CHAPTER 4 - AUDIT THEORY AND PRACTICE EXAM QUESTIONS AND ANSWERS 2025
1. In determining auditor independence, the SEC considers which of the following as an independence
impairment? (pg. 137)
a.
An auditor performs the accounting work and then audits it.
b.
An auditor has no conflicting interest with the client.
c.
An auditor does not act as an advocate for the audit client.
d.
An auditor does not act as an employee of the audit client. - (ANSWER)An auditor performs the
accounting work and then audits it.
2. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of
stock in McBurgers Corporation, then what is Pulley considered to have? (pg. 137 - see direct financial
interest)
a.
An immaterial indirect financial interest in McBurgers Corporation.
b.
A material indirect financial interest in the McBurgers Corporation.
c.
A loophole for claiming independence from McBurgers Corporation.
d.
An direct financial interest in McBurgers Corporation. - (ANSWER)An direct financial interest in
McBurgers Corporation.
3. Which of the following employment positions could an auditor's spouse hold in a client without
violating the independence requirements? (pg 137 - see family relationships)
a.
Controller.
,CHAPTER 4 - AUDIT THEORY AND PRACTICE EXAM QUESTIONS AND ANSWERS 2025
b.
Treasurer.
c.
Order entry staff.
d.
Internal audit director. - (ANSWER)Order entry staff.
4. An audit firm is not considered independent when it performs which of the following services for a
publicly traded audit client? pg. 138 (second paragraph)
a.
Tax return preparation as approved by the board of directors.
b.
Basic accounting record keeping and financial statement preparation.
c.
Accounting information system design and implementation.
d.
Both B and C.
e.
None of the above. - (ANSWER)Both B and C.
5. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while
attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and
Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of
Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each
month. Which of the following best describes Julie's independence status? pg 137 (see loans)
a.
Impaired because Julie has a direct financial interest in FNBW.
b.
Impaired because Julie has a material indirect financial interest in FNBW.
, CHAPTER 4 - AUDIT THEORY AND PRACTICE EXAM QUESTIONS AND ANSWERS 2025
c.
Not impaired because Julie has an immaterial indirect financial interest in FNBW.
d.
Not impaired because Julie is permitted to take normal loans from FNBW. - (ANSWER)Not impaired
because Julie is permitted to take normal loans from FNBW.
6. Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while
attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and
Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of
Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each
month. According to the AICPA, why is Julie is considered a covered member for FNBW independence
purposes? pg. 137 (see covered member)
a.
She will be working on the engagement.
b.
She has a direct financial interest in FNBW.
c.
She graduated in the same area as the client is operating.
d.
She has an immaterial direct financial interest in FNBW. - (ANSWER)She will be working on the
engagement.
7. In determining the types of activities, engagements and interactions an auditor should have with a
client, what must the CPA and the audit firm do?
a.
Follow the rules exactly as they are written.
b.
Assess all of their relationships with every client to ensure that independence is intact.
c.
Focus on client satisfaction above all other considerations.
1. In determining auditor independence, the SEC considers which of the following as an independence
impairment? (pg. 137)
a.
An auditor performs the accounting work and then audits it.
b.
An auditor has no conflicting interest with the client.
c.
An auditor does not act as an advocate for the audit client.
d.
An auditor does not act as an employee of the audit client. - (ANSWER)An auditor performs the
accounting work and then audits it.
2. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of
stock in McBurgers Corporation, then what is Pulley considered to have? (pg. 137 - see direct financial
interest)
a.
An immaterial indirect financial interest in McBurgers Corporation.
b.
A material indirect financial interest in the McBurgers Corporation.
c.
A loophole for claiming independence from McBurgers Corporation.
d.
An direct financial interest in McBurgers Corporation. - (ANSWER)An direct financial interest in
McBurgers Corporation.
3. Which of the following employment positions could an auditor's spouse hold in a client without
violating the independence requirements? (pg 137 - see family relationships)
a.
Controller.
,CHAPTER 4 - AUDIT THEORY AND PRACTICE EXAM QUESTIONS AND ANSWERS 2025
b.
Treasurer.
c.
Order entry staff.
d.
Internal audit director. - (ANSWER)Order entry staff.
4. An audit firm is not considered independent when it performs which of the following services for a
publicly traded audit client? pg. 138 (second paragraph)
a.
Tax return preparation as approved by the board of directors.
b.
Basic accounting record keeping and financial statement preparation.
c.
Accounting information system design and implementation.
d.
Both B and C.
e.
None of the above. - (ANSWER)Both B and C.
5. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while
attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and
Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of
Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each
month. Which of the following best describes Julie's independence status? pg 137 (see loans)
a.
Impaired because Julie has a direct financial interest in FNBW.
b.
Impaired because Julie has a material indirect financial interest in FNBW.
, CHAPTER 4 - AUDIT THEORY AND PRACTICE EXAM QUESTIONS AND ANSWERS 2025
c.
Not impaired because Julie has an immaterial indirect financial interest in FNBW.
d.
Not impaired because Julie is permitted to take normal loans from FNBW. - (ANSWER)Not impaired
because Julie is permitted to take normal loans from FNBW.
6. Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while
attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and
Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of
Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each
month. According to the AICPA, why is Julie is considered a covered member for FNBW independence
purposes? pg. 137 (see covered member)
a.
She will be working on the engagement.
b.
She has a direct financial interest in FNBW.
c.
She graduated in the same area as the client is operating.
d.
She has an immaterial direct financial interest in FNBW. - (ANSWER)She will be working on the
engagement.
7. In determining the types of activities, engagements and interactions an auditor should have with a
client, what must the CPA and the audit firm do?
a.
Follow the rules exactly as they are written.
b.
Assess all of their relationships with every client to ensure that independence is intact.
c.
Focus on client satisfaction above all other considerations.
