Audit 3
Which of the following is NOT one of the indicators of audit quality identified by the IAASB in its "Framework for Audit Quality"?
Having no experience in auditing a particular client
If an engaged audit firm uses other audit firms that provide less than 5% of the total audit work performed, the identity of those other audit firms must be disclosed to the public in the Form AP.
False
The auditor's report on a review of financial statements provides positive assurance regarding the fair presentation of the financial statements.
False
Under AICPA auditing standards, the introductory paragraph of the auditor's report is never modified when the auditor issues a modified opinion.
False
Under PCAOB standards, auditors will be required to identify and disclose at least one Critical Audit Matter (CAM) for each audit engagement as part of the standard audit report.
False
When an auditor concludes that the financial statements are fairly stated in accordance with GAAP, he or she would issue a disclaimer of opinion.
False
When providing negative assurance, the auditor states an opinion regarding the subject matter she evaluated.
False
When the auditor signs the audit report in the United States, he or she signs his or her own name.
False
While auditors may consider all three objectives of internal control, they are primarily concerned with the compliance objective of internal control.
False
A form filed with the SEC when a firm changes auditors is the:
Form 8-K
For audits of public companies, the auditor's report is typically addressed to the board of directors and stockholders of the company--not to management.
True
Other matter paragraphs are relevant to the user's understanding of the audit, the auditor's responsibilities, or to the auditor's report.
True
Prior to accepting an audit client, the auditor is required to determine whether the financial statements have been prepared according to an acceptable framework.
True
Critical Audit Matters (CAM's)
(1) material to the financial statements, (2) especially challenging, subjective, or involving complex judgment by the auditor, and (3) that are communicated or required to be communicated to the audit committee of the board of directors. These are matters that the auditor identifies during the course of the audit, not necessarily before the engagement begins.
In which of the following situations would a CPA firm be independent with respect to an audit client?
A professional employee assigned to the engagement has a spouse that is employed as a salesperson by the client
If the auditor believes that required disclosures of a significant nature are omitted from the financial statements under examination, the auditor should decide between issuing
A qualified opinion or an adverse opinion
Which client corporate governance body is typically responsible for hiring and compensating the auditors?
Audit Committee
In every annual and quarterly filing, management has to state to the public that they evaluated effectiveness of the company's internal controls within __________ prior to the report issued to the public.
90 days
Which of the following acts by a CPA would most likely be a violation of the AICPA Code of Professional Conduct?
A "Covered Member's" spouse owns an immaterial amount of stock in an audit client.
An auditor's independence is considered impaired if the auditor has
A joint, closely held business investment with the client that is material to the auditor's net worth
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated, and the misstatements are pervasive?
Adverse
The SEC has the following enforcement mechanisms available to them except: -Imposing fines for violations of its rules -Barring violators from participating in SEC registered companies -Public disclosure of investigations into wrongdoing -All of the above are enforcement tools available to the SEC
All of the above are enforcement tools available to the SEC
Each of the following must be disclosed regarding a CAM that is identified by the auditor, except: -Description of what the CAM is -Discussion of the main considerations leading the auditor to determine that the matter is a CAM -Description of how the CAM was addressed in the audit -Reference to the relevant financial statement accounts or disclosures relating to the CAM -All of the above must be disclosed regarding a CAM identified by the auditor
All of the above must be disclosed regarding a CAM identified by the auditor
Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?
An investment held through a regulated mutual fund.
Jones, CPA, is the group engagement partner who is auditing the consolidated financial statements of his client. Jones plans to refer to a component auditor's examination of the financial statements of a subsidiary company but does not wish to present the other CPA's audit report. Both Jones and the other CPA's audit reports have noted no exceptions to generally accepted accounting principles. Under these circumstances the opinion paragraph of Jones' consolidated audit report should express
An unmodified opinion
Which of the following is the correct sequence with regards to the auditor's reliance on the client's internal controls?
Assess design and implementation of controls, decision to rely on controls, testing controls
Which auditing firms are subject to annual PCAOB inspections?
Auditing firms auditing 100 or more public issuers
Which of the following is a correct statement relative to auditor liability under common law?
Auditors are normally liable to their clients for either ordinary or gross negligence in performing the audit.
Which of the following is the "established criteria" against which a client's internal controls in the United States are evaluated?
COSO framework
A qualified opinion is the opinion the auditor issues when he or she believes the financial statements are fairly stated in accordance with GAAP. True or False
False
Critical Audit Matters (CAMs) are defined as those matters that are critical for the auditor to know about before beginning the audit.
False
If a previous auditor does not want his or her audit report from a prior period to be included in the current year filing, the auditor should re-audit the prior year financial statements and present the findings of their audit in the current year audit report.
False
Which of the following types of audit opinions would most likely be issued when the auditor is unable to obtain adequate audit evidence regarding several material account balances?
