Chapter 1

1. Recording, classifying, and summarizing economic events in a logical manner for the purpose
of providing financial information for decision making is commonly called:
c
a. finance.
b. auditing.
c. accounting.
d. economics.

2. In the audit of historical financial statements, which of the following accounting bases is the
most common?
c
a. Regulatory accounting principles.
b. Cash basis of accounting.
c. Generally accepted accounting principles.
d. Liquidation basis of accounting.

3. Any service that requires a CPA firm to issue a report about the reliability of an assertion that is
made by another party is a(n):
b
a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.

4. Three common types of attestation services are:

a.
a. audits, reviews, and “other” attestation services.
b. audits, verifications, and “other” attestation services.
c. reviews, verifications, and “other” attestation services.
d. audits, reviews, and verifications.

5. The organization that is responsible for providing oversight for auditors of public companies is
called the ________.
d
a. Auditing Standards Board.
b. American Institute of Certified Public Accountants.
c. Public Oversight Board.
d. Public Company Accounting Oversight Board.
6.
The Sarbanes-Oxley Act applies to which of the following companies?
c
a. All companies.
b. Privately held companies.
c. Public companies.
d. All public companies and privately held companies with assets greater than $500 million.

7. Providing quantitative information that management and others can use to make decisions is the
function of:
d
a. management information systems.
b. auditing.
c. finance.
d. accounting.

8.
An audit of historical financial
statements most commonly
includes the:
medium
a. balance sheet, the income
statement, and the statement
of cash flows.
d
b. income statement, the
statement of cash flows, and
the statement of net working
capital.
c. statement of cash flows,
the balance sheet, and the
retained earnings statement.
d. balance sheet, the income
statement, and the statement
of cash flows.

9.
medium
The ___________ rate may be
defined as approximately the
rate a bank could earn by
investing
in U.S. treasury notes for the
same length as the length of a
business loan.
c
a. nominal
b. stated
c. risk-free
d. prevailing

10.
The use of the Certified Public
Accountant title is regulated
by:
medium
a. the federal government.
b
b. state law through a
licensing department or
agency of each state.
c. the American Institute of
Certified Public Accountants
through the licensing
departments
of the tax and auditing
committees.
d. the Securities and
Exchange Commission.

11.
An operational audit has as
one of its objectives to:
medium
a. determine whether the
financial statements fairly
present the entity’s
operations.
c
b. evaluate the feasibility of
attaining the entity’s
operational objectives.
c. make recommendations for
improving performance.
d. report on the entity’s
relative success in attaining
profit maximization.

12.
An audit of historical financial
statements is most often
performed to determine
whether the:
medium
a. organization is operating
efficiently and effectively.
d
b. entity is following specific
procedures or rules set down
by some higher authority.
c. management team is
fulfilling its fiduciary
responsibilities to
shareholders.
d. none of these choices.

13.
medium
An examination of part of
an organization’s procedures
and methods for the
purpose of
evaluating efficiency and
effectiveness is what type of
audit?
a
a. Operational audit.
b. Compliance audit.
c. Financial statement audit.
d. Production audit.

14.
medium
An audit to determine whether
an entity is following specific
procedures or rules set down
by
some higher authority is
classified as a(n):
b
a. audit of financial
statements.
b. compliance audit.
c. operational audit.
d. production audit.

15.
Which of the following is a
type of audit evidence?
medium
a. Oral responses to the
auditor from employees of the
company under audit.
d
b. Written communications
from company employees or
outsiders.
c. Observations made by an
auditor.
d. Evidence may take any of
the above forms.
8.
An audit of historical financial statements most commonly includes the:
d
a. balance sheet, the income statement, and the statement of cash flows.
b. income statement, the statement of cash flows, and the statement of net working capital.
c. statement of cash flows, the balance sheet, and the retained earnings statement.
d. balance sheet, the income statement, and the statement of cash flows.

9. The ___________ rate may be defined as approximately the rate a bank could earn by investing
in U.S. treasury notes for the same length as the length of a business loan.
c
a. nominal
b. stated
c. risk-free
d. prevailing

10. The use of the Certified Public Accountant title is regulated by:
b
a. the federal government.
b. state law through a licensing department or agency of each state.
c. the American Institute of Certified Public Accountants through the licensing departments
of the tax and auditing committees.
d. the Securities and Exchange Commission.

11. An operational audit has as one of its objectives to:

c
a. determine whether the financial statements fairly present the entity’s operations.
b. evaluate the feasibility of attaining the entity’s operational objectives.
c. make recommendations for improving performance.
d. report on the entity’s relative success in attaining profit maximization.

12.
An audit of historical financial statements is most often performed to determine whether the:
d
a. organization is operating efficiently and effectively.
b. entity is following specific procedures or rules set down by some higher authority.
c. management team is fulfilling its fiduciary responsibilities to shareholders.
d. none of these choices.

