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A company is viewed as the result of more or less formal contracts, in which

several groups make some kind of contribution to the company, given a certain
price describes what theory?

A. Moderator of claimants theory.

B. Agency theory. (Answer)
C. Lending credibility theory.
D. Quasi-judicial theory.

Under the SarbanesOxley Act, auditors cannot generally offer certain services to
audit clients. Which of the following is a service that they can offer audit
clients?

A. Advice on accounting information systems.

B. Tax services. (Answer)
C. Corporate finance services.
D. Legal services.

Which of the following is not a core principle of the International Forum of

Independent Audit Regulators (IFIAR)?

A. Legislation requiring caps on auditor liability. (Answer)

B. Corporate governance practices that support highquality corporate reporting
and auditing practice.
C. Effective educational and training arrangements for accountants and
auditors.
D. An enforcement system for preparers of financial statements to ensure
compliance with accounting standards.

Which of the following firms is not considered one of the Big Four audit firms?

A. Grant Thorton. (Answer)

B. Ernst & Young.
C. KPMG.
D. Deloitte.

Which of the following is not a second-tier audit firm?

A. Myer, Hoffman & McCann.

B. Canway, Cheatem and How. (Answer)
C. Crowe Group.
 D. BDO Seidman.

Which one of the following is not a theory on the demand of audit services?

A. Theory of inspired confidence.

B. Lending credibility theory. (Answer)
C. Agency theory.
D. Privity theory.

Regarding civil liability under statutory law:

A. Auditors may have their bonuses confiscated.

B. Auditors may get jail terms.
C. Auditors may receive financial penalties. (Answer)
D. Auditors may be fined for violating confidentiality.

That ordinary negligence is not sufficient for a liability to a third party because
of lack of privity of contract between the third party and the auditor is a
doctrine based on:

A. Ultramares Corporation v Touche et al. (Answer)

B. Caparo Industries, PLC v Dickman and Others.
C. USA Securities Act 1933.
D. Tort Law.

Regarding criminal liability under statutory law:

A. Auditors may be imprisoned for lack of professional competence and due care.
B. Auditor may receive financial penalties.
C. Auditors may get jail terms. (Answer)
D. Auditors may be fined for violating confidentiality.

Section 404 of the SarbanesOxley Act requires each annual report of a company to
contain an internal control report which should:

A. Contain an assessment of the effectiveness of the internal control structure

and procedures for financial reporting. (Answer)
B. State the responsibility of management for establishing and maintaining an
adequate internal control for management reporting.
C. State the responsibility of management for establishing and maintaining an
adequate shareholder controls.
D. All of the above.
The disciplinary court of an audit professional organisation makes its judgement
about auditor liability and determines the sanction. It may be any of the following
except:

A. A forfeiture of client fees. (Answer)

B. A fine.
C. A suspension for a limited period of time.
D. A lifetime ban from the profession.

Companies listed on the London Stock Exchange are required to adhere to a

Principles of Good Governance and Code of Best Practice. This regulation is called:

A. The Combined Code. (Answer)

B. The SarbanesOxley Act.
C. The COSO Report.
D. The Company Act.

All the following are suggested solutions to auditor liability except:

A. A legally determined cap on the liability of auditors.

B. Exclude certain activities with a higher risk profile from the auditors'
liability. (Answer)
C. Require private insurance be purchased by audit firms to cover liabilities.
D. Firm structured as a limited liability partnership.

Which of the following is a cost of an agency relationship?

A. Initial loss.
B. Monitoring costs. (Answer)
C. Corporate governance costs.
D. Interest costs.

Legal liability for the auditor is based on all the following except:

A. Liability for members of professional accounting organisations.

B. Common law. (Answer)
C. Constitutional liability under statutory law.
D. Civil liability under statutory law.

In the Caparo Industries case, the House of Lords of the UK, following the Court of
Appeal, set out a three-fold test for an obligation (duty of care) to arise from
negligence in an audit opinion. Two of the three include harm must be reasonably
foreseeable and the parties must be in a relationship of proximity. What is the
third test of obligation?
 A. It violates statutory law.
B. It must be fair, just and reasonable to impose liability. (Answer)
C. It violates common law.
D. It is not written.

That original purchasers of company shares on the initial public offering have
recourse against the auditor for up to the original purchase price if the financial
statements are false or misleading is part of what law?

