Auditing Theory

1.

Which organizations operate to enforce ethical conduct among certified public accountants?

A.

The SEC and state boards of accountancy.
B.

The AICPA, state societies of CPAs, and state boards of accountancy.
C.

The AICPA, state societies of CPAs, and the SEC.
D.

The National Association of State Boards of Accountancy.

Correct Answer
B. The AICPA, state societies of CPAs, and state boards of accountancy.

Explanation
The correct answer is the AICPA, state societies of CPAs, and state boards of accountancy. These organizations are responsible for enforcing ethical conduct among certified public accountants. The AICPA (American Institute of Certified Public Accountants) sets ethical standards for the profession and has a code of professional conduct that CPAs must adhere to. State societies of CPAs also play a role in promoting ethical behavior among their members. State boards of accountancy regulate the licensing and disciplinary actions for CPAs in their respective states, ensuring that ethical standards are upheld. The SEC (Securities and Exchange Commission) primarily focuses on regulating the financial markets and public companies, rather than specifically enforcing ethical conduct among CPAs.

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2.

Which of the following is prohibited by the AICPA Code of Professional Conduct?

A.

A firm that designates itself “Members of the AICPA” when one partner has been expelled from the AICPA.
B.

Practice of public accounting in the form of a professional corporation.
C.

Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners.
D.

Holding as an investment 10 of 1,000 outstanding shares in a commercial corporation that performs bookkeeping services.

Correct Answer
A. A firm that designates itself “Members of the AICPA” when one partner has been expelled from the AICPA.

Explanation
The AICPA Code of Professional Conduct prohibits a firm from designating itself as "Members of the AICPA" when one of its partners has been expelled from the AICPA. This is because the use of such a designation implies that all partners in the firm are members of the AICPA, which is not the case when one partner has been expelled. This violates the principle of integrity and professional behavior, as it misrepresents the firm's membership status and undermines the credibility of the AICPA.

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3.

In a governmental financial audit, the auditor is required to test an entity's compliance with applicable laws and regulations and to prepare a written report that provides all of the following except

A.

Positive assurance on items tested.
B.

. Negative assurance on items not tested.
C.

A description of material instances of noncompliance for items tested.
D.

. A description of the entity's performance on major financial assistance programs.

Correct Answer
D. . A description of the entity's performance on major financial assistance programs.

Explanation
The auditor is required to test an entity's compliance with applicable laws and regulations and prepare a written report that provides positive assurance on items tested, negative assurance on items not tested, and a description of material instances of noncompliance for items tested. However, the report does not include a description of the entity's performance on major financial assistance programs.

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4.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the

A.

Efficiency of the audit.
B.

Effectiveness of the audit.
C.

Selection of the sample.
D.

Audit quality controls.

Correct Answer
A. Efficiency of the audit.

Explanation
The risk of incorrect rejection and the risk of assessing control risk too high relate to the efficiency of the audit. This means that if the efficiency of the audit is low, there is a higher likelihood of incorrectly rejecting the sample or assessing control risk too high. This could be due to factors such as inadequate planning, insufficient resources, or ineffective sampling techniques. Therefore, it is important for auditors to ensure that their audit procedures are efficient in order to minimize these risks.

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5.

In a variables sampling plan, an auditor must generally consider each of the following except

A.

Variation within the population.
B.

Acceptable risk of incorrect acceptance.
C.

Tolerable error.
D.

Population size.

Correct Answer
D. Population size.

Explanation
In a variables sampling plan, an auditor must generally consider variation within the population, acceptable risk of incorrect acceptance, and tolerable error. However, population size is not a factor that needs to be considered in this type of sampling plan. The focus is on the variability of the population, the risk of accepting incorrect results, and the acceptable level of error, rather than the size of the population being sampled.

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6.

When an auditor selects a sample of items from the vouchers payable register for the last month of the period audited and traces the items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that

A.

. Recorded obligations were paid.
B.

Incurred obligations were recorded in the correct period.
C.

. Recorded obligations were valid.
D.

Cash disbursements were recorded as incurred obligations.

Correct Answer
C. . Recorded obligations were valid.

Explanation
The auditor is gathering evidence primarily in support of the assertion that recorded obligations were valid. By tracing the items from the vouchers payable register to underlying documents, the auditor can verify that the recorded obligations actually existed and were legitimate. This helps to ensure that the financial statements accurately reflect the company's obligations and liabilities.

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7.

To improve control over merchandise purchases, a company's receiving department should

A.

Accept merchandise only if an approved purchase order is on hand.
B.

. Accept and count all merchandise received from known vendors.
C.

Rely on shipping documents to prepare receiving reports.
D.

Be responsible for handling merchandise but not for preparing receiving reports.

Correct Answer
A. Accept merchandise only if an approved purchase order is on hand.

Explanation
The correct answer is to accept merchandise only if an approved purchase order is on hand. This ensures that the receiving department has proper documentation and authorization for the merchandise being received. It helps prevent unauthorized purchases and ensures that the company has control over its inventory and expenses. Accepting and counting all merchandise received from known vendors may not be sufficient as it does not guarantee that the purchases were approved. Relying solely on shipping documents to prepare receiving reports may lead to errors or discrepancies. The receiving department should be responsible for both handling merchandise and preparing receiving reports to ensure accuracy and accountability.

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8.

Client strategy templates provide a means for an auditor to

A.

. Acquire, evaluate, and document evidence
B.

Focus on transactions likely to affect audit risk.
C.

Compile the strategies and characteristics of an entity.
D.

Distinguish between engagement risk and audit risk.

Correct Answer
C. Compile the strategies and characteristics of an entity.

Explanation
Client strategy templates provide a means for an auditor to compile the strategies and characteristics of an entity. This means that the templates allow the auditor to gather and organize information about the client's strategies, such as their business goals and objectives, as well as the characteristics of the entity, such as its industry, size, and structure. By having this information compiled in a template, the auditor can have a better understanding of the client's operations and risks, which can help in planning and conducting the audit effectively.

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9.

Which of the following incorrectly matches the authoritative body with its authoritative pronouncements?

A.

Accounting and Review Services Committee: "Statements on Standards for Accounting and Review Services"
B.

Auditing Standards Board: "Statements on Auditing Standards"
C.

Auditing Standards Executive Committee: "Statements on Auditing Procedure"
D.

. Securities and Exchange Commission: "Financial Reporting Releases"

Correct Answer
C. Auditing Standards Executive Committee: "Statements on Auditing Procedure"

Explanation
The given answer is correct because it accurately identifies the mismatch between the authoritative body and its authoritative pronouncements. The Auditing Standards Executive Committee is incorrectly matched with "Statements on Auditing Procedure." The correct pronouncements for this committee are "Statements on Auditing Standards."

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10.

Due professional care requires

A.

A critical review of the work done at every level of supervision.
B.

The examination of all corroborating evidence available.
C.

The exercise of error-free judgment.
D.

A consideration of internal control structure that includes tests of controls.

Correct Answer
A. A critical review of the work done at every level of supervision.

Explanation
Due professional care requires a critical review of the work done at every level of supervision. This means that professionals should carefully assess and evaluate the work performed by their subordinates or team members. By conducting a critical review, professionals can identify any errors, omissions, or inconsistencies in the work and take necessary corrective actions. This ensures that the work meets the required standards and is of high quality. It also helps in maintaining the integrity and credibility of the profession. The other options listed, such as the examination of corroborating evidence, exercising error-free judgment, and considering internal control structure, are important aspects of due professional care but are not specifically mentioned in the question.

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