Pilihan Ganda

Chapter 13

Which of the following can be used by organizations for obtaining financing?

a. Notes.
b. Mortgages.
c. Bonds.
d. All of the above.

Which of the following accounts would not typically be included in the audit of debt
obligations?
a. Interest income.
b. Interest expense.
c. Bonds payable.
d. Notes payable.

Inherent risks related to debt obligations primarily include which of the following?
a. Debt is not properly authorized.
b. Interest expense is not properly accrued.
c. Debt covenants are not properly disclosed.
d. Debt is not appropriately classified as short or long term.
e. All of the above are inherent risks related to debt obligations.

Which of the following is not an inherent risk typically associated with the existence of
dividends?
a. Dividends are recorded before being declared.
b. Dividends are not properly amortized.
c. Dividends have not been approved before being declared.
d. Dividends are recorded in the wrong period.

Which of the following most accurately describes the nature of fraud related to debt
obligations described in the case of Federico Quinto Jr., CPA, presented in the Professional
Judg-ment in Context feature?
a. Interest expense was recorded in the wrong period.
b. Entire loan payments were charged to principal.
c. Debt covenants and potential violations were not appropriately presented and
disclosed.
d. Long-term debt was misclassified as short-term debt.
Which of the following most accurately describes the nature of fraud related to
stockholders’ equity accounts described in the case of Delphi Corporation presented in the
Professional Judgment in Context feature?
a. Stock options were back dated.
b. Stock sales were not authorized.
c. Proceeds from stock sales were misappropriated.
d. Expenses were charged directly to retained earnings, rather than to the appropriate
expense accounts.

Which of the following would an auditor typically not perform as part of gaining an understanding
of the client’s con-trols related to debt obligations?
a. Review the client’s documentation of controls.
b. Recalculate interest expense.
c. Inquire of management about the process for reviewing com-pliance with debt covenants.
d. Review policies related to approval required for new debt.

Which of the following is a control the auditor would expect a client to have implemented related
to stockholders’ equity transactions?
a. A policy requiring approval by the board of directors for all stock transactions.
b. Reconciliation of equity accounts to the general ledger.
c. CFO and CEO authorization of all stock transaction approved by the board of directors.
d. The auditor would typically expect all of the above controls to be in place.

Which of the following statements is true regarding plan-ning analytical procedures for debt
obligations and stockholders’ equity transactions?
a. Because there are typically only a few stockholders’ equity transactions, the auditor is not
required to perform planning analytical procedures for stockholders’ equity accounts.
b. Trend analysis would not typically be performed for debt obligations.
c. The long-term debt-to-equity ratio could be considered by the auditor as part of the
planning analytical procedures.
d. All of the above statements are true.

Which of the following are typical planning analytical procedures related to debt obligations?
a. Estimate interest expense based on average interest rates and average debt outstanding.
b. Calculate the total debt-to-equity ratio and perform a trend analysis with prior periods.
c. Calculate the long-term debt-to-equity ratio and perform a trend analysis with prior periods.
d. Calculate the times interest earned ratio and perform a trend analysis with prior periods.
e. All of the above could be performed as planning analytical procedures related to debt
obligations.

How does an auditor typically respond to identified risks of material misstatement associated with
debt obligations?
a. The auditor will typically plan to perform a controls reliance approach to the audit.
b. The auditor will typically plan an approach that uses only substantive procedures.
c. The auditor does not need to respond to identified fraud risks since the risk of fraud related to
debt obligations is typically minimal.
d. Because of the low level of risk of material misstatement, the auditor would only rely on
planning analytical procedures.

How does an auditor typically respond to identified risks of material misstatement associated with
stockholders’ equity accounts?
a. The auditor will typically plan to perform a controls reliance approach to the audit.
b. The auditor will typically plan an approach that uses only substantive procedures.
c. The auditor does not need to respond to identified fraud risks since the risk of fraud related to
stockholders’ equity accounts is typically minimal.
d. Because of the low level of risk of material misstatement, the auditor would only rely on
preliminary analytical procedures.

