Principles of Auditing & other Assurance Services Whittington 18e Exam I Chapter 1 questions 1 The form of attestation that

provides the highest form of assurance is a(n): A) Assembly. B) Compilation. C) Review. D) Examination.

2 Audits of financial statements include an expression of a conclusion about which of the following financial statement characteristics? A) Governance B) Reliability C) Relevance D) Timeliness 3 A review of a company's financial statements by a CPA firm: A) Is significantly less in scope than an audit and results in a report which provides positive assurance, although not absolute assurance. B) Is similar in scope to an audit and adds similar credibility to the statements. C) Concludes with the issuance of a report expressing the CPA's opinion as to the fairness of the statements. D) Is designed to provide limited assurance.

4 The Sarbanes Oxley Act included provisions establishing the: A) Auditing Standards Board. B) Congressional Auditing Overview Board. C) Public Company Accounting Oversight Board. D) Securities and Exchange Commission. 5 In performing a financial statement audit, which of the following would an auditor be least likely to consider? A) Internal control B) Compliance with GAAP C) Fairness of the financial statement amounts D) Quality of management's business decisions 6 Which of the following is not considered a type of audit? A) Operational audit B) Sufficiency audit C) Compliance audit D) Financial statement audit

7 Internal auditors are most likely to issue a report on which of the following? A) Annual financial statement reporting B) Internal control C) Tax compliance D) Quarterly financial statement reporting

8 With which of the following is the AICPA least concerned? A) Professional standards for CPAs B) Research and development of accounting standards C) Standards guiding the conduct of internal auditors D) Self regulation of the accounting profession

9 If an auditor had a substantial stock investment in a client that s(he) was auditing, which of the following would be true? A) The auditor would lack independence. B) The auditor would be violating the FASB standards. C) The auditor would be violating the Institute of Management Accounting standards. D) The auditor would be violating the IIA standards.

10 The attest function: A) Is an essential part of every engagement performed by a CPA. B) Requires a complete review of all transactions during the period under examination. C) Requires a review of a sample of transactions during the period under examination. D) Includes the preparation of a written report of the CPA's findings.

Chapter 2 questions 1 Generally accepted accounting principles (GAAP) are distinguished from generally accepted auditing standards (GAAS) in that: A) GAAP are the principles for presentation of financial statements and underlying transactions, while GAAS are the standards auditors should follow when conducting an audit. B) GAAP are the principles auditors follow when conducting an audit, while GAAS are the standards for presentation of financial statements and underlying transactions. C) GAAP are promulgated by the SEC, while GAAS are promulgated by the FASB. D) When GAAP are violated, sufficiently strong GAAS may make up for most GAAP deficiencies. 2 When GAAS often do not provide "hard and fast rules," they provide subjective guidance which allows auditors to: A) Tailor their audit to procedures requested by management. B) Only apply those standards that are important to the audit. C) Accurately interpret the profession's Code of Professional Conduct. D) Use adequate professional judgment when applying the standards.

3 The Sarbanes-Oxley Act requires that auditors of certain large publicly traded companies in the United States perform an integrated audit that includes providing an audit report on a company's internal control and which of the following? A) Financial statements and compliance with laws and regulations B) Financial statements C) Compliance with laws and regulations D) Neither financial statements nor compliance with laws and regulations 4 Which of the following is not an underlying premise of an audit relating to management's responsibility to provide an auditor? A) Provide all information relevant to the preparation and fair presentation of the financial statements. B) Provide any additional information requested by the auditor. C) Provide inner-connectivity to all operational databases used during the previous three year period. D) Provide unrestricted access to those within the entity whom the auditor determines it necessary to obtain audit evidence. 5 The auditors provide an opinion on whether the financial statements are presented in accordance with the: A) Applicable financial reporting framework. B) Attestation standards. C) Current industry standards. D) Generally accepted auditing standards. 6 The primary difference between financial statement errors and fraud is that: A) Errors are intentional misstatements by management, while fraud involves unintentional mistakes or omissions. B) Errors are unintentional mistakes or omissions, while fraud involves intentional misstatements. C) There is no difference as errors and fraud have the same meaning. D) Errors are more likely to provide an indication that an illegal act has occurred. 7 Auditor responsibility for identifying "direct effect" illegal acts differs from their responsibility for detecting: A) Errors. B) Fraud. C) Management fraud. D) Other illegal acts. 8 When the Statements on Auditing Standards use the word "must" relating to a requirement, it means that the auditor: A) Must fulfill the requirement when it is possible. B) Must comply with the requirements unless the auditor finds that alternative actions are sufficient. C) May only decide not to perform the procedure in the audit of a nonpublic company. D) May use professional judgment in all circumstances in deciding whether to meet the requirement. 9 The level of assurance provided by an audit of detecting a material misstatement is referred to as: A) Absolute assurance. B) High assurance. C) Negative assurance. D) Reasonable assurance.

