Professional Ethics in Auditing Exam
Answer Key
Course Introduction
Professional Ethics in Auditing explores the fundamental ethical principles and codes of conduct that guide auditors in their professional responsibilities. The course examines the importance of integrity, objectivity, confidentiality, and professional competence and their application in real-world auditing scenarios. Students will analyze ethical dilemmas commonly faced by auditors, review relevant regulatory frameworks, and evaluate the consequences of unethical behavior for both individuals and organizations. By integrating theoretical foundations with practical case studies, this course aims to equip students with the ethical reasoning skills necessary to uphold public trust and maintain the credibility of the auditing profession.
Recommended Textbook Principles of Auditing and Other Assurance Services 19th Edition by Ray Whittington
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Chapter 1: The Role of the Public Accountant in the American Economy
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Q1) The American Institute of Certified Public Accountants has the primary authority to establish accounting standards.
A)True
B)False
Answer: False
Q2) Which of the following types of services is generally provided only by CPA firms?
A)Tax audits.
B)Financial statement audits.
C)Compliance audits.
D)Operational audits.
Answer: B
Q3) Many small companies elect to have their financial statements reviewed by a CPA firm,rather than incur the cost of an audit.
A)True
B)False
Answer: True
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Chapter 2: Professional Standards
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Q1) A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of:
A)Acceptance and continuance of client relationships and specific engagements.
B)Engagement performance.
C)Human resources.
D)Relevant ethical requirements.
Answer: C
Q2) An attestation engagement:
A)Has as its primary source of standards the assurance standards.
B)Includes a report on subject matter, or on an assertion about subject matter.
C)Includes search and verification procedures for all major accounts.
D)Is ordinarily an examination, review or compilation engagement. Answer: B
Q3) Which of the following is not an element of quality control?
A)Documentation.
B)Engagement performance.
C)Monitoring.
D)Relevant ethical requirements. Answer: A
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Chapter 3: Professional Ethics
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Q1) As compared to the AICPA Code of Professional Conduct,IFAC's International Code of Ethics for Professional Accountants:
A)Applies to more types of services.
B)Has more specific restrictions.
C)Has less specific restrictions.
D)Is less conceptual.
Answer: C
Q2) Which of the following is not a broad category of threat to auditor independence?
A)Familiarity.
B)Safeguards implemented by the client.
C)Financial self interest.
D)Undue Influence.
Answer: B
Q3) Independence is required of a CPA performing:
A)Audits, but not any other professional services.
B)All attestation services, but not other professional services.
C)All attestation and tax services, but not other professional services.
D)All professional services.
Answer: B
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Chapter 4: Legal Liability of CPAS
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Q1) The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:
A)Unknowingly violates the 1934 Securities Exchange Act.
B)Knowingly or unknowingly violates the 1934 Securities Exchange Act.
C)Unknowingly violates the 1933 Securities Act.
D)Knowingly or unknowingly violates the 1933 Securities Act.
Q2) The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:
A)Less than the Securities Act of 1933.
B)The same as the Securities Act of 1933.
C)Greater than the Securities Act of 1933.
D)Indeterminate in relation to the Securities Act of 1933.
Q3) In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?
A)Rosenblum v.Adler.
B)Hochfelder v.Ernst.
C)1136 Tenants Corporation v.Rothenberg.
D)Continental Vending.
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Chapter 5: Audit Evidence and Documentation
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Q1) Which of the following is not a function of working papers?
A)Provide support for the auditors' report.
B)Provide support for the accounting records.
C)Aid partners in planning and conducting future audits.
D)Document staff compliance with generally accepted auditing standards.
Q2) A schedule set up to combine similar general ledger accounts,the total of which appears on the working trial balance as a single amount,is referred to as a:
A)Supporting schedule.
B)Lead schedule.
C)Corroborating schedule.
D)Reconciling schedule.
Q3) Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by:
A)Performing substantive procedures.
B)Performing tests of controls.
C)Assessing control risk.
D)Obtaining a client representation letter.
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Chapter 6: Audit Planning, understanding the Client, assessing
Risks, and Responding
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Q1) A successor auditor is required to attempt communication with the predecessor auditor prior to
A)Performing test of controls.
B)Testing beginning balances for the current year.
C)Making a proposal for the audit engagement.
D)Accepting the engagement.
Q2) Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.
A)True
B)False
Q3) To best test existence,an auditor would sample from the:
A)General ledger to source documents.
B)General ledger to the financial statements.
C)Source documents to the general ledger.
D)Source documents to journals.
Q4) The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts.
A)True
B)False
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Chapter 7: Internal Control
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Sample Questions
Q1) A significant deficiency:
A)Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting.
B)Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality.
C)Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting.
D)Is less severe than a material weakness.