Disclaimer
Restrictions imposed by a client prohibit the observation of physical inventories, which account for an extremely significant portion of total assets (65%). Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(n)
Disclaimer of opinion
The following language was taken from an auditor's report on a client's financial statements: "We have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements." This is an example of which type of audit opinion?
Disclaimer of opinion
Which document contains general overview of the agreement between the client and the auditor, including the scope of the engagement, expectations of management and the auditor, and the general nature of work to be performed and deliverable to be produced?
Engagement letter
For audits of publicly-traded companies in the United States, where is the name of the lead engagement partner required to be disclosed?
In the PCAOB's Form AP
Roberts, CPA was involved in a lawsuit. The result of the lawsuit is that Roberts was found liable along with the Board of Directors and the associated Attorneys. The Attorneys were found to be 50% liable, the Board 15% liable and Roberts to be 35% liable. The judgement total was for $1,000,000. If the Attorneys and the Board are both unable to pay their portion and Roberts is found liable for the entire $1,000,000 then what legal doctrine was applied in the case?
Joint and Several liability
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
Management does not provide reasonable justification for a change in accounting principles.
An audit is designed to identify which type of misstatements in the financial statements? -All misstatements -Only immaterial misstatements -Both material and immaterial misstatements -None of the above
None of the above
Which of the following is generally a cause of intentional misstatements in the financial statements? -Weak internal controls -Human judgment errors -Unqualified client staff -None of the above
None of the above
Which of the following best describes what is meant by professional skepticism? -Being skeptical of professionals -Having a questioning mind while accusing others of wrongdoing -Assuming others are lying to you until you prove them right or wrong -None of the above accurately describe professional skepticism
None of the above accurately describe professional skepticism
The primary objectives achieved by a high quality system of internal control are:
Operations, reporting, and compliance
The following language was taken from an auditor's report on financial statements:"In our report dated March 1, 20X1, we expressed an opinion that the 20X0 financial statements did not fairly present the financial position, results of operations, and cash flows of ABC Company in accordance with accounting principles generally accepted in the United States of America because of two departures from such principles: (1) ABC Company carried its property, plant, and equipment at appraisal values, and provided for depreciation on the basis of such values, and (2) ABC Company did not provide for deferred income taxes with respect to differences between income for financial reporting purposes and taxable income. As described in Note X, the Company has changed its method of accounting for these items and restated its 20X0 financial statements to conform with accounting principles generally accepted in the United States of America. Accordingly, our present opinion on the restated 20X0 financial statements, as presented herein, is different from that expressed in our previous report."This is an example of which type of paragraph?
Other matter
Which standard setter issues auditing standards for audits of public companies in the U.S.?
PCAOB
The AICPA allows an auditor to perform which of the following services for an audit client?
Performance of bookkeeping services for the client
Which of the following is not considered a threat to independence in the Conceptual Framework for AICPA Independence Standards?
Public interest threat.
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated due to a misstatement in one particular account balance?
Qualified
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated, and the misstatements are not pervasive?
Qualified
Which of the following types of audit opinions would most likely be issued when the auditor is unable to obtain adequate audit evidence regarding one material account balance?
Qualified
An auditor's report included an additional paragraph disclosing that there is a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The auditor views the misstatement involved as material, but not so pervasively material as to make the overall financial statements misleading. The opinion paragraph of the auditor's report most likely expressed a(n)
Qualified opinion
The following language was taken from an auditor's report on financial statements: "In our opinion, except for the possible effects of the matter described in the previous paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1" This is an example of which type of audit opinion?
Qualified opinion
The auditor is unable to reach a conclusion as to the propriety of management's representations due to management's inadequate record retention policies. The auditor will have to consider issuing a(n)
Qualified opinion or a disclaimer of opinion
Which of the following will not result in modification of the auditor's report due to a scope limitation?
Reliance placed on the report of another auditor.
The auditor specifies the time period covered by the auditor's report in which paragraph of the standard unmodified audit report issued under AICPA standards?
Report on the Financial Statements
The McKesson & Robbins fraud led to the addition of the following auditing standards
Requirement to confirm accounts receivable & Requirement to observe the inventory count
In their audit report for which of the following engagements would the auditor provide negative assurance?
Review of financial statements
Which organization has congressional authority to oversee public companies?
SEC
Which of the following is not an AICPA pronouncement enforceable under the AICPA Code of Professional Conduct?
Statements on Responsibilities in Personal Consulting Advisory Practice.
During a review of financial statements, the auditor would NOT perform which of the following audit procedures? Inquiries Analytical procedures Substantive tests of transactions The auditor would perform each of the audit procedures listed above
Substantive tests of transactions
Which of the following statements is correct? a. CPA working papers that include copies of client's records are not available to third parties under any circumstances. b. Client prepared records (e.g. the general ledger) may be retained by the CPA until fees due to the CPA are received. c. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement have not yet been paid. d. CPA working papers are the joint property of the CPA and the client.
Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement have not yet been paid.
Linda Spring, CPA, is in court defending herself against charges filed under the Securities Act of 1933. In general Spring will escape liability under which of the following circumstances?
That she followed GAAS in performing her audit.
The Securities Act of 1934 is considered to be friendlier to CPAs than the 1933 Act for which of hte following reasons?
The 1934 Act requires that plaintiffs demonstrate that the auditors acted intentionally to mislead users of the financial statements.
Which of the following elements is most frequently necessary to hold a CPA liable to a client?
The CPA failed to exercise due care.
Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"?
The CPA's father is president of the audit client
Which of the following organizations may revoke the license of a CPA to practice?
The State Society of CPAs.
Which answer below best describes the difference between a material weakness in internal control and a significant deficiency in internal control?
The difference between the two is the size of the resulting potential misstatement that could get through the control systems undetected.
Winters, CPA conducted an audit of Green, Inc. The financial statements contained a misstatement in the filing with the SEC. Winters is being sued by an investor who purchased shares of Green in the initial public offering. Which of the following would be a viable defense by Winters?
The misstatement is immaterial to the financial statements as a whole.
Which of the following is NOT a reason the auditor may choose to not rely on internal controls for audit evidence?
They are going to use a reliance approach instead
An auditor has audited a client's financial statements for 5 consecutive years. The client presents 3 years worth of financial statements in the filing for comparative purposes. For the 2012 audit, the auditor expressed a qualified opinion due to a scope limitation on confirmation of receivables. In the 2013 audit, the auditor issued an unqualified opinion on the 2013 financial statements. When presenting the audit report for comparative financial statements (2011-2013), the auditor can change his or her opinion on the 2012 audit of financial statement to be an unqualified opinion if he or she desires.
True
Emphasis of matter paragraphs and other matter paragraphs are both included in the auditor's report after the opinion paragraph.
True
The opinion paragraph should indicate the financial reporting framework used by the client in preparing the financial statements. TrueFalse
True
When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, the auditor should add an emphasis of matter paragraph to his or her audit report.
True
When the auditor signs the audit report in the United States, the auditor signs the name of the firm he or she works for.
True
If plaintiffs file a suit against auditors based on common law which of the following approaches is most favorable to the auditors?
Ultramares
When an auditor conducts an audit in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a basis of accounting such as the cash basis of accounting, the auditor should issue a(n)
Unmodified opinion with an emphasis-of-matter paragraph
The auditor's report on internal control quality can express which of the following opinions regarding the quality of internal control?
Unqualified or Adverse only
After performing all necessary procedures a predecessor auditor reissues a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditor should
Use the date of the previous report
Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchanges Commission. How many annual audit period(s) must be completed before such employment can be accepted?
`One
Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?
a. The auditor is not independent.
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated due to misstatements in several account balances?
adverse
Negative Assurance
auditor does not provide an opinion, but rather states whether or not anything significant came to his or her attention during the course of the evaluation.
A CPA who is not in public practice is obligated to follow which of the following rules of conduct?
b. Integrity and objectivity.
When an accountant is not independent, the accountant is precluded from issuing a:
b. Review report.
When issuing a modified audit opinion under AICPA standards, the auditor adds an explanatory paragraph _____________ the opinion paragraph in the auditor's report.
before
The profession's ethical standards would most likely be considered to have been violated when a CPA
c. Issued a report on a financial forecast that omitted a caution regarding achievability.
Which of the following is not an AICPA pronouncement enforceable under the AICPA Code of Professional Conduct? a. Statements on Auditing Standards. b. Statements on Standards for Accounting and Review Services. c. Statements on Responsibilities in Personal Consulting Advisory Practice. d. Statements on Standards for Valuation Services.
c. Statements on Responsibilities in Personal Consulting Advisory Practice.
According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors?
c. The CPA does not audit the company and has no other business connection with the company.
Which of the following is not a source of guidance to CPAs with respect to their professional responsibilities? a. Principles of the Code of Professional Conduct b. Interpretations of the Code of Professional Conduct c. Rules of the Code of Professional Conduct d. All of the above are sources of guidance
d. All of the above are sources of guidance
During the course of an audit of financial statements, auditors seek to control which type of risk?
detection risk
An auditor is unable to obtain adequate audit evidence regarding several material account balances. Which of the following types of audit opinions would most likely be issued?
disclaimer
What term refers to the risk of loss associated with accepting an audit engagement?
engagement risk
AICPA peer review policies require that the largest audit firms be inspected annually.