10 Which of the following is not a function of the Public Company Accounting Oversight Board? A) Conduct inspections of registered public accounting firms. B) Establish or adopt auditing standards. C) Promulgate accounting principles. D) Register public accounting firms that prepare audit reports of publicly traded companies. 11 If financial statements are not fairly presented on an overall basis, the most likely type of audit opinion will be a(n): A) Adverse opinion. B) Disclaimer of opinion. C) Qualified opinion. D) GAAP departure opinion. 12 Professional skepticism includes a questioning mind and a(n): A) Analysis of each transaction occurring during the period. B) Critical assessment of audit evidence. C) Detailed analysis of internal control procedures. D) Investigation of all laws impacting the organization. Chapter 3 questions 1 Ethical dilemmas generally involve situations in which the: A) Welfare of one or more individuals is affected by another's decision. B) AICPA has established "rulings" prohibiting conflicts of interest. C) Individual involved must make a decision that affects continuation of an ethical approach. D) The IIA Code of Conduct has recently been modified. 2 Which of the following forms of organization is most likely to restrict the personal liability of CPAs not involved on a particular audit that their firm has conducted? A) Limited liability partnership B) Partnership C) Professional corporation D) Restricted company 3 Which of the following is correct concerning the AICPA Conceptual Framework for Independence Standards? A) It suggests that a CPA should evaluate whether a particular threat to independence would lead another CPA, aware of all the relevant facts, to conclude that an unacceptable risk of nonindependence exists. B) It relates to actual independence, not independence in appearance. C) It applies only when the Code of Professional Conduct does not directly address a threat to independence. D) It is relevant only in those situations in which consulting services are being performed. 4 Which of the following is not considered by the AICPA Conceptual Framework for Independence Standards a broad category of threat to auditor independence? A) Adverse interest B) Financial self-interest C) Management participation D) Safeguards

5 A CPA's investment in the stock of an audit client is considered a(n): A) Direct financial interest which impairs independence regardless of amount. B) Direct financial interest which impairs independence when material. C) Indirect financial interest that impairs independence regardless of amount. D) Indirect financial interest that impairs independence when material. 6 Which of the following statements is true with respect to the SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? A) The auditor is not independent. B) The auditor is independent if he or she is able to maintain a level of professional detachment. C) The auditor can audit the financial statements only if the of the audit process does not culminate in the expression of an opinion on the financial statements. D) The auditor cannot audit the financial statements since the auditor lacks integrity. 7 In which circumstance is a CPA firm's independence most likely to be impaired? A) An individual on the audit has a close relative who is a receptionist for the client. B) The father of the audit senior holds a material financial interest in the client of which the senior is unaware. C) The spouse of a staff member on the audit has an immaterial common stock investment in the audit client.. D) The partner in charge of the office's compensation is affected by office profitability, a portion of which arises from this audit. 8 Which of the following partners is least likely to be considered a "covered member" for purposes of the audit of Company A, performed by the Chicago office of a national CPA firm? A) The partner in charge of the entire CPA firm. B) A partner in the San Diego office of the CPA firm who maintains a small, immaterial investment in Company A. C) A partner in the Chicago office who worked on the Company A audit in previous years, but currently has no responsibilities with respect to the audit. D) The partner in charge of the Chicago office. 9 Which of the following is a correct statement concerning the Sarbanes-Oxley Act of 2002? A) It applies to audits of all companies doing business in the United States. B) It makes performance of nonattest services relating to financial information systems design and implementation for audit clients unlawful. C) It requires the divestiture of a consulting department of any CPA firm performing audits of publicly traded companies. D) It requires the reporting of all illegal acts identified during an audit to the Justice Department. 10 Contingency fee based pricing of accounting services is: A) Always strictly prohibited in public accounting practice. B) Never restricted in public accounting practice. C) Prohibited if associated with the type of audit opinion received. D) Considered an act discreditable to the profession. 11 Which of the following best describes the passing of confidential information from a client to its auditor, that information: A) Should in no circumstances be conveyed to third parties.

