SALEM STATE COLLEGE
ACC 407 AUDTING – MID-TERM EXAM
PROFESSOR MCGEE – OCTOBER 2003
CHAPTERS 1, 2, 3, 4 AND MODULE B
NAME__________________________________________
Please circle the best/correct letter.
1. The probability that an auditor will give an inappropriate opinion on financial statements best describes
a. audit risk
b. inherent risk
c. control risk
d. detection risk
2. When assessing the hierarchy of sufficient competent evidence in auditing which of the following would be the least persuasive:
a. direct, personal knowledge
b. external evidence
c. internal evidence
d. verbal representations given by the client’s officers.
3. In Massachusetts how many credit hours of education is required before a candidate can sit for the CPA exam.
a. 126 credit hours
b. 120 credit hours
c. 150 credit hours
d. 100 credit hours
4. According to the fourth reporting standard in the generally accepted auditing standards (GAAS), when an overall opinion cannot be given, the auditor must
a. withdraw from the engagement
b. state the reason
c. give an adverse opinion
d. qualify the report
5. Because of the risk of material misstatement, an audit of financial statements in accordance with generally auditing standards should be planned an performed with an attitude of
a. objective judgment
b. independent integrity
c. professional skepticism
d. impartial conservatism
6. Which of the following is not one of the ideals expressed in the AICPA Principles of Professional Conduct?
a. integrity
b. responsibilities
c. objectivity and independence
d. professional interest
7. The interpretation of Rule 501, Acts Discreditable to the profession, would not include
a. membership in an activist political party
b. withholding a client’s books until a professional fee is paid
c. failure to follow government audit standards in government audits
d. permitting others to make misleading entries in records
8. Which of the following forms of organization would not be allowed under Rule 505 of the Professional Code of Conduct?
a. limited liability partnership; all partners are CPAs
b. limited liability partnership; 70% of partners are CPAs
c. limited liability corporation; all shareholders are CPAs
d. partnership; 40% of partners are CPAs
9. ‘We conducted our audits in accordance with generally accepted auditing standards’ would appear in which paragraph of the standard unqualified audit report
a. introductory
b. scope
c. opinion
d. explanatory
10. Auditors are required to make consistency reference in the audit report when there are changes in
a. accounting estimates
b. the format of the statement of cash flows
c. the classification of financial statement amounts
d. accounting principles
11. The objective in an auditor’s review of credit ratings is of client’s customers is to obtain evidence related to management’s assertion about
a. compliance
b. existence or occurrence
c. rights and obligations
d. valuation or allocation
12. The primary purpose for obtaining an understanding of the company’s internal control in a financial statement audit is
a. to determine the nature, timing, and extent of auditing procedures to be performed
b. to make consulting suggestions to the management
c. to obtain direct sufficient competent evidential matter to afford a reasonable basis for an opinion on the financial statements
d. to determine whether the company has changed any accounting principles
13. A CPA found that the client has not capitalized a material amount of costs for machinery and equipment in the financial statements. When considering the materiality of this departure from GAAP, the CPAs reporting options are
a. unqualified opinion or disclaimer of opinion
b. unqualified opinion or qualified opinion
c. emphasis paragraph with unqualified opinion or an adverse opinion
d. qualified opinion or adverse opinion
14. The purpose of the audit is to obtain and evaluate evidence about five assertions management makes in financial statements. Which of the following is not an assertion
a. existence or occurrence
b. completeness
c. rights and obligations
d. professional skepticism
15. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interest users is called
a. auditing services
b. assurance services
c. compliance assertion
d. taxation services
16. An auditor may not issue a qualified opinion when
a. an accounting principle at variance with GAAP is used
b. the auditor lacks independence with respect to the audited entity
c. a scope limitation prevents the auditor from completing an important audit procedure
d. the auditor’s report refers to the work of a specialist
17. The probability that audit procedures will fail to produce evidence of material misstatements is called
a. inherent risk
b. audit risk
c. control risk
d. detection risk
18. Rule 203 of the AICPA Code of Professional Conduct
a. allows for an unqualified opinion due to a justifiable departure from GAAP
b. requires a qualified opinion be issued
c. requires the auditor to be independent
d. allows for a disclaimer of opinion
19. When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
a. refer to the change in an explanatory paragraph
b. explicitly concur that the change is preferred
c. not refer to consistency in the auditor’s report
d. refer to the change in the opinion paragraph
20. CPA Krogstad is the executive in charge of the Omaha office of the audit firm. He is responsible for the practice in all areas of audit, and consulting, but he does not serve as a field audit partner or a reviewer. CPA Ward is the partner in charge of the Dodger, Inc. audit (an SEC filing). The audit firm’s independence is impaired if:
a. Krogstad owns Dodger common stock
b. Krogstad’s brother owns 10 shares of Dodger common stock
c. Ward’s sister-in-law is a sales representative with the territory in California
d. Ward’s fellow partner CPA Felix in the Omaha office has a wife who owns Dodger stock through a mutual fund held in her own employer’s employee benefit plan
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Problems –
1. Identify the deficiencies and errors in the following report.
To the employees of Alpha Co.
We have audited the accompanying balance sheet of Alpha Co. as of June 30, 2003 and 2002, and the related statements of cash flows and retained earnings for the years then ended. These financial statements are the responsibility of the Company’s management.
We conducted our audits in accordance with the Statements on Auditing Standards issued by the Auditing Standards Board of the American Institute of Certified Public Accountants. These standards require that we plan and perform the audit to obtain absolute 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 internal controls, accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide an unconditional basis for our opinion.
In our opinion, the financial statements referred to above correctly show the financial position of Alpha Co. at June 30, 2003 and 2002 and the results of their operations for the years then ended.
/s/ Salem State Associates
Certified Public Accountants
June 30, 2003
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2. Alan Fallon was recently promoted to senior accountant and was put in charge Bill Crobsy Markets Inc. audit. Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first audit as a senior, he intends to bring the job in on budget. To save time, he gave the assistants the audit program for Star Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client’s place of business, because “my time is billed out at such a high rate, we’ll go right over budget”. He did call them once a day from another audit in which he was working. The assistants told Alan that he audit program did not always match up with what they found at Bill Crosby Markets. Alan responded, “just cross out whatever is not relevant in the audit program and don’t add anything – it will only make up go over budget.”
When Alan came out near the end of fieldwork, one assistant was concerned that no inventory observation was done at the out-of-town locations of Bill Crosby Markets. The audit program had stipulated that inventory should be observed for in-town stores only. Start Food Stores had only one store not in town while Bill Crosby Markets had three out of their five stores in other cities. Alan told the assistant to get inventory sheets from the client for the other stores. He added, “Make sure that the inventory balance in general ledger agrees with the total of all inventory sheets.” The next day, Alan reviewed all work papers and submitted the job for review by the manager.
Required:
a. Describe the GAAS field work standards
b. Do you believe that Bill Crosby Markets Inc audit is in compliance with these standards? Explain.