AUDITING & ASSURANCE SERVICES
EXAM QUESTIONS AND ANSWERS.
VERIFIED 2025/2026.
A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to
comply with requirements of auditing standards. - ANS audit
Distinguish between what is meant by business failure and audit failure - ANS : Business
failure occurs when a business is unable to repay its lenders or meet expectations of its
investors because of economic or business conditions, such as recession, poor management
decisions, or unexpected competition in the industry. Audit failure occurs when the auditor
issues an incorrect audit opinion because it failed to comply with the requirements of auditing
standards.
Audit risk is the risk there will be an audit failure for a given audit engagement. - ANS False
The term "audit failure" refers to the situation when the auditor has followed auditing standards
yet still fails to discover that the client's financial statements are materially misstated. -
ANS false
In the performance of an audit, a CPA:
A) is legally liable for not detecting client fraud.
B) must strictly follow GAAS for privately held clients.
C) must strictly follow PCAOB auditing standards for publicly held clients.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,D) must exercise due professional care in the performance of their audit responsibilities. -
ANS D
Auditors who fail to exercise due care in their performance of professional services may be
liable for:
A) punitive liability.
B) breach of contract.
C) excess liability.
D) criminal charges - ANS B
Recklessness in the case of an audit is present if the auditor knew an adequate audit was not
done but still issued an opinion, even though there was no intent to deceive financial statement
users. This description is the legal term for:
A) ordinary negligence.
B) gross negligence.
C) constructive fraud.
D) fraud. - ANS C
The standard of due care to which the auditor is expected to adhere to in the performance of
the audit is referred to as the:
A) prudent person concept.
B) common law doctrine.
C) due care concept.
D) vigilant person concept. - ANS A
Auditors may be liable to their clients for:
A)
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,Punitive damages Compensatory damages
Yes Yes
B)
Punitive damages Compensatory damages
No No
C)
Punitive damages Compensatory damages
Yes No
D)
Punitive damages Compensatory damages
No Yes - ANS A
Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom
they rely. This would not include:
A) employees of the CPA firm.
B) employees of the audit client.
C) other CPA firms engaged to do part of the audit work.
D) specialists employed by the CPA firm to provide technical advice on the audit. - ANS B
"Absence of reasonable care that can be expected of a person in a set of circumstances"
defines:
A) pecuniary negligence.
B) gross negligence.
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, C) extreme negligence.
D) ordinary negligence. - ANS D
An example of a breach of contract would likely include:
A) an auditor's refusal to return the client's general ledger book until the client paid last year's
audit fees.
B) a bank's claim that an auditor had a duty to uncover material errors in financial statements
that had been relied on in making a loan.
C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a
backlog of other work which was more lucrative.
D) an auditor's claim that the client staff is unqualified. - ANS C
Privity of contract exists between:
A) auditor and the federal government.
B) auditor and third parties.
C) auditor and client.
D) auditor and client attorney - ANS C
An individual who is not party to the contract between a CPA and the client, but who is known
by both and is intended to receive certain benefits from the contract is known as:
A) a third party.
B) a common law inheritor.
C) a tort.
D) a third-party beneficiary. - ANS D
Laws that have been passed by the U.S. Congress and other governmental units are:
A) statutory laws.
4 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
EXAM QUESTIONS AND ANSWERS.
VERIFIED 2025/2026.
A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to
comply with requirements of auditing standards. - ANS audit
Distinguish between what is meant by business failure and audit failure - ANS : Business
failure occurs when a business is unable to repay its lenders or meet expectations of its
investors because of economic or business conditions, such as recession, poor management
decisions, or unexpected competition in the industry. Audit failure occurs when the auditor
issues an incorrect audit opinion because it failed to comply with the requirements of auditing
standards.
Audit risk is the risk there will be an audit failure for a given audit engagement. - ANS False
The term "audit failure" refers to the situation when the auditor has followed auditing standards
yet still fails to discover that the client's financial statements are materially misstated. -
ANS false
In the performance of an audit, a CPA:
A) is legally liable for not detecting client fraud.
B) must strictly follow GAAS for privately held clients.
C) must strictly follow PCAOB auditing standards for publicly held clients.
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,D) must exercise due professional care in the performance of their audit responsibilities. -
ANS D
Auditors who fail to exercise due care in their performance of professional services may be
liable for:
A) punitive liability.
B) breach of contract.
C) excess liability.
D) criminal charges - ANS B
Recklessness in the case of an audit is present if the auditor knew an adequate audit was not
done but still issued an opinion, even though there was no intent to deceive financial statement
users. This description is the legal term for:
A) ordinary negligence.
B) gross negligence.
C) constructive fraud.
D) fraud. - ANS C
The standard of due care to which the auditor is expected to adhere to in the performance of
the audit is referred to as the:
A) prudent person concept.
B) common law doctrine.
C) due care concept.
D) vigilant person concept. - ANS A
Auditors may be liable to their clients for:
A)
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
,Punitive damages Compensatory damages
Yes Yes
B)
Punitive damages Compensatory damages
No No
C)
Punitive damages Compensatory damages
Yes No
D)
Punitive damages Compensatory damages
No Yes - ANS A
Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom
they rely. This would not include:
A) employees of the CPA firm.
B) employees of the audit client.
C) other CPA firms engaged to do part of the audit work.
D) specialists employed by the CPA firm to provide technical advice on the audit. - ANS B
"Absence of reasonable care that can be expected of a person in a set of circumstances"
defines:
A) pecuniary negligence.
B) gross negligence.
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
, C) extreme negligence.
D) ordinary negligence. - ANS D
An example of a breach of contract would likely include:
A) an auditor's refusal to return the client's general ledger book until the client paid last year's
audit fees.
B) a bank's claim that an auditor had a duty to uncover material errors in financial statements
that had been relied on in making a loan.
C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a
backlog of other work which was more lucrative.
D) an auditor's claim that the client staff is unqualified. - ANS C
Privity of contract exists between:
A) auditor and the federal government.
B) auditor and third parties.
C) auditor and client.
D) auditor and client attorney - ANS C
An individual who is not party to the contract between a CPA and the client, but who is known
by both and is intended to receive certain benefits from the contract is known as:
A) a third party.
B) a common law inheritor.
C) a tort.
D) a third-party beneficiary. - ANS D
Laws that have been passed by the U.S. Congress and other governmental units are:
A) statutory laws.
4 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED.
