loan from a banking client in a prior year.
b. where a CPA has obtained a home mortgage loan in 1988 from a client.
c. where a CPA has obtained an auto lease from a banking client in the current year.
d. where the spouse of a CPA has obtained a home mortgage loan in the current year.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

25. Which of the following represents a situation in which the auditors may disclose client information to outside parties?
a. Bringing working papers to a professional CPA workshop as an example of quality work.
b. Complying with a validly issued and enforceable subpoena or summons.
c. Showing the client’s bank statement to a neighbor who is a shareholder to emphasize its cash position.
d. Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

26. The ethical framework derived from utilitarianism and rights theories indicates all of the following steps except
a. identification of the legal issues.
b. determination of affected parties and their rights.
c. determination of the most important rights.
d. development of alternative courses of action.

ANS: PTS: 1 OBJ: An Ethical Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

27. Which of the following is a purpose of an ethical framework?
a. to provide a defined methodology to solve the ethical problem.
b. to provide a defined methodology to aid the user in making complex ethical decisions.
c. to provide a defined program to solve ethical dilemmas.
d. to provide all of the above.

ANS: PTS: 1 OBJ: An Ethical Framework
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

28. Normally the auditor is not permitted to divulge confidential information obtained from a client. Which of the following situations would be a violation of this requirement?
a. to respond to the information request of a shareholder.
b. to respond to a quality review request of the state board of accountancy.

c. to initiate a complaint with the AICPA’s ethics division.
d. to ensure adequate disclosure in accordance with GAAP.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

29. Under the AICPA definition, who among the following would not be considered a covered member?
a. an individual on the attest engagement team.
b. an individual in a position to influence the attest engagement.
c. a partner in the office of the lead engagement partner.
d. all would be considered covered members.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

30. Rule 201, dealing with General Standards that are applicable to all CPAs no matter the type of services that are rendered, does not include which factor?
a. Due professional care.
b. Integrity and objectivity.
c. Planning and supervision.
d. Sufficient relevant data.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

31. Independence is required for which of the following types of services?
a. audits.
b. tax work.
c. consulting.
d. always required of the CPA.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

32. Independence is not required for which of the following types of services?
a. audits.
b. reviews.
c. consulting.
d. attestation.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

33. Commissions and referral fees are not permitted in which types of situations?
a. Tax.
b. Reviews.
c. Audits.
d. Both B and C.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

34. Among close relative of the covered member, e.g., brothers, sisters, mother, father, and cousins, when is ownership of the client’s stock by them considered the same as ownership by the covered member?
a. Key financial position.
b. Immaterial financial interest in the client with covered member’s knowledge.
c. Material financial interest in the client without the covered member’s knowledge.
d. All are considered part of the covered member’s close relatives and so would affect the covered member’s independence.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

35. A covered member may not have a loan to or from the client, except for permitted and grandfathered loans. When would nonpayment of tax fees due to the auditor by the client be converted to a loan classification?
a. After 90 days.
b. After six months.
c. After one year.
d. After two years.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

36. The General Standards of Rule 201 are required of all members of the AICPA. They include all of the following except
a. professional competency.
b. integrity and objectivity.
c. planning and supervision.
d. sufficient relevant data.

ANS: PTS: 1 OBJ: AICPA Code of Professional Conduct
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

37. An auditor that has an attitude that includes a questioning mind and a critical assessment of audit evidence is considered which of the following?
a. Professionally Skeptical. c. Professionally Competent.
b. Professionally Independent. d. Professionally Efficient.

ANS: PTS: 1 OBJ: Professional Skepticism
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

38. An auditor who is professionally skeptical will do which of the following?
a. Critically question contradictory audit evidence.
b. Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high.
c. Reasonably question the authenticity of documentation.
d. All of the above.

ANS: PTS: 1 OBJ: Professional Skepticism
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

39. According to international auditing standards, professional skepticism includes being alert to all of the following except:
a. Audit evidence that contradicts other audit evidence obtained.
b. Long-standing relationships with management that should be used as a basis to trust the information they provide.
c. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.
d. Conditions that may indicate possible fraud.

ANS: PTS: 1 OBJ: Professional Skepticism
NAT: AACSB-Ethics | AACSB-Analytical skills | AICPA BB-Critical thinking

ESSAY

1. The importance of independence

Why is “independence” referred to as the cornerstone of auditing?

ANS:

ANS:

3. Non-audit services prohibited or permitted under Sarbanes-Oxley

Harry Rawlins CPAs, are engaged by DK, Inc., a public company to perform the year-end audit.
A. Discuss the types of services that Harry Rawlins CPAs will not be able to perform for DK under the Sarbanes-Oxley Act of 2002.
B. Under what circumstances may Harry Rawlins CPAs perform certain non-audit services for DK, Inc. under Sarbanes-Oxley Act of 2002?

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4. AICPA Code of Professional Conduct, Rule 101

Livingston and Associates is a CPA firm in Las Vegas, Nevada and it performs the financial statement audit for Smith Plastics, Inc. For each non-related situation below, determine if each individual represented is independent of Smith Plastics and if Livingston and Associates (the Firm) is independent of Smith Plastics:

A. Sam Livingston, an audit partner, meets Jill Warner, CFO of Smith Plastics after the engagement begins and they fall in love. Sam and Jill marry in Lake Tahoe, California a short time later. Sam Livingston will not be on the audit engagement team of Smith Plastics.
B. The Firm hires Billy Messer as a staff auditor. Billy is aware that his father has a material investment in Smith Plastics. Billy will not work on the Smith Plastics audit.
C. Lucy Brown is an audit manager at the Firm. Bob, her high school aged son, owns 1% of the equity of Smith Plastics. The investment is not material to Bob or Lucy’s net worth. Lucy is assigned as the audit manager for the Smith Plastics engagement.
D. Smith Plastics has paid all but $5,000 of the previous years audit fees.
E. Julie Simpson, tax partner at the Firm has a 401k plan with multiple securities making up the balance. One of the securities in the plan is that of Smith Plastics which comprises .05% of the total balance of Julie’s 401k. Julie does not have a significant portion of her retirement or savings in this particular plan.

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5. Keeping client information confidential

The rule on confidentiality is intended to protect the client’s information. The rule, however, does not apply in certain circumstances.
A. Explain the rule on confidentiality.
B. Identify the circumstances in which the rule of confidentiality does not apply.

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6. Engagement fees

Jonathan Tubb, CPA, agrees to prepare a 2009 tax return for Don Brogan. Tubb agrees to accept 30 percent of the refund obtained as his fee. Discuss the ethics of this situation using the ethical framework
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7. Independence

Discuss what audit independence is and why it is important to the audit firm and the profession. What are some major threats to audit firm independence and what are some of the steps that audit firms and the profession have taken in addressing those threats?

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