AUDITING THEORY AND PRACTICE
CHAPTER 1 PRACTICE TEST
QUESTIONS AND COMPLETE
ANSWERS
Kramer bought Newmania Corp. common stock in an offering registered under the Securities Act of
1933. Seinfeld & Co., CPAs, gave an unqualified opinion on Newmania's financial statements that
were included in the registration statement filed with the SEC. Kramer sued Seinfeld under the
provisions of the 1933 Act that deal with omission of facts required to be in the registration
statement. Kramer must prove that: ANSW✅✅there was a material misstatement in the financial
statements.
The following statement ____________________most accurately describes an auditor's statutory
legal liability.
The auditor has a greater burden of defense under the Securities Act of 1933 than under the
Securities Exchange Act of 1934.
Statutory liability usually modifies the auditor's liability to the client.
The Securities Act of 1933 broadened the auditor's common law liability and the Securities Exchange
Act of 1934 narrowed it.
Criminal liability only arises under state law. ANSW✅✅The auditor has a greater burden of
defense under the Securities Act of 1933 than under the Securities Exchange Act of 1934.
_______________ increased legal protections available to whistleblowers. ANSW✅✅Sarbanes-
Oxley Act of 2002.
________________ is responsible for setting auditing standards for audits of publicly-traded
companies in the U.S. ANSW✅✅PCAOB
The auditor must be independent of the auditee unless:
, both parties agree that the independence issue is not a problem.
the lack of independence does not influence his or her professional judgment.
the lack of independence is insignificant.
none of the above—the auditor cannot lack independence. ANSW✅✅none of the above—the
auditor cannot lack independence.
The largest public accounting firms are typically structured as_________________
ANSW✅✅limited liability partnerships.
At what level of authority does an auditor usually get his/her first supervisory experiences?
ANSW✅✅Senior
Doing ________________ is typical for an operational audit. ANSW✅✅make recommendations
for improving performance.
_____________________ is responsible for the financial statements. ANSW✅✅Management of
the organization.
For auditors, ________________ is part of the Due Professional Care standard. ANSW✅✅exercise
professional skepticism during the audit.
An internal auditor is likely to be more concerned with ________ than the external auditor.
ANSW✅✅the efficiency of operations
Which of the following best describes the role of corporate governance?
Shareholders vote to decide who should be members of the board of directors.
Management often is compensated based on the company's profitability.
CHAPTER 1 PRACTICE TEST
QUESTIONS AND COMPLETE
ANSWERS
Kramer bought Newmania Corp. common stock in an offering registered under the Securities Act of
1933. Seinfeld & Co., CPAs, gave an unqualified opinion on Newmania's financial statements that
were included in the registration statement filed with the SEC. Kramer sued Seinfeld under the
provisions of the 1933 Act that deal with omission of facts required to be in the registration
statement. Kramer must prove that: ANSW✅✅there was a material misstatement in the financial
statements.
The following statement ____________________most accurately describes an auditor's statutory
legal liability.
The auditor has a greater burden of defense under the Securities Act of 1933 than under the
Securities Exchange Act of 1934.
Statutory liability usually modifies the auditor's liability to the client.
The Securities Act of 1933 broadened the auditor's common law liability and the Securities Exchange
Act of 1934 narrowed it.
Criminal liability only arises under state law. ANSW✅✅The auditor has a greater burden of
defense under the Securities Act of 1933 than under the Securities Exchange Act of 1934.
_______________ increased legal protections available to whistleblowers. ANSW✅✅Sarbanes-
Oxley Act of 2002.
________________ is responsible for setting auditing standards for audits of publicly-traded
companies in the U.S. ANSW✅✅PCAOB
The auditor must be independent of the auditee unless:
, both parties agree that the independence issue is not a problem.
the lack of independence does not influence his or her professional judgment.
the lack of independence is insignificant.
none of the above—the auditor cannot lack independence. ANSW✅✅none of the above—the
auditor cannot lack independence.
The largest public accounting firms are typically structured as_________________
ANSW✅✅limited liability partnerships.
At what level of authority does an auditor usually get his/her first supervisory experiences?
ANSW✅✅Senior
Doing ________________ is typical for an operational audit. ANSW✅✅make recommendations
for improving performance.
_____________________ is responsible for the financial statements. ANSW✅✅Management of
the organization.
For auditors, ________________ is part of the Due Professional Care standard. ANSW✅✅exercise
professional skepticism during the audit.
An internal auditor is likely to be more concerned with ________ than the external auditor.
ANSW✅✅the efficiency of operations
Which of the following best describes the role of corporate governance?
Shareholders vote to decide who should be members of the board of directors.
Management often is compensated based on the company's profitability.
