Project #2738 - Auditing Exam




Assume you are the partner in charge of the 2007 audit of Becker Corporation, a private company. The audit report has not yet been prepared. In each independent situation following (1-8), indicate the appropriate action (a-g) to be taken. The possible actions are as follows:



a.     Issue a standard unqualified report.


b.    Qualify both the scope and opinion paragraphs.


c.     Qualify the opinion paragraph.


d.    Issue an unqualified opinion with an explanatory paragraph.


e.     Issue an unqualified opinion with modified wording (no explanatory paragraph).


f.     Issue an adverse opinion.


g.    Disclaim an opinion.



The situations are as follows:


              1.    Becker Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements.



              2.    Management of Becker Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material.



              3.    You were unable to confirm accounts receivable with Becker’s customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures.



              4.    One week before the end of fieldwork, you discover that the audit manager on the Becker engagement owns a material amount of Becker’s common stock.



              5.    You relied upon another CPA firm to perform part of the audit. Although you were the principal auditor, the other firm audited a material portion of the financial statements. You wish to refer to (but not name) the other firm in your report.



              6.    You have substantial doubt about Becker’s ability to continue as a going concern.



              7.    Becker Corporation changed its method of computing depreciation in 2007. You concur with the change and the change is properly disclosed in the financial statement footnotes.



              8.    Ten days after the balance sheet date, one of Becker’s buildings was destroyed by a fire. Becker refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material.






                                                The following is a portion of a qualified audit report issued for a private company:





Independent Auditor’s Report


To the shareholders of Tamarak Corporation


       We have audited the accompanying balance sheet of Tamarak Corporation as of October 31, 2007, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

       We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

       The company has included in property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be expensed in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be decreased by $4,000,000, long-term debt by $2,000,000, and retained earnings by $180,000 as of October 31, 2005, and net income and earnings per share would be decreased by $180,000 and $.62, respectively, for the year then ended.







Complete the above qualified audit report by preparing the opinion paragraph. Do not date or sign the report.










The following situations involve a possible violation of the AICPA’s Code of Professional Conduct. For each situation, (1) determine the applicable rule number or name 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.







a.     In 2004, Freeman and Johnson, both CPAs, decided to form a CPA practice.  In 2007, Freeman and Johnson approached Bill Delaney, a physician and medical expert, and asked him to assist them with their growing medical consulting practice. Delaney agreed, but only after he was given an ownership interest in the firm. Delaney does not intend to quit his private medical practice.



            Rule:  __________                  Violation?   Yes    No







b.    Brian DePalie has a successful dentistry practice in Charleston. Brian has recommended one of his patients to Katie Walton, CPA. To show gratitude for the referral, Katie has agreed to pay Brian a token gift of $50. Katie discloses the payment arrangement to her new clients.



            Rule:  __________                  Violation?   Yes    No







c.     The accounting firm of Bayer & Peng, CPAs, is negotiating a fee with a new audit client. They agree the client will pay $50,000 if Bayer & Peng issues a clean, unqualified opinion, $40,000 if a qualified opinion is issued, and only $20,000 if an adverse opinion is issued.



            Rule:  __________                  Violation?   Yes    No







d.    Don Smith, CPA, is a member of the engagement team that performs the audit of Shaw Corporation. Don’s five-year-old daughter, Precious, received ten shares of Shaw Corporation’s common stock for her fifth birthday. The stock was a gift from Precious’s grandmother.



            Rule:  __________                  Violation?   Yes    No







e.     Jennifer Harris, CPA, is a partner in the CPA firm that audits Alltech, Inc., a closely held corporation. Jennifer’s sister-in-law is the chief financial officer at Alltech, Inc.



            Rule # __________                 Violation?   Yes    No







  1. Match seven of the terms (a-k) with the definitions provided below (1-7):



a.     Tests of details of balances


b.    Tests of controls


c.     Substantive tests of transactions


d.    Analytical procedures


e.     Transaction-related audit objectives


f.     Management assertions


g.    Balance-related audit objectives


h.    Fraud


i.     Illegal act


j.     Error


k.    Management fraud



              1.    An intentional misstatement of the financial statements.



              2.    A set of six audit objectives the auditor must meet, including timing, posting and summarization, and accuracy.



              3.    Implied or expressed representations made by the client about classes of transactions, account balances and disclosures in the financial statements.



              4.    Audit procedures testing for monetary misstatements to determine whether the balance-related audit objectives have been satisfied for each significant account balance.



              5.    A set of nine audit objectives the auditor must meet, including completeness, detail tie-in, and rights and obligations.



              6.    Audit procedures designed to test the effectiveness of control policies and procedures.



              7.    Use of comparisons and relationships to assess whether account balances or other data appears reasonable.





5. Below are five audit procedures, all of which are tests of transactions associated with the audit of the acquisition and payment cycle. Also below are the six general transaction-related audit objectives and the five management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested.



         Audit Objectives                                                Assertions


A.     Occurrence                                                         V.        Occurrence


B.     Completeness                                                     W.        Completeness


C.     Accuracy                                                            X.        Accuracy


D.     Posting and summarization                                Y.        Classification


E.     Classification                                                     Z.         Cutoff


F.      Timing



1.      Foot the purchases journal and trace the totals to the related general ledger accounts.


            (1)          .


