MULTIPLE-CHOICE QUESTIONS

1. Which of the following is not a reason that audit firms continue to experience high levels of litigation?

a. Joint and several liability statutes.

b. Class action lawsuits.

c. Contingent fee compensation for audit firms.

d. A misunderstanding by some users that an unqualified audit opinion represents an insurance policy against investment losses.

2. The shareholders of a bank sue Karen Frank, CPA, for malpractice due to an audit failure that preceded the bank's financial failure. The jury determines that Frank is 40 percent at fault and that management is 60 percent at fault. The bank has no financial resources, nor does its management. Under joint and several liability Frank will pay what percentage of the damages?

a. 100%.

b. 50%.

c. 40%.

d. None of the above.

3. Which of the following statements is false?

a. Breach of contract occurs when a person competently performs a contractual duty.

b. Negligence is the failure to exercise reasonable care, thereby causing harm to another person or to property.

c. Gross negligence is operating with a reckless disregard for the truth, or the failure to use even minimal care.

d. Fraud is an intentional concealment or misrepresentation of a material fact with the intent to deceive another person, causing damage to the deceived person.

4. An audit client can sue the auditor under contract law for which of the following?

a. Breach of contract.

b. Negligence.

c. Gross negligence.

d. Fraud.

e. All of the above.

5. The remedies for breach of contract include which of the following?

a. Requiring specific performance of the contract agreement.

b. Granting an injunction to prohibit the auditor from doing certain acts, such as disclosing confidential information.

c. Providing for recovery of amounts lost as a result of the breach.

d. All of the above.

6. An example of a foreseen user would include which of the following?

a. The auditor knows that the First National Bank wants audited financial statements as part of the client's application for a loan.

b. The auditor knows that the client needs audited financial statements because it wants to obtain a loan from one of several possible banks.

c. Current and prospective creditors and stockholders are likely to use the audited financial statements.

d. None of the above.

7. Which of the following is not a step in the framework for professional decision making?

a. Structure the audit problem.

b. Assess consequences of decision.

c. Assess the likelihood of fraud.

d. Gather information and audit evidence.

e. Conduct sensitivity analysis.

8. An auditor who is professionally skeptical will do which of the following?

a. Critically question contradictory evidence.

b. Carefully evaluate the reliability of audit evidence.

c. Reasonably question the authenticity of documentation.

d. Reasonably question the honesty and integrity of management.

e. All of the above.

9. Utilitarianism does not require which of the following when a person considers how to resolve an ethical dilemma?

a. Identification of the potential problem and courses of action.

b. Identification of the potential direct or indirect impact of actions on each affected party who has an interest in the outcome.

c. Identification of the motivation of the person facing the ethical dilemma.

d. Assessment of the desirability of each action for each affected party.

10. Which of the following statements related to rights theory is false?

a. The highest order rights include the rights to life, autonomy, and human dignity.

b. The second order rights include rights granted by the government, such as civil rights and legal rights.

c. The third order rights include social rights, such as the right to higher education, to good health care, and to earning a living.

d. The fourth order rights include one's nonessential interests or personal tastes.

11. Rule 201 of the AICPA Rules of Conduct requires the auditor to do which of the following?

a. Undertake only those professional services that the auditor or audit firm can reasonably expect to be completed with professional competence.

b. Exercise due professional care in the performance of professional services.

c. Adequately plan and supervise the performance of professional services.

d. Obtain sufficient relevant data to afford a reasonable basis for conclusions in relation to professional services performed.

e. All of the above.

12. Which of the following statements is false?

a. An auditor in public practice shall be independent in the performance of professional services.

b. In performing audit services, the auditor shall maintain objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate his or her judgment to others.

c. In performing audit services, the auditor may accept only contingent fees for publicly-traded audit clients.

d. An auditor in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive.