Question 1

The title of the PCAOB auditor's report is:

Accepted Answer

A)  Independent Auditor's Report 
B)  Report of Independent Registered Public Accounting Firm 
C)  Auditor's Report on Management's Financial Statements 
D)  Auditor's Report on Internal Controls 
A)  Independent Auditor's Report 
B)  Report of Independent Registered Public Accounting Firm 
C)  Auditor's Report on Management's Financial Statements 
D)  Auditor's Report on Internal Controls

Question 2

When would it be appropriate for an auditor to withdraw from an engagement?

Accepted Answer

A)  In order to avoid issuing an adverse opinion 
B)  When that auditor cannot observe the taking of inventory or is unable to confirm receivables 
C)  When the auditor concludes that management cannot be trusted 
D)  When the auditor has overbooked too much work 
A)  In order to avoid issuing an adverse opinion 
B)  When that auditor cannot observe the taking of inventory or is unable to confirm receivables 
C)  When the auditor concludes that management cannot be trusted 
D)  When the auditor has overbooked too much work

Question 3

In the Reauditing Financial Statements case, all of the following would be appropriate questions to ask a predecessor auditor except:

Accepted Answer

A)  why the predecessor auditor was fired 
B)  whether there were any differences of opinion between management and the predecessor auditor 
C)  whether they could obtain the predecessor auditor workpapers 
D)  whether there were any integrity concerns of top management 
A)  why the predecessor auditor was fired 
B)  whether there were any differences of opinion between management and the predecessor auditor 
C)  whether they could obtain the predecessor auditor workpapers 
D)  whether there were any integrity concerns of top management

Question 4

An example of fraudulent financial statements is:

Accepted Answer

A)  Misrepresentation of events, transactions, and other significant events in the financial statements 
B)  Failure to provide adequate documentation to support financial statements assertions 
C)  Aggressive accounting for transactions, events, or other significant matters 
D)  Misappropriation of assets 
A)  Misrepresentation of events, transactions, and other significant events in the financial statements 
B)  Failure to provide adequate documentation to support financial statements assertions 
C)  Aggressive accounting for transactions, events, or other significant matters 
D)  Misappropriation of assets

Question 5

Auditors are responsible to detect and correct errors when they are:

Accepted Answer

A)  Material 
B)  Material or immaterial 
C)  Due to an illegal act 
D)  Management fails to correct for the error 
A)  Material 
B)  Material or immaterial 
C)  Due to an illegal act 
D)  Management fails to correct for the error

Question 6

The auditor's responsibility with regard to illegal acts is greatest when:

Accepted Answer

A)  The illegal acts have an indirect and material effect on financial statement amounts 
B)  The illegal acts have a direct and material effect on financial statement amounts 
C)  The illegal acts have a direct and immaterial effect on financial statement amounts 
D)  Illegal acts exist regardless of the effects on the financial statements 
A)  The illegal acts have an indirect and material effect on financial statement amounts 
B)  The illegal acts have a direct and material effect on financial statement amounts 
C)  The illegal acts have a direct and immaterial effect on financial statement amounts 
D)  Illegal acts exist regardless of the effects on the financial statements

Question 7

The ethical dilemma that faces Ronnie Maloney is best described as:

Accepted Answer

A)  Whether the loan loss reserves of the bank were understated 
B)  Whether to file a whistle-blower's complaint with the SEC under Dodd-Frank 
C)  Whether to commit fraud to cover up stealing from the company 
D)  Whether to properly inform the audit committee of critical audit matters 
A)  Whether the loan loss reserves of the bank were understated 
B)  Whether to file a whistle-blower's complaint with the SEC under Dodd-Frank 
C)  Whether to commit fraud to cover up stealing from the company 
D)  Whether to properly inform the audit committee of critical audit matters

Question 8

Internal controls, an internal audit function, and an audit committee are all elements of a strong corporate governance system. How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

Accepted Answer

The internal audit function should be an

Question 9

The objective of an engagement quality review is to:

Accepted Answer

A)  Assess how an audit has been conducted and the appropriateness of the audit opinion 
B)  Assess the firm's own quality controls and the appropriateness of the audit opinion 
C)  Assess how an audit has been conducted and the firm's own quality control procedures 
D)  Assess whether materiality has been properly evaluated 
A)  Assess how an audit has been conducted and the appropriateness of the audit opinion 
B)  Assess the firm's own quality controls and the appropriateness of the audit opinion 
C)  Assess how an audit has been conducted and the firm's own quality control procedures 
D)  Assess whether materiality has been properly evaluated

Question 10

Which of the following summarizes the essence of field work standards of GAAS?