B) Is not legally protected and can be subpoenaed by a federal court. C) Can only be released for peer reviews after receiving permission from the client. D) Should be conveyed to the public if it affects the "correctness" of the financial statements. 12 Which of the following is a correct statement concerning a publicly traded company that purchases the practice of a public accounting firm? A) It must be owned by partners who are involved in public accounting. B) It must separate performance of attest services and allow them to be performed by the remaining "shell" public accounting firm it has purchased (or by another public accounting firm). C) It can perform all services ordinarily performed by a traditional CPA firm within the framework of its own corporate entity. D) It may not restrict its liability in any manner for services it now provides which previously had been provided by the traditional CPA firm. Chapter 4 questions 1 What type(s) of liability do CPA's have in the United States? A) Both common law and statutory law B) Only common law C) Only statutory law D) Neither common law nor statutory law 2 Ordinarily a claim of negligence against a CPA states that the CPAs performed their duties: A) Without due professional care. B) With reckless disregard of professional responsibilities. C) With wanton disregard to GAAS. D) With reckless disregard to GAAP. 3 Under which common law approach is an unidentified third party least likely to be able to recover damages from a CPA who is guilty of ordinary negligence? A) Due Diligence Approach B) Ultramares Approach C) Restatement of Torts Approach D) Rosenblum Approach 4 Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party? A) Due Diligence Approach B) Ultramares Approach C) Restatement of Torts Approach D) Rosenblum Approach 5 A CPA is considered 5% responsible for an investor's loss. Under which concept is it most likely that the CPA will be held liable for 100% of the damages if the other defendants are bankrupt? A) Common law liability B) Joint and several liability C) Proportionate liability D) Statutory liability

6 Establishing "due diligence" is most directly related to court cases tried under: A) Common law by third parties. B) Common law by clients. C) The 1933 Securities Act. D) The 1934 Securities Exchange Act. 7 A common stock investor's burden of proof relating to a CPA's deficiency of performance under the 1933 Securities Act, when compared to the 1934 Securities Exchange Act, is: A) Greater. B) Less. C) Equal. D) Indeterminate. 8 Under common law rules, a claimant suing a CPA firm based on an audit of financial statements must prove each of the following except: A) A loss was sustained. B) Reliance upon the audited financial statements was a proximate cause of the loss. C) The loss sustained was material to the claimant. D) The auditors were guilty of either ordinary or gross negligence, depending upon the claimant's recovery rights. 9 The concept of privity may be important in defending auditors against potential claimants. Privity in general only allows: A) Clients to sue their auditors. B) Lenders of the client to sue the auditor. C) Anyone that relied upon the audited financial statements to make a decision to sue the auditor as long as the auditor knew or should have known of such reliance. D) Shareholders who relied upon the audited financial statements to make an investment decision. 10 Which of the following is not correct concerning the Securities Act of 1933 and Securities Exchange Act of 1934 with regard to auditor liability? A) The 1933 Act holds auditors to a higher standard of performance. B) The 1934 Act provides protection to more third parties. C) The 1933 Act relates to common law liability, while the 1934 Act relates to statutory law liability. D) Only the 1934 Act is affected by the Private Securities Litigation Reform Act of 1995 provision for proportionate liability under certain circumstances.