Q&A Hero

Q: In which of the following circumstances would a CPA who audits XM Corporation lack independence? A. The CPA and XM's president are both on the board of directors of COD Corporation. B. The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company. C. The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile. D. The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.

Q: According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Purchasing a product from a third party and reselling it to a client. B. Writing a financial management newsletter promoted and sold by a publishing company. C. Accepting a commission for recommending a product to an audit client. D. Accepting engagements obtained through the efforts of third parties.

Q: According to the ethical standards of the profession, which of the following acts is generally prohibited? A. Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client. B. Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society. C. Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent. D. Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

Q: The profession's ethical standards would most likely be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the A. CPA would not be independent. B. Fee was a competitive bid. C. Actual fee would be substantially higher. D. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

Q: In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the A. Auditor's acquiescence in use of this defense. B. Common law. C. AICPA Code of Professional Conduct. D. State law.

Q: In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee? A. A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan. B. A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience. C. A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement. D. A fee based on the fee charged by the prior auditor.

Q: In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances A. Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement. B. Jackson may accept a referral fee from the other CPA firm. C. Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance. D. Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.

Q: Which of the following is allowable for a CPA? A. A used car loan from a banking client where the client has a lien on the car. B. An uncollateralized signature loan from a client. C. Owning more than five percent of the outstanding shares of client stock in a retirement account. D. The audit engagement partner serves on the client's audit committee.

Q: A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is A. Considered acceptable by the AICPA Code of Professional Conduct. B. Ill-advised because it would impair the CPA's independence with respect to the client. C. Considered discreditable to the profession. D. A violation of generally accepted auditing standards.

Q: A CPA's license to practice will ordinarily be suspended or revoked automatically for A. Controlling the bookkeeping for a compilation client. B. Conviction of willful failure to file personal income tax return. C. Refusing to respond to an inquiry by the AICPA practice review committee. D. Accepting compensation while honoring a subpoena to appear as an expert witness.

Q: Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code? A. Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate. B. A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. C. A requirement of most state laws calls for the profession to establish a code of conduct. D. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

Q: Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A. The SEC. B. The AICPA. C. A state CPA society. D. A state board of accountancy.

Q: The quality control standards are concerned primarily with A. Actions of individual auditors. B. A firm's monitoring of its practice. C. Disciplinary actions against individual auditors. D. Preventing legal action.

Q: A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through A. Compliance with generally accepted reporting standards. B. A system of quality control. C. A system of peer review. D. Continuing professional education.

Q: Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8? A. Monitoring. B. Independence. C. Human resources. D. Relevant ethical requirements.

Q: The SEC has issued independence rules that differ from the AICPA's in all of the following areas except: A. Working paper documentation. B. Provision of other professional services. C. Human resource and compensation-related issues. D. Required communication.

Q: In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firm A. Which owes the CPA audit fees for more than one year. B. In which the CPA has a large active margin account. C. In which the CPA's brother is the controller. D. Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

Q: A CPA, while performing an audit, strives to achieve independence in appearance in order to A. Reduce risk and liability. B. Comply with the generally accepted standards of fieldwork. C. Become independent in fact. D. Maintain public confidence in the profession.

Q: According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)? A. The office's managing partner who determines the compensation of the attest engagement partner. B. The office's IT expert, who consulted with the engagement partner regarding the client's IT system. C. The partner in another office in a nearby city who regularly plays golf with the engagement partner. D. The office's partner who monitors quality control over the attest engagement.

Q: A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice A. Used a records-retention agency to store the CPA's working papers and client records. B. Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff. C. Referred life insurance assignments to the CPA's spouse, who is a life insurance agent. D. Failed to file his personal tax return.

Q: Which of the following is required for a firm to designate itself as a "Member of the American Institute of Certified Public Accountants" on its letterhead? A. At least one of the partners must be a member. B. The partners whose names appear in the firm name must be members. C. All partners must be members. D. The firm must be a dues-paying member.

