Audit Book Test #1 (2)


Sume CPAs followed the PCAOB auditing standards in performing the audit

The responsibility of a CPA when performing an audit is to

behave as a "reasonably prudent CPA" would in performing the audit

Which of the following describes what a plaintiff must prove under the liability provisions of the Securities Act of 1933 to be awarded damages from a CPA who issued an unqualified opinion on financial statements included in a registration statement?

The financial statements audited by the CPA were materially misstated

Isle of Palmtrees, Inc.

1933 Act, Section 11

Which of the following will cause an auditor to be vulnerable to a criminal lawsuit under the Securities Acts?

Intentionally helping the client's CEO and CFO to redraft the company's financial statements to include material fraudulent information

Among the things that a plaintiff must prove for an auditor to be liable for damages under 10b-5 of the 1934 Securities Exchange Act is

The financial statements were materially misstated

Based only on the original outcome of the Ultramares case, to which of the following parties will an accountant be liable for negligence?

Parties in privity

When a CPA is found guilty of being actively involved in a fraud, and as a part of the fraud issued a misleading and inappropriate unqualified opinion on a company's financial statements, to whom will the auditor probably be found liable under common law?

Anyone who suffered a loss as a result of the fraud

Doll, CPA

Urban Bank will win because Doll knew that Show was presenting the financial statements and audit reports to banks that would rely on the financial statements

If a CPA is sued using the 1934 Act, 10b-5, which of the following does a shareholder need to prove to prevail in the suit?

Intentional misleading conduct intended to damage the shareholders (scienter) by the auditor

Assume a CPA conducts an audit in accordance with generally accepted auditing standards and issues an unqualified audit opinion on financial statements that contain misstatements that are immaterial both individually and on an aggregated basis. The CPA is

The problems in the financial statements did not make them materially misstated

Old CPA is sued by YoungCorp. using 10b-5. If YoungCorp prevails in the suit, it will be entitled to

receive the amount of any loss caused by fraud

The three-part test for near privity established in the Credit Alliance case

makes it relatively difficult for third-party financial statement users to establish near privity because it is uncommon for them to have direct interaction with a company's auditor.

Which of the following is not true based on the Restatement of Torts, Section 522, affecting the auditor's liability to foreseen third parties?

liability for damages will extend to those who could have been expected to rely on the audited financial statements only when the auditor is found guilty of, at a minimum, gross negligence or constructive fraud

And auditor will only enter into negotiation or arbitration related to a lawsuit it

A)the auditor is guilty
B)the auditor is not guilty but is concerned that the plaintiff may prevail
C)the auditor believes it will cost less to settle a case than pursue defending against the allegations
D)all of the above may cause an auditor to agree to

A company files for bankruptcy after it becomes known that the CFO stole millions of dollars and fraudulently manipulated the financial statements to cover the theft.

separate and proportionate liability theory

In the Arthur Andersen case, the Supreme Court did not uphold the finding of the lower court because

of the jury instructions

The SEC rules of practice

can be used to bar an auditor or audit firm from practicing before the SEC


is granted by SOX the power to issue subpoenas

Being found guilty of criminal fraud

results from a charge made by the government

Professional standards related to client acceptance are legally required by



contains information about the proposal process and engagement

Independence issues that would stop an audit firm from proposing on a potential client

may result from financial and business interest in the potential company

When financial statements are "restated," it may result from

discovery of an error in past financial statements

Which of the following is least important to the auditor when investigating a potential new audit client

level of the CEO's charitable giving in the community

Although they may all be informative regarding risk, which of the following may be of concern for a large, international audit firm considering accepting a company as a new client?

management authority is concentrated in one or two people, even though the client company is very large

Auditors review the financial information of potential clients to

look for information about related parties

An auditor issues a going-concern opinion when

there is uncertainty about whether the company will have or be able to obtain sufficient resources to meet its obligations in the upcoming year

Auditors obtain information about potential clients from all of the following except


An engagement letter

documents the understanding of the engagement between the auditor and client

Which of the following would the auditor not consider as an indicator of the need for further investigation of a potential new client?