Which of the following statements best describes the audi-tor’s typical approach to testing
controls related to debt obligations?
a. Controls would be tested for integrated audit purposes, but not for financial
statement audit purposes.
b. Controls would be tested for financial statement audit pur-poses, but not for integrated
audit purposes.
c. Controls would be tested for both the integrated audit and financial statement audit.
d. Controls would not be tested for either the integrated audit or financial statement audit.

Which of the following statements best describes the audi-tor’s typical approach to testing
controls related to stockholders’ equity accounts?
a. Controls would be tested for integrated audit purposes, but not for financial
statement audit purposes.
b. Controls would be tested for financial statement audit pur-poses, but not for integrated
audit purposes.
c. Controls would be tested for both the integrated audit and financial statement audit.
d. Controls would not be tested for either the integrated audit or financial statement audit.

The audit program for long-term debt should include which of the following procedures?
a. Verification of the existence of the bondholders.
b. Review of debt loan agreements.
c. Inspection of the accounts payable master file.
d. Review of supporting documentation for credit entries to the bond interest income account.

When a client does not maintain its own stock records, the auditor should obtain written
confirmation from the stock transfer agent concerning which of the following?
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value. d. The number of shares subject to
agreements to repurchase.
d. The number of shares subject to agreements to repurchase.

Chapter 14

The auditor discovers various errors in the client’s financial statements during the audit. At
the end of the audit, these misstatements are analyzed to determine if they need to be
recorded and corrected. In which situation could management and the auditor decide not to
correct the misstatement?
a. If, by correcting the misstatement, net income would increase rather than decrease.
b. If, by correcting the misstatement, net income would decrease rather than increase.
c. If the misstatement is material.
d. If the misstatement is immaterial.
The PCAOB’s AS 14 provides insight that auditors must consider as they decide whether
management’s refusal to correct a detected misstatement is indicative of intentional bias.
Which of the following is a form of management bias in this setting?
a. Refusal on the part of management to allow the auditor to communicate with the audit
committee about the misstatement.
b. The identification by management of additional adjusting entries that offset
misstatements accumulated by the auditor.
c. Refusal on the part of management to allow the auditor to collect additional evidence to
evaluate the materiality of the misstatement.
d. The identification by management of procedures that the auditor omitted during the audit,
which yield information about the misstatement.

In obtaining evidence about loss contingencies, which of the following are sources of
evidence that the auditor should obtain from management?
a. A description and evaluation of contingencies that existed at the balance sheet date.
b. Assurance that the accounting and disclosure requirements concerning contingent
liabilities have been met.
c. Documentation of communication with internal and external legal counsel of the client.
d. All of the above.

In completing the audit, the auditor must obtain a letter of audit inquiry. Which of the
following is an accurate description of a letter of audit inquiry?
a. A letter that is the primary source of corroborative evidence concerning litigation,
claims, and assessments, which is received from the client’s legal counsel.
b. A letter that is the primary source of corroborative evidence concerning cash valuation,
which is received from the client’s bank.
c. A letter that is the primary source of corroborative evidence concerning accounts
receivable valuation, which is received from the client’s customer.
d. A letter that is the primary source of corroborative evidence concerning inventory
valuation, which is received from the client’s supplier.

In completing the audit, the auditor should review man-agement’s significant accounting
estimates. In this setting, the auditor is responsible for providing reasonable assurance about
which of the following?
a. The estimates are reasonable.
b. The estimates are presented in conformity with GAAP.
c. The disclosure about the estimates is adequate.
d. All of the above.

In evaluating the reasonableness of significant accounting estimates, the auditor should

consider which of the following?
a. The significance of the estimate.
b. The sensitivity of the estimate to variations.
c. The sensitivity of the estimate to misstatement and bias.
d. All of the above.
In completing the audit, the auditor should review the adequacy of the disclosures in the
financial statements. When assessing the disclosures, the auditor should have reasonable
assurance that which of the following are characteristic of the disclosures?
a. The disclosed events and transactions have occurred and per-tain to the entity.
b. All the disclosures that should have been included are included.
c. The disclosures are understandable to users.
d. All of the above.

The auditor’s report does not provide assurance about which of the following elements of the
client’s financial reporting?
a. The 10-K.
b. The MD&A.
c. The financial statements.
d. The disclosures in the footnotes to the financial statements.