            (2)          .



2.      Recompute the cash discounts taken by the client.


            (1)          .


            (2)          .



3.      Compare dates on cancelled checks with the bank cancellation date.


            (1)          .


            (2)          .



4.      Trace from a sample of cancelled checks to the cash disbursements journal.


            (1)          .


            (2)          .



5.      Examine supporting documentation for a sample of transactions for authorized payee and  amount and to determine services or goods were received.


            (1)          .


            (2)          .








Below are 10 documents typically examined during an audit. Classify each document as either internal or external.

Type of Document



1.      Canceled checks for payments of accounts payable.


2.      Payroll time cards.


3.      Duplicate sales invoices.


4.      Vendors’ invoices.


5.      Bank statements.


6.      Minutes of the board of directors’ meetings.


7.      Signed lease agreements.


8.      Notes receivable.


9.      Subsidiary accounts receivable records.


10.    Remittance advices.












Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) physical examination, (2) confirmation, (3) documentation, (4) observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure.


Type of Evidence

Audit Procedures


1.    Watch client employees count inventory to determine whether company procedures are being followed.


2.    Count inventory items and record the amount in the audit files.


3.    Trace postings from the sales journal to the general ledger accounts.


4.    Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year.


5.    Obtain information about the client’s internal controls by asking questions of client personnel.


6.    Trace column totals from the cash disbursements journal to the general ledger.


7.    Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation.


8.    Review the total of repairs and maintenance for each month to determine whether any month’s total was unusually large.


9.    Compare vendor names and amounts on purchases invoices with entries in the purchases journal.


10.  Foot entries in the sales journal to determine whether they were correctly totaled by the client.


11.  Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact.


12.  Obtain a written statement from the client’s bank stating the client’s year-end balance on deposit.




8.  Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with:


a.     technical training that assures proficiency as a valuation expert.


b.    professional education that is required in order to perform with due professional care.


c.     knowledge required to fulfill assigned responsibilities.


d.    knowledge required to perform a peer review.




9. Williams & Co., a member of the Private Companies Practice Section, is to have a “peer review.” The peer review can be performed by:


a.     a CPA firm selected by Williams & Co.


b.    a review team selected by the state society.


c.     internal auditors.


d.    either a or b.




10. Hansen Corporation’s stock is listed on a national stock exchange and registered with the Securities and Exchange Commission. Hansen’s management hires a CPA to perform an independent audit of Hansen’s financial statements. The primary objective of this audit is to provide assurance to the:


a.     investors in Hansen Corporation’s stock.


b.    stock exchange.


c.     Securities and Exchange Commission.


d.    management of Hansen Corporation.




11. Which of the following is not an essential component of quality control?


a.     Policies and procedures to ensure that firm personnel are actively engaged in marketing          strategies.


b.    Policies and procedures to ensure that the work performed by firm personnel meet      applicable professional standards.


c.     Policies to ensure that personnel maintain their independence in fact and in appearance.


d.    Policies that ensure that monitoring activities are effectively applied.




12. Which of the following is true regarding the AICPA-approved practice monitoring programs?


a.     The Center for Public Company Audit Firms does not offer a peer review program.


b.    Firms registered with the PCAOB must not enroll in an AICPA-approved practice            monitoring program.


c.     Public accounting firms must be enrolled in an AICPA-approved practice monitoring       program for members in the firm to be eligible for membership in the AICPA.


d.    The AICPA peer review program is administered through the SEC.




13. Which of the following statements is true as it relates to limited liability partnerships?

a.     Only senior partners are liable for the partnership’s debts.

b.    Partners have no liability in a limited liability partnership arrangement.

c.     Partners are personally liable for the acts of those under their supervision.

d.    All partners must be AICPA members.



14. If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter, the auditor should generally seek guidance from which of the following sources?


a.     Statements on Auditing Standards.


b.    Statements on Standards for Accounting and Review Services.


c.     Regulations issued by the Securities and Exchange Commission.


d.    The AICPA Code of Professional Conduct.




15. The SEC requirements of greatest interest to CPAs are set forth in the SEC’s:


a.     Regulation S-X and Accounting Series Releases.


b.    S-1 through S-16 forms.


c.     Director’s newsletter.


d.    Forms 8-K, 10-K, and 10-Q.






16. The necessity to issue a disclaimer of opinion may arise because of:

a.     a severe limitation on the scope of the audit.

b.    a lack of independence between the auditor and client.

c.     either a or b.

d.    neither a nor b.


17. When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue:

a.         an adverse opinion.

b.         a disclaimer of opinion.

c.         either a qualified opinion or an adverse opinion.

d.         either a qualified opinion or an unqualified opinion with modified wording.


18. If the auditor lacks independence, a disclaimer of opinion must be issued:

a.         if the client requests it.

b.         only if it is highly material.

c.         only if it is material but not highly material.

d.         in all cases.


19. Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes:

a.         net income.

b.         total assets.

c.         working capital.

d.         all of the above.


