Professional Documents
Culture Documents
TRUE-FALSE QUESTIONS
1-1 When the auditor has no reservations about managements financial statements or internal controls, the audit
opinion is said to be unqualified.
1-2 Independence is referred to as the cornerstone of the auditing profession.
1-3 The sole responsibility of management with regard to financial reporting involves preparing and
presenting financial statements in accordance with the applicable financial reporting framework.
1-4 The internal audit function is designed primarily to assist the external auditor in providing assurance to third
party users of the financial statements.
1-5 The Big 4 audit firms are the only types of firms that con- duct financial statement audits.
1-6 With regard to working in a team environment, larger audit firms have teams with more continuity and
overlap across engagements, whereas smaller audit firms have multiple teams that typically disband after each
engagement.
1-7 Congress passed the Sarbanes-Oxley Act of 2002 in response to a variety of major economic shocks during the
early 2000s.
1-8 The AICPA sets auditing standards for nonpublic companies in the United States.
1-9 Audit quality is achieved when the audit is performed in accordance with GAAS and when it provides
reasonable assurance that the financial statements have been presented in accordance
with GAAP and are not materially misstated due to errors or fraud.
1-10 One of the key drivers of audit quality is the gross margin achieved by the audit firm and the ability of
the engagement partner to maintain those margins over the duration of the audit engagement.
1-11 There exist three types of review programs: (1) external inspections/peer reviews, (2) engagement quality
reviews, and (3) interoffice reviews.
1-12 The engagement letter states the scope of the work to be done on the audit so that there should be no
doubt in the mind of the client, external auditor, or the court system as to the expectations agreed to by the
external auditor and the client.
MULTIPLE-CHOICE QUESTIONS
1-13 Which of the following factors does not create a demand for external
audit services?
a.
b.
c.
d.
1-14 Which of the following expectations can users of the audit report
CHAPTER 2
TRUE-FALSE QUESTIONS
2.1
LO 1
The Great Salad Oil Swindle of 1963 could best be catego- rized as an
LO 1
financial reporting.
2.3
LO 2
and rationalization.
2.4
Management compensation schemes that heavily emphasize stockbased compensation most affect the opportunity to commit fraud.
LO 2
2.5
In the Enron fraud, one of the key ways that management covered up the fraud was to shift debt off the
balance sheet to special purpose entities.
2.7
Professional skepticism involves the validation of informa- tion through probing questions, critical
assessment of evidence, and attention to inconsistencies.
2.8
The investing public generally recognizes that it is very difficult for auditors to detect fraud, and so
it does not hold auditors accountable when auditors fail to detect it.
2.9
Auditing standards historically have reflected the belief that it is not reasonable to expect auditors to
detect cleverly hidden frauds.
2.10 The Sarbanes-Oxley Act of 2002 was written by Congress to address problems revealed in frauds that
were committed in the late 1980s.
2.11 An important change caused by the Sarbanes-Oxley Act is that auditors are no longer allowed to
provide most consulting services for their public company audit clients.
2.12 Corporate governance is the process by which the
2.13
owners and creditors of an organization exert control
over
2.14
and require accountability for the resources entrusted to
the organization.
2.15 Companies with effective corporate governance are more risky to audit.
2.16
2.17
2.6
2.18 MULTIPLE-CHOICE
2.19
QUESTIONS
2.20 What is the primary difference between fraud and errors in financial statement reporting?
a. The materiality of the misstatement.
b. The intent to deceive.
c. The level of management involved.
d. The type of transaction effected.
2.21
2.28 Which of the following creates an opportunity for fraud to be committed in an organization?
a. Management demands financial success.
b. Poor internal control.
c. Commitments tied to debt covenants.
d. Management is aggressive in its application of accounting rules.
2.29 Which of the following is a common rationalization for fraudulent financial reporting?
a. This is a one-time transaction and it will allow the company to get through the current financial
crisis, but well never do it
2.30
again.
a. We are only borrowing the money; we will pay it back next year.
b. Executives at other companies are getting paid more than we are, so we deserve the money.
c. The accounting rules dont make sense for our company, and they make our financial results
look weaker than is necessary,
2.31 so we have a good reason to record revenue using a
nonGAAP method.
a. a. and d.
2.32
2.33 Which of the following types of transactions did WorldCom management engage in as part of that
companys fraudulent finan- cial reporting scheme?
a. Recorded bartered transactions as sales.
b. Used restructuring reserves from prior acquisitions to decrease expenses.
c. Capitalized line costs rather than expensing them.
d. All of the above.
e. None of the above.
2.34
2.35 Which of the following is a valid conclusion of the third COSO report?
a. The most common frauds involve outright theft of assets.
b. The individuals most often responsible for fraud include low-level accounting personnel,
such as accounts payable clerks.
c. The majority of frauds took place at companies that were listed
2.36 on the Over-The-Counter market rather than those listed
on the NYSE.
a. All of the above.
b. None of the above.
2.37
2.38 Which of the following statements is accurate regarding the Center for Audit Qualitys 2010 paper
on deterring and detecting fraud in financial reporting?
a. It recognizes that preventing and detecting fraud is the job of the external auditor alone.
b. It notes that an effective fraud risk management program can
2.39 be expected to prevent virtually all frauds, especially those
per- petrated by top management.
a. It illustrates that communication among those involved in the
2.40 financial reporting process is critical.
a. All of the above.
b. None of the above.
2.41
a.
b.
c.
d.
e.
2.44 The Sarbanes-Oxley Act enacted which of the following pro- visions as a response to a growing
number of frauds?
a. The PCAOB was established, and it has the power to conduct
2.45 inspections of audits for external audit firms that audit
more than 100 publicly traded companies in a given year.
a. The lead audit partner and reviewing partner must rotate
2.46 off the audit of a publicly traded company at least
every 10 years.
a. Annual reports must state the responsibility of management for
2.47 establishing and maintaining an adequate internal control
structure and procedures for financial reporting, and management must have the companys internal audit function attest to
the accuracy of the annual reports.
a. All of the above.
b. None of the above.
2.48
2.49 Which of the following statements is correct regarding the Public Company Accounting Oversight
Board (PCAOB)?
a. The PCAOB is a nonprofit corporation, not an agency of the
2.50
U.S. government.
a. The PCAOB will have five financially literate members who are prominent individuals of
integrity and reputation with a commitment to the interests of investors and the public.
b. The PCAOB has authority to set standards related to public company audit reports and to
conduct inspections of registered external audit firms.
c. All of the above.
d. None of the above.
2.51 LO 6
Audit committee activities and responsibilities include which of the
following?
a. Selecting the external audit firm.
b. Approving corporate strategy.
c. Reviewing management performance and determining compensation.
d. All of the above.
e. None of the above.
2.52 Which of the following audit committee responsibilities has the NYSE mandated?
a. Obtaining each year a report by the internal auditor that addresses the companys internal
control procedures, any
2.53 quality control or regulatory problems, and any
a.
b.
2.55
2.56
2.57
c.
d.