A. The Securities Exchange Act 1934 of the USA.

B. The Companies Act 2004 of the UK.
C. SarbanesOxley Act 2002 of the USA.
D. The Securities Act 1933 of the USA. (Answer)

The US SarbanesOxley Act 2002 set all of the following criminal penalties except:

A. To knowingly destroy, create, manipulate documents and/or impede or

obstruct federal investigations will be subject up to 20 years imprisonment.
B. Auditors who give an unqualified opinion when a qualified opinion is
required are subject to 2 years imprisonment. (Answer)
C. CFOs and CEOs who falsely certify financial statements or internal
controls are subject to 10 years imprisonment.
D. Failure to keep all audit reports or related work papers for 7 years
may result in 10 years imprisonment.

In a system of proportionate liability:

A. There is a legally determined cap on the liability of auditors.

B. Some audit firms are structured as a limited liability partnership.
C. An audit firm is liable for only the uninsured amount.
D. An audit firm is not liable for the entire loss incurred by plaintiffs
but only to the extent to which the loss is attributable to the auditor. (Answer)

Concerning fraud, the auditors current position is that:

A. When fraud is discovered by the auditor they must report it in their audit
opinion.
B. The auditor is responsible for obtaining reasonable assurance that the
financial statements are free from material statement, whether caused by fraud or
error. (Answer)
C. Fraud detection is the objective of an audit.
D. The auditor can take no responsibility for fraud.
PCAOB Audit Standard #1:

A. Addresses references in auditors reports to the standards of the

Public Company Accounting Oversight Board.
B. Adopted as interim standards, on an initial, transitional basis, GAAP
in AICPAs Auditing Standards Board's Statement on Auditing Standards No. 95.
C. States that the auditor in their opinion must refer to the standards
of the Public Company Accounting Oversight Board (United States).
D. Includes all of the above.
E. Includes the second and third statements.

Which of the following is not required of an internal control report based on

Section 404 of the SarbanesOxley Act?

A. It must contain an assessment, as of the end of the fiscal year, of the

effectiveness of the internal control structure and procedures for financial
reporting.
B. Companies must select suitable criteria (COSO-based) against which it may
evaluate the effectiveness of internal controls for authorisation, safeguarding
assets, and properly recording of transactions.
C. State the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting.
D. Management attests to any difference between an independent auditors
assertions under Section 404 and the audit evidence on internal controls. (Answer)

The PCAOB Audit Standards include all the following areas except:

A. Audit of internal controls.

B. Functional audit quality. (Answer)
C. Audit opinion reference.
D. All of the above.

US Statement on Auditing Standards No. 99 (SAS 99) requires that as part of the
planning process the audit team must consider how and where the entitys financial
statements might be susceptible to fraud. It requires that auditors gather
information necessary to identify risks of material misstatement due to fraud by:

A. Inspecting critical sales cycle documents.

B. Inquiring of management and others within the entity about the risks of
fraud.
C. Confirming accounts receivable.
D. Examining internal controls.

Which of the following is not a key provision of PCAOBs Audit Standard No. 2 on
Internal Control Reports?

A. Identifying internal fraud control. (Answer)

 B. Testing and evaluating the effectiveness of the design of controls.
C. Evaluating managements assessment.
D. Obtaining an understanding of internal control over financial reporting,
including performing walkthroughs.

Which statutory Act established the first US statutory civil recovery rules for
third parties against auditors, that original purchasers have recourse against the
auditor for up to the original purchase price of their shares if the financial
statements are false or misleading?

A. The SarbanesOxley Act 2002.

B. The Securities Act 1933. (Answer)
C. The COSO Report.
D. The Securities Exchange Act 1934.

In order to hold the auditor successfully legally liable in a civil suit, all the
following conditions have to be met except:

A. The plaintiff must prove losses beyond a reasonable doubt (quantum issue).
(Answer)
B. An audit failure/neglect has to be proven (negligence issue).
C. The plaintiff has to prove a causal relationship between their losses and
the alleged audit failure (causation issue).
D. The auditor should owe a duty of care to the plaintiff (due professional
care).

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Which one of the following statements is true?

A. Corporate governance addresses the principalagent relationship between

management and directors on the one hand and the relationship between the company
and suppliers on the other.
B. It is the responsibility of internal audit to design and monitor controls
that reasonably assure that objectives are met.
C. The management board approves the mission, vision, objectives and strategy
of the entity.
D. Conflicts of interests between management and stakeholders can result in
bankruptcies or major frauds. (Answer)

Common stock that is widely distributed among individuals describes what type of
corporate governance structure?

