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COMPREHENSIVE REVIEWER AUDITING THEORY 1. In determining the primary responsibility of the external auditor for an audit of a company‟s financial statements, the auditor owes primary allegiance to: A. the management of the audit client because the auditor is hired and paid by management. B. the audi...

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COMPREHENSIVE REVIEWER AUDITING THEORY 1. In determining the primary responsibility of the external auditor for an audit of a company‟s financial statements, the auditor owes primary allegiance to: A. the management of the audit client because the auditor is hired and paid by management. B. the audit committee of the audit client because that committee is responsible for coordinating and reviewing all audit activities within the company. C. stockholders, creditors, and the investing public. D. the Auditing and Assurance Standards Council, because it determines auditing standards and auditor‟s responsibility. 2. Which of the following would not represent one of the primary problems that would lead the users to demand for independent audits of a company‟s financial statements? A. Management bias in preparing financial statements. B. The downsizing of business and financial markets. C. The complexity of transactions affecting financial statements. D. The remoteness of the user from the organization and thus the inability of the user to directly obtain financial information from the company. 3. Assurance services involve all the following except: A. improving the quality of information for decision purposes. B. improving the quality of the decision model used. C. improving the relevance of information. D. implementing a system that improves the processing of information. 4. Which of the following is the broadest and most inclusive concept? A. Audits of financial statements. B. Internal control audit. C. Assurance services. D. Compilation services. 5. Which of the following is a correct statement? A. An audit provides limited assurance by attesting to the fairness of the client‟s assertions. B. A review provides positive assurance by attesting the reliability of the client‟s assertions. C. Management consulting services provide attestation in all cases. D. Accounting services do not provide attestation. 6. Unlike consulting services, assurance services: A. make recommendation to management B. report on how to use information C. report on the quality of information D. are two-party contracts. 7. Financial statements audits: A. reduce the cost of capital B. report on compliance with laws and regulations C. assess management„s efficiency D. overlook information risk 8. A summary of findings rather than assurance is most likely to be included in a(n):

A. B. C. D.

Agreed-upon procedures report Compilation report Examination report Review report

9. The risk associated with a company's survival and profitability is referred to as: A. Business Risk B. Information Risk C. Detection Risk D. Control Risk 10. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n): A. Peer Review Engagement B. Quality Control Engagement C. Quality Assurance Engagement D. Attestation Engagement 11. Attestation risk is limited to a low level in which of the following engagement(s)? A. Both examinations and reviews B. Examinations, but not reviews C. Reviews, but not examinations D. Neither examinations nor reviews 12. .An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? A. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period C. Operational audits do not ordinarily result in the preparation of a report D. The operational audit deals with pre-tax income 13. The review of a company's financial statements by a CPA firm: A. Is substantially less in scope of procedures than an audit B. Requires detailed analysis of the major accounts C. Is of similar scope as an audit and adds similar credibility to the statements D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements 14. When performing an engagement to review a nonpublic entity's financial statements, an accountant most likely would: A. Obtain an understanding of the entity's internal control. B. Limit the distribution of the accountant's report. C. Confirm a sample of significant accounts receivable balances. D. Ask about actions taken at board of directors' meetings. 15. Which of the following professionals has primary responsibility for the performance of an audit? A. The managing partner of the firm B. The senior assigned to the engagement C. The manager assigned to the engagement D. The partner in charge of the engagement 16. Assurance services may include which of the following?

A. B. C. D.

attesting to financial statements examination of the economy and efficiency of governmental operations evaluation of a division's performance for management all of the given choices

17. The auditor of financial statements must make very difficult interpretations regarding authoritative literature. Additionally, the auditor must A. proceed beyond PFRS to assess how the economic activity is portrayed in the financial statements. B. force management to make certain decisions regarding their financial statements. C. disregard independence in order to find the underlying truth of the evidence. D. establish new criteria by which financial statements may be compared. 18. Which one of the following is not a part of the attest process? A. gathering evidence about assertions B. proving the accuracy of the books and records C. evaluating evidence against objective criteria D. communicating the conclusions reached 19. Which one of the following is not a reason why the users of financial statements desire for an independent assessment of the financial statement presentation? A. complexity of transactions affecting the financial statements B. lack of criteria on which to base information C. remoteness of the user from the organization D. all of them are potential reasons 20. Independent professional services that are provided on financial or other information that improve the quality of decision making are known as A. internal auditing. B. financial auditing. C. assurance services. D. attestation services. 21. An audit which determines whether organizational policies are being followed and whether external mandates are being met is known as A. a financial audit. B. a compliance audit. C. an operational audit. D. none of the above 22.

