AUDITING THEORY PART 3

21. An audit which determines whether organizational policies are being followed and whether

external mandates are being met is known as

A. a financial audit.

B. a compliance audit.

C. an operational audit.

D. none of the above

22. May a CPA hire for the CPA‟s public accounting firm a non-CPA systems analyst who

specializes in developing computer systems?

A. Yes, provided the CPA is qualified to perform each of the specialist‟s tasks.

B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist‟s

end product.

C. No, because non-CPA professionals are not permitted to be associated with CPA firms

in public practice.

D. No, because developing computer systems is not recognized as a service performed by

public accountants.

23. Which of the following services may a CPA perform in carrying out a consulting service

for a client?

I. Analysis of the client‟s accounting system

II. Review of the client‟s proposed business plan

III. Preparation of information for obtaining financing

A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

24. Which of the following describes how the objective of a review of financial statements

differs from the objective of a compilation engagement?

A. The primary objective of a review engagement is to test the completeness of the

financial statements prepared, but a compilation tests for reasonableness.

B. The primary objective of a review engagement is to provide positive assurance that the

financial statements are fairly presented, but a compilation provides no such assurance.

C. In a review engagement, accountants provide limited assurance, but a compilation

expresses no assurance.

D. In a review engagement, accountants provide reasonable or positive assurance that the

financial statements are fairly presented, but a compilation provides limited assurance.

25. Which of the following factors most likely would cause a CPA to decline a new audit

engagement?

A. The CPA does not understand the entity's operations and industry.

B. Management acknowledges that the entity has had recurring operating losses.

C. The CPA is unable to review the predecessor auditor's working papers.

D. Management is unwilling to permit inquiry of its legal counsel.

26. When a firm or a member of the assurance team holds a direct financial interest or a material

indirect financial interest in the assurance client as a trustee, a self-interest threat may be

created by the possible influence of the trust over the assurance client. Accordingly, such an

interest cannot be held when:

A. The member of the assurance team, an immediate family member of the member of

the assurance team, and the firm are beneficiaries of the trust.

B. The interest held by the trust in the assurance client is not material to the trust.

C. The trust is not able to exercise significant influence over the assurance client.

D. The member of the assurance team or the firm does not have significant influence over
any investment decision involving a financial interest in the assurance client.

27. An inadvertent violation of the Independence rules as it relates to a financial interest in an

assurance client would not impair the independence of the firm, the network firm or a

member of the assurance team when:

A. The firm, and the network firm, has established policies and procedures that require all

professionals to report promptly to the firm any breaches resulting from the purchase,

inheritance or other acquisition of a financial interest in the assurance client.

B. The firm, and the network firm, promptly notifies the professional that the financial

interest should be disposed of.

C. The disposal occurs at the earliest practical date after identification of the issue, or the

professional is removed from the assurance team.

D. All of the given choices.

28. If a firm, or a network firm, has a direct financial interest in a financial statement audit client

of the firm, the appropriate safeguard against the self-interest threat created would be:

A. Dispose the entire financial interest.

B. Dispose of a sufficient amount of the financial interest so that the remaining interest is

no longer material.

C. Any of the two is appropriate.

D. None of the two is appropriate.

29. If a firm, or a network firm, has a material financial interest in an entity that has a

controlling interest in a financial statement audit client, the self interest threat created is so

significant. The audit firm can only perform the engagement if it:

I. Dispose of the entire financial interest.

II. Dispose of a sufficient amount of the financial interest so that the remaining

interest is no longer significant.

A. Either I or II

B. Neither I nor II

C. I only

D. II only

30. Which of the following safeguards is inappropriate if a firm has a material financial interest

in an entity that has a controlling interest in a financial statement audit client?

A. Discuss the presence of self-interest threat with the client‟s board of directors.

B. Dispose of the financial interest in total.

C. Dispose of a sufficient amount of the financial interest.

D. Either dispose of a sufficient amount of the financial interest or the financial interest in

total.