The auditor has responsibility regarding clients’ noncom-pliance with laws and regulations.
Obviously, management may try to hide acts involving noncompliance, which limits the
auditor’s ability to detect such acts. Which of the following are inherent limitations that affect
the auditor’s ability to detect acts involving noncompliance?
a. Laws and regulations often relate to operational issues within the entity that do not
necessarily relate to the financial state-ments, so the information systems relating to financial
reporting may not capture noncompliance.
b. Management may act to conceal noncompliance, or may override controls, or may
intentionally misrepresent facts to the auditor.
c. The legal implications of noncompliance are ultimately a matter for legal authorities to
resolve and are not a matter about which the auditor can resolve.
d. All of the above.

Which of the following is an important provision of the Foreign Corrupt Practices Act?
a. Auditors of clients operating in foreign countries must hire a joint auditor in the
foreign country to provide assur-ance that laws and regulations have been followed by
the client.
b. Auditors of clients operating in foreign countries must provide reasonable assurance that
any inventory observations that occur in the foreign country are observed by at least some
audit personnel from the U.S.; this requirement is in place because fraud often occurs in
inventory accounts.
c. Companies that have securities listed on U.S. markets must make and keep financial
records that accurately and fairly reflect the transactions of the company and must design and
maintain an adequate system of internal accounting controls.
d. Companies that have securities listed on U.S. markets must adhere to the internal control
requirements of both the U.S. and the applicable foreign country.

In evaluating whether the client is a going concern, the auditor should ask which of the
following questions?
a. Are there indicators of going-concern problems?
b. Is it likely that management can mitigate any identified going-concern problems?
c. Are disclosures about the going-concern problems adequate?
d. All of the above.
The Altman Z-Score is a model used to help assess the likelihood that a company will go
bankrupt. The model contains which of the following ratios?
a. Working capital to total assets.
b. Working capital to total sales.
c. Sales to total debt.
d. Sales to total accounts receivable.

Which of the following statements concerning review ana-lytical procedures is false?

a. Review analytical procedures help auditors assess the overall presentation of the financial
statements.
b. The auditor’s expectations in review analytical procedures should be more precise
than those for substantive analytics.
c. Auditing standards require the use of review analytical proce-dures to assist in identifying
ending account relationships that are unusual.
d. Ratio analysis, common-size analysis, and analysis of the dol-lar and percentage changes
in each income statement item over the previous year are useful for performing review ana-
lytical procedures.
The analytical procedures of the financial statements of Koss Corporation that are depicted in
Exhibit 14.5 reveal which of the following indicators of the fraud?
a. Cash balances had declined to their lowest level since FYE 2004.
b. Cost of goods sold as a percentage of sales had risen sharply over the period, with a
particularly significant increase from FYE 2008 to 2009.
c. Net income as a percentage of sales had decreased sharply over the period, with a
particularly significant decrease from FYE 2008 to 2009.
d. All of the above.

In completing the audit, the auditor must obtain a man-agement representation letter. Which
of the following statements about the management representation letter is false?
a. The management representation letter is intended to remind management about its
responsibility for the financial statements.
b. The management representation letter is prepared on the cli-ent’s letterhead, is addressed
to the auditor, and should be signed by the CEO and the CFO.
c. Management’s refusal to sign the management representation letter is considered
such a violation of ethics and profession-alism that auditors of publicly traded clients
must resign from the engagement immediately and require the client to file a Form 8-K
with the SEC.
d. The contents of the management representation letter may be limited to matters that are
considered material to the finan-cial statements and should include representations about
known fraud involving management or employees.

In completing the audit, the auditor must assess manage-ment’s representations, including
certifications required under SOX for public companies. Which of the following statements is
true concerning this certification?
a. Section 302 of SOX requires the signing officers of publicly traded companies
(usually the CEO and CFO) to certify, among other things, that the financial statements
are fairly presented in accordance with GAAP.
b. Section 302 of SOX requires the auditor of publicly traded companies to certify, among
other things, that the financial statements are fairly presented in accordance with GAAP.
c. Section 302 of SOX requires the signing officers of publicly traded companies (usually the
CEO and CFO) to certify, among other things, that no material fraud has taken place within
the entity for a period not to exceed one year prior to the issuance of the financial statements.
d. Section 302 of SOX requires the auditor of publicly traded companies to certify, among
other things, that no material fraud has taken place within the entity for a period not to exceed
one year prior to the issuance of the financial statements.

Which of the following is an example of a Type II subse-quent event? (a,b,c type I)

a. A lawsuit is settled for a different amount than was accrued.
b. A sale of inventory below carrying value provides evidence that the net realizable value
was less than cost at year-end.
c. Information becomes available that provides evidence about the valuation of an estimate or
reserve that had been accrued at year-end.
d. None of the above.

After the report release date, the auditor may become aware of facts that may have affected
the financial statements and auditor’s report, had the facts been known at the time of issu-
ance. With regard to this situation, which of the following state-ments is true?
a. Because such facts become known after the report release date, the auditor cannot
reasonably be held accountable for these issues; no action is required on the part of the
auditor.
b. If the auditor decides that steps should be taken to prevent further reliance on the
financial statements and audit report, the client is advised to make appropriate and
timely disclo-sure of these new facts.
c. If such facts would have been investigated had they been known at the report date, the
auditor should determine whether engagement personnel are competent and qualified to
perform audits; action is required on the part of the auditor to assess whether engagement
personnel should be retained to work on the engagement in the subsequent year.
d. If the auditor decides that steps should be taken to prevent further reliance on the financial
statements and audit report, the auditor should notify the audit committee immediately; no
action beyond this is required on the part of the auditor because of confidentiality concerns.

Which of the following statements is false concerning engagement quality reviews?

a. The purpose of the engagement quality review is to provide reasonable assurance that the
audit and audit documentation are complete and that they support the audit opinion on the
financial statements.
b. The engagement quality review must be documented, and the documentation should
include who performed the review, which documents were reviewed, and the date the
engage-ment quality reviewer provided approval of the issuance of the audit opinion.
c. Engagement quality reviews are required for both publicly traded companies and
private companies in the U.S.
d. One of the procedures that would be performed during the engagement quality review is to
determine if appropriate con-sultations have taken place on difficult or contentious matters.
Which of the following is not a procedure that would be performed during an engagement
quality review?
a. Evaluating whether or not to continue providing audit ser-vices to the client in the
subsequent year, based on informa-tion gained during the current-period audit.
b. Discussing significant matters related to the financial state-ments and internal controls.
c. Evaluating judgments about materiality and the disposition of corrected and uncorrected
identified misstatements.
d. Reviewing the engagement team’s evaluation of the firm’s independence in relation to the
engagement.

Which of the following statements is true when consider-ing omitted audit procedures
discovered after the report date?
a. After the audit report has been issued, the auditor may dis-cover that an important audit
procedure was not performed.
b. Such an omission may be discovered when audit documenta-tion is reviewed as part of an
external or internal review program.
c. The auditor should decide whether the previously issued audit report can still be supported
in light of the omitted procedures.
d. All of the above.

If it is discovered after the report date that the auditor failed to confirm receivables, which of
the following statements is true?
a. The auditor should try to examine subsequent collections of accounts receivable to
help determine whether the accounts receivables existed and whether they were
properly valued at the balance sheet date.
b. The auditor must resign immediately.
c. The auditor must notify the SEC immediately.
d. The auditor must notify users of the financial statements immediately.

Which of the following is not a typical communication between the auditor and the audit
committee at the end of an audit engagement?
a. Discussion of the auditor’s responsibility under GAAS.
b. Discussion of the client continuance decision.
c. Discussion about auditor independence.
d. Discussion about management judgments and accounting estimates.

Which of the following is not a typical communication between the auditor and the audit
committee?
a. Discussion of the cash confirmation process.
b. Discussion of significant audit adjustments.
c. Discussion of significant accounting policies.
d. Discussion about the quality of the company’s accounting principles.
In completing the audit, the auditor communicates with management via the management
letter. Which of the following is false about management letters?
a. The management letter is used to make significant opera-tional or control
recommendations to management.
b. Many audit firms consider management’s inattention to addressing comments in the letter
to be an important risk factor in subsequent-year audits.
c. The management letter is required for publicly traded compa-nies in the U.S., but not
privately held companies.
d. All of the above are false.