Accepted Answer

A)  Quality of professionals that perform an audit 
B)  Criteria for judging the quality of audit work 
C)  Whether the auditor was independent in conducting the audit 
D)  Whether the auditor reviewed the client's financial statements for adherence to GAAP 
A)  Quality of professionals that perform an audit 
B)  Criteria for judging the quality of audit work 
C)  Whether the auditor was independent in conducting the audit 
D)  Whether the auditor reviewed the client's financial statements for adherence to GAAP

Question 11

The primary accounting issue in the Wetherford International case is:

Accepted Answer

A)  Fraudulent recording of revenues on sales to customers 
B)  Fraudulent use of company resources by top management for personal purposes 
C)  Fraudulent inflation of earnings using deceptive income tax accounting 
D)  Fraudulent inflation of inventory to reduce losses on the income statement 
A)  Fraudulent recording of revenues on sales to customers 
B)  Fraudulent use of company resources by top management for personal purposes 
C)  Fraudulent inflation of earnings using deceptive income tax accounting 
D)  Fraudulent inflation of inventory to reduce losses on the income statement

Question 12

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that:

Accepted Answer

A)  Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved 
B)  The most common fraud technique involved understating expenses 
C)  The audit committee always sanctioned the fraud 
D)  A minority of audit reports issued during the fraud period contained unqualified audit opinions 
A)  Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved 
B)  The most common fraud technique involved understating expenses 
C)  The audit committee always sanctioned the fraud 
D)  A minority of audit reports issued during the fraud period contained unqualified audit opinions

Question 13

Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion?

Accepted Answer

A)  The financial statements have followed GAAP 
B)  Consistency in the application of GAAP 
C)  Adequate disclosures exist in the statements 
D)  Gathering sufficient audit evidence to warrant an opinion 
A)  The financial statements have followed GAAP 
B)  Consistency in the application of GAAP 
C)  Adequate disclosures exist in the statements 
D)  Gathering sufficient audit evidence to warrant an opinion

Question 14

Identify the deficiencies in the following audit report of the AICPA. Explain why each item is a deficiency.
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders, XYZ Company
We have audited the accompanying consolidated financial statements of XYZ Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the management's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by during the audit, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company and its subsidiaries as of December 31, 2018, and 2017, and the results of its operations and its cash flows for the years then ended in accordance with auditing standards of the Public Company Accounting Oversight Board.
Optional Paragraph
Report on Other Legal and Regulatory Requirements
[Auditor's signature]
[Auditor's city and state]

Accepted Answer

Deficiencies
Title should be Independent

Question 15

Which of the following is not one of the evaluations of the control environment of an organization?

Accepted Answer

A)  Whether management's philosophy and operating style promote effective internal control over financial reporting 
B)  Whether sound integrity and ethical values, particularly of top management, are developed and understood 
C)  Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control 
D)  Whether the company has an anonymous hotline 
A)  Whether management's philosophy and operating style promote effective internal control over financial reporting 
B)  Whether sound integrity and ethical values, particularly of top management, are developed and understood 
C)  Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control 
D)  Whether the company has an anonymous hotline

Question 16

Which of the following is NOT a common audit deficiency in PCAOB inspections?

Accepted Answer

A)  Inadequate internal controls over financial reporting 
B)  Maintaining an independent audits 
C)  Lack of due care 
D)  Inability to exercise the appropriate level of professional skepticism 
A)  Inadequate internal controls over financial reporting 
B)  Maintaining an independent audits 
C)  Lack of due care 
D)  Inability to exercise the appropriate level of professional skepticism

Question 17

All of the following are ICFR-related audit deficiencies in PCAOB inspection reports except:

Accepted Answer

A)  Inadequate testing of management review controls 
B)  Inadequate testing of the top-down risk-based approach 
C)  Inadequate qualifications of auditors 
D)  Inadequate identification of information technology risks 
A)  Inadequate testing of management review controls 
B)  Inadequate testing of the top-down risk-based approach 
C)  Inadequate qualifications of auditors 
D)  Inadequate identification of information technology risks

Question 18

Typically, when a going concern issue exists the auditor should:

Accepted Answer

A)  Issue an unmodified opinion with an emphasis-of-matter paragraph 
B)  Issue a modified opinion and explain the reasons for the going concern issue 
C)  Issue a disclaimer of opinion 
D)  Withdraw from the engagement 
A)  Issue an unmodified opinion with an emphasis-of-matter paragraph 
B)  Issue a modified opinion and explain the reasons for the going concern issue 
C)  Issue a disclaimer of opinion 
D)  Withdraw from the engagement

Question 19

What is enterprise risk management (ERM)?