May a CPA hire for the CPA‟s public accounting firm a non-CPA systems analyst who specializes in developing computer systems? A. Yes, provided the CPA is qualified to perform each of the specialist‟s tasks. B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist‟s end product. C. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice. D. No, because developing computer systems is not recognized as a service performed by public accountants.

23.

Which of the following services may a CPA perform in carrying out a consulting service for a client? I.

Analysis of the client‟s accounting system

II. III. A. B. C. D.

Review of the client‟s proposed business plan Preparation of information for obtaining financing

I and II only I and III only II and III only I, II, and III

24.

Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement? A. The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness. B. The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance. C. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance. D. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.

25.

Which of the following factors most likely would cause a CPA to decline a new audit engagement? A. The CPA does not understand the entity's operations and industry. B. Management acknowledges that the entity has had recurring operating losses. C. The CPA is unable to review the predecessor auditor's working papers. D. Management is unwilling to permit inquiry of its legal counsel.

26. When a firm or a member of the assurance team holds a direct financial interest or a material indirect financial interest in the assurance client as a trustee, a self-interest threat may be created by the possible influence of the trust over the assurance client. Accordingly, such an interest cannot be held when: A. The member of the assurance team, an immediate family member of the member of the assurance team, and the firm are beneficiaries of the trust. B. The interest held by the trust in the assurance client is not material to the trust. C. The trust is not able to exercise significant influence over the assurance client. D. The member of the assurance team or the firm does not have significant influence over any investment decision involving a financial interest in the assurance client. 27. An inadvertent violation of the Independence rules as it relates to a financial interest in an assurance client would not impair the independence of the firm, the network firm or a member of the assurance team when: A. The firm, and the network firm, has established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from the purchase, inheritance or other acquisition of a financial interest in the assurance client. B. The firm, and the network firm, promptly notifies the professional that the financial interest should be disposed of. C. The disposal occurs at the earliest practical date after identification of the issue, or the professional is removed from the assurance team. D. All of the given choices. 28. If a firm, or a network firm, has a direct financial interest in a financial statement audit client of the firm, the appropriate safeguard against the self-interest threat created would be: A. Dispose the entire financial interest.

B. Dispose of a sufficient amount of the financial interest so that the remaining interest is no longer material. C. Any of the two is appropriate. D. None of the two is appropriate. 29. If a firm, or a network firm, has a material financial interest in an entity that has a controlling interest in a financial statement audit client, the self interest threat created is so significant. The audit firm can only perform the engagement if it: I. Dispose of the entire financial interest. II. Dispose of a sufficient amount of the financial interest so that the remaining interest is no longer significant. A. Either I or II B. Neither I nor II C. I only D. II only 30. Which of the following safeguards is inappropriate if a firm has a material financial interest in an entity that has a controlling interest in a financial statement audit client? A. Discuss the presence of self-interest threat with the client‟s board of directors. B. Dispose of the financial interest in total. C. Dispose of a sufficient amount of the financial interest. D. Either dispose of a sufficient amount of the financial interest or the financial interest in total. 31. The retirement benefit plan of a firm, or a network firm, has a financial interest in a financial statement audit client. If the self-interest threat that is created by the financial interest is significant, the firm that intends to continue the engagement should: A. Reduce the financial interest so that the remaining interest is no longer material. B. Discuss the matter with the audit committee of the financial statement audit client. C. Refer the audit of the stockholders‟ equity of the financial statement audit client to other CPA. D. Either dispose of the financial interest in total or a sufficient amount so that the remaining amount is no longer material. 32. The following loans and guarantees would not create a threat to independence, except: A. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to the firm, provided the loan is made under normal lending procedures, terms and requirements and the loan is immaterial to both the firm and the assurance client. B. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to a member of the assurance team or their immediate family, provided the loan is made under normal lending procedures, terms and requirements. C. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an assurance client that is a bank, broker or similar institution, provided the deposit or account is held under normal commercial terms. D. If the firm, or a member of the assurance team, makes a loan to an assurance client that is not a bank or similar institution, or guarantees such an assurance client's borrowing. 33. Examples of close business relationships that may create self-interest and intimidation threat least likely include: A. Having a material financial interest in a joint venture with the assurance client or a controlling owner, director, officer or other individual who performs senior managerial functions for that client.

