PRINCIPLES OF AUDITING AND OTHER
ASSURANCE SERVICES 2026 PRACTICE
QUESTIONS AND SOLUTIONS
◉ Distinguish between what is meant by business failure and audit
failure Answer: : 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. Answer: 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. Answer: 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.
D) must exercise due professional care in the performance of their
audit responsibilities. Answer: 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 Answer: 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. Answer: 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. Answer: A
◉ Auditors may be liable to their clients for:
A)
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 Answer: 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. Answer: B
◉ "Absence of reasonable care that can be expected of a person in a
set of circumstances" defines:
A) pecuniary negligence.
B) gross negligence.
C) extreme negligence.
D) ordinary negligence. Answer: 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.
ASSURANCE SERVICES 2026 PRACTICE
QUESTIONS AND SOLUTIONS
◉ Distinguish between what is meant by business failure and audit
failure Answer: : 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. Answer: 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. Answer: 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.
D) must exercise due professional care in the performance of their
audit responsibilities. Answer: 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 Answer: 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. Answer: 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. Answer: A
◉ Auditors may be liable to their clients for:
A)
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 Answer: 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. Answer: B
◉ "Absence of reasonable care that can be expected of a person in a
set of circumstances" defines:
A) pecuniary negligence.
B) gross negligence.
C) extreme negligence.
D) ordinary negligence. Answer: 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.