A. Public.
B. Network.
 C. Supervisory.
D. Market. (Answer)

Which of the following is not something performed by the companys board?

A. Oversees management and ensures the quality of information provided to

shareholders and to financial markets through the financial statements.
B. Defines the companys strategy.
C. Day to day supervision of the sales manager. (Answer)
D. Appoints the corporate officers responsible for managing the company and
implementing this strategy.

The SarbanesOxley Act requires that executive officers attest to all the following
except:

A. All deficiencies in internal control or any fraud has been disclosed to

regulators. (Answer)
B. Their conclusions about effectiveness of internal control.
C. Based on their knowledge there are no untrue statements or omissions of
material fact.
D. The statements fairly present the companys financial condition.

In a two-tier structure of corporate governance:

A. Non-executives are responsible for the day-to-day operations.

B. CEO and chair of the board are split. (Answer)
C. The chair of the non-executive board is also chair of the executive board.
D. Members of the supervisory board are appointed by the executive board.

A board member is independent when:

A. She represents the shareholders not other constituencies.

B. She is a family member of the CEO.
C. She has no relationship of any kind whatsoever with the corporation, its
group or the management of either that is such as to colour her judgement. (Answer)
D. She is a top executive of the company supervised.

Which of the following is not a responsibility of audit committees?

Management compensation. (Answer)

Monitoring management.
Reviewing corporate reporting processes.
Relations with the independent auditor.
To support the supervisory role of the audit committee, the SarbanesOxley Act
requires the auditor to report directly to the audit committee:
I. All critical accounting policies and practices in use by the publicly listed
company.
II. Generally accepted audit standards alternatives discussed with management and
any alternative preferred by the audit firm.
III. Other material written communications such as management letters and
unadjusted audit differences.

I II III
a. Yes Yes Yes
b. No Yes Yes
c. Yes Yes No
d. Yes No Yes

a (Answer)
c
b
d

The 2012 EU Commission Communication Action Plan: European company law and
corporate governance strives to:

Improve the framework for cross-border operation of companies.

Enhance competition between companies and investors.
Prevent countries from introducing a two-tier board structure.
Encourage short-term shareholder engagement. (Answer)

Which of the following is not a code of corporate governance?

Cromme.
The SarbanesOxley. (Answer)
King.
Vienot.

Section 407 of the SarbanesOxley Act states that the SEC shall issue rules to
require listed companies to disclose whether at least one member of its audit
committee is a financial expert. Which of the following statements is not true of
the financial expert?

The company should consider if the financial expert has experience with internal
accounting controls. (Answer)
The financial expert must have experience in the preparation or auditing of
financial statements of other SEC listed companies.
The company should consider if the financial expert has an understanding of
generally accepted accounting principles and financial statements.
The listed company must disclose the name of the audit committee financial expert
and whether that person is independent.

According to agency theory:

The management board is the agent. (Answer)

Self-interest plays no role.
The management board is the principal.
Information asymmetry does not exist.

Sustainability reporting consists of:

Environmental issues.
Economic, social and environmental issues. (Answer)
Social and environmental issues.
Economic issues.

According to Anglo-Saxon best practice, the board represents:

All constituencies.
The employees.
Shareholders not other constituencies. (Answer)
Minority shareholders.

According to best practice the audit committee:

Selects the auditor. (Answer)

Oversees the accounting department.
Nominates the executive board.
Is responsible for designing adequate internal controls.

XBRL refers to:

An automated audit tool.

Standard language for business reporting. (Answer)
A tool for generating a web-based audit report.
Financial reporting software.

Internal control objectives are, among others:

Segregation of duties.
Risk assessment.
 Control environment and monitoring.
Compliance with law and regulations. (Answer)

In 2006 the International Forum of Independent Audit Regulators (IFIAR) was

established to:

Block any further merges between large audit firms.

Provide a focus for contacts with shareholders.
Promote legal enforcement of non-compliance with law and regulation.
Share knowledge of the audit market environment and practical experience of
independent audit regulatory activity. (Answer)

A whistleblower procedure should be implemented:

As a tool of management.
As a tool of public relations. (Answer)
To support the internal audit department.
For receipt, retention and treatment of complaints received by the company
regarding accounting, internal controls or auditing matters.

An internal audit department:

Reports directly to the shareholders.

Guarantees reliable information processing.
Is a tool of management. (Answer)
Is managed by the external auditor.