accounting quiz due friday

I. Multiple Choice questions (20X2 = 40 Points)

1. The nature and extent of a CPA firm’s quality control policies and procedures do not depend upon

A. The CPA firm size

B. Cost-benefit considerations

C. The nature and complexity of the firm’s practice

D. Knowledge and experience of its personnel

2. An auditor inspects the sales invoices processed to see whether the accuracy of invoices has been verified. This is an example of

A. A test of control

B. A test of details of balances

C. A substantive test of transactions

D. It is both a test of control and s substantive test of transactions

3. An auditor cannot be held liable under the Exchange Act's Rule 10b-5 exclusively on the reason that the auditor:

A. knew that the financial statements under audit were materially misleading and the auditor attested to the fairness of the financial statements anyway

B. was reckless when he attested to the fairness of the financial statements

C. was negligent when he attested to the fairness of the financial statements

D. none of the above

4. The auditor sets the acceptable level of Audit Risk based on:

A. His/her judgment

B. The level of acceptable detection risk

C. Statistical tables and analysis

D. AICPA Guidelines

5. The primary purpose of Statements on Auditing Standards is:

A. They are guides for an auditor to decide on auditing procedures in variety of situations

B. They are authoritative statements, enforced through the Code of professional Conduct

C. They are procedural outlines that are intended to narrow the areas of inconsistency and divergence of audit auditor opinion

D. They are a body of interpretative guidance

6. During the preliminary analysis of accounts receivable turnover, an auditor noted the following rates over these accounting periods:

2012: 6.5%; 2013: 5.2%; 2014: 3.8%

Which of the following is the most likely cause of the decrease in accounts receivable turnover

A. Liberalization of credit policy

B. Increased cash sales

C. Increase in cash discount offered

D. Shortening of due date terms

7. The auditor must obtain evidential matter that is both competent and sufficient to support his opinion. To be ‘competent’, evidence must be:

A. Enough

B. Believable

C. Relevant

D. Written

8. If a potential loss on a contingent liability is remote, the liability usually is:

A. Neither accrued nor disclosed in footnotes

B. Disclosed in footnotes, but not accrued

C. Accrued and indicated in the body of the financial statements.

D. Disclosed in the auditor's report but not disclosed on the financial statements

9. An audit manager carefully reviews the work performed by subordinates on an

Audit. This is an example of:

A. Applying auditing procedures to an audit

B. Complying with generally accepted accounting principles

C. Compliance auditing

D. Applying quality-control procedures

10. Which of the following matters is typically included in the engagement letter by an auditor?

A. Analytical procedures that the auditor plans to apply

B. Arrangements regarding fees and billing

C. Benchmarking with other companies

D. Identification of working capital issues

11. In a report on an audit of financial statements of a SEC registered public company, the auditor must specifically refer to the:

A. The standards established by the Institute of Certified Public Accountants (AICPA)

B. US Generally Accepted Accounting Principles (GAAP)

C. International Financial Reporting Standards (IFRS)

D. The standards of the Public Company Accounting Oversight Board (United States)

12. The criteria used to evaluate the fairness of financial statements:

A. Are generally accepted auditing standards

B. Are generally accepted accounting principles

C. Are attestation standards

D. Will vary depending on the type of opinion being expressed

13. Entity level Controls do not include

A. Board and Audit Committee Oversight

B. Internal Audit’s role in monitoring controls

C. Segregation of Duties

D. Entity’s risk assessment process

14. An auditor is checking if the client has sent an invoice for every item that has been shipped. In this case, the auditor is testing the management assertion of:

A. Existence or occurrence of sales

B. Existence of accounts payable

C. Existence of accounts receivable

D. Completeness of sales

15. The auditor may consider issuing an unqualified report with an explanatory paragraph in each of the following circumstances except

A. There is a substantial doubt whether the firm is a going concern

B. GAAP has been inconsistently applied

C. There is a material departure from GAAP

D. There is a material departure from GAAP because following GAAP will make the financial statements misleading

16. The auditor usually performs preliminary analytical procedures in the planning phase of an audit to help make an initial assessment of control risk.

A. True

B. False

17. If the control risk is set at the maximum, an auditor need not conduct any testing of controls but proceed to conduct substantive tests.

A. True

B. False

18. Auditors use sampling only for substantive tests and not for tests of controls.

A. True

B. False

19. The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both banks is referred to as kiting.

A. True

B. False

20. Specific materiality levels are provided by accounting and auditing standards for all financial statement audits.

A. True

B. False

· End of Multiple Choice/True or False Questions -

II. Essay Questions (Points as shown against each. Total 60 points)

Q1. (15 Points)

The AICPA's Code of Professional Conduct consists of two parts, Principles and Rules.

a. Describe the purpose of each of the two parts. (5 points)

b. Describe the disciplinary action that may be taken against a member who violates the Code. (5 points)

c. Must the Rules be followed by members of the AICPA that are not in public practice? Explain your answer. (5 points)

Q2. (15 Points)

a. What do you understand by ‘Professional skepticism’? (5 points)

b. Do you think it supports any of the Generally Accepted Auditing Standards? Explain (5 points)

c. How is professional skepticism exercised? Discuss with an illustration. (5 points)

Q3. (15 Points)

As part of the audit process, an auditor performs two types of testing: Tests of controls and substantive testing.

a. Distinguish between the two, detailing their objectives and role in the audit process (7 points)

b. Discuss in detail, the use of one test of control and once substantive test in any of the accounting cycles studied in this course (8 points)

Q4. (15 Points)

Read the Auditing Standard 9 on the PCAOB website and discuss the requirements, established by the PCAOB, regarding planning an audit of a public company.

· End of Final Exam -

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