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Question 1 of 50 An auditor may use ______________ as a defense under the Securities Act of 1933? Independence Scienter Due Care Immaterial loss Contributory Negligence Question 2 of 50 In each of the following situations, a CPA would be considered not independent except when: A CPA is a business partner of a client's spouse. A CPA has obtained a 90-day signature loan from a client. A CPA has obtained an interest-free loan from a banking client. A CPA has obtained a loan for investment purposes from a client. A CPA has obtained an auto loan from a banking client. Question 3 of 50 All of the following statements are false, except: According to Rights Theory, the highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. CPA certificates for auditors are issued by state boards of accountancy. The court system acts as a deterrent to quality controls for the auditing profession. The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. Effective audit processes, by themselves, are sufficient to achieve audit quality. Question 4 of 50 Directional testing involves testing transactions or balances primarily for which type of error? Overstatement. Either overstatement nor understatement. Either overstatement or understatement. Understatement. None of these are correct. Question 5 of 50 _________________ is the first phase in an audit. Testing of account balances Understanding internal controls Client acceptance or client continuance Testing the revenue cycle Understanding the client Question 6 of 50 Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002? Designing internal controls. All of these are management responsibilities. Certify the accuracy of financial statements. Ensuring financial statements and disclosures are accurate. Establish a corporate code of conduct. Question 7 of 50 The auditors' reprocessing of transactions are designed to test which of the following assertions? Accuracy Occurrence Rights Existence Completeness Question 8 of 50 An example of ________________________ is when an auditor selects a sample of items recorded and traces them back to the supporting documentation. Direct testing for valuation. Direct testing for rights. Directional testing for existence. Accuracy testing for presentation. Directional testing for completeness. Question 9 of 50 All of the following audit procedures will address the existence/occurrence for accounts receivables and sales, except: Confirm balances of unpaid invoices with customers. Trace bill of lading to sales invoice and sales journal. None of these answers are correct. Scan sales journal for duplicate entries. Examine subsequent collection. Question 10 of 50 Which of the following factors would lead an auditor to assess inherent risk at a higher level? The account balance is easily determined without estimation. The account balance is composed of simple transactions. None of these would lead the auditor to assess a higher level of inherent risk. The account balance is composed of a high volume of nonroutine transactions. All of these would lead the auditor to assess a higher level of inherent risk. Question 11 of 50 Research consistently shows that there are three factors associated with most frauds. The three factors are: 1. Incentives or Pressures 2. Opportunities 3. Attitudes or Rationalization With each factor, there are indicators that the factor may exist. Which of the following indicators is not associated with the Opportunities factor? Ineffective monitoring by management. Complex or difficult to understand transactions. Audit firm focus is on consulting for higher fees rather that audit services. Aggressive accounting stance. Weak or nonexistent internal controls. Question 12 of 50 In which of the following independent situations, is it most likely that fraud related to revenue recognition will be identified by the auditor? Sales have decreased 5% in the current period over the previous period and is consistent with the results of competitors. Sales are higher in the month preceding each quarter end. The sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction. Gross margin is equivalent in the current period to previous periods and is below that of the industry. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors. Question 13 of 50 One example of a(an) ______________ is an edit test. supporting control input control output control processing control custody control Question 14 of 50 Which of the following statements is false? Incorrect aging of accounts receivable is a fraud scheme. If the auditor believes internal controls are ineffective, he should extend substantive testing. Lapping can occur when duties are inadequately segregated. Auditors can gain an understanding of internal controls by reviewing the client's documentation. It is necessary for the auditor to understand internal controls for integrated audits but not for financial statement only audits. Question 15 of 50 Internal control is a process designed to achieve objectives in __________________. None of these categories. Compliance with applicable laws. Operational Effectiveness. Reliability of financial reporting. All of these categories. Question 16 of 50 __________________ is not a factor included in Rule 201 - General Standards of the AICPA Code of Professional Conduct. Sufficient relevant data. Planning and supervision. Due professional care. All of these factors are included in Rule 201. Integrity and objectivity. Question 17 of 50 In order for revenue recognition on a product sale to occur, the company must make sure that which of the following has been accomplished? A price is discussed based upon the customer's resale of the product. The cash is realized on the sale of the product. The customer is given the option to return the product at any time. The product is adequately delivered to the customer. The discount period has passed. Question 18 