13. An examination of part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit?
a
a. Operational audit.
b. Compliance audit.
c. Financial statement audit.
d. Production audit.

14. An audit to determine whether an entity is following specific procedures or rules set down by
some higher authority is classified as a(n):
b
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.

15. Which of the following is a type of audit evidence?

d
a. Oral responses to the auditor from employees of the company under audit.
b. Written communications from company employees or outsiders.
c. Observations made by an auditor.
d. Evidence may take any of the above forms.

16. Which of the following services provides the lowest level of assurance on a financial statement?
a
a. A review.
b. An audit.
c. Neither service provides assurance on financial statements.
d. Each service provides the same level of assurance on financial statements.

17. The three requirements for becoming a CPA include all but which of the following?
c
a. Uniform CPA examination requirement.
b. educational requirements.
c. Character requirements.
d. Experience requirement.

18. In “auditing” financial accounting data, the primary concern is with:

a
a. determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies with government
requirements.

19. Financial statement users often receive unreliable financial information from companies. Which
of the following is not a common reason for this?
d
a. Complex business transactions.
b. Large amounts of data.
c. Lack of firsthand knowledge about the business.
d. Each of these choices is a common reason for unreliable financial information.

20. Which of the following is not a Trust Services principle as defined by the AICPA or CICA?
challenging
d
a. Online privacy.
b. Availability.
c. Processing integrity.
d. Operational integrity.

21. Which one of the following is more difficult to evaluate objectively?

c
a. Presentation of financial statements in accordance with generally accepted accounting
principles.
b. Compliance with government regulations.
c. Efficiency and effectiveness of operations.
d. All three of the above are equally difficult.

22. The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing
which of the following types of services to that company?
c
a. Reviews of quarterly financial statements.
b. Preparation of corporate tax returns.
c. Most consulting services.
d. Tax services.

23. Which of the following audits can be regarded as generally being a compliance audit?
challenging
a
a. IRS agents’ examinations of taxpayer returns.
b. GAO auditor’s evaluation of the computer operations of governmental units.
c. An internal auditor’s review of a company’s payroll authorization procedures.
d. A CPA firm’s audit of the local school district.

24. Which of the following can be significantly affected by an audit?

challenging
b
a. Business risk.
b. Information risk.
c. The risk-free interest rate.
d. Inherent risk.

25. The trait that distinguishes auditors from accountants is the:

challenging
d
a. auditor’s ability to interpret accounting principles generally accepted in the United States.
b. auditor’s education beyond the bachelor’s degree.
c. auditor’s ability to interpret FASB Statements.
d. auditor’s accumulation and interpretation of evidence related to a company’s financial
statements.

26. Attestation services on information technology include WebTrust services and SysTrust
services. Which of the following statements most accurately describes SysTrust services?
b
a. SysTrust services provide assurance on business processes, transaction integrity and
information processes.
b. SysTrust services provide assurance on system reliability in critical areas such as security
and data integrity.
c. SysTrust services provide assurance on internal control over financial reporting.
d. SysTrust services provide assurance as to whether accounting personnel are following
procedures prescribed by the company controller.
37. The criteria by which an auditor evaluates the information under audit may vary with the
information being audited.
a
a. True
b. False

38. The criteria used by an external auditor to evaluate published financial statements are known as
generally accepted auditing standards.
b
a. True
b. False

39. The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies.
b
a. True
b. False

40. The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing
and financial reporting.
a
a. True
b. False

41. Only companies that file annual statements with the Securities and Exchange Commission are
required to have an annual external audit.
b
a. True
b. False

42. The financial statements most commonly audited by external auditors are the balance sheet, the
income statement, and the statement of changes in retained earnings.
b
a. True
b. False

43. The primary purpose of a compliance audit is to determine whether the financial statements are
prepared in compliance with generally accepted accounting principles.
b
a. True
b. False
44. Results of compliance audits are typically reported to someone within the organizational unit
being audited rather than to a broad spectrum of outside users.
a
a. True
b. False

45. The primary role of the United States General Accounting Office is the enforcement of the
federal tax laws as defined by Congress and interpreted by the courts.
b
a. True
b. False

46. CPA firms are never allowed to provide bookkeeping services for audit clients.
b
a. True
b. False

47. Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor
attest to their internal control over financial reporting.
a
a. True
b. False

48. The Sarbanes-Oxley Act requires a company’s chairman of the board of directors, CEO, and
CFO to certify the company’s financial statements.
b
a. True
b. False

49. The criterion that is most likely to be used as a framework in evaluating a company’s internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act is the Enterprise
Risk Management framework.
b
a. True
b. False

50. Most public companies’ audited financial statements are available on the SEC’s EDGAR
database.
a
a. True
b. False

Chapter 2

1. Which one of the following is not one of the three General Standards?
a
a. Proper planning and supervision.
b. Independence of mental attitude.
c. Adequate training and proficiency.
d. Due professional care.

2. Which one of the following is not a Field Work Standard?

b
a. Adequate planning and supervision.
b. Due professional care.
c. Understand the entity and its environment including internal control.
d. Sufficient appropriate audit evidence.

3. The General Standards stress the importance of:

b
a. evidence accumulation.
b. personal qualities the auditor should possess.
c. communicating the auditor’s findings to the reader.
d. general supervision of the audit.

4. The generally accepted auditing standard that requires “Adequate technical training and
proficiency” is normally interpreted as requiring the auditor to have:
a
a. formal education in auditing and accounting.
b. worked for an entity similar to the entity being audited.
c. independence in mental attitude
d. a graduate degree in a business field.
5. Members of the Public Company Accounting Oversight Board are appointed and overseen by:
d
a. the U.S. Congress.
b. the American Institute of Certified Public Accountants.
c. the Auditing Standards Board.
d. the Securities and Exchange Commission.

6. Statements on Auditing Standards provide auditors of privately held companies with ______
guidance regarding the conduct of financial statement audits.
b
a. fairly extensive
b. some limited
c. practically no
d. specific and detailed

7. Which of the following statements most accurately captures the intent of the standards of field
work?
c
a. Field work standards are primarily concerned with personal attributes necessary during the
conduct of the audit.
b. Field work standards provide extensive guidance regarding the conduct of an audit.
c. Field work standards are primarily directed at the auditor’s planning, understanding of
internal control, and evidence accumulation.
d. Field work standards are primarily concerned with the conduct of substantive testing as
opposed to testing of internal controls.

8. Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for
establishing auditing standards?
c
a. Securities and Exchange Commission
b. Public Company Accounting Oversight Board
c. Auditing Standards Board
d. National Association of Accounting

9. Standards issued by the Public Company Accounting Oversight Board must be followed by
CPAs who audit:
b
a. both private and public companies.
b. public companies only.
c. private companies, public companies, and nonprofit entities.
d. private companies only.

10. Which of the following is the least likely form of business for a CPA firm?
b
a. General partnership
b. General corporation
c. Limited liability company
d. Limited liability partnership

11. The Statements on Auditing Standards issued by the Auditing Standards Board:
a
a. are interpretations of generally accepted auditing standards.
b. are the equivalent of laws for audit practitioners.
c. must be followed in all situations.
d. are optional guidelines which an auditor may choose to follow or not follow when conducting an
audit.

12. An auditor need not abide by a particular auditing standard if the auditor believes that:
a
a. the issue in question is immaterial in amount.
b. more expertise is needed to fulfill the requirement.
c. the requirement of the standard has not been addressed by the PCAOB.
d. any of the above three are correct.

13. The Public Company Accounting Oversight Board does not:

b
a. perform inspections of the quality controls at audit firms that audit public companies.
b. establish auditing standards that must be followed by CPAs on all audits.
c. oversee auditors of public companies.
d. perform any of the above functions.

14.
The form that must be completed and filed with the Securities and Exchange Commission whenever a
company experiences a significant event that is of interest to public investors is the:
b
a. Form S-1.
b. Form 8-K.
c. Form 10-K.
d. Form 10-Q

15. The form that must be filed with the Securities and Exchange Commission whenever a company
plans to issue new securities to the public is the:
a
a. Form S-1.
b. Form 8-K.
c. Form 10-K.
d. Form 10-Q.

16. The third general standard states that due care is to be exercised in the performance of an audit.
This standard is generally interpreted to require:
c
a. objective review of the adequacy of the technical training of firm personnel.
b. thorough review of the existing internal control structure.
c. critical review of work done at every level of supervision.
d. periodic review of a CPA firm’s quality control procedures.

17. Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its
inspection of a registered accounting firm.
d
a. The PCAOB may not enforce some disciplinary action against the accounting firm.
b. The PCAOB may not report the matter to the Securities and Exchange Commission.
c. The PCAOB may not report the matter to the appropriate state accountancy board
d. The PCAOB may not suspend the license to practice of the CPA guilty of the violation.

18. Which of the following statements best describes the primary purpose of Statements on Auditing
Standards?
d
a. They are guides intended to set forth auditing procedures that are applicable to a variety of
situations.
b. They are procedural outlines that are intended to narrow the areas of inconsistency and divergence
of auditor opinion.
c. They are authoritative statements, enforced through the Code of Professional Conduct, and
are intended to limit the degree of auditor judgment.
d. They are interpretations that are intended to clarify the meaning of “generally accepted
auditing standards.”

19. Statements on Standards for Accounting and Review Services are issued by the:
a
a. Accounting and Review Services Committee.
b. Professional Ethics Executive Committee.
c. Securities and Exchange Commission.
d. Financial Accounting Standards Board.

20. Consulting Standards are issued by the:

a
a. Accounting and Review Services Committee.
b. Securities and Exchange Commission.
c. Management Consulting Services Executive Committee.
d. Financial Accounting Standards Board.

21. The auditor’s judgment concerning the overall fairness of presentation of financial position, results
of operations, and changes in cash flow is applied within the framework of:
d
a. quality control.
b. generally accepted auditing standards which include the concept of materiality.
c. the auditor’s evaluation of the audited company’s internal control.
d. generally accepted accounting principles.

22. A basic objective of a CPA firm is to provide professional services to conform to professional
standards. Reasonable assurance of achieving this basic objective is provided through:
c
a. continuing professional education.
b. compliance with generally accepted reporting standards.
c. a system of quality control.
d. a system of peer review.

23. 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:
c
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.

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

25. 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
a. investors in Hansen Corporation’s stock.
b. stock exchange.
c. Securities and Exchange Commission.
d. management of Hansen Corporation.

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

medium
a
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.

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

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

29. 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
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.

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

31. The AICPA has authority to establish standards and rules in all but which of the following areas?
d
a. Auditing standards applicable to financial statements of private companies.
b. Compilation and review standards.
c. Professional conduct.
d. Auditing standards applicable to financial statements of private and public companies.

32. Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS)
should be looked upon by practitioners as:
c
a. ideals to work towards, but which are not achievable.
b. maximum standards that denote excellent work.
c. minimum standards of performance that must be achieved on each audit engagement.
d. benchmarks to be used on all audits, reviews, and compilations.

33. Which one of the following is not a requirement for belonging to the Private Companies
Practice Section of the American Institute of Certified Public Accountants?
c
a. Adherence to quality control standards.
b. Mandatory peer review.
c. Partner rotation after a period of ten consecutive years.
d. Continuing education.

34. Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board are:
b
a. part of the generally accepted auditing standards under the AICPA Code of Professional Conduct.
b. interpretations of generally accepted auditing standards and departures from such statements must
be justified.
c. interpretations of generally accepted auditing standards and such standards must be
followed in every engagement.
d. generally accepted auditing procedures that are not covered by the AICPA Code of
Professional Conduct.

46. Membership in the AICPA is restricted to CPAs who are currently practicing as independent
auditors.
b
a. True
b. False

47. Membership in the AICPA is mandatory for all licensed practicing CPAs
b
a. True
b. False

48. Any public accounting firm can be a member of the AICPA if the firm meets the membership
requirements.
a
a. True
b. False

49. Statements on Auditing Standards (SASs) are issued by the Public Company Accounting
Oversight Board.
b
a. True
b. False

50. Auditors of public companies should, in the absence of guidance issued by the PCAOB, follow
auditing standards issued by the SEC.
b
a. True
b. False

51.
The U.S. Congress has oversight responsibility for the PCAOB.
b
a. True
b. False
52. Form 10-K must be filed with the SEC whenever a public company experiences a significant
event.
b
a. True
b. False

53. In a limited liability partnership, partners are personally liable for liabilities arising from
negligent acts of other partners, but not for liabilities arising from acts of other employees.
b
a. True
b. False

54. Limited liability companies are structured and taxed like a general partnership, but their owners
have limited personal liability similar to that of a general corporation.
a
a. True
b. False

55. All CPA firms registered with the PCAOB are required to undergo a peer review at least once
every two years.
b
a. True
b. False

56. Statements on Auditing Standards (SASs) are considered to be interpretations of the ten
generally accepted auditing standards.
a
a. True
b. False

57. Any CPA firm that audits more than 100 public companies is required to have an annual
inspection by the PCAOB.
a
a. True
b. False

58. The overall purpose of the Securities and Exchange Commission is to assist in providing
investors with reliable information upon which to make investment decisions.
a
a. True
b. False

59. International Standards on Auditing are issued by the International Auditing Practices
Committee.
a
a. True
b. False

Chapter 3

1. Auditing standards require that the audit report must be titled and that the title must:
a
a. include the word “independent.”
b. indicate if the auditor is a CPA.
c. indicate if the auditor is a proprietorship, partnership, or incorporated.
d. indicate the type of audit opinion issued.

2. To emphasize the fact that the auditor is independent, a typical addressee of the audit report
could be:
a
Company Controller Shareholders Board of Directors
a. No Yes Yes
b. No No Yes
c. Yes Yes No
d. Yes No No

3. The purpose of the introductory paragraph in the standard unqualified report is:
b
a. to identify that the type of opinion issued is unqualified.
b. to identify the financial statements audited and the dates and time periods covered by the
report.
c. to indicate the CPA followed applicable audit standards.
d. to indicate all the financial statements are in accordance with GAAP.

