Midterm Exam Assignments
[ 1 ] Which of the following statements is true concerning an auditor’s responsibilities regarding financial statements?
A. An auditor may not draft an entity’s financial statements based on information from management’s accounting system.
B. The adoption of sound accounting policies is an implicit part of an auditor’s responsibilities.
C. An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion.
D. Making suggestions that are adopted about an entity’s internal control environment impairs an auditor’s independence.
[ 2 ] Who establishes generally accepted auditing standards?
A. Auditing Standards Board and the Public Company Accounting Oversight Board.
B. Financial Accounting Standards Board and the Governmental Accounting Standards Board.
C. State Boards of Accountancy.
D. Securities and Exchange Commission.
[ 3 ] The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley’s financial statements. The primary objective of this audit is to provide assurance to the
A. Regional stock exchange.
B. Investors in Donley securities.
C. Securities and Exchange Commission.
D. Board of directors of Donley.
[ 4 ] A financial statement audit is designed to
A. Provide assurance on internal control and to identify significant deficiencies and material weaknesses.
B. Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material.
C. Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.
D. Obtain absolute assurance on the financial statements and express an opinion on the financial statements.
[ 5 ] Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as
A. An activity whose purpose is to search for fraud.
B. A discipline that attests to financial information presented by management.
C. A professional activity that measures and communicates financial and business data.
D. A regulatory function that prevents the issuance of improper financial information.
[ 6 ] Which of the following statements correctly defines the term “reasonable assurance”?
A. A substantial level of assurance to allow an auditor to detect a material misstatement.
B. A significant level of assurance to allow an auditor to detect a material misstatement.
C. An absolute level of assurance to allow an auditor to detect a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.
[ 7] Competence as an independent auditor includes all of the following except
A. Having the technical qualifications to perform an engagement.
B. Possessing the ability to supervise assistants.
C. Warranting the infallibility of the work performed.
D. Consulting others if additional technical information is needed.
[ 8 ] Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A. The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit techniques.
B. Managements disregard of its responsibility to maintain an adequate internal control environment.
C. The CPA’s inability to determine whether related-party transactions were consummated on terms equivalent to arm’s-length transactions.
D. Management’s refusal to permit the CPA to perform substantive procedures before year end.
[ 9 ] Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. The prospective client has already completed its physical inventory count.
B. The CPA lacks an understanding of the prospective client’s operations and industry.
C. The CPA is unable to review the predecessor auditor’s audit documentation.
D. The prospective client is unwilling to make all financial records available to the CPA.
[ 10 ] An auditor’s document includes the following statement: “Our audit is subject to the risk that errors, fraud, or illegal acts, if they exist, will not be detected. However, we will inform you of any such matters that come to our attention.” The above passage is most likely from
A. The explanatory paragraph of a “subject to” qualified auditor’s opinion.
B. An engagement letter.
C. The explanatory paragraph of a compliance report on a government entity subject to GAO standards.
D. A comfort letter.
[ 11 ] In assessing whether to accept a client for an audit engagement, a CPA should consider the
Client’s Business Risk CPA’s Business Risk
A. Yes Yes
B. Yes No
C. No Yes
D. No No
[ 12 ] An auditor should design the audit plan to
A. Select all material transactions for substantive testing.
B. Minimize substantive testing prior to the balance sheet date.
C. Implement the audit strategy.
D. Perform either tests of controls or tests of transactions on each account balance.
[ 13 ] Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
A. Make a preliminary judgment about materiality.
B. Confirm a sample of the entity’s accounts payable with known creditors.
C. Obtain written representations from management that there are no unrecorded transactions.
D. Communicate management’s initial selection of accounting policies to the audit committee.
[ 14 ] 1n addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?
A. Procedures performed to assess independence and the ability to perform the engagement.
B. The understanding of the terms of the engagement, including scope, fees, and resource allocation.
C. Other audit procedures to be performed to comply with generally accepted auditing standards.
D. Issues with management integrity that could affect the decision to continue the audit engagement.
[ 151 When planning an audit, an auditor should
A. Consider whether substantive procedures may be reduced based on the results of the internal control questionnaire.
B. Determine materiality for the financial statements as a whole.
C. Conclude whether changes in compliance with prescribed controls require a change in the reliance on controls.
D. Prepare a preliminary draft of the management representation letter.
[ 16 ] The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is
A. Audit risk.
B. Inherent risk.
C. Control risk.
D. Detection risk.
[ 17] Which of the following is a false statement about materiality?
A. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
D. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.
[ 18 ] The ultimate purpose of assessing control risk in a financial statement audit is to contribute to the auditor’s evaluation of the risk that
A. Specific internal control activities are not operating as designed.
B. The collective effect of the control environment may not achieve the control objectives.
C. Tests of controls may fail to identify activities relevant to assertions.
D. Material misstatements may exist in the financial statements.
[ 19 ] Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.
[ 20 ] Which of the following presumptions is least likely to relate to the reliability of audit evidence?
A. The more effective internal control is, the more assurance it provides about the accounting data and financial statements.
B. An auditor’s opinion is formed within a reasonable time to achieve a balance between benefit and cost.
C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D. The auditor’s direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.
[ 21 ] Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is
A. Qualified and describe the departure in a separate paragraph.
B. Unmodified but not mention the departure in the auditor’s report.
C. Qualified or adverse, depending on materiality, and describe the departure in an other-matter paragraph.
D. Unmodified and describe the departure in an other-matter paragraph.
[ 22 ] The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of
A. Quality control.
B. Generally accepted auditing standards, which include the concept of materiality.
C. The auditor’s assessment of the risk of material misstatement.
D. Generally accepted accounting principles.
[ 23 ] The auditor’s opinion refers to U.S. generally accepted accounting principles (U.S. GAAP). Which of the following best describes U.S. GAAP?
A. The interpretations of accounting rules and procedures by certified public accountants on audit engagements.
B. The pronouncements of the Financial Accounting Standards Board.
C. The guidelines set forth by various governmental agencies that derive their authority from Congress.
D. Principles issued by bodies designated by the Council of the AICPA.
[24 ] A major purpose of the auditor’s report on financial statements is to
A. Assure investors of the complete accuracy of the financial statements.
B. Clarify for the public the nature of the auditor’s responsibility and performance.
C. Deter creditors from extending loans in high-risk situations.
D. Describe the specific auditing procedures undertaken to gather evidence for the opinion.
[ 25 ] How are management’s responsibility and the auditor’s responsibility represented in the auditor’s report?
Management’s Auditor’s responsibility responsibility
A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly
