MULTIPLE CHOICE QUESTIONS - CPA Diary
Chapter 1
Multiple-Choice Questions
|1. |Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial |
|easy |information for decision making is commonly called: |
|c |a. finance. |
| |b. auditing. |
| |c. accounting. |
| |d. economics. |
| | |
|2. |In the audit of historical financial statements, which of the following accounting bases is the most common? |
|easy | |
|c |a. Regulatory accounting principles. |
| |b. Cash basis of accounting. |
| |c. Generally accepted accounting principles. |
| |d. Liquidation basis of accounting. |
| | |
|3. |Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another |
|easy |party is a(n): |
|b |a. accounting and bookkeeping service. |
| |b. attestation service. |
| |c. assurance service. |
| |d. tax service. |
| | |
|4. |Three common types of attestation services are: |
|easy |a. audits, reviews, and “other” attestation services. |
|a |b. audits, verifications, and “other” attestation services. |
| |c. reviews, verifications, and “other” attestation services. |
| |d. audits, reviews, and verifications. |
| | |
|5. (SOX) |The organization that is responsible for providing oversight for auditors of public companies is called the ________.|
|easy | |
|d |a. Auditing Standards Board. |
| |b. American Institute of Certified Public Accountants. |
| |c. Public Oversight Board. |
| |d. Public Company Accounting Oversight Board. |
| | |
|6. (SOX) |The Sarbanes-Oxley Act applies to which of the following companies? |
|easy |a. All companies. |
|c |b. Privately held companies. |
| |c. Public companies. |
| |d. All public companies and privately held companies with assets greater than $500 million. |
| | |
|7. |Providing quantitative information that management and others can use to make decisions is the function of: |
|medium | |
|d |a. management information systems. |
| |b. auditing. |
| |c. finance. |
| |d. accounting. |
| | |
|8. |An audit of historical financial statements most commonly includes the: |
|medium |a. balance sheet, the income statement, and the statement of cash flows. |
|d |b. income statement, the statement of cash flows, and the statement of net working capital. |
| |c. statement of cash flows, the balance sheet, and the retained earnings statement. |
| |d. balance sheet, the income statement, and the statement of cash flows. |
| | |
|9. |The ___________ rate may be defined as approximately the rate a bank could earn by investing in U.S. treasury notes |
|medium |for the same length as the length of a business loan. |
|c |a. nominal |
| |b. stated |
| |c. risk-free |
| |d. prevailing |
| | |
|10. |The use of the Certified Public Accountant title is regulated by: |
|medium |a. the federal government. |
|b |b. state law through a licensing department or agency of each state. |
| |c. the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing |
| |committees. |
| |d. the Securities and Exchange Commission. |
| | |
|11. |An operational audit has as one of its objectives to: |
|medium |a. determine whether the financial statements fairly present the entity’s operations. |
|c |b. evaluate the feasibility of attaining the entity’s operational objectives. |
| |c. make recommendations for improving performance. |
| |d. report on the entity’s relative success in attaining profit maximization. |
| | |
|12. |An audit of historical financial statements is most often performed to determine whether the: |
|medium |a. organization is operating efficiently and effectively. |
|d |b. entity is following specific procedures or rules set down by some higher authority. |
| |c. management team is fulfilling its fiduciary responsibilities to shareholders. |
| |d. none of these choices. |
| | |
|13. |An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and |
|medium |effectiveness is what type of audit? |
|a |a. Operational audit. |
| |b. Compliance audit. |
| |c. Financial statement audit. |
| |d. Production audit. |
| | |
|14. |An audit to determine whether an entity is following specific procedures or rules set down by some higher authority |
|medium |is classified as a(n): |
|b |a. audit of financial statements. |
| |b. compliance audit. |
| |c. operational audit. |
| |d. production audit. |
| | |
|15. |Which of the following is a type of audit evidence? |
|medium |a. Oral responses to the auditor from employees of the company under audit. |
|d |b. Written communications from company employees or outsiders. |
| |c. Observations made by an auditor. |
| |d. Evidence may take any of the above forms. |
| | |
|16. |Which of the following services provides the lowest level of assurance on a financial statement? |
|medium |a. A review. |
|a |b. An audit. |
| |c. Neither service provides assurance on financial statements. |