4. The scope paragraph of the standard unqualified audit report states that the audit is designed to:
d
a. discover all errors and/or irregularities.
b. discover material errors and/or irregularities.
c. conform to generally accepted accounting principles.
d. obtain reasonable assurance whether the statements are free of material misstatement.

5. The audit report date on a standard unqualified report indicates:

d
a. the last day of the fiscal period.
b. the date on which the financial statements were filed with the Securities and Exchange
Commission.
c. the last date on which users may institute a lawsuit against either client or auditor.
d. the last day of the auditor’s responsibility for the review of significant events that
occurred subsequent to the date of the financial statements.

6. As a result of management’s refusal to permit the auditor to physically examine inventory, the
auditor has not accumulated sufficient appropriate evidence to conclude whether financial
statements are stated in accordance with GAAP. The auditor must depart from the unqualified
audit report because:
d
a. the financial statements have not been prepared in accordance with GAAP.
b. the scope of the audit has been restricted by circumstances beyond either the client’s or
auditor’s control.
c. the auditor has lost independence.
d. the scope of the audit has been restricted.

7
An adverse opinion is issued when the auditor believes:
d
a. some parts of the financial statements are materially misstated or misleading.
b. the financial statements would be found to be materially misstated if an investigation were
performed
c. the auditor is not independent.
d. the overall financial statements are so materially misstated that they do not present fairly the
financial position or results of operations and cash flows in conformity with GAAP

8.
easy
If a misstatement is
immaterial to the financial
statements of the entity for
the current period,
but is expected to have a
material effect in future
periods, it is appropriate to
issue a(n):
c
a. adverse opinion.
b. qualified opinion.
c. unqualified opinion.
d. disclaimer of opinion.

9. (Public)
easy
Whenever an auditor issues
an audit report for a public
company, the auditor can
choose to
issue a report in which of the
following forms?
c
a. A combined report on
financial statements and
internal control over financial
reporting.
b. Separate reports on
financial statements and
internal control over financial
reporting.
c. Either a or b.
d. Neither a nor b.

10.
easy
When determining whether an
exception is “highly material,”
the extent to which the
exception
affects different elements of
the financial statements must
be considered. This concept is
called:
b
a. materiality.
b. pervasiveness.
c. financial analysis.
d. ratio analysis.

11.
medium
An auditor determines the
financial statements include
a material departure from
GAAP.
Which type of opinion may be
issued?
d

Disclaimer
Qualified
Adverse
a.
Yes
No
No
b.
No
Yes
No
c.
Yes
No
Yes
d.
No
Yes
Yes
12. (Public)
easy
If an auditor performs an audit
of a public company, the
scope paragraph should make
reference
to which standards?
c
a. Accounting standards.
b. Generally accepted
auditing standards.
c. Standards issued by the
PCAOB (U.S.).
d. Any of the above
standards.

13.
easy
If an auditor performs an
audit of a private company,
the scope paragraph should
make
reference to which standards?
b
a. Accounting standards.
b. U.S. generally accepted
auditing standards.
c. Standards issued by the
PCAOB (U.S.).
d. Any of the above
standards.

14.
easy
Examples of unqualified
opinions which contain
modified wording (without
adding an
explanatory paragraph)
include:
a
a. the use of other auditors.
b. material uncertainties.
c. substantial doubt about the
audited company (or the
entity) continuing as a going
concern.
d. lack of consistent
application of GAAP.
8. If a misstatement is immaterial to the financial statements of the entity for the current period,
but is expected to have a material effect in future periods, it is appropriate to issue a(n):
c
a. adverse opinion.
b. qualified opinion.
c. unqualified opinion.
d. disclaimer of opinion.

9. Whenever an auditor issues an audit report for a public company, the auditor can choose to
issue a report in which of the following forms?
c
a. A combined report on financial statements and internal control over financial reporting.
b. Separate reports on financial statements and internal control over financial reporting.
c. Either a or b.
d. Neither a nor b.

10. When determining whether an exception is “highly material,” the extent to which the exception
affects different elements of the financial statements must be considered. This concept is called:
b
a. materiality.
b. pervasiveness.
c. financial analysis.
d. ratio analysis.

11. An auditor determines the financial statements include a material departure from GAAP.
Which type of opinion may be issued?
d
Disclaimer Qualified Adverse
a. Yes No No
b. No Yes No
c. Yes No Yes
d. No Yes Yes

12. If an auditor performs an audit of a public company, the scope paragraph should make reference
to which standards?
c
a. Accounting standards.
b. Generally accepted auditing standards.
c. Standards issued by the PCAOB (U.S.).
d. Any of the above standards.

13. If an auditor performs an audit of a private company, the scope paragraph should make
reference to which standards?
b
a. Accounting standards.
b. U.S. generally accepted auditing standards.
c. Standards issued by the PCAOB (U.S.).
d. Any of the above standards.