Q: A violation of the profession's ethical standards would most likely have occurred when a CPA A. Purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period. B. Made arrangements with a bank to collect notes issued by a client in payment of fees due. C. Named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name. D. Issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

Q: For private companies, accounting firms are prohibited from providing A. Outsourced internal audit services. B. Audit services. C. Review services. D. None of the above.

Q: What is meant by the Code of Professional Conduct's definition of "holding out"? A. Informing a client about one's status as a CPA. B. Withholding an audit report until the fee is paid. C. Not sharing audit documentation with a successor auditor. D. Not suggesting that management make an adjusting entry that is deemed immaterial.

Q: Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct? A. Integrity. B. Due care. C. Reporting. D. Scope and nature of services.

Q: In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except: A. The AICPA's Auditing Standards Board. B. The Professional Code of Conduct. C. The Independence Standards Board. D. The PCAOB.

Q: With respect to ethics, the justice-based approach A. Suggests that auditors should always verify ownership of a client's material tangible assets. B. Is primarily concerned with equity and impartiality. C. Suggests that an individual's actions should not violate the rights of any individual. D. Recognizes that decisions involve trade-offs between costs and benefits.

Q: With respect to ethics, the utilitarian theory A. Suggests that auditors should always verify ownership of a client's material tangible assets. B. Is primarily concerned with equity and impartiality. C. Suggests that an individual's actions should not violate the rights of any individual. D. Recognizes that decisions involve trade-offs between costs and benefits.

Q: With respect to ethics, the rights-based approach A. Suggests that auditors should always verify ownership of a client's material tangible assets. B. Is primarily concerned with equity and impartiality. C. Suggests that an individual's actions should not violate the rights of any individual. D. Recognizes that decisions involve trade-offs between costs and benefits.

Q: PCAOB rules require tax services provided by a public company auditor to be considered and approved by the company's audit committee.

Q: The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.

Q: If a CPA owns an insurance policy issued by an attest client, independence would be considered impaired, even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.

Q: A financial interest is "beneficially owned" when an individual or entity is NOT the recorded owner of the interest but has a right to some or all of the underlying benefits of ownership.

Q: An indirect financial interest is defined as a financial interest that is owned or is under the control of an individual or entity.

Q: As per the Conceptual Framework for AICPA Independence Standards made effective in 2006, a CPA is required to identify and assess the extent to which a threat to independence exists.

Q: If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work.

Q: The rules contained in Section 100 cover issues relating to independence, integrity, and auditing standards.

Q: Identify the special purpose framework used in each of the following situations. 1.A real estate company reports to its partners on the basis used to complete the income tax return. 2.A company has its financial statements prepared on a price-level adjusted basis as required by its lender. 3.An insurance company reports in compliance with the rules of a state insurance commission. 4.A partnership reports on revenues received and expenses paid. What modifications must be made to the standard auditor's report for these situations?

Q: Changes in a client's accounting choices either affect "consistency" in the application of GAAP or they do not. For each item listed below, state whether the item affects consistency and identify the effect the change will have on the audit report. 1.Change in accounting estimate. 2.Correction of an error in principle. 3.Change in reporting entity. 4.Correction of an error that does not involve an accounting principle. 5.Change in accounting principle. 6.Change in classification and reclassification. 7.Change expected to have a material future effect.

Q: The following four situations require a modification to the standard unqualified/unmodified audit report. Identify the modification required for each. a. Opinion based in part on the report of another auditor. b. Going concern. c. Lack of consistency. d. Additional emphasis.

Q: In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include A. Net Income. B. Stockholders' Equity. C. Both A & B. D. None of the above.

Q: In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion? A. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. B. The financial statements fail to disclose information that is required by generally accepted accounting principles. C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

Q: A scope limitation sufficient to preclude an unqualified opinion always will result when management A. Prevents the auditor from reviewing the working papers of the predecessor auditor. B. Engages the auditor after the year-end physical inventory is completed. C. Requests that certain material accounts receivable not be confirmed. D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

Q: In the first audit of a client, because of the client's record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor would A. Be unable to express an opinion on the current year's results of operations and cash flows. B. Express a qualified opinion on the financial statements because of a client-imposed scope limitation. C. Withdraw from the engagement and refuse to be associated with the financial statements. D. Specifically state that the financial statements are not comparable to the prior year because of an uncertainty.