of 50 Of the following items listed, which one would be considered the most reliable type of audit evidence? Confirmations from banks. None of these are reliable audit evidence Customer accounts receivable files. Purchase orders from vendors. Computerized general ledger. Question 19 of 50 All of the following statements are true, except: It is true that audit evidence consists of both information that corroborates management's assertions and information that contradicts such assertions. It is true that the auditor uses professional judgment to determine which audit procedures to perform. It is true that when the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high, the auditor is more likely to use negative confirmations. It is true that when the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence. It is true that inherent and control risks are risk controlled by the auditor. Question 20 of 50 A company has in place a process that is designed to ensure that no employee is paid for more than 80 hours of sick pay. This is an example of a(an) ___________. input control output control processing control cash management control entity-wide control Question 21 of 50 All of the following statements are true, except: Contingent fees are prohibited for tax professionals when preparing tax returns for clients Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees. Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting. Question 22 of 50 Which of the following accounts is not a directly related account in the revenue cycle? Sales discounts Allowance for doubtful accounts Warranty expense Sales returns and allowances Accounts receivable Question 23 of 50 The _______________ is responsible for setting International Standards of Auditing. AICPA IAASB FASB IFRS IASB Question 24 of 50 Which of the following statements is correct concerning the risk of material misstatement? Risk of material misstatement must be assessed in non-quantitative terms. Risk of material misstatement is controllable by the client. None of these statements are correct. Risk of material misstatement can be controlled and changed by the auditor. Risk of material misstatement arises because audit procedures have been misapplied. Question 25 of 50 Which one of the following statements is true? The client's verbal evidence is more reliable than evidence from independent outside sources. Appropriateness deals with the quantity of evidence the auditor collects, whereas sufficiency deals with the quality of evidence the auditor collects. Liabilities and expenses are most often tested for overstatements. Underlying accounting records consist of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries. Even though all audits are different, they can all be approached in the same manner. Question 26 of 50 The auditor's detection of __________________ is a key indicator of fraud in the revenue cycle. Customer collections that are over 90 days past due. Credit entries in customer accounts receivable for authorized writeoffs. Recurring entries in the sales journal. None of these answers are correct. Altered shipping documents and invoices. Question 27 of 50 All of the following statements are true, except: A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings goal. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls. A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level. The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues. A consistent pattern of earnings growth would eliminate the auditor's concern for fraud in revenue recognition. Question 28 of 50 Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to _________________. Increase Remain the same Decrease Become less difficult to ascertain Become more difficult to ascertain Question 29 of 50 Which of the following statements is false? A company's history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level. Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence. The purpose of the auditor's consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing. Current auditing standards do not require the confirmation of receivables if accounts receivable are not material. Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties. Question 30 of 50 Which of the following statements is true? Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. Obtaining evidence about internal controls is the phase of the audit opinion formulation process that is most commonly thought of as auditing by the general public. The AICPA has a peer review program that reviews and evaluates the portions of an audit firm's accounting and audit practice that are not inspected by the PCAOB. The SEC and PCAOB independence rules for auditors are identical. Internal audit is the term used to describe a systematic process of objectively obtaining evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. Question 32 of 50 Which term describes the type of threat which occurs when top management threatens to replace the audit firm because of a disagreement over an accounting issue? Financial self-interest threat Undue influence threat Competitive threat Management participation threat Adverse interest threat Question 33 of 50 The Utilitarian Theory requires all of the following actions, except: Identify the potential impact of actions on each affected party. None of these answers is correct. Identify the desirability of each action. Identify the potential problem. Identify the rights of the affected parties. Question 34 of 50 Of the following types of audit evidence, _________________ is the most reliable? Directly observable evidence. Evidence from a poorly controlled system. Copies of client prepared documents. Evidence from the client's organization. Facsimiles of documents. Question 35 of 50 ______________ is the audit report referred to when the auditor has no reservations about management's financial statements. A peer review A qualified report