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Page 1
1. (TCO F) Which of the following statements is true of a public company's financial statements?
(Points : 5)
6. (TCO F) An example of a document the auditor receives from the client, but which was
prepared by someone outside the client's organization, is a(n): (Points : 5)
confirmation
sales invoice
vendor invoice
bank reconciliation
7. (TCO F) The primary purpose of performing analytical procedures in the planning phase of an
audit is to: (Points : 5)
help the auditor obtain an understanding of the client's industry and business
assess the growing concern assumption
indicate possible misstatements
reduce detailed tests
8. (TCO F) When the auditor has reason to believe an illegal act has occurred without any
corrective action being taken, the auditor should: (Points : 5)
inquire of management only at one level below those likely to be involved with the
illegality
begin communication with the FASB in accordance with PCAOB regulations
consider accumulating additional evidence to determine if there is actually an illegal act
withdraw from the engagement
9. (TCO F) When auditors use documents to support recorded transactions, the process is often
called: (Points : 5)
inquiry
confirmation
vouching
physical examination
10. (TCO G) Which of the following statements is not correct with respect to analytical
procedures? (Points : 5)
Auditing standards emphasize the need for auditors to develop and use expectations
Analytical procedures must be performed throughout the audit
Analytical procedures may be performed at any time during the audit
Analytical procedures use comparisons and relationships to assess whether account
balances appear reasonable
11. (TCO G) Which of the following ratios is best used to assess a company's ability to meet its
long-term debt obligations? (Points : 5)
Quick ratio
Return on common equity
Debt to equity
Current ratio
Page 2
1. (TCO A) Match the following definitions to the terms.
2. (TCO B) The following is a portion of a qualified audit report issued for a private company:
3. (TCO C) The following situation involves a possible violation of the AICPA's Code of
Professional Conduct. For each situation, (1) determine the applicable rule number from the
Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the
situation violates (or does not violate) the Code.
Your answer should be set up something like this:
Rule # __________
Violation? Yes or No
1 or 2 line explanation:
Jim is the audit partner for the small CPA firm of Jim, CPA, PA. Jim's neighbor Duffy has a
financial advisement practice whereby she sells mutual funds to individuals for their retirement.
Jim's firm is performing the audit for a privately held company Jim's best friend Cressy owns. Jim
refers Cressy to Duffy for retirement advice. Cressy buys 10 units of ABC Mutual Fund which
generates Duffy a fat little commission fee. Duffy buys Jim a $25 gift certificate to the local movie
theater.
(Points : 10)
4. (TCO C) The following situation involves a possible violation of the AICPA's Code of
Professional Conduct. For each situation, (1) determine the applicable rule number from the
Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the
situation violates (or does not violate) the Code.
Your answer should be set up something like this:
Rule # __________
Violation? Yes or No
1 or 2 line explanation:
Brad Heist, CPA, was traveling from Dallas to Houston, Texas, when he was pulled over by a
police officer on suspicion of driving under the influence. The breath-a-lyzer and a subsequent
blood test revealed that Brad was definitely impaired. He was convicted in court of driving while
under the influence of alcohol (DUI). This was Brad's fourth conviction of DUI in less than a year,
a felony under current Texas law. Accordingly, Brad was sentenced to 18 months in prison.
(Points : 10)
5. (TCO C) Brandt, CPAs has obtained Big-Bucks, a new publicly-held client. Big-Bucks has
various accounting-related needs that Brandt, CPAs would like to fulfill. Partner-in-charge D.
Brandt has discussed with Big-Bucks the possibility of performing the annual audit of Big-Bucks
as well as preparing the tax returns, business plan, quarterly write-up services, and providing
consultation on the viability and valuation of mining gas reserves in Tennessee. An outside expert
would be hired by Brandt CPAs to provide expert advice to the CPA firm on mining gas reserves.
Additionally, Brandt, CPA's audit manager who will be assigned to this audit has previously been
approached by Big-Bucks to come work for the company as Chief Financial Officer. The audit
manager has refused the offer, since his cousin's sister-in-law is a 10 percent shareholder in BigBucks and does not want her to have any say in his employment.
Under the Sarbanes-Oxley Act of 2002, what issues do you see and how would you advise
Brandt, CPAs? Is there ever a time when Brandt, CPAs could perform any of these services for
Big-Bucks?
(Points : 25)
6. (TCO D) Discuss the sanctions the Securities and Exchange Commission can impose on
auditors. (Points : 25)
7. (TCO F) Match five of the terms (a-h) with the definitions provided below (1-5):
a. Audit documentation
b. Audit procedures
c. Audit objectives
d. Analytical procedures
e. Budgets
f. Reliability of evidence
g. Sufficiency of evidence
h. Persuasiveness of evidence
____ 1. Use of comparisons and relationships to assess the reasonableness of account balances
____ 2. Detailed instructions for the collection of a type of audit evidence
____ 3. The degree to which evidence can be considered believable or trustworthy
____ 4. Contains all the information that the auditor considers necessary to conduct an adequate
audit and to provide support for the audit report
____ 5. This is determined by the amount of evidence obtained
(Points : 25)
8. (TCO G) Auditors routinely conduct analytical procedures in the planning, testing, and
completion phases of the audit. Identify the primary and secondary purposes of performing
analytical procedures in each phase of the audit. (Points : 25)