14. Examples of unqualified opinions which contain modified wording (without adding an
explanatory paragraph) include:
a
a. the use of other auditors.
b. material uncertainties.
c. substantial doubt about the audited company (or the entity) continuing as a going
concern.
d. lack of consistent application of GAAP.

15. GAAP requires that changes in accounting principles be to a:

c
a. more conservative principle.
b. principle with equal authoritative support.
c. preferable principle.
d. principle detailed in a FASB pronouncement.

16. A CPA may wish to emphasize specific matters regarding the financial statements even though
an unqualified opinion will be issued. Normally, such explanatory information is:
c
a. included in the scope paragraph.
b. included in the opinion paragraph.
c. included in a separate paragraph in the report.
d. included in the introductory paragraph.

17. An auditor who issues a qualified opinion because sufficient appropriate evidence was not
obtained should describe the limitations in an explanatory paragraph. The auditor should also
refer to the limitation in the:
d
Scope Opinion Notes to the
paragraph paragraph financial statements

a. Yes No Yes
b. No Yes Yes
c. No Yes No
d. Yes Yes No
18. When the auditor evaluates the effect of a change in accounting principle, the materiality of the
change should be evaluated based on:
b
a. the prior years presented.
b. the current year effect of the change.
c. guidelines included in GAAS.
d. the effect on total assets.

19. Conditions requiring a departure from an unqualified audit report include all but which of the
following?
b
a. Management refused to allow the auditor to confirm significant accounts receivable for
which there were no alternative procedures performed.
b. Management decided not to allow the auditor to confirm significant accounts receivable,
but the auditor obtained sufficient appropriate evidence by examining subsequent cash
receipts.
c. The audit partner’s dependent child received a gift of 100 shares of a client’s stock for her
birthday from a grandparent.
d. Management has determined that fixed assets should be reported in the balance sheet at
their replacement values rather than historical costs. The auditors do not concur.

20. The introductory paragraph of the standard audit report states that the financial statements are:
b
a. the responsibility of the auditor.
b. the responsibility of management.
c. the joint responsibility of management and the auditor.
d. none of the above.

21. The introductory paragraph of the standard audit report states that the financial statements and
the opinion expressed about those statements are:
d
a. the responsibility of the auditor.
b. the responsibility of management.
c. the joint responsibility of management and the auditor.
d. none of the above.

22.
The introductory paragraph of the standard audit report states that the auditor is:
c
a. responsible for the financial statements and the opinion on them.
b. responsible for the financial statements.
c. responsible for the opinion on the financial statements.
d. jointly responsible for the financial statements with management.

23. PCAOB Auditing Standard No. 2 requires the audit of internal control over financial reporting
to be integrated with:
a
a. the audit of the financial statements.
b. the quarterly review of financial information.
c. the review of annual financial statements.
d. none of the above.
24.
The audit report indicates that (1) management is responsible for the content of the financial
statements and (2) the auditor is responsible for evaluating the appropriateness of the
accounting principles chosen by management. Which paragraph contains those statements?
d
a. Both are in the introductory paragraph.
b. Both are in the scope paragraph.
c. Both are in the opinion paragraph.
d. None of the above are true.

25. If the balance sheet of a company is dated December 31, 2009, the audit report is dated
February 8, 2010, and both are released on February 15, 2010, this indicates that the auditor has
searched for subsequent events that occurred up to:
c
a. December 31, 2009.
b. January 1, 2010
c. February 8, 2010
d. February 15, 2010.

26. A combined report on financial statements and internal control over financial reporting includes
all but which of the following types of paragraphs?
b
a. Inherent limitations paragraph.
b. Description paragraph.
c. Opinion paragraph.
d. Each of the above paragraphs is included.

27. Whenever an auditor issues a qualified opinion, the implication is that the auditor:
d
a. does not know if the financial statements are presented fairly.
b. does not believe the financial statements are presented fairly.
c. believes the financial statements are presented fairly.
d. believes the financial statements are presented fairly “except for” a specific aspect of
them.
28.
The necessity to issue a disclaimer of opinion may arise because of:
c
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.

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

30.
If the auditor lacks independence, a disclaimer of opinion must be issued:
d
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.

31. Misstatements must be compared with some measurement base before a decision can be made
about materiality. A commonly accepted measurement base includes:
d
a. net income.
b. total assets.
c. working capital.
d. all of the above.

32. 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
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.

33. The dollar amount of some misstatements cannot be accurately measured. For example, if the
client was unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect
on:
b
a. net income.
b. users of the financial statements.
c. the auditor’s exposure to lawsuits.
d. management’s future decisions.

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

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

36. 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:
d
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.

37.
When a disclaimer is issued because the auditor lacks independence:
d
a. no report title is included on the report.
b. a one-paragraph audit report is issued.
c. the only reason cited for issuing the disclaimer is the lack of independence.
d. all of the above are correct.