An adverse report An integrated report An unqualified report Question 36 of 50 _________________ is a specific corporate governance responsibility of Executive Management. Approving major changes, such as mergers Implementing an effective ethical environment Setting the compensation structure for the audit team Approving non-audit work performed by the audit firm Reviewing the budget of the internal audit function Question 37 of 50 In smaller audit firms, it is typical that __________________________. The type of work is primarily external audits. None of these answers are correct. The firm has multiple teams that work on the audit of a single entitiy and then disband. The firm has multiple teams that overlap across engagements. The firm has a relatively higher level of staff turnover. Question 38 of 50 Which of the following statements is false? It is true that if an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly. It is correct that, according to professional audit standards, the audit team should assemble early in the planning stages of an audit to conduct a fraud "brainstorming" meeting in order to determine the types of fraud that may occur with the client. It is true that users rely on the auditors' independent assessment of financial statement presentation because few users have direct knowledge of the company's operations. It is true that the consideration of fraud in financial statement audits is a relatively new concept derived originally from the Sarbanes-Oxley Act. It is true that auditing exists because users need unbiased information on which to assess management performance and make economic decisions. Question 39 of 50 If an auditor were to divulge confidential information obtained from a client in order to __________________. It would be considered a violation of the standard of confidentiality. All of these would be violations of the standard of confidentiality. To ensure adequate disclosure in accordance with GAAP. To initiate a complaint with the AICPA's ethics division. To respond to the information request of a shareholder. To respond to a quality review request of the state board of accountancy. Question 40 of 50 The _________________ phase of the audit opinion formulation process is most commonly thought of as auditing by the general public. making reporting decisions None of these answers are correct. performing risk assessment obtaining evidence about internal controls obtaining substantive evidence about accounts Question 41 of 50 All of the following statements are false, except: Management of companies should have the ability to hire and fire the external auditor. Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. The SEC has authority to establish GAAP for all business enterprises. The audit committee is a subcommittee of the board of directors comprised of independent outside directors. The Public Company Accounting Oversight Board was established by the AICPA in response to Securities laws. Question 42 of 50 The most common criteria against which the auditor measures the fairness of financial statement presentation for a U.S.-based company is: Government accounting principles Sarbanes-Oxley compliance Generally accepted accounting standards Auditing standards Generally accepted accounting principles Question 43 of 50 The Sarbanes-Oxley Act strengthened auditor independence by _______________. requiring all audit staff members to be certified public accountants. requiring the lead partner to rotate off the audit engagement at least every five years. requiring a different audit firm from the one that performs the audit to prepare the client's tax return. requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act. requiring auditors to report the nature of any auditor-client disagreements to the SEC. Question 44 of 50 Which of the following statements is true? Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised. The revenue cycle considered by auditors includes the sales process but not collections. The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization. The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction and collecting the receivable. Auditors and management should agree on what is considered material. Question 45 of 50 Which of the following procedures has to be completed at or after the end of the period? Assessment of control risk All of these must be completed prior to period end Engagement letter Brainstorming Evaluation of adjusting entries Question 46 of 50 One form of _____________ is when a cross-sectional analysis of revenue recorded across multiple sales locations is performed. common size analysis ratio analysis completeness analysis trend analysis correlation analysis Question 47 of 50 _______________ is not a cause of action against an auditor for breach of contract. Failing to discover an immaterial error or employee fraud. All of these are cause of actions for breach of contract. Violating client confidentiality. Providing the audit report on time. Withdrawing from an audit engagement without justification. Question 48 of 50 All of the following are incentives or pressures to commit fraud, except: Pending stock option expirations Pending retirement Equity convenants Greed Management compensation schemes Question 49 of 50 An audit program is created to specify _____________________. Audit objectives and procedures to be followed during the audit process. The audit team to be assigned to the audit engagement. The audit procedures that will be performed every year for the client. The type of audit opinion to be rendered based upon procedures performed. How an auditor should think while performing audit procedures. Question 50 of 50 _______________ would be considered the most reliable type of audit evidence? Purchase orders from vendors. Customer accounts receivable files. Computerized general ledger. None of these answers are correct. Confirmations from banks