| |d. Each service provides the same level of assurance on financial statements. |
| | |
|17. |The three requirements for becoming a CPA include all but which of the following? |
|medium |a. Uniform CPA examination requirement. |
|c |b. Educational requirements. |
| |c. Character requirements. |
| |d. Experience requirement. |
| | |
|18. |In “auditing” financial accounting data, the primary concern is with: |
|medium |a. determining whether recorded information properly reflects the economic events that occurred during the accounting|
|a |period. |
| |b. determining if fraud has occurred. |
| |c. determining if taxable income has been calculated correctly. |
| |d. analyzing the financial information to be sure that it complies with government requirements. |
| | |
|19. |Financial statement users often receive unreliable financial information from companies. Which of the following is |
|medium |not a common reason for this? |
|d |a. Complex business transactions. |
| |b. Large amounts of data. |
| |c. Lack of firsthand knowledge about the business. |
| |d. Each of these choices is a common reason for unreliable financial information. |
| | |
|20. |Which of the following is not a Trust Services principle as defined by the AICPA or CICA? |
|challenging |a. Online privacy. |
|d |b. Availability. |
| |c. Processing integrity. |
| |d. Operational integrity. |
| | |
|21. |Which one of the following is more difficult to evaluate objectively? |
|challenging |a. Presentation of financial statements in accordance with generally accepted accounting principles. |
|c | |
| |b. Compliance with government regulations. |
| |c. Efficiency and effectiveness of operations. |
| |d. All three of the above are equally difficult. |
| | |
|22. (SOX) |The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types |
|challenging |of services to that company? |
|c |a. Reviews of quarterly financial statements. |
| |b. Preparation of corporate tax returns. |
| |c. Most consulting services. |
| |d. Tax services. |
| | |
|23. |Which of the following audits can be regarded as generally being a compliance audit? |
|challenging |a. IRS agents’ examinations of taxpayer returns. |
|a |b. GAO auditor’s evaluation of the computer operations of governmental units. |
| |c. An internal auditor’s review of a company’s payroll authorization procedures. |
| |d. A CPA firm’s audit of the local school district. |
| | |
|24. |Which of the following can be significantly affected by an audit? |
|challenging |a. Business risk. |
|b |b. Information risk. |
| |c. The risk-free interest rate. |
| |d. Inherent risk. |
| | |
|25. |The trait that distinguishes auditors from accountants is the: |
|challenging |a. auditor’s ability to interpret accounting principles generally accepted in the United States. |
|d |b. auditor’s education beyond the Bachelor’s degree. |
| |c. auditor’s ability to interpret FASB Statements. |
| |d. auditor’s accumulation and interpretation of evidence related to a company’s financial statements. |
| | |
|26. |Attestation services on information technology include WebTrust services and SysTrust services. Which of the |
|challenging |following statements most accurately describes SysTrust services? |
|b |a. SysTrust services provide assurance on business processes, transaction integrity and information processes. |
| |b. SysTrust services provide assurance on system reliability in critical areas such as security and data integrity. |
| |c. ysTrust services provide assurance on internal control over financial reporting. |
| |d. SysTrust services provide assurance as to whether accounting personnel are following procedures prescribed by the |
| |company controller. |
| | |
Essay Questions
|27. |Discuss the three primary requirements for becoming a CPA. |
|easy | |
| |Answer: |
| |The three primary requirements for becoming a CPA are: |
| |Educational requirement. An undergraduate degree with a major in accounting is required. Most states now require 150 |
| |semester hours for licensure and some states require 150 semester hours before taking the CPA exam. |
| |Uniform CPA examination requirement. This is a four-part exam with components on auditing and attestation, financial |
| |accounting and reporting, regulation, and business environment and concepts. |
| |Experience requirement. The experience requirement varies from state to state with some states requiring no |
| |experience, while other states require up to two years of audit experience. |
| | |
| | |
|28. |Two types of attestation services provided by CPA firms are audits and reviews. Discuss the similarities and |
|easy |differences between these two types of attestation services. Which type provides the least assurance? |
| |Answer: |