20. When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n):

a.      understatement of inventory.

b.      understatement of retained earnings caused by a miscalculation of dividends payable.

c.      misclassification of notes payable as a long-term liability when it should be current.

d.      misclassification of salary expense as a selling expense when it should be allocated equally to both selling and administrative expense.


21. The dollar amount of some misstatements cannot be accurately measured. For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on:

a.     net income.

b.    users of the financial statements.

c.     the auditor’s exposure to lawsuits.

d.    management’s future decisions.


22. Whenever there is a scope restriction, the appropriate response is to issue a(n):

a.     disclaimer of opinion.

b.    adverse opinion.

c.     qualified opinion.

d.    unqualified report, a qualification of scope and opinion, or a disclaimer, depending on materiality.


23. Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

a.     A client’s lawsuit against another company which claims the other company has infringed        on its patent.

b.    Loss of major customers.

c.     Significant recurring operating losses.

d.    Working capital deficiencies.


24. The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that all other statements are presented fairly. The auditor:

a.     may issue either an unqualified or a qualified opinion.

b.    must issue an adverse opinion with “except for” in the opinion paragraph.

c.     may issue an unqualified opinion.

d.    must issue a qualified opinion with “except for” in the opinion paragraph.


25. Rule 101 indicates that materiality is a consideration for:


Evaluating direct investments made by the CPA




Evaluating indirect ownership investments
























26. It is not a violation of the AICPA’s Code of Professional Conduct for a CPA to:


a.     charge fees as an expert witness determined by the amount awarded to the plaintiff, even though the  CPA also performs a compilation for client use .


b.    base consulting fees on a percentage of a bond issue, even though the CPA performs a review of the client’s financial statements.


c.     base fees for a tax service on the amount of the refund that the client will receive.


d.    base consulting fees on a percentage of a bond issue, even though CPA performs an audit of the client’s financial statements.




27. Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the AICPA’s Code of Professional Conduct?


a.     The CPA firm has issued the standard unqualified audit report after auditing a governmental agency, although GAAS was not followed because the government required procedures different from GAAS.


b.    The CPA firm discriminates in its hiring practices based on the age of the applicant.


c.     The CPA retains the client’s books and records to enforce past-due payment of the CPA’s bill, even after the client has demanded they be returned.


d.    The CPA firm’s partner-in-charge was arrested recently on his way home from the firm’s holiday party. He was a passenger in a car driven by his wife and she was charged with “driving while intoxicated.”




28. There are a number of offenses for which a CPA may be expelled from membership in the AICPA. Which of the following is not one of these offenses?


a.     The willful failure to file any income tax return that the CPA, as an individual taxpayer, is required by law to file.


b.    The willful filing of a fraudulent income tax return on a client’s behalf.


c.     Conviction of a crime punishable by imprisonment of 6 months.


d.    The willful aiding in the preparation of a false and fraudulent income tax return.




29. Which of the following statements regarding professional and regular corporations is not true?


a.   Shareholders in both professional corporations and regular corporations are individually liable in litigation against the CPA firm.


b.   The shareholders, officers, and employees must comply with all Code of Professional Conduct requirements.


c.   Stock in a public accounting corporation must be held by only those CPAs who are qualified to practice.


d.   The firm name must meet the same requirements as those for a single proprietorship and partnership.




30. The auditor’s evaluation of the likelihood of material employee fraud is normally done initially as a part of:


a.     tests of controls.


b.    tests of transactions.


c.     understanding the entity’s internal control.


d.    the assessment of whether to accept the audit engagement.




31. When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that:


a.     the transactions are related to financing a company rather than to its operations.


b.    most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively.


c.     both a and b are correct.


d.    neither a nor b is correct.




32. Illegal acts are defined in SAS 54 (AU217) as:


a.     violations of laws or government regulations.


b.    violations of laws or government regulations other than errors.


c.     violations of laws or government regulations other than fraud.


d.    violations of law which would result in the arrest of the perpetrator.




33. Most illegal acts affect the financial statements:


a.     directly.


b.    only indirectly.


c.     both directly and indirectly.


d.    materially if direct; immaterially if indirect.




34. With respect to the detection of illegal acts, auditing standards state that the auditor provides:


a.     no assurance that they will be detected.


b.    the same reasonable assurance provided for other items.


c.     assurance that they will be detected, if material.


d.    assurance that they will be detected, if highly material.




35. In describing the cycle approach to segmenting an audit, which of the following statements is not true?


a.     All general ledger accounts and journals are included at least once.


b.    Some journals and general ledger accounts are included in more than one cycle.


c.     The “capital acquisition and repayment” cycle is closely related to the “acquisition of goods and services and payment” cycle.


d.    The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.




36. Which of the following journals would be included most often in the various audit cycles?


a.     Cash receipts journal.


b.    Cash disbursements journal.


c.     General journal.


d.    Sales journal.






37. What types of transactions can limit auditor independence?










38. Under what conditions would an auditor issue a disclaimer?










Subject Mathematics
Due By (Pacific Time) 02/27/2013 11:00 pm
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