Audit Quiz 1 - Ch. 1, 2 & 4
Which of the following is a type of auditors' opinion? - Unmitigated - Qualified - Advisory - Disclosing
Qualified
Government Accountability Office (GAO): - Is primarily concerned with rapid processing of all accounts payable incurred by the federal government. - Responsibilities include audits of government agencies - Is an organization of professional accountants whose primary interest is in the effectiveness of presidential expenditures - Is primarily concerned with budgets and forecasts approved by the PCAOB.
responsibilities include audits of government agencies
T / F The Public Company Accounting Oversight Board establishes auditing standards for the audits of all companies.
False
Inquiries and analytical procedures ordinarily form the basis for which type of engagement? - Agreed-upon procedures - Audit - Examination - Review
Review
Which of the following series of pronouncements are issued by the Securities and Exchange Commission? - Auditing Registrar Releases - Form S-1 - Accounting and Auditing Enforcement Releases - Statements of Position
Accounting and Auditing Enforcement Releases
Item below relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. b. The plaintiff security purchaser must prove a monetary loss occurred.
Applies to both acts. Section 11 of the 1933 Securities Act. & Section 10(b) of the Securities Exchange Act.
Item below relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. d. The plaintiff security purchaser must prove privity with the CPA.
Applies to neither of the acts.
The Statements on Auditing Standards have been issued by the: - Auditing Standards Board - Financial Accounting Standards Board - Securities and Exchange Commission - Federal Bureau of Investigation
Auditing Standards Board
The Statements on Auditing Standards have been issued by the: - Auditing Standards Board - Financial Accounting Standards Board - Securities and Exchange Commission - Federal Bureau of Investigation.
Auditing Standards Board
A public company unqualified audit report is least likely to have which of the following titled sections? - Opinion - Basis for opinion - Auditor responsibilities - Critical audit matters
Auditor responsibilities
A common law case in which the court held that auditors should be held liable for ordinary negligence only to third parties they know will use the financial statements for a particular purpose
Credit Alliance v. Arthur Andersen & Co.
A common law case in which the court held that the auditors should be held liable for ordinary negligence only to third parties they know will use the financial statements for a particular purpose
Credit Alliance v. Arthur Andersen & Co.
d. If the CPAs provided negligent tax advice to a public company, the client would bring suit under:
Common law.
What type of audit is most likely to be involved by bank examiners employed by the Federal Deposit Insurance Corporation? - Financial - Compliance - Operational - Integral
Compliance
k. The most significant result of the Continental Vending