SECTION: Please select the best answer for the following questions.

1. Which of the following is an underlying condition that in part creates the demand by users for reliable information?

A. Economic transactions are numerous and complex.

B. Decisions are time sensitive.

C. Users are separated from accounting records by distance and time.

D. Financial decisions are important to investors and users.

E. All of the above.

2. When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?

A. Cutoff.

B. Existence.

C. Valuation and allocation.

D. Rights and obligations.

E. Occurrence.

3. According to the American Accounting Association (AAA), the definition of auditing includes the following statement

A. An independent appraisal function established within an organization to examine and evaluate its activities.

B. A process of reducing to a socially acceptable level the information risk to users of financial statements.

C. An expression of opinion on the fairness of financial statements.

D. A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events.

4. Which of the following best describes assurance services?

A. Independent professional services that report on the client's financial statements.

B. Independent professional services that improve the quality of information for decision makers.

C. Independent professional services that report on specific written management assertions.

D. Independent professional services that improve the client's operations.

5. Which of the following is not a PCAOB assertion about inventory related to presentation and disclosure?

A. Inventory is properly classified as a current asset on the balance sheet.

B. Inventory is properly stated at its cost on the balance sheet.

C. Major inventory categories and their valuation bases are adequately disclosed in notes.

D. All of the above are PCAOB presentation and disclosure assertions about inventory.

6. Maralee has been approached by J. Fox Entertainment to perform an audit of her theatre company. Maralee has never audited a theatre company before. Maralee can

A. Decline the engagement because she does not have the specialized industry knowledge.

B. Recommend another auditor and receive a fee for the referral.

C. Accept the engagement if she can obtain the required knowledge before the end of the engagement.

D. Accept the engagement with the understanding that additional hours will be required to learn and understand the nature of the business.

7. Which of the following philosophical principles in ethics emphasizes the following rules rather than on the consequences of the decision?

A. Imperative principle.

B. Utilitarianism principle.

C. Generalization principle.

D. Moral principle.

8. Which of the following statements included in the advertising of a CPA firm is permissible according to Rule 502, Advertising and Other Forms of Solicitation?

A. "Bob Bullet, CEO of A-One Corp, states that we are the best auditors his company has ever used."

B. "We provide the best audit coverage of any firm in the state."

C. "We audit the five largest manufacturing companies in the state."

D. "We have several tax partners who work closely with judges and IRS attorneys on high-profile legal issues."

9. The basic rationale for permitting CPAs to accept commissions is that

A. It does not affect independence in attest functions.

B. Professional liability insurance policies permit commission work.

C. State boards of accounting permit commissions and contingent fees.

D. Other professionals charge commissions in personal financial planning engagements.

10. Most state boards of accountancy do not

A. Issue licenses to practice accounting.

B. Regulate tax practice.

C. Limit the attest function to license holders.

D. Administer an ethics examination.

11. Audit evidence is usually considered sufficient when

A. It is reliable.

B. There is enough quantity to afford a reasonable basis for an opinion on financial statements.

C. It has the qualities of being relevant, objective, and free from unknown bias.

D. It has been obtained through random selection methods.

12. Which of the following is not considered a type of audit evidence?

A. Entity's trial balance.

B. Auditors' calculations.

C. Physical observation.

D. Verbal statements made by client personnel.

13. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to:

A. Certify the correctness of Camden's financial statements.

B. Make a complete examination of Camden's records and verify all of Camden's transactions.

C. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).

D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

14. The primary purpose of the auditors' study of internal control for a nonpublic entity is:

A. To provide constructive suggestions to the client for improving its internal control.

B. To report on internal control as required by Auditing Standard No. 5.

C. To identify and detect fraud and irregularities perpetrated by client personnel.

D. To determine the nature, timing, and extent of substantive procedures.

15. Audit evidence is usually considered sufficient when

A. It is reliable.

B. There is enough quantity to afford a reasonable basis for an opinion on financial statements.

C. It has the qualities of being relevant, objective, and free from unknown bias.

D. It has been obtained through random selection methods.

16. N. Lauren hires D. Humphrey, CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming

A. Breach of contract.

B. Ordinary negligence.

C. Gross negligence.

D. Constructive fraud.

17. Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

A. The total responsibility for loss is divided among all parties responsible for the loss.

B. Defendants who knowingly committed a violation of securities laws remain jointly and severally liable.

C. The full amount of damages may be recovered from any defendants involved in the action.

D. A solvent defendant's liability may be increased by 50 percent if other defendants are insolvent.

18. Which of the following factors would not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?

A. The extent to which the third party relied upon the misstated financial statements and this reliance resulted in their loss.

B. The nature of the activity by the auditors that resulted in their failure to exercise appropriate levels of professional care.

C. The relationship between the auditors and a third party.

D. The jurisdiction in which the action occurred.

19. When a client sues an accountant for failure to perform consulting work properly, the accountants' best defense is probably based on the doctrine of

A. Lack of privity of contract.

B. Contributory negligence on the part of the client.

C. Lack of any measurable dollar amount of damages.

D. No negligence on the part of the consultant.

20. Under the liability provisions of section 11 of the Securities Act of 1933, auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement. Under section 11, auditors usually are not liable to the purchaser

A. If they can show contributory negligence on the part of the purchaser.

B. If they can demonstrate due diligence.

C. Unless the purchaser can prove privity with the auditors.

D. Unless the purchaser can prove scienter on the part of the auditors.