Accounting 424B

Professor Rick Hayes, Ph.D.

MIDTERM EXAM
Hayes, Dassen, Schilder & Wallage Chapters 1-8 and Wiley CPA Review

NAME: ______________________
Answer the 30 multiple-choice questions on a Scantron form and the three (3) other
objective format and essay problems in the space provided on this exam.

1. Which of the following best describes what is meant by the term generally accepted
auditing standards?
a. Measures of the quality of the auditor's performance.
b. Pronouncements issued by the Auditing Standards Board.
c. Rules acknowledged by the accounting profession because of their universal
application.
d. Procedures to be used to gather evidence to support financial statements.

2. Which of the following is a "self review" threat to member independence?

a. An engagement team member prepares invoices for the attest client.
b. A second partner review is required on all attest engagements.
c. An engagement team member has a spouse that serves as CFO of the attest
client.
d. An engagement team member has a direct financial interest in the attest client.

3. Which of the following bodies enforce the audit requirements of the Employee
Retirement Security Act of 1974 (ERISA) with respect to employee benefit plans?
a. The Securities and Exchange Commission.
b. The Department of Pension Management.
c. The Department of Labor.
d. The Public Company Accounting Oversight Board.

4. According to the ethical standards of the profession, which of the following acts is
generally prohibited?
a. Accepting a commission for recommending a product to an audit client.
b. Writing a financial management newsletter promoted and sold by a publishing
company.
c. Purchasing a product from a third party and reselling it to a client.
d. Accepting engagements obtained through the efforts of third parties.

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5. Which of the following statements is correct regarding an accountant's working
papers?
a. The accountant owns the working papers but generally may not disclose them
without the client's consent or a court order.
b. The client owns the working papers but the accountant has custody of them
until the accountant's bill is paid in full.
c. The accountant owns the working papers and generally may disclose them as
the accountant sees fit.
d. The client owns the working papers but, in the absence of the accountant's
consent, may not disclose them without a court order.

6. Based on the IFAC Code of Ethics for Professional Accountants, threats to

independence arise from all of the following except:
a. The audit relationship.
b. Advocacy.
c. Self interest
d. Intimidation.

7. The nature and extent of a CPA firm’s quality control policies and procedures depend
on:

The CPA firm’s The nature of the Cost-benefit

size CPA firms practice considerations
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No yes Yes

8. An attitude that includes a questioning mind and a critical assessment of audit evidence
is referred to as
a. Due professional care.
b. Supervision.
c. Reasonable assurance.
d. Professional skepticism.

9. A successor auditor should request the new client to authorize the predecessor auditor
to allow a review of the predecessor' s

Engagement letter Working papers

a. No Yes
b. Yes No
c. Yes Yes
d. No No

10. Which of the following statements would least likely appear in an auditor's
engagement letter?

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 a. After performing our preliminary analytical procedures we will discuss with
you the other procedures we consider necessary to complete the engagement.
b. During the course of our audit we may observe opportunities for economy in,
or improved controls over, your operations.
c. Our engagement is subject to the risk that material misstatements or fraud, if
they exist, will not be detected.
d. Fees for our services are based on our regular per diem rates, plus travel and
other out-of-pocket expenses.

11. Before accepting an audit engagement, a successor auditor should make specific
inquiries of the predecessor auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report
was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.

12. Which of the following nonfinancial information would an auditor most likely
consider in performing analytical procedures during risk assessment?
a. Turnover of personnel in the accounting department
b. Objectivity of audit committee members.
c. Square footage of selling space.
d. Management’s plans to repurchase stock.

13. Which of the following is an example of fraudulent financial reporting?

a. An employee steals inventory and the "shrinkage" is recorded in cost of goods
sold.
b. The treasurer diverts customer payments to his personal due, concealing his
actions by debiting an expense account, thus overstating expenses.
c. Company management changes inventory count tags and overstates ending
inventory, while understating cost of goods sold.
d. An employee steals small tools from the company and neglects to return them;
the cost is reported as a miscellaneous operating expense.

14. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of inherent risk and
control risk.
b. Lower the assessed level of control risk from the maximum level to below the
maximum.
c. Eliminate the assessed level of inherent risk from consideration as a planning
factor.
d. Postpone the planned timing of substantive tests from interim dates to the year-
end.

15. Which of the following relatively small misstatements most likely could have a
material effect on an entity's financial statements?

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 a. A petty cash fund disbursement that was not properly authorized.
b. A piece of obsolete office equipment that was not retired.
c. An illegal payment to a foreign official that was not recorded.
d. An uncollectible account receivable that was not written off.

16. Which of the following most accurately summarizes what is meant by the term
“material misstatement”?
a, Fraud and direct-effect illegal acts
b. Material error, material fraud, and certain illegal acts.
c. Fraud involving senior management and material fraud.
d. Material error and material illegal acts.

17. Which of the following factors most likely would cause a CPA to not accept a new
audit engagement?
a. The prospective client is unwilling to make all financial records available to the
CPA.
b. The CPA lacks an understanding of the prospective client's operation and
industry.
c. The CPA is unable to review the predecessor auditor's working papers.
d. The prospective client has already completed its physical inventory count.

