Question Details

Devry ACCT 555  Midterm Exam 1. (TCO F) If the auditor believes that the financial statements are not fairly stated or is unable to reach an conclusion because of insufficient evidence, the auditor (Points : 5) 
       should withdraw from the engagement.
       should request an increase in audit fees so that more resources can be used to conduct the audit.
       has the responsibility of notifying financial statement users through the auditor's report.
       should notify regulators of the circumstances.


Question 2. 2. (TCO F) The auditor's best defense when material misstatements are not uncovered is to have conducted the audit (Points : 5) 
       in accordance with auditing standards.
       as effectively and as reasonably possible.
       in a timely manner.
       only after an adequate investigation of the management team.


Question 3. 3. (TCO F) Which statement is true of a public company's financial statements? (Points : 5) 
       Sarbanes-Oxley requires only the CEO to certify the financial statements.
       Sarbanes-Oxley requires only the CFO to certify the financial statements.
       Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.
       Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements. 


Question 4. 4. (TCO F) When the auditor knows that a material illegal act has occurred, he or she must (Points : 5) 
       report it to the proper governmental authorities.
       issue a qualified audit report.
       consider the effects on the financial statements, including the adequacy of disclosure.
       issue an adverse opinion.


Question 5. 5. (TCO F) Which form of evidence is most reliable? (Points : 5) 
       General ledger account balances
       Confirmation of accounts receivable balance received from a customer
       An internal memo explaining the issuance of a credit memo
       Copy of month-end adjusting entries 


Question 6. 6. (TCO F) An example of an external document is (Points : 5) 
       employee time reports.
       bank statements.
       purchase order for company purchases.
       carbon copies of checks.


Question 7. 7. (TCO F) "The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria by a competent, independent person" is a definition of (Points : 5) 
       analytical procedures.
       tests of transactions.
       tests of balances.
       auditing.


Question 8. 8. (TCO F) To be considered reliable evidence, confirmations must be controlled by (Points : 5) 
       a client employee responsible for accounts receivable.
       a financial statement auditor.
       a client's internal audit department.
       a client's controller or CFO.


Question 9. 9. (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 going concern assumption.
       indicate possible misstatements.
       reduce detailed tests.


Question 10. 10. (TCO G) Which statement 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.


Question 11. 11. (TCO G) Which ratio 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 

1. (TCO A) Match the following definitions to the appropriate terms.
(Points : 5) 
Potential Matches:
1 : Pronouncements providing specific guidance on auditing matters for all entities except public companies
2 : Standards used by nonpublic companies and for interim audits for public companies as initially adopted by the PCAOB
3 : The standards used for public company audits
    
Question 2. 2. (TCO B) The following is a portion of a qualified scope and opinion report due to a scope restriction. (Note: A separate report was issued on the effectiveness of internal control over financial reporting.) 
 
To the shareholders of Fast Times Corporation,
 
We have audited the accompanying balance sheet of Fast Times Corporation as of September 30, 2009, and the related statements of income, retained earnings, and cash flows for the past year. 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.
 
Except as discussed in the following paragraph, we conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
 
We were unable to obtain audited financial statements supporting the company's investment in a foreign affiliate stated at $1,040,000, or its equity in earnings of that affiliate of $501,000, which is included in net income, as described in Note 14 to the financial statements. Because of the nature of the company's records, we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures.
 
Required: Complete the above report by preparing the opinion paragraph. Do not date or sign the report. (Points : 20) 
      
       


Question 3. 3. (TCO C) The following situation involves a possible violation of the AICPA's code of professional conduct. For this 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.
 
Provide a one- or two-line explanation.
 
Kelley Brent, CPA, is a partner in the CPA firm that audits Dane Inc., a closely-held corporation. Kelley- sister-in-law's brother is the chief financial officer of Dane Inc. (Points : 10) 
      
       


Question 4. 4. (TCO C) The following situation involves a possible violation of the AICPA's code of professional conduct. For this 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.
 
Provide a one- or two-line explanation.
 
Brad Heist, CPA, was traveling from Dallas to Houston, TX, when he was pulled over by a police officer on suspicion of driving under the influence. The Breathalyzer 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) 
      
       


Question 5. 5. (TCO C) Under the provisions of the Sarbanes-Oxley Act of 2002 (SOX), the audit committee of a public company has specific guidelines to which employees must adhere. Discuss some of the mandated features of the audit committee of a public company under SOX. (Points : 25) 
      
       


Question 6. 6. (TCO D) There are four major sources of an auditor's legal liability. One source is liability to the audit client under common law. Briefly summarize the other three sources. (Points : 25) 
      
       


Question 7. 7. (TCO F) Below are 10 documents typically examined during an audit. Classify each document as either internal or external.
_____ 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 (Points : 25) 
      
       


Question 8. 8. (TCO G) Discuss the four primary purposes of analytical procedures performed during the planning phase of an audit. (Points : 25)