Q2) The independent auditors might consider the procedures performed by the internal auditors because:
A)They are employees whose work must be reviewed during substantive testing.
B)They are employees whose work might affect the independent auditors' work.
C)Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations.
D)Their degree of independence may be inferred by the nature of their work.
Q3) Well-designed internal control will prevent all fraud by top management.
A)True
B)False
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Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Q1) Which of the following procedures would an entity most likely include in its disaster recovery plan?
A)Convert all data from external formats to an internal company format.
B)Maintain a program to prevent illegal activity.
C)Develop an auxiliary power supply to provide uninterrupted electricity.
D)Store duplicate copies of files in a location away from the computer center.
Q2) When conducting field work for a physical inventory,an auditor cannot perform which of the following steps using a generalized audit software package?
A)Observing inventory.
B)Selecting sample items of inventory.
C)Analyzing data resulting from inventory.
D)Recalculating balances in inventory reports.
Q3) For good internal control,programmers should not be given access to complete program documentation for the programs they work on.
A)True
B)False
Q4) The operating system is an example of system software.
A)True
B)False
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Chapter 9: Audit Sampling
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Q1) Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000.After performing the sampling plan,the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $650,000.Based on these results,the auditor would:
A)Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that the population does not contain a material misstatement.
B)Because the total audited value ± tolerable misstatement includes the book value, conclude that the population does not contain a material misstatement.
C)Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that there is too great a risk that the account balance is materially misstated.
D)Because the total audited value ± adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.
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Chapter 10: Cash and Financial Investments
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Q1) Internal control over marketable securities is enhanced when:
A)Securities are held by the cashier.
B)Securities are registered in the name of the custodian.
C)Detailed records of securities are maintained by the custodian of the securities.
D)Securities are held under joint control of two or more officials.
Q2) A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.
A)True
B)False
Q3) Signed checks should be returned to the cash disbursements clerk for mailing.
A)True
B)False
Q4) Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:
A)Check Clearing for the 21<sup>st</sup> Century Act.
B)Public Company Accounting Oversight Board's Standard No.2.
C)Foreign Corrupt Practices Act.
D)Sarbanes-Oxley Act.
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Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
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Q1) The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests.Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?
A)A substantial number of accounts are in disputes.
B)The combination of inherent risk and control risk is high.
C)Client records include a large number of relatively small balances.
D)The auditors believe that recipients of the requests are unlikely to give them consideration.
Q2) Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except:
A)It understates liabilities.
B)It overstates revenues
C)It overstates net income.
D)It overstates assets.
Q3) The department approving a sales transaction should be the shipping department.
A)True
B)False
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Chapter 12: Inventories and Cost of Goods Sold
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Q1) Which of the following is least likely to be accurate statement concerning characteristics of an audit?
A)An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied.
B)Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed.
C)The direction of tests for overstatement errors is generally directed from the recorded entry to source documents.
D)Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.
Q2) The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.
A)True
B)False
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Chapter 13: Property Plant and Equipment: Depreciation and Depletion
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Q1) When comparing an initial audit with a subsequent year audit for a particular client,the scope of audit procedures for which of the following accounts would be expected to decrease the most?
A)Accounts receivable.
B)Cash.
C)Marketable securities.
D)Property, plant and equipment.
Q2) In testing for unrecorded retirements of equipment,an auditor might.
A)Select items of equipment from the accounting records and then attempt to locate them during the plant tour.
B)Compare depreciation expense with the prior year's depreciation expense.
C)Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
D)Scan the general journal for unusual equipment retirements.
Q3) The auditors' approach to the audit of property,plant and equipment largely results from the fact that relatively few transactions occur.
A)True
B)False
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Chapter 14: Accounts Payable and Other Liabilities
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Q1) The auditor will most likely perform extensive tests for possible understatement of: A)Revenues.
B)Assets.
C)Liabilities.
D)Capital.
Q2) Confirmation of accounts payable is a required generally accepted auditing procedure.
A)True
B)False
Q3) The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis.
A)True
B)False
Q4) Which of the following is the best control procedure to prevent the payment of an invoice twice?
A)Review of supporting documentation by the person signing the check.
B)Requiring dual signatures on checks.
C)Use of a check protector.
D)Reconciliation of vendor statements to accounts payable.
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Chapter 15: Debt and Equity Capital
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Q1) The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to:
A)Evaluate internal control over securities.
B)Determine the validity of prepaid interest expense.
C)Ascertain the reasonableness of imputed interest.
D)Detect unrecorded liabilities.
Q2) The auditors are required to confirm bond holdings directly with the bondholders.
A)True
B)False
Q3) Which of the following is not a primary objective in the audit of interest-bearing debt?
A)Establish the completeness of recorded interest-bearing debt.
B)Establish the legality of outstanding debt.
C)Determine that debt is properly valued.
D)Determine that the presentation and disclosure of interest-bearing debt is appropriate.