Q: When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should A. A. B. B. C. C. D. D.

Q: Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Cravens will probably A. Decline the engagement. B. Express an unqualified/unmodified opinion on the balance sheet and income statement except for inventory. C. Issue a disclaimer of opinion. D. Issue an adverse opinion.

Q: An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may A. Issue an "except for" qualified opinion after discussing the matter with the client's board of directors. B. Consider the matter closed since the other information is not in the audited financial statements. C. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory/emphasis-of-matter paragraph. D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

Q: A special report related to compliance with contractual provisions provides A. Positive assurance. B. Negative assurance. C. No assurance. D. None of the above.

Q: When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's A. Net income. B. Retained earnings. C. Assets. D. Working capital.

Q: An engagement to express an opinion on a system of internal control will generally A. Only require those procedures already applied in assessing control risk during a financial statement audit. B. Increase the reliability of the financial statements that have already been audited. C. Be more extensive in scope than the assessment of control risk made during a financial statement audit. D. Be more limited in scope than the assessment of control risk made during a financial statement audit.

Q: Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements? A. First standard. B. Second standard. C. Third standard. D. Fourth standard.

Q: An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except: A. An opinion as to whether the basis of accounting used is appropriate under the circumstances. B. An opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting. C. Reference to the note to the financial statements that describes the basis of presentation. D. A statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.

Q: When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should A. Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles. B. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. C. Not express an opinion on whether the statements are presented in conformity with the basis of accounting used. D. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

Q: All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in a client's annual report except: A. The auditor is under no obligation to perform audit procedures on this other information. B. The auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C. The auditor must request that material inconsistencies be corrected. D. The auditor must perform audit procedures on this other information.

Q: What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB? A. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. B. The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information. C. The auditor should apply certain limited procedures to the required supplementary information and report deficiencies in or omissions of, such information. D. The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.

Q: When audited financial statements are presented in a client's document containing other information, the auditor should A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements. C. Perform the appropriate substantive auditing procedures to corroborate the other information. D. Read the other information to determine that it is consistent with the audited financial statements.

Q: When audited financial statements are presented in a document containing other information, the auditor A. Has an obligation to perform auditing procedures to corroborate the other information. B. Is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact. C. Should read the other information to consider whether it is inconsistent with the audited financial statements. D. Has no responsibility for the other information because it is not part of the basic financial statements.

Q: The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to A. Indicate in the auditor's report that the "other financial information" is unaudited. B. Consider whether the "other financial information" is accurate by performing a limited review. C. Obtain written representations from management as to the material accuracy of the "other financial information." D. Read and consider the manner of presentation of the "other financial information."

Q: An auditor may reasonably issue an "except for" qualified opinion for A. A scope limitation or an unjustified accounting change. B. A scope limitation, but not an unjustified accounting change. C. An unjustified accounting change, but not a scope limitation. D. Neither an unjustified accounting change nor a scope limitation.

Q: A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should A. Clearly state the specific reasons for lack of independence. B. Not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards. C. Not describe the reason for lack of independence but should state specifically that the CPA is not independent. D. Include a middle paragraph clearly describing the CPA's association with the client and explaining why the CPA was unable to gather sufficient appropriate evidential matter to warrant the expression of an opinion.

Q: When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the client's financial statement? A. When the auditor believes the financial statements are misleading. B. When the auditor was unable to observe the taking of the physical inventory. C. When the auditor is uncertain about the outcome of a material uncertainty. D. When the auditor has performed insufficient auditing procedures to express an opinion.

Q: Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report? A. Additional emphasis. B. Lack of consistency in the financial statements due to accounting changes. C. Going concern. D. Opinion based in part on the report of another auditor.