38.When a client has not applied GAAP consistently from the prior year to the current year, the
auditor does not concur with the appropriateness of the change, and the change in GAAP has a
material effect on the financial statements, the auditor should issue a(n):
d
a. disclaimer.
b. adverse opinion.
c. unqualified opinion.
d. qualified opinion.

39. Which of the following is not a change that affects consistency and, therefore, does not require
an explanatory paragraph?
c
a. Change in accounting principle, such as a change from LIFO to FIFO.
b. Change in reporting entity, such as the inclusion of an additional company in combined
financial statements.
c. Change in an estimate, such as a decrease in the life of an asset for depreciation purposes. d.
Correction of errors by changing from non-GAAP to GAAP.

40. Items that materially affect the comparability of financial statements generally require
disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will
most likely issue:
c
a. a disclaimer.
b. an unqualified opinion.
c. a qualified opinion.
d. an adverse opinion.

41. Auditors sometimes encounter situations in which the outcome of a matter cannot be reasonably
estimated at the time the financial statements are issued. These matters are referred to as:
c
a. inestimable matters.
b. non sequiturs.
c. uncertainties.
d. in-suspense matters.

42. When there is uncertainty about a company’s ability to continue as a going concern, the
auditor’s concern is the possibility that the client may not be able to continue its operations or
meet its obligations for a “reasonable period of time.” For this purpose, a reasonable period of
time is considered not to exceed:
b
a. six months from the date of the financial statements.
b. one year from the date of the financial statements.
c. six months from the date of the audit report.
d. one year from the date of the audit report.

43. When the auditor concludes that there is substantial doubt about the entity’s ability to continue
as a going concern, the appropriate audit report would be:
d
a. an unqualified opinion with an explanatory paragraph.
b. a disclaimer of opinion.
c. neither a nor b.
d. either a or b.

44. An auditor may not issue a qualified opinion when:

c
a. a scope limitation prevents the auditor from completing an important audit procedure.
b. the auditor’s report refers to the work of a specialist.
c. the auditor lacks independence with respect to the audited entity.
d. an accounting principle at variance with GAAP is used.

45. When a company’s financial statements contain a departure from GAAP with which the auditor
concurs, the departure should be explained in:
b
a. the scope paragraph.
b. an explanatory paragraph that appears before the opinion paragraph.
c. the opinion paragraph.
d. an explanatory paragraph after the opinion paragraph.

46. Which of the following representations does an auditor make explicitly and which implicitly
when issuing an unqualified opinion?
b
Conformity Adequacy of
with GAAP disclosure
a. Explicitly Explicitly
b. Explicitly Implicitly
c. Implicitly Explicitly
d. Implicitly Implicitly

47. William Gregory, CPA, is the principal auditor for a multi-national corporation. Another CPA
has examined and reported on the financial statements of a significant subsidiary of the corporation.
Gregory is satisfied with the independence and professional reputation of the other auditor, as well as
the quality of the other auditor’s examination. With respect to his report on
the consolidated financial statements, taken as a whole, Gregory:
c
a. must not refer to the examination of the other auditor.
b. must refer to the examination of the other auditor.
c. may refer to the examination of the other auditor.
d. may refer to the examination of the other auditor, in which case Gregory must include in
the auditor’s report on the consolidated financial statements a qualified opinion with respect to the
examination of the other auditor.

48. A company has changed its method of inventory valuation from an unacceptable one to one in
conformity with generally accepted accounting principles. The auditor’s report on the financial
statements of the year of the change should include:
d
a. no reference to consistency.
b. a reference to a prior period adjustment in the opinion paragraph.
c. an explanatory paragraph that justifies the change and explains the impact of the change
on reported net income.
d. an explanatory paragraph explaining the change.

49. Sarbanes-Oxley requires auditors of a public company to audit a company’s financial statements
and attest to management’s report on the effectiveness of internal control over financial reporting.
What type of assurance does the auditor provide in this report?
a
a. Positive assurance on the financial statements and on the effectiveness of internal control
over financial reporting.
b. Positive assurance on the financial statements and negative assurance on the effectiveness
of internal control over financial reporting.
c. Limited assurance on the financial statements and on the effectiveness of internal control
over financial reporting.
d. There is no guidance on what level of assurance to provide.

50.
Whenever the client imposes restrictions on the scope of the audit, the auditor should be
concerned that management may be trying to prevent discovery of misstatements. In such cases,
the auditor will likely issue a:
c
a. disclaimer of opinion in all cases.
b. qualification of both scope and opinion in all cases.
c. disclaimer of opinion whenever materiality is in question.
d. qualification of both scope and opinion whenever materiality is in question.

