ACC231 : Midterm Revision Exam

[CH1-Part a] Arthur Andersen was convicted in 2002 of obstruction of justice after its employees destroyed Enron audit documents, although the U.S. Supreme Court later overturned the conviction in 2005.

[CH1-Part b] Auditing is defined as the recording, classifying, and summarizing of economic events in a logical manner to provide financial information for decision making.

[CH1-Part b] According to the notes, audits existed even before governments required them, mainly because audits reduce information risk.

[CH1-Part b] A review of financial statements provides positive assurance because the practitioner performs mainly inquiries and analytical procedures.

[CH1-Part b] In an assurance engagement on financial statements, the client's management is the responsible party, while shareholders and banks are the intended users.

[CH1-Part c] Tax services and management consulting services provided by CPA firms are examples of attestation services.

[CH1-Part c] Evaluating whether the computerized payroll processing of a subsidiary is operating efficiently and effectively is an example of a compliance audit.

[CH1-Part c] For non-governmental firms, the financial statement audit is typically performed by internal auditors.

[CH1-Part c] To become an ACCA member, a candidate needs three years of experience, while the CPA normally requires two years of experience.

[CH2-part a] According to Article (18) of the Bahraini auditor law, auditors in Bahrain should establish a limited liability partnership (LLP).

[CH2-part a] In a Limited Liability Partnership (LLP), a partner is not responsible for the acts of other partners or staff who are not under his supervision.

[CH2-part a] The Securities Exchange Act of 1934 requires companies planning to issue new securities to the public to submit a registration statement to the SEC.

[CH2-part b] PCAOB auditing standards apply only to audits of U.S. public companies and other SEC registrants, including brokers and dealers.

[CH2-part b] The AICPA principles and auditing standards should be viewed by practitioners as maximum standards or ideals of performance.

[CH2-part b] Peer review is the review by CPAs of another CPA firm's compliance with its quality control system.

[CH1-Part b] A bank officer is pricing a loan for Al-Noor Trading. She estimates a risk-free interest rate of 3%, a premium of 2.5% for the customer's business risk, and a premium of 1.5% for information risk. If the bank sets the rate as the sum of the three factors in the notes, what interest rate should it charge?

[CH1-Part b] A small company borrows BD 200,000. The bank will remove its 2% information-risk premium if the company provides audited financial statements. An annual audit would cost BD 5,500. Which conclusion is correct?

[CH1-Part c] Bahrain's National Bureau for Revenue examines whether a company has followed the tax regulations when filing its returns. According to the notes, what type of audit is this, and who performs it?

[CH2-part b] While auditing a Bahraini retailer, Ali finds an error in the inventory balance and must decide whether it is material. According to the notes, the misstatement is material if knowledge of it would:

[CH2-part a] A U.S. body oversees the PCAOB, has considerable influence in setting GAAP and disclosure requirements, and can establish rules for any CPA associated with audited financial statements filed with it. Which body is this?

[CH1-Part a] Arthur Andersen audited Enron while also earning millions of dollars from consulting services to the same company. Which problem does this situation illustrate most directly?

[CH1-Part b] An Internal Revenue agent examines a taxpayer's cancelled checks and supporting records and compares them with the Internal Revenue Code. In the definition of auditing, the Internal Revenue Code represents the:

[CH1-Part b] Which of the following is NOT one of the three main ways to reduce information risk listed in the notes?

[CH1-Part b] In agency theory, the shareholders who provide the capital but often lack the time or expertise to manage the company are called the:

[CH1-Part b] A practitioner's report states: 'Nothing has come to our attention that causes us to believe that the financial statements are not prepared in accordance with the accounting standards.' This wording indicates:

[CH1-Part b] Which statement correctly distinguishes an auditor from an accountant according to the notes?

[CH1-Part b] Which of the following is NOT one of the elements of an assurance engagement listed in the notes?

[CH1-Part c] An online retailer engages a CPA firm to report on the reliability and security of its electronic information for e-business through WebTrust. Based on the notes, this service is classified as:

[CH1-Part c] A retail chain hires a firm to perform anonymous shopping to assess how sales personnel deal with customers and which procedures they follow. This service is an example of:

[CH1-Part c] Based on the examples in the notes, which of the following correctly pairs a type of audit with its established criteria?

[CH1-Part c] A government ministry wants an independent evaluation of the efficiency and effectiveness of its operations. According to the notes, who typically performs this type of audit?

[CH2-part a] An auditor with about four years of experience coordinates the audit procedures and supervises and reviews the work of staff. Her staff level is most likely:

[CH2-part a] Which organizational structure of a CPA firm is taxed like a partnership while its partners have limited liability like a corporation?

[CH2-part a] Which of the following is a function of the PCAOB established by the Sarbanes-Oxley Act?

[CH2-part a] Which body plays a role in Bahrain similar to the role of the SEC in the USA?

[CH2-part a] Which of the following is NOT one of the factors listed in the notes as influencing the structure of CPA firms?

[CH2-part b] A CPA firm in Bahrain audits a local private company that has no connection to the U.S. market. Which auditing standards apply, and who issues them?

[CH2-part b] During an audit, Noor keeps a questioning mind, stays alert to conditions that might indicate misstatement due to fraud or error, and critically assesses the evidence. This attitude is called:

[CH2-part b] A CPA firm requires every partner and employee to answer an annual questionnaire covering stock ownership and membership on boards of directors. Which quality control element does this procedure support?

[CH2-part b] Before accepting any new client, a CPA firm prepares an evaluation form covering the predecessor auditor's comments and an evaluation of management's integrity. Which quality control element is this?

[CH1-Part a] Discuss four ways in which Arthur Andersen failed in its role as Enron's auditor, and explain the consequences for the firm and for the accounting profession.

[CH1-Part b] Define auditing and explain the key words and phrases included in the definition, using the audit of a tax return as an example.

[CH1-Part b] Explain the agency problem between owners and managers, and between a company and its lenders, and discuss how auditing helps reduce agency costs.

[CH1-Part b] Compare positive assurance and negative assurance, giving an example engagement for each.

[CH1-Part c] Distinguish between attestation services, other assurance services, and nonassurance services provided by CPA firms, giving examples of each.

[CH1-Part c] List and explain the three main types of audits performed by CPAs, giving an example of each and identifying who typically performs each type.

[CH2-part a] List and explain the organizational structures available to CPA firms, and state the requirement for auditors in Bahrain.

[CH2-part b] Explain the four principles around which the AICPA Clarity Project organizes the auditing standards.

[CH1-Part b] Calculate the annual interest rate and the annual interest cost of the loan (a) without audited financial statements and (b) with audited financial statements. What is the annual interest saving?

[CH1-Part b] Should Dilmun Fresh Foods obtain an annual audit? Support your answer with the figures and explain, using agency theory, why the owners themselves would also benefit from the audit.

[CH1-Part c] Classify the yearly check required by the bank's loan condition: identify the type of audit, the information, the established criteria, and the category of service it belongs to.

[CH2-part a] Evaluate Ahmed's proposal and Sara's plan in light of the Bahraini auditor law.

[CH2-part a] Identify the staff level of Yusuf, Maryam, Khalid and Fatima, and justify each using the details in the case.

[CH2-part b] Identify the element of quality control that each of the four approved policies represents, and briefly explain why.