B. Arrangements to combine one or more services or products of the firm with one or more services or products of the assurance client and to market the package with reference to both parties. C. Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the assurance client‟s products or services, or the assurance client acts as the distributor or marketer of the products or services of the firm. D. The purchase of goods and services from an assurance client by the firm (or from an audit client by a network firm) or a member of the assurance team, provided the transaction is in the normal course of business and on an arm‟s length basis. 34. When a firm or a member of the assurance team and the audit client or one of its officers hold interest in a closely-held entity, a threat to independence is not created, except: A. The relationship is clearly insignificant to the firm or a member of the assurance team and the audit client. B. The relationship is other than insignificant which is acceptable for indirect financial interest. C. The interest held is immaterial to the investor or group of investors. D. The interest does not give the investor, or group of investors, the ability to control the closely-held entity. 35. When an immediate family member of a member of the assurance team is a director or an officer of the assurance client in a position to exert direct and significant influence over the subject matter information of the engagement, the threat to independence can only be reduced to an acceptable level, aside from withdrawing from the engagement, by: A. Removing the individual from the assurance team. B. Reduce the participation of the professional. C. Discuss the matter with the audit committee of the client entity. D. Request the audit client management to require the immediate family member of the professional to go on forced vacation leave. 36. Which of the following relationships is most likely to impair a CPA‟s independence with respect to a particular audit client on which the CPA works as a member of the engagement team? A. A close relative has a material investment in that client of which the CPA is not aware. B. A cousin has an immaterial investment in that client of which the CPA is not aware. C. The CPA‟s father is the president of the audit client. D. The CPA‟s spouse participates in a savings plan sponsored by the client. 37. An inadvertent violation of the rules on family and personal relationships would not impair the independence of a firm or a member of the assurance team when: A. The firm has established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from changes in the employment status of their immediate or close family members or other personal relationships that create threats to independence. B. Either the responsibilities of the assurance team are re-structured so that the professional does not deal with matters that are within the responsibility of the person with whom he or she is related or has a personal relationship, or, if this is not possible, the firm promptly removes the professional from the assurance engagement. C. Additional care is given to reviewing the work of the professional. D. All of the given choices.

38. If a member of the assurance team, partner or former partner of the firm has joined the assurance client, the significance of the self-interest, familiarity or intimidation threats created is least likely affected by A. The position the individual has taken at the assurance client. B. The amount of any involvement the individual will have with the assurance team. C. The length of time that the individual was a member of the assurance team or firm. D. The former position of the individual within the assurance team or firm. 39.

Using the same senior personnel on an assurance engagement over a long period of time may create a familiarity threat. The significance of the threat will least likely depend upon A. The length of time that the individual has been a member of the assurance team. B. The role of the individual on the assurance team. C. The structure of the client. D. The nature of the assurance engagement.

40. A small CPA firm provides audit services to a large local company. Almost 80 percent of the CPA firm‟s revenues come from this client. Which statement is most likely to be true? A. Appearance of independence may be lacking. B. The small CPA firm does not have proficiency to perform a larger audit. C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. D. The auditor should provide an “emphasis of a matter paragraph‟ to his audit report adequately disclosing this information and then it may issue an unqualified opinion. 41. A professional accountant has been the partner-in-charge of a particular audit client for the past eight years. This situation could result to the following threat to professional independence: A. Self-review B. Advocacy C. Intimidation D. Familiarity 42. Which statement is incorrect regarding long association of senior personnel with audit clients that are listed entities? A. Using the same lead engagement partner on an audit over a prolonged period may create a familiarity threat. B. The lead engagement partner should be rotated after a pre-defined period, normally no more than six years. C. A partner rotating after a pre-defined period should not participate in the audit until a further period of time, normally two years, has elapsed. D. When audit client becomes a listed entity the length of time the lead engagement partner has served the audit client in that capacity should be considered in determining when the partner should be rotated. 43. The professional accountant who has been the lead engagement partner for an audit engagement for a prolonged period of time may continue to serve as the lead engagement partner before rotating off the engagement for how many years after the audit client becomes a listed entity? A. One year B. Three years C. Two years D. Four years

44.

While the lead engagement partner should be rotated after such a pre-defined period, some degree of flexibility over timing of rotation may be necessary in certain circumstances. Examples of such circumstances include: A. Situations when the lead engagement partner‟s continuity is especially important to the au...