In the Auditing in Practice feature “An Example Man-agement Letter to a College

Foundation” which of the following items is not present in the management letter?
a. The auditor’s observations and recommendations to management.
b. Management’s response.
c. The issue of whether or how management responded to the management letter related to
the prior-year’s audit.
d. What actions the auditor will take in the subsequent-year audit to help management
address the identified weaknesses.

Chapter 15

Which of the following statements is false regarding audit reporting?

a. The auditor’s opinion should be expressed in a written report.
b. The auditor should provide an opinion in accordance with the auditor’sfindingsorstate
thatan opinioncannotbeexpressed.
c. The opinion should state whether the financial statements are presented fairly, in all
material respects, in accordance with the applicable financial reporting framework.
d. None of the above statements are false.

Which of the following statements is true regarding the auditor’s responsibilities related to
reporting?
a. Sufficient appropriate evidence should be obtained to afford a reasonable basis for the
opinion regarding the financial statements under audit.
b. The audit opinion relates only to the client’s financial state-ments, and does not relate to
the required footnote disclosures.
c. If the auditor has reservations about the fairness of presenta-tion of the financial
statements, the auditor does not need toprovide the reason for this reservation, but needs
to only state that the financial statements are not fairly presented.
d. All of the above statements are true.
In which of the following situations would an auditor ordinarily issue an unqualified audit
opinion without an explana-tory paragraph?
a. The auditor wishes to emphasize that the client had signifi-cant related-party
transactions.
b. The auditor decides to refer to the report of another auditor as a basis, in part, for the
auditor’s opinion.
c. The client issues financial statements that present financial position and results of
operations, but omits the statement of cash flows.
d. The auditor has substantial doubt about the client’s ability to continue as a going concern,
but the circumstances are fully disclosed in the financial statements.

In which of the following situations would an auditor ordinarily issue an unqualified audit
opinion without an explana-tory paragraph? a. The auditor wishes to emphasize that the
client had signifi-cant related-party transactions.
b. The auditor decides to refer to the report of another auditor as a basis, in part, for the
auditor’s opinion.
c. The client issues financial statements that present financial position and results of
operations, but omits the statement of cash flows.
d. The auditor has substantial doubt about the client’s ability to continue as a going concern,
but the circumstances are fully disclosed in the financial statements.

Which of the following scenarios describes a situation when an auditor cannot typically
issue a standard unqualified audit opinion?
a. The client has prepared its financial statements using IFRS as the financial reporting
framework.
b. The auditor has complied with the auditing standards of both the AICPA and the IAASB.
c. The auditor is not independent.
d. The auditor believes that the client will remain a going concern for a reasonable period
of time.

In which of the following situations would an auditor typi-cally issue an unqualified opinion,
but include explanatory language?
a. The client has changed an accounting principle, has reason-able justification for the
change, and has followed GAAP in accounting for and disclosing the change.
b. The auditor has substantial doubt about the client being a going concern.
c. The client has had significant transactions with related enti-ties that the auditor wants to
emphasize.
d. An auditor would typically issue an unqualified opinion, but include explanatory language,
in all of the above situations.

Eagle Company’s financial statements contain a departure from GAAP because, due to
unusual circumstances, the state-ments would otherwise be misleading. Which of the
following audit opinions should the auditor provide?
a. Unqualified, do not mention the departure in the auditor’s report.
b. Unqualified, and describe the departure in a separate para-graph of the audit report.
c. Qualified, and describe the departure in a separate paragraph of the audit report.
d. Qualified or adverse, depending on materiality, and describe the departure in a
separate paragraph of the audit report.

Tech Company has an uncertainty because of pending liti-gation. The auditor’s decision to
issue a qualified opinion rather than an unqualified opinion most likely would be
determined by which of the following?
a. Inconsistent application of GAAP.
b. Inability to estimate the amount of loss.
c. The client’s lack of experience with such litigation.
d. Adequacy of the disclosures.

Which of the following phrases should not be used when the auditor is qualifying the audit
opinion?
a. With the exception of
b. Except for
c. Subject to
d. Any of the above phrases would be appropriate.

In which of the following circumstances would an auditor be most likely to express an

adverse opinion on a company’s financial statements?
a. Information comes to the auditor’s attention that raises sub-stantial doubt about the
company’s ability to continue as a going concern.
b. The auditor is denied access to minutes of board of directors’ meetings by the client.
c. Tests of controls indicate that the organization’s ICFR is ineffective.
d. The financial statements are not in conformity with FASB requirements regarding the
capitalization of leases.