51. CPAs issue several types of “special audit reports.” Which of the following circumstances
would not require the issuance of a special audit report?
b
a. The client’s financial statements are prepared using the cash basis.
b. The client’s financial statements are prepared using the accrual basis.
c. The CPA has been retained to audit only the current assets.
d. The CPA has been retained to review the internal control system, not the financial
statements.

52.
When a qualified or adverse opinion is issued, the qualifying paragraph is inserted:
b
a. between the introductory and scope paragraphs.
b. between the scope and opinion paragraphs.
c. after the opinion paragraph, as a fourth paragraph.
d. immediately after the address, as the first paragraph.

53. For the report containing a disclaimer for lack of independence, the disclaimer is in the:
challenging
c
a. third or opinion paragraph.
b. second or scope paragraph.
c. first and only paragraph.
d. fourth or explanatory paragraph.

54. Which of the following is not a primary category of attestation report?

a
a. Compilation report.
b. Review report.
c. Audit report.
d. Special audit report based on a basis of accounting other than GAAP.

55. Most auditors believe that financial statements are “presented fairly” when the statements are in
accordance with GAAP, and that it is also necessary to:
b
a. determine that they are not in violation of FASB statements.
b. examine the substance of transactions and balances for possible misinformation.
c. review the statements using the accounting principles promulgated by the SEC.
d. assure investors that net income reported this year will be exceeded in the future.

56. In which of the following situations would the auditor most likely issue an unqualified report?
d
a. The client valued ending inventory by using the replacement cost method.
b. The client valued ending inventory by using the Next-In-First-Out (NIFO) method.
c. The client valued ending inventory at selling price rather than historical cost.
d. The client valued ending inventory by using the First-In-First-Out (FIFO) method, but
showed the replacement cost of inventory in the Notes to the Financial Statements.

57. Which of the following statements is true?

d
a. The auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
b. The auditor is required to issue a disclaimer of opinion in the event of a going concern
problem.
c. The auditor is required to issue a disclaimer of opinion for a material uncertainty and for
a going concern problem.
d. The auditor has the option, but is not required, to issue a disclaimer of opinion for a
material uncertainty or for a going concern problem.

58. The most common case in which conditions beyond the client’s and auditor’s control cause a
scope restriction is an engagement:
a
a. agreed upon after the client’s balance sheet date.
b. where the client won’t allow the auditor to confirm receivables for fear of offending its customers
c. where the auditor doesn’t have enough staff to satisfactorily audit all of the client’s
foreign subsidiaries.
d. where the client is going through Chapter 11 bankruptcy.

59. When the auditor cannot perform procedures and the amounts are so material that a disclaimer
of opinion rather than a qualified opinion is required, the:
d
a. opinion paragraph will state “does not present fairly.”
b. opinion paragraph will state “presents fairly.”
c. scope paragraph will be unchanged from the standard unqualified opinion.
d. scope paragraph will be deleted.

60. When misstatements are so material that an adverse opinion is issued, a scope paragraph would
be:
b
a. qualified.
b. unchanged.
c. deleted.
d. expanded to identify the additional procedures which the auditor performed.

61. When the client fails to make adequate disclosure in the body of the statements or in the related
footnotes, it is the responsibility of the auditor to:
d
a. inform the reader that disclosure is not adequate, and to issue an adverse opinion.
b. inform the reader that disclosure is not adequate, and to issue a qualified opinion.
c. present the information in the audit report and issue an unqualified or qualified opinion.
d. present the information in the audit report and to issue a qualified or an adverse opinion.

62. The “unqualified report with explanatory paragraph” and the “unqualified report with modified
wording”:
c
a. arise as a result of an incomplete audit.
b. arise when the financial statements are not “presented fairly.”
c. meet the criteria of a complete audit with satisfactory results.
d. meet the criteria of a complete audit but with unsatisfactory results.

63. Which of the following will not cause the auditor to issue a standard unqualified report with an
explanatory paragraph or modified wording?
c
a. Emphasis of a matter.
b. Reports involving other auditors.
c. Auditor disagrees with client’s departure from GAAP.
d. Lack of consistent application of GAAP.

64. Which of the following is not one of the principal CPA firm’s alternatives when issuing a report
if a different CPA firm performed part of the audit?
a
a. Issue a joint report signed by both CPA firms.
b. Make no reference to the other CPA firm in the audit report, and issue the standard
unqualified opinion.
c. Make reference to the other auditor in the report by using modified wording (a shared
opinion or report)
d. A qualified opinion or disclaimer, depending on materiality, is required if the principal
auditor is not willing to assume any responsibility for the work of the other auditor.
65. Which of the following statements is not true?
c
a. A one-paragraph report is generally used when the auditor is not independent.
b. A three-paragraph report ordinarily indicates there are no exceptions in the audit.
c. More than three paragraphs in the report indicates there must be some type of qualification in the
audit.
d. An unqualified opinion with an explanation or modified wording would require more than three
paragraphs