the company is highly decentralized; top management delegates a significant amount of decision-making authority and spends most of its management time on oversight of those decision makers

Which of the following may be difficult information for an auditor to obtain prior to accepting a public company as a client?

the amount and quality of information available to the people within the company who have decision-making responsibility

Financial statement restatements

A)are an important consideration for an auditor investigating a potential client
B)may be needed to correct an error
C)may be an indicator of the possibility of a material weaknesses in ICFR
D)all of the above

An auditor investigates a potential client's business activities

to confirm that the company's business activities are compatible with what the audit firm wants in its client portfolio

Professional guidance useful to the client acceptance and continuance process is found in

A)Quality Control Standards and Auditing Standards on fraud
B)COSO Enterprise Risk Management and Internal Control frameworks
C)Auditing Standards on risk and Auditing Standards on ICFR
D)All of the above

Inquiry of the predecessor auditor

is helpful even if the predecessor responds with a statement indicating that no information or only a limited response can be made

An engagement letter

distinguishes those responsibilities that are management's and those responsibilities that are the auditor's

Which of the following would not cause the auditor concerns about management?

management stays fully informed about the financial performance of the company on a regular basis

Related party transactions

must by disclosed

An audit firm's knowledge and experience

must be considered by the audit firm in client acceptance decisions to determine whether the firm has the competence to provide the professional services requested

The audit strategy for an integrated audit

documents the big picture issues of an audit

Information for developing the audit strategy comes from all the following sources except

communication with the audit client's outside attorney

Scoping decisions

include consideration of multiple client locations

Entity-level controls

can affect the audit plan for tests of program controls

For the ICFR audit of an integrated audit, outsourced operations

may be material to the audit client's ICFR, and in that case audit evidence must be obtained and evaluated

The nature, timing, and extent of audit procedures

maybe influenced by information obtained on prior-year audits of a recurring audit engagement once the information has been updated

For purposes of an integrated audit, materiality

is assessed within the context of users with certain qualifications

During audit planning the auditor finds that gross profit is much greater in the current year than in prior years and decides to increase the audit emphasis on sales and inventories. The auditor most likely discovered the change in gross profit by

analytical procedures

After the auditor has determined materiality at the financial statement level, he or she evaluates the amount of misstatement that would be material at the account balance level. The term for this threshold amount is

tolerable misstatement

When evaluating the dollar amount of financial statement materiality, the auditor's judgment mainly addresses

the amount of misstatement that would influence an economic decision of a reasonable person with appropriate qualifications relying on the financial statements

Which of the following is not part of risk assessment?

performing substantive procedures

Which of the following is the most serious indicator of higher risk?

competition in the industry is increasing, and the company is experiencing unexpected obsolescence of its products

Which of the following is not considered in scoping an audit engagement?

the general level of economic activity in the company's geographic environment

Using the terms of the Fraud Triangle, if management places great importance on achieving the financial performance predicated by analysts and it seems that the predictions will not be achieved-for example, when net income or earnings per share is going t

incentive for fraudulent financial reporting

Which of the following is not true about significant, unusual, or highly complex transactions, especially those close to period-end?

they are expected as a part of the financial closing process and represent typical risk

Obtaining an understanding of ICFR and assessing its design effectiveness contribute to the auditor accomplishing all of the following except

determining whether ICFR is effective

The audit planning meeting

provides an opportunity to instruct assistants on the need to communicate accounting and auditing matters they feel are significant to the financial statements to the auditor responsible for the audit engagement

The amount of supervision required for a staff auditor

will depend on the difficulty of the task and the skills and experience of the individual

Which of the following audit procedures cannot be performed at an interim date?

tests of the year-end closing process

A specialist who assists on an audit

can be an employee of an audit firm, client, or neither

A walkthrough

is a combination of inquiry, observation, inspection, and reperformance used for understanding the system and assessing design effectiveness

The auditor-in-charge of an engagement that requires the skills of an auditor particularly trained to deal with the impacts of IT

must be sufficiently knowledgeable to work with the IT auditor