| |Two primary types of attestation services are: audits of historical financial statements and reviews of historical |
| |financial statements. While both services involve the accumulation and evaluation of evidence regarding assertions |
| |made by management in the company’s financial statements, a review involves a less extensive examination and provides|
| |a lower level of assurance about the client’s financial statements than an audit. |
|29. |Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise |
|medium |must an auditor possess beyond that of an accountant? |
| |Answer: |
| |The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of |
| |providing financial information for decision making. To do this, accountants must have a sound understanding of the |
| |principles and rules that provide the basis for preparing the financial information. In addition, accountants are |
| |responsible for developing systems to ensure that the entity’s economic events are properly recorded on a timely |
| |basis and at a reasonable cost. |
| |The role of auditors is to determine whether the financial information prepared by accountants properly reflects the |
| |economic events that occurred. To do this, the auditor must not only understand the principles and rules that provide|
| |the basis for preparing financial information, but must also possess expertise in the accumulation and evaluation of |
| |audit evidence. It is this latter expertise that distinguishes auditors from accountants. |
| | |
|30. |Discuss the similarities and differences between financial statement audits, operational audits, and compliance |
|medium |audits. Give an example of each type. |
| |Answer: |
| |Financial statement audits, operational audits, and compliance audits are similar in that each type of audit involves|
| |accumulating and evaluating evidence about information to ascertain and report on the degree of correspondence |
| |between the information and established criteria. The differences between each type of audit are the information |
| |being examined and the criteria used to evaluate the information. An example of a financial statement audit would be |
| |the annual audit of IBM Corporation, in which the external auditors examine IBM’s financial statements to determine |
| |the degree of correspondence between those financial statements and generally accepted accounting principles. An |
| |example of an operational audit would be an internal auditor’s evaluation of whether the company’s computerized |
| |payroll-processing system is operating efficiently and effectively. An example of a compliance audit would be an IRS |
| |auditor’s examination of an entity’s federal tax return to determine the degree of compliance with the Internal |
| |Revenue Code. |
| | |
|31. |Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue |
|medium |agents, and internal auditors. |
| |Answer: |
| |The roles of all four types of auditors are similar in that they involve the accumulation and evaluation of evidence |
| |about information to ascertain and report on the degree of correspondence between the information and established |
| |criteria. The differences in their roles center around the information audited and the criteria used to evaluate that|
| |information. Independent auditors primarily audit companies’ financial statements. GAO auditors’ primary |
| |responsibility is to perform the audit function for Congress. IRS auditors are responsible for the enforcement of |
| |federal tax laws. Internal auditors primarily perform operational and compliance audits for their employing company. |
| | |
|32. (SOX) |What is an engagement to attest on internal control over financial reporting? |
|medium | |
| |Answer: |
| |Section 404 of the Sarbanes-Oxley Act requires public companies to report management’s assessment of the |
| |effectiveness of internal control over financial reporting. The Act further requires auditors to attest to the |
| |effectiveness of internal control over financial reporting. This evaluation, which is integrated with the audit of |
| |financial statements, provides forward-looking information, because effective internal controls reduce the likelihood|
| |of future misstatements in the financial statements. |
|33. |To do an audit, it is necessary for information to be in a verifiable form and some criteria by which the auditor can|
|challenging |evaluate the information. (A) What information and criteria would an independent CPA firm use when auditing a |
| |company’s historical financial statements? (B) What information and criteria would an Internal Revenue Service |
| |auditor use when auditing that same company’s tax return? (C) What information and criteria would an internal auditor|
