Question Details

ACCT 555 
MIDTERM 
Week 4 : Materiality, Risk, and Internal Control - Midterm 


Page 1 


1. (TCO F) Which of the following statements 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.

2. (TCO F) If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can:
Issue an adverse audit report;    Issue a qualified audit report (Points : 5) 
        Yes;   Yes
        No;   No
        Yes;   No
        No;   Yes


3. (TCO F) Which of the following statements is most correct regarding errors and fraud? (Points : 5) 
        An error is unintentional, whereas fraud is intentional.
        Fraud occurs more often than errors in financial statements.
        Errors are always fraud and fraud is always errors.
        Auditors have more responsibility for finding fraud than errors.


4. (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


5. (TCO F) The Auditing Standards Board has concluded that analytical procedures are so important that they are required during: (Points : 5) 
        planning and test of control phases
        planning and completion phases
        test of control and completion phases
        planning, test of control, and completion phases


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. 
____ Public Company Accounting Oversight Board Auditing Standards 
____ Generally Accepted Auditing Standards 
____ Statements on Auditing Standards 
a. Pronouncements providing specific guidance on auditing matters for all entities except public companies
b. The standards used for public company audits
c. Standards used by non-public companies and for interim audits for public companies as initially adopted by the PCAOB
(Points : 5) 

        


2. (TCO B) 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, 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.
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, 2009, and net income and earnings per share would be decreased by $180,000 and $0.62, respectively, for the past year.
Required: Complete the above qualified audit report by preparing the opinion paragraph. Do not date or sign the report.
(Points : 20) 

        


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 Big-Bucks 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)