18. An auditor most likely would assess control risk at a high level if the payroll
department supervisor is responsible for.
a. Authorizing payroll rate changes for all employees.
b. Comparing payroll registers with original batch transmittal data.
c. Examining authorization forms for new employees.
d. Hiring all subordinate payroll department employees.

19. Which of the following questions would entity most likely be included in an internal
control questionnaire concerning the completeness assertion for purchases?
a. Is an authorized purchase order required before the receiving department can
accept a shipment or the vouchers payable department can record a voucher?
b. Are purchase orders, receiving reports, and vouchers pre-numbered and
periodically accounted for?
c. Is the unpaid voucher file periodically reconciled with inventory records by an
employee who does not have access to purchase requisitions?
d. Are purchase requisitions pre-numbered and independently matched with
vendor invoices?

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20. In assessing control risk, an auditor ordinarily selects from a variety of techniques,
including
a. Inquiry and analytical procedures.
b. Comparison and confirmation.
c. Reperformance and observation.
d. Inspection and verification.

21. The objective of tests of details of transactions performed as tests of controls is to

a. Evaluate whether controls operated effectively.
b. Determine whether controls have been placed in operation.
c. Detect material misstatements in the account balances of the financial
statements.
d. Monitor the design and use of entity documents such as prenumbered shipping
forms.

22. When an auditor increases the assessed level of control risk because certain control
procedures were determined to be ineffective, the auditor would most likely increase the
a. Extent of tests of controls.
b. Extent of tests of details.
c. Level of detection risk.
d. Level of inherent risk.

23. Which statement is correct concerning the relevance of various types of controls to a
financial audit?
a. Controls over the reliability of financial reporting are ordinarily most directly
relevant to an audit, but other controls may also be relevant.
b. An auditor may ordinarily ignore a consideration of controls when a
substantive audit approach is taken.
c. Controls over safeguarding of assets and liabilities are of primary importance,
while controls over the reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.

24. Which of the following most likely would not be considered an inherent limitation of
the potential effectiveness of an entity's internal control?
a. Collusion among employees.
b. Management override. .
c. Mistakes in judgment
d. Incompatible duties

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25. Regardless of the assessed level of control risk, an auditor would perform some
a. Tests of controls to determine the effectiveness of internal control policies.
b. Substantive tests to restrict detection risk for significant transaction classes.
c. Analytical procedures to verify the design of internal control.
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk.

26. When a customer fails to include a remittance advise with a payment, it is common
practice for the person opening the mail to prepare one. Consequently, mail should be
opened by which of the following employees?
a. Credit manager.
b. Accounts receivable clerk.
c. Sales Manager.
d. Receptionist.

27. Which of the following is most likely to indicate a significant deficiency relating to a
client’s antifraud programs?
a. Audit committee passivity when conducting oversight functions.
b. A “whistle-blower” program that encourages anonymous submissions.
c. A broad scope of internal audit activities.
d. Lack of performance of criminal background investigations for likely
customers.

28. An auditor tests an entity's policy of obtaining credit approval before shipping goods
to customers in support of management's financial statement assertion of
a. Existence or occurrence.
b. Completeness.
c. Valuation or allocation.
d. Rights and obligations.

29. The purpose of segregating the duties of hiring personnel and distributing payroll
checks is to separate the
a. Human resources function from the controllership function.
b. Authorization of transactions from the custody of related assets.
c. Operational responsibility from the record keeping responsibility.
d. Administrative controls from the internal accounting controls.

30. In an integrated audit, which of the following is defined as a weakness in internal

control that allows more than a remote likelihood of misstatement that is more than
inconsequential, but less than material?
a. Control deficiency.
b. Reportable condition.
c. Significant deficiency.
d. Material weakness.

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31. – 38 MATCHING
For Set 1, and Set 2 match the phrase in the Definition column to the letter of the Term
defined Notice that the questions are in sets of 4 (31-34, 35-38) PLACE YOUR
ANSWER ON YOUR SCANTRON.

Letter Definition Term

Set 1 Set 1
31. The standards to be applied on related services. A. IFRS
32. The standards to be applied to the review of historical B.ISQC
financial information. C.ISRS
33. The standards to be applied by practitioners in D.ISAE
assurance engagements dealing with information other
E.ISRE
than historical financial information
34. The standards to be applied for all services falling under
the Standards of the IAASB

Set 2 = definition Set 3 term

35. The International Accounting Standards Board (IASB) A. IAS
set these standards B. ISA
36. What International Financial Reporting Standards were C. IFRS
originally called D. IAASB
37. The standards to be applied by auditors in reporting on E. ISRE
historical financial information.
38. The standards to be applied by practitioners in
assurance engagements are set by this group

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ESSAY: (Please use the exam pages for answers to 39 and 40.)
39. What are the four Phases of the Audit Process Model? List the objectives and
procedures for each phase. Determine which is the most important of the four and
explain why.

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40. .Audit risk is the risk that the auditor gives an inappropriate audit opinion when the
financial statements are materially misstated. Define the three risks that are components
of audit risk. Describe how each of the three risks affects the need for evidence when the
risk is increased.

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