When an auditor issues an adverse opinion, which of the following should be included in the
opinion paragraph?
a. The reasons that the financial statements are misleading.
b. A reference to a separate paragraph that describes the reason for the adverse opinion.
c. A statement that indicates that the financial statements are
fairly stated except for a reason that is described in the sepa-rate paragraph.
d. The financial statement effects of the departure from GAAP.

When disclaiming an opinion because of a client-imposed scope limitation, which of the

following is false regarding changes that would be made to the audit report?
a. The auditor would indicate in a separate paragraph why the audit did not comply with
professional auditing standards.
b. The auditor would omit the scope paragraph.
c. The auditor would modify the introductory paragraph.
d. The auditor would omit the opinion paragraph.

In which of the following situations would a disclaimer of opinion not be appropriate?

a. The auditor is not independent.
b. The client imposed a substantial restriction on the scope of the audit.
c. The financial statements have a departure from GAAP that is not justified.
d. A disclaimer of opinion would be appropriate in all of the above situations.

In which of the following situations would an auditor usually choose between issuing a
qualified opinion and issuing a disclaimer of opinion?
a. Departure from GAAP.
b. Inadequate disclosure of accounting policies.
c. Inability to obtain sufficient appropriate evidence for a reason other than a
management-imposed scope restriction.
d. Unreasonable justification for a change in accounting principles.

Tread Corp. accounts for the effect of a material account-ing change prospectively, when
the inclusion of the cumulative effect of the change is required in the current year. Which of
the following opinions would the auditor choose?
a. Qualified opinion or a disclaimer of opinion.
b. Disclaimer of opinion or an unqualified opinion with an explanatory paragraph.
c. Unqualified opinion with an explanatory paragraph or an adverse opinion.
d. Qualified opinion or an adverse opinion.

The auditor of a large U.S. public company has deter-mined that a material weakness exists
in the client’s ICFR. Which of the following statements is true?
a. Weakness requires an adverse opinion on the financial statements.
b. The auditor should express an adverse opinion on internal controls only if a material
misstatement was found in the financial statements.
c. The auditor should express an adverse opinion on ICFR, even though no material
misstatements were found in the financial statements.
d. The auditor is not required to express an opinion on internal controls.

In which of the following situations would the auditor modify the audit report on ICFR?
a. The auditor identifies multiple unrelated significant deficien-cies in ICFR.
b. The auditor concludes that management’s report on ICFR is not complete or is
improperly presented.
c. The auditor relies on the work of other auditors, but decides not to include a reference to
the other auditors.
d. The auditor would modify the audit report on ICFR in all of the above situations.

Chapter 16

Complex judgments are found in what types of accounts?

a. Asset accounts.
b. Liability accounts.
c. Income statement accounts.
d. All of the above.

Which of the following statements is true about accounts requiring management estimates?
a. Because these accounts are estimates, the auditor likely just accepts whatever
management determines to be appropriate.
b. Only a limited number of accounts on the balance sheet require management estimates.
c. Net accounts receivable is an account that does not require a management estimate.
d. None of the above is true.

Which of the following actions will the auditor take when evaluating identified
misstatements?
a. The auditor will consider misstatements in both the current and prior periods.
b. The auditor will use either the rollover method or the iron curtain method, but not both.
c. The auditor will evaluate each misstatement individually, rather than consider the
aggregate effect of all misstatements.
d. The auditor will do all of the above.

Which of the following statements is true regarding the auditor’s evaluation of

misstatements?
a. The auditor should consider the client’s selective correction of misstatements to be a
form of management bias.
b. The auditor does not need to consider whether the statement of cash flows is materially
correct.
c. If the client resists correcting a misstatement the auditor should consider that
misstatement to be material.
d. Both a. and c. are true.

Which of the following would the auditor not try to deter-mine about a client’s warranty
estimate?
a. Whether the estimate is reasonable in the circumstance.
b. Whether the estimate was based on verifiable, objective assumptions.
c. How management developed the estimate.
d. Whether the factors and assumptions used by management deviate from historical
patterns.