| |use when performing an operational audit to evaluate whether the company’s computerized payroll processing system is |
| |operating efficiently and effectively? |
| |Answer: |
| |(A) The information used by a CPA firm in a financial statement audit is the financial information in the company’s |
| |financial statements. The most commonly used criteria are accounting principles generally accepted in the United |
| |States. |
| | |
| |(B) The information used by an IRS auditor is the financial information in the company’s federal tax return. The |
| |criteria are the internal revenue code and interpretations. |
| | |
| |(C) The information used by an internal auditor when performing an operational audit of the payroll system could |
| |include various items such as the number of errors made, costs incurred by the payroll department, and number of |
| |payroll records processed each month. The criteria would consist of company standards for departmental efficiency and|
| |effectiveness. |
| | |
|34. |Explain what is meant by information risk, and discuss the four causes of this risk. |
|challenging | |
| |Answer: |
| |Information risk is the possibility that information upon which a business decision is made is inaccurate. Four |
| |causes of information risk are: |
| |remoteness of information, |
| |biases and motives of the provider, |
| |voluminous data, and |
| |complex exchange transactions. |
| | |
|35. |Attestation services fall into five categories. What are these categories? |
|challenging |Answer: |
| |The five categories of attestation services include: |
| |audits of historical financial statements, |
| |attestation on internal control over financial reporting, |
| |reviews of historical financial statements, |
| |attestation services on information technology, and |
| |other attestation services that may be applied to a broad range of subject matter. |
| | |
|36. |Discuss four factors that are likely to significantly reduce information risk in the next five to ten years. |
|challenging | |
| |Answer: |
| |Four factors that are likely to significantly reduce information risk in the next five to ten years are: |
| |technological advances, |
| |more companies will go on-line, reducing the risk of investors obtaining outdated information, |
| |new accounting and auditing standards, and |
| |auditors will find more efficient and effective audit techniques. |
Other Objective Answer Format Questions
|37. |The criteria by which an auditor evaluates the information under audit may vary with the information being audited. |
|easy |a. True |
|a |b. False |
|38. |The criteria used by an external auditor to evaluate published financial statements are known as generally accepted |
|easy |auditing standards. |
|b |a. True |
| |b. False |
|39. (SOX) |The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies. |
|easy |a. True |
|b |b. False |
|40. (SOX) |The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting. |
|easy |a. True |
|a |b. False |
|41. |Only companies that file annual statements with the Securities and Exchange Commission are required to have an annual|
|easy |external audit. |
|b |a. True |
| |b. False |
|42. |The financial statements most commonly audited by external auditors are the balance sheet, the income statement, and |
|easy |the statement of changes in retained earnings. |
|b |a. True |
| |b. False |
|43. |The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance|
|medium |with generally accepted accounting principles. |
|b |a. True |
| |b. False |
|44. |Results of compliance audits are typically reported to someone within the organizational unit being audited rather |
|medium |than to a broad spectrum of outside users. |
|a |a. True |
| |b. False |
|45. |The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined|
|medium |by Congress and interpreted by the courts. |
|b |a. True |
| |b. False |
|46. |CPA firms are never allowed to provide bookkeeping services for audit clients. |
|medium |a. True |
|b |b. False |
|47. (SOX) |Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal |
|medium |control over financial reporting. |
|a |a. True |
| |b. False |
|48. (SOX) |The Sarbanes-Oxley Act requires a company’s chairman of the board of directors, CEO, and CFO to certify the company’s|
|challenging |financial statements. |
|b |a. True |
| |b. False |
|49. (SOX) |The criterion that is most likely to be used as a framework in evaluating a company’s internal control over financial|
|challenging |reporting under Section 404 of the Sarbanes-Oxley Act is the Enterprise Risk Management framework. |
|b |a. True |
| |b. False |
|50. |Most public companies’ audited financial statements are available on the SEC’s EDGAR database. |
|challenging |a. True |
|a |b. False |
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