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Chapter 16: Auditing Operations and Completing the Audit
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Q1) A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
A)Confirmation of related lawsuits with the claimants.
B)Qualification of the audit report.
C)An assessment that loss of the litigation is probable.
D)An adverse opinion.
Q2) Which of the following is an analytical procedure that should be applied to the income statement?
A)Select sales and expense items and trace amounts to related supporting documents.
B)Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
C)Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.
D)Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
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Chapter 17: Auditors Report
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Q1) Audit reports should be dated the date on which sufficient appropriate audit evidence has been collected.
A)True
B)False
Q2) When an adverse opinion is expressed,the opinion paragraph should include a direct reference to:
A)A note to the financial statements which discusses the basis for the opinion.
B)The Auditor's Responsibility section of the audit report which discusses the basis for the opinion rendered.
C)A separate paragraph (section) which discusses the basis for the opinion rendered. D)The consistency in the application of generally accepted accounting principles.
Q3) A client imposed scope limitation will generally result in a disclaimer of opinion,regardless of whether sufficient appropriate audit evidence is gathered using alternative procedures.
A)True
B)False
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Chapter 18: Integrated Audits of Public Companies
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Q1) Which of the following is a strong indicator that a material weakness in internal control exists?
A)Restatement of previously issued financial statements to reflect a correction.
B)Inadequate controls over non-routine transactions.
C)Inadequate controls over the period-end financial reporting process.
D)Weaknesses in a control activity.
Q2) PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to routine transactions in their consideration of internal control.
A)True
B)False
Q3) Which of the following is most likely to be considered a material weakness in internal control?
A)An ineffective control environment.
B)Restatement of previously issued financial statements due to a change in accounting principles.
C)Inadequate controls over non-systematic transactions.
D)Weaknesses in risk assessment.
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Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) The underwriter of a securities offering may request that an auditor perform specified procedures and supply certain assurances concerning unaudited information contained in a registration statement.The auditor's response to such a request is commonly called a:
A)Report under federal security statutes.
B)Comfort letter.
C)Review of interim financial information.
D)Compilation report for underwriters.
Q2) For a CPA,a client imposed scope limitation during a review of financial statements is most likely to result in:
A)Resignation from the engagement.
B)Issuance of a disclaimer of opinion.
C)Issuance of an adverse opinion.
D)Only an explanatory paragraph added to report, with no change in the assurance provided.
Q3) An audit opinion on cash basis financial statements is an example of an opinion on financial statements that follow a special purpose financial reporting framework.
A)True
B)False
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Chapter 20: Additional Assurance Services: Other Information
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Q1) The WebTrust engagement relates most directly to
A)Financial statements maintained on the Internet.
B)Health care facilities.
C)Risk assurance procedures.
D)Electronic commerce systems.
Q2) A Type 2 service auditor's report addresses:
A)Only management's description and design of its controls.
B)Management's description and design of its controls and control operating effectiveness.
C)Only control operating effectiveness.
D)Control operating effectiveness and primary assertion reliability.
Q3) Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report?
A)The specified party takes responsibility for the sufficiency of procedures.
B)Use of the report is restricted.
C)Limited assurance on the information presented.
D)A summary of procedures performed.
Q4) Independence is required for the performance of all assurance services.
A)True
B)False
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Chapter 21: Internal, Operational, and Compliance Auditing
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Q1) In an audit in accordance with Government Auditing Standards,the auditors are required to provide a report on:
A)Compliance with general requirements.
B)The schedule of financial assistance received.
C)The organization's internal control.
D)Findings and questioned costs.
Q2) Compliance auditing procedures are:
A)Tests of controls.
B)Observation procedures.
C)Substantive procedures.
D)Confirmation procedures.
Q3) The primary purpose of the internal auditors' evaluation of internal control is to:
A)Determine if management has planned and implemented activities needed to attain goals and objectives.
B)Determine the extent of tests of controls needed during field work.
C)Identify areas for fraud investigation.
D)Determine if employees have incompatible duties that have compromised the control environment.
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Chapter 22: Probability-Proportion-To-Size Sampling
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Q1) In a probability-proportional-to-size sample with a sampling interval of $10,000,an auditor discovered that a selected account receivable with a recorded amount of $5000 had an audited amount of $4,000.If this were the only misstatement discovered by the auditor,the projected misstatement of this sample would be:
A)$1,000.
B)$2,000.
C)$5,000.
D)$10,000.
Q2) In a probability-proportional-to-size sample,increasing the tolerable misstatement has what effect on sample size,when all other factors are held constant?
A)Increases.
B)Decreases.
C)No effect.
D)Indeterminate.
Q3) The upper limit on misstatement in a probability-proportional-to-size sample plan consists of the total of the projected misstatement and the tolerable misstatement.
A)True
B)False
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