Which of the following procedures would an auditor most likely perform as part of auditing
management estimates of long-term liabilities?
a. Inquire of management about related party transactions.
b. Confirm inventories held at outside warehouses.
c. Review past experience of the client related to warranty claims.
d. Send confirmations to client vendors.

Which of the following valuation issues are associated with merger and acquisition activity?
a. Valuing assets of the acquired organization at their FMV at the time of acquisition.
b. Measuring restructuring charges associated with the acquisition.
c. Valuing liabilities of the acquired organization at their FMV at the time of acquisition.
d. All of the above.

Which of the following situations might require an auditor to rely on a specialist to obtain
sufficient appropriate evidence related to acquisitions?
a. The acquired organization has assets that may have been impaired.
b. The acquired organization has environmental liabilities related to site clean-up costs.
c. The acquired organization has liabilities related to employee pension plans.
d. All of the above.

A Level 3 fair value estimate is an estimate based on which of the following?

a. The value of similar assets traded on a foreign exchange.
b. The value of the same asset, but traded on a foreign exchange.
c. The value is not readily observable in any marketplace and therefore requires an
estimate using a model.
d. The value is not readily observable, but there are market trades of similar assets that can
serve as a surrogate for value of the asset in question.

Which of the following pieces of evidence would most likely not be considered by the
auditor in evaluating the potential impairment of goodwill?
a. The acquisition made by a competitor of an organization that is not a direct competitor
of the client.
b. The current market capitalization of the organization in com-parison with its net book
value.
c. The cash flows and operating data of the reporting unit since acquisition compared with
estimates made at the time of acquisition.
d. The growth or decline in market share of the reporting unit since acquisition.

An audit client has invested heavily in new equity and debt securities. Which of the
following would not constitute an appro-priate role for the organization’s board of
directors?
a. Receive and review periodic reports by the internal audit function on compliance with the
organization’s investment policies and procedures.
b. Approve all new investments.
c. Review and approve written policies and guidelines for investments in marketable
securities.
d. Periodically review the risks inherent in the portfolio of mar-ketable securities to
determine whether the risk is within
parameters deemed acceptable by the board.

Which of the following factors is a risk factor associated with derivative securities that
should be considered by the auditor?
a. Management’s objective for entering into such transactions may relate to misstating the
financial statements.
b. The complexity of the security.
c. The organization’s experience with such securities.
d. All of the above are risk factors.
Chapter 17

Which of the following are examples of the subject matter of an attestation engagement?
a. Prospective financial information.
b. Physical characteristics, such as the square footage of facili-ties, or processes within
facilities.
c. Historical events, such as the price of a market basket of goods on a certain date.
d. The accuracy of compliance assertions about grants, con-tracts, and regulations.
e. All of the above.

Which of the following is not a component of an attes-tation engagement?

a. Information or a process (the subject matter) on which the assurance service is provided.
b. Criteria for evaluation, such as compliance with regulations.
c. Federal regulatory guidelines.
d. A written attestation report.
e. Sufficient appropriate evidence.

In which of the following ways does a review differ from a financial statement audit?
a. A review does not involve obtaining an understanding of the organization’s ICFR.
b. A review does not involve assessing fraud risk. c. A review does not involve testing
accounting records by obtaining sufficient appropriate evidence through inspec-tion,
observation, confirmation, or examining source documents.
d. A review does not involve a practitioner obtaining assurance that he or she will become
aware of all significant matters that would be investigated in an audit.
e. All of the above.

Which of the following statements regarding compilations is false?

a. A compilation engagement enables the practitioner to state whether, on the basis of
procedures which do not provide all the evidence that would be required in an audit,
anything has come to the practitioner’s attention that causes the practi-tioner to believe
that the financial statements are not pre-pared, in all material respects, in accordance
with the applicable financial framework.
b. The objective of a compilation engagement is to assist man-agement in presenting
financial information in the form of financial statements without undertaking to obtain or
provide any assurance that there are no material modifications that should be made to the
financial statements in order for the statements to be in conformity with the applicable
financial reporting framework.
c. In a compilation, the practitioner is not required to make inquiries or perform procedures
to verify, corroborate, or review information provided by the client.
d. In a compilation, the practitioner should read the financial state-ments, including
footnotes, to make sure that they are appropri-ate in form and free from obvious material
misstatement.