Accepted Answer

A)  A process of evaluating internal controls to ensure operations are carried out efficiently and effectively 
B)  A process designed to identify material events that may affect the financial statements and to manage risk within the entity's risk appetite 
C)  A process, effected by an entity's board of directors, management, and other personnel designed to identify potential events that may affect the entity and to manage risk within its risk appetite 
D)  A process by which compliance with laws and regulations can be assessed 
A)  A process of evaluating internal controls to ensure operations are carried out efficiently and effectively 
B)  A process designed to identify material events that may affect the financial statements and to manage risk within the entity's risk appetite 
C)  A process, effected by an entity's board of directors, management, and other personnel designed to identify potential events that may affect the entity and to manage risk within its risk appetite 
D)  A process by which compliance with laws and regulations can be assessed

Question 20

Section 302 of the Sarbanes-Oxley Act requires:

Accepted Answer

A)  Management's report on internal controls 
B)  Auditor's independent report 
C)  Auditor's assessment of management's report on internal controls 
D)  Management's certification of the financial statements 
A)  Management's report on internal controls 
B)  Auditor's independent report 
C)  Auditor's assessment of management's report on internal controls 
D)  Management's certification of the financial statements

The title of the PCAOB auditor's report is:

When would it be appropriate for an auditor to withdraw from an engagement?

In the Reauditing Financial Statements case, all of the following would be appropriate questions to ask a predecessor auditor except:

An example of fraudulent financial statements is:

Auditors are responsible to detect and correct errors when they are:

The auditor's responsibility with regard to illegal acts is greatest when:

The ethical dilemma that faces Ronnie Maloney is best described as:

Internal controls, an internal audit function, and an audit committee are all elements of a strong corporate governance system. How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

The objective of an engagement quality review is to:

Which of the following summarizes the essence of field work standards of GAAS?

The primary accounting issue in the Wetherford International case is:

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that:

Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion?

Which of the following is not one of the evaluations of the control environment of an organization?

Which of the following is NOT a common audit deficiency in PCAOB inspections?

All of the following are ICFR-related audit deficiencies in PCAOB inspection reports except:

Typically, when a going concern issue exists the auditor should:

What is enterprise risk management (ERM)?

Section 302 of the Sarbanes-Oxley Act requires:

Ethical Reasoning: Implications for Accounting

Cognitive Processes and Ethical Decision Making in Accounting

Organizational Ethics and Corporate Governance

Ethics and Professional Judgment in Accounting

Legal, Regulatory, and Professional Obligations of Auditors

Earnings Management

Ethical Leadership and Decision-Making in Accounting

Filters

Exam 5: Fraud in Financial Statements and Auditor Responsibilities

The title of the PCAOB auditor's report is:

When would it be appropriate for an auditor to withdraw from an engagement?

In the Reauditing Financial Statements case, all of the following would be appropriate questions to ask a predecessor auditor except:

An example of fraudulent financial statements is:

Auditors are responsible to detect and correct errors when they are:

The auditor's responsibility with regard to illegal acts is greatest when:

The ethical dilemma that faces Ronnie Maloney is best described as:

Internal controls, an internal audit function, and an audit committee are all elements of a strong corporate governance system. How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

The objective of an engagement quality review is to:

Which of the following summarizes the essence of field work standards of GAAS?

The primary accounting issue in the Wetherford International case is:

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that:

Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion?

Which of the following is not one of the evaluations of the control environment of an organization?

Which of the following is NOT a common audit deficiency in PCAOB inspections?

All of the following are ICFR-related audit deficiencies in PCAOB inspection reports except:

Typically, when a going concern issue exists the auditor should:

What is enterprise risk management (ERM)?

Section 302 of the Sarbanes-Oxley Act requires:

Ethical Reasoning: Implications for Accounting

Cognitive Processes and Ethical Decision Making in Accounting

Organizational Ethics and Corporate Governance

Ethics and Professional Judgment in Accounting

Legal, Regulatory, and Professional Obligations of Auditors

Earnings Management

Ethical Leadership and Decision-Making in Accounting

Filters