Q: When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make A. No reference to the predecessor auditor. B. Reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. C. Reference to the predecessor auditor only if the predecessor auditor expressed an unqualified/unmodified opinion. D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

Q: Auditing standards define special purpose financial statements as including those prepared under the following base(s) A. Regulatory basis. B. Tax basis. C. Contractual basis. D. All of the above.

Q: If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an) A. Disclaimer of opinion. B. Qualified opinion. C. Review report. D. Unqualified opinion with a separate explanatory paragraph.

Q: When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Prepare prospective financial information to verify whether management's plans can be effectively implemented. B. Project future conditions and events for a period of time not to exceed one year following the date of the financial statements. C. Issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements. D. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Q: Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must A. Obtain written approval from the predecessor auditor to include the prior year's financial statements. B. Issue a standard comparative audit report indicating the division of responsibility. C. Express an opinion on the current year statements alone and make no reference to the prior year statements. D. Disclose the reasons for any qualification in the predecessor auditor's opinion.

Q: An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s) A. "Reasonable period of time, not to exceed one year" and "going concern." B. "Reasonable period of time, not to exceed one year" but not "going concern." C. "Going concern" but not "reasonable period of time, not to exceed one year." D. Neither "going concern" nor "reasonable period of time, not to exceed one year."

Q: In the auditor's report, the principal auditor decides not to make reference to another CPA who audited a client's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor A. Issues an unqualified/unmodified opinion on the consolidated financial statements. B. Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements. C. Is unable to review the other CPA's audit programs and working papers. D. Is satisfied as to the other CPA's independence and professional reputation.

Q: The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor's report should make A. No reference to the report or the work of the successor auditor. B. Reference to the work of the successor auditor in the scope paragraph. C. Reference to both the work and the report of the successor auditor in the opinion paragraph. D. Reference to the report of the successor auditor in the scope paragraph.

Q: Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit? A. He need make no reference. B. He must refer to the qualification of the other auditor and qualify his report likewise. C. He must include the other auditor's report with his report but need not qualify his report. D. He must include the other auditor's report with his report and give an explanation of its significance.

Q: Which of the following would be considered a change that does not affect consistency? A. Change expected to have a material future effect. B. Change in accounting principle. C. Correction of an error in principle. D. None of the above are considered changes that do not affect consistency.

Q: An accountant has been engaged to report on an entity's internal controls without performing an audit of the financial statements. What restrictions, if any, should the accountant place on the use of this report? A. This report should be restricted for use by management. B. This report should be restricted for use by the audit committee. C. This report should be restricted for use by a specified regulatory agency. D. The accountant does not need to place any restrictions on the use of this report.

Q: An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions? A. Financial position and results of operations arising from cash transactions. B. Assets and liabilities arising from cash transactions and revenue collected and expenses paid. C. Balance sheet and income statement resulting from cash transactions. D. Cash balance sheet and the source and application of funds.

Q: Other bases of accounting (special purpose frameworks) include all of the following except: A. Tax basis. B. Non-GAAP methods used for internal reporting. C. Cash basis. D. Regulatory basis.

Q: An auditor would issue an adverse opinion if A. The audit was begun by other independent auditors who withdrew from the engagement. B. A qualified opinion cannot be given because the auditor lacks independence. C. A restriction on the scope of the audit was significant. D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Q: When an auditor expresses an adverse opinion, the opinion paragraph should include A. The principal effects of the departure from generally accepted accounting principles. B. A direct reference to a separate paragraph disclosing the basis for the opinion. C. The substantive reasons for the financial statements being misleading. D. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

Q: When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n) A. Qualified opinion or a disclaimer of opinion. B. Qualified opinion or an adverse opinion. C. Adverse opinion or a disclaimer of opinion. D. Qualified opinion or an unqualified opinion.

Q: Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification.

Q: Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report? A. A change in accounting estimate. B. A change in accounting principle. C. A change in the companies included in combined financial statements. D. A correction of an error in principle.