Which of the following procedures is an appropriate review procedure for interim financial
information?
a. Making inquiries.
b. Performing analytical procedures.
c. Reading the minutes of board of directors’ meetings. d. Reading the interim information
to consider whether it appears to conform to GAAP.
e. All of the above.

Which of the following statements about reporting on interim financial statements is false?
a. The disclosure and reporting requirements for interim finan-cial statements differ from
those for annual financial statements.
b. Information disclosed in the latest annual financial statements must be repeated in the
interim financial statements, except for continuing contingencies and other uncertainties.
c. The negative assurance provided for interim financial state-ments should be modified
when there is a material departure from GAAP or inadequate disclosure.
d. Interim financial statements should include disclosures about events that occurred since
the latest year end, such as changes in accounting principles or estimates and significant
changes in financial position.

Which of the following situations are special considera-tions for reporting?

a. Audits of financial statements prepared in accordance with special-purpose frameworks.
b. Audits of single financial statements and specific elements, accounts, or items of a
financial statement.
c. Reporting on compliance with aspects of contractual agree-ments or regulatory
requirements.
d. All of the above.

Refer to Exhibit 17.8. In which of the following situations would the practitioner include an
emphasis-of-matter paragraph alerting readers about the preparation in accordance with a
special-purpose framework?
a. When a cash basis is used.
b. When a tax basis is used.
c. When a regulatory basis (for use by management and the regulator only) is used.
d. When a contractual basis is used.
e. All of the above.

Refer to Exhibit 17.12. Assume that the practitioner is engaged to perform an agreed-upon
procedures engagement. The procedure agreed upon was for the practitioner to: (a)
calculate the number of blocks or streets paved during the year ended September 30, 2015,
shown on contractors’ certificates of project completion; and (b) compare the resultant
number to the number in an identified chart of performance statistics. Which of the
following would be an appropriate way to describe the results of agreed-upon procedures?
a. Nothing came to my attention that would indicate that the number is inconsistent with
the chart of performance statistics.
b. The number of blocks of streets paved approximated the number of blocks included in
the chart of performance statistics.
c. The number of blocks of streets paved in the chart of performance statistics was Y
blocks more than the number calculated from the contractors’ certificates of project
completion.
d. All of the above would be acceptable.

A compilation of prospective financial statements includes which of the following steps?

a. Assembling prospective financial statements based on the responsible party’s
assumptions.
b. Performing compilation procedures, including reading the prospective financial
statements, along with their assumptions and accounting policies, and considering whether
they appear to be presented in conformity with AICPA presentation guidelines and that they
are not obviously inappropriate.
c. Issuing a compilation report.
d. All of the above.

Which of the following statements about forensic account-ing is false?

a. Forensic accountants will examine, only on a sample basis, material transactions
believed to relate to the fraud.
b. Forensic accounting builds support for legal action against the person committing the
fraud by identifying the fraud, cal-culating the damages caused by the fraud, and building
both factual and testimonial evidence of the fraud.
c. The primary purpose of forensic engagements is to detect, investigate, and document a
situation in which fraud almost certainly exists.
d. Forensic accountants are often asked to provide litigation support, in which they are
called on to give expert testimony about financial data and accounting activities.

Forensic accounting differs from auditing on which of the following dimensions?

a. Focus.
b. Approach.
c. Scope.
d. End product.
e. All of the above.

Which of the following organizations was created to establish sustainability accounting

standards for use in 10-K fil-ings with the SEC?
a. Prince’s Accounting for Sustainability Project.
b. GRI.
c. AccountAbility.
d. SASB.

Which of the following statements relating to sustainability reporting is false?

a. Sustainability reports are very similar and contain virtually identical information across
organizations because of the high level of regulation governing such disclosures.
b. Sustainability reporting involves voluntary corporate disclo-sures about sustainability
initiatives, plans, and associated outcomes.
c. Investor interest, socially responsible investment funds, and the Dow Jones Sustainability
Index have each created demand for sustainability reporting.
d. The terms nonfinancial reporting, corporate social responsi-bility reporting, triple
bottom-line reporting, and sustainabil-ity reporting are often used to describe essentially
the same activities