false
According to the AICPA's Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards, the auditor has responsibility for the preparation and fair presentation of the financial statements, including the design and maintenance of effective internal control, that are free from material misstatement, whether due to error or fraud.
false
An audit failure occurs when the auditor reports to the public their opinion that the financial statements are not free of material misstatements when the financial statements actually contain a material misstatement.
false
Auditors provide value to the financial statements through preventing, but not usually through detecting material misstatements.
false
External auditors may not rely on the work performed by the client's internal auditors
false
For audits of public companies, the auditor's report is typically addressed to the management of the company.
false
If the auditor chooses not to rely on internal controls for audit evidence, he or she would still need to thoroughly test the controls to obtain a proper understanding of the appropriateness of the design and implementation of controls.
false
In order to maximize long-term profitability, audit firms generally seek to engage every client that becomes available.
false
Once a CPA has Passed the CPA exam, or its equivalent in other countries, the CPA has all knowledge necessary to conduct a high quality audit and has no need for further education.
false
One result of the market for lemons in the capital markets is that products sold by the companies are often less expensive.
false
The AICPA requires that auditors disclose in the auditor's report how long they have served as the auditor to that particular client.
false
The PCAOB randomly selects which audit engagements to inspect in its annual inspection process.
false
The audit committee of a public company only needs to approve audit related services performed by the client's external auditor.
false
The auditor should indicate which auditing standards were followed in conducting the audit in the introductory paragraph of the auditor's report.
false
The engagement partner is one who has no engagement responsibilities with the client other than to review the work performed by the engagement team.
false
The following language was taken from an auditor's report on a client's financial statements:"The Company's financial statements do not disclose [describe the nature of the omitted information that is not practicable to present in the auditor's report]. In our opinion, disclosure of this information is required by accounting principles generally accepted in the United States of America.In our opinion, except for the omission of the information described in the previous paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0."This is an example of a qualified opinion due to a scope limitation.
false
The following language was taken from an auditor's report on financial statements:"In our opinion, except for the possible effects of the matter described in the previous paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1"This is an example of an unqualified opinion.
false
The introductory paragraph of the AICPA's version of the auditor's report is always modified when the auditor issues a modified opinion.
false
Using the COSO internal control framework as a benchmark for quality is mandatory for the audit of internal control over financial reporting.
false
When the auditor is unable to obtain adequate audit evidence regarding one material account balance for a non-pervasive issue, he would most likely issue an adverse opinion.
false
COSO was originally founded by ______ organizations, including the AICPA.
five
Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:
integrity of management
Each of the following is an example of control activities except?
monitoring
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(n): Disclaimer of opinion (Yes or No), Qualified opinion (Yes or No)
no; no
Although the PCAOB expects that most audit engagements will involve one or more CAMs, the standards recognize
that each engagement may not contain a CAM. In those cases, the report would include a statement saying that the auditor determined that there are no critical audit matters.
A common cause for intentional misstatements is pressure to meet analyst expectations.
true
A predecessor auditor requires permission from the client's management prior to responding to inquiries from the incoming auditor regarding the predecessor auditor's experiences in auditing the client.
true
AS 7 requires engagement quality control reviews to be conducted and overseen by a concurring partner on every public company audit.
true
An audit report that is reissued from a prior year is typically used when a different auditor audited the financial statements of the previous year.
true
An unqualified (unmodified) audit opinion is a positive opinion regarding the financial statements indicating that the auditor believes the financial statements are fairly stated without qualification. TrueFalse
true
As illustrated in the HealthSouth fraud case discussed in this topic, audit failures frequently lead to litigation and reputation losses that are far greater than audit fees received.
true
Control activities include both preventive controls and detective controls.
true
GAAP is the 'established criteria' used in the preperation of financial statements in the US.
true
If the auditor uses a pure substantive approach, he or she will typically not test the client's controls.
true
Management is ultimately responsible for establishing and maintaining internal controls at the company.
true
The Control Environment component of internal control relates to client integrity, proper board oversight and reporting channels, commitment to hiring competent employees, and proper accountability for internal control related actions.
true
The approach to documenting the auditor's understanding of internal control varies depending on the complexity of the system of internal control.
true
The audit of financial statements and the audit of internal control over financial reporting should be conducted by the SAME external auditor.
true
The auditor can issue either combined or separate audit reports when reporting on both the audit of financial statements and the audit of internal control.
true
The auditor must become familiar with the client's controls even if he or she is only engaged to audit the financial statements.
true
The following language was taken from the auditor's report on financial statements:"In our opinion, because of the significance of the matter discussed in the previous paragraph, the consolidated financial statements referred to above do not present fairly the financial position of ABC Company and its subsidiaries as of December 31, 20X1"This is an example of an adverse opinion.
true
When an auditor concludes that the financial statements are fairly stated in accordance with GAAP, he or she would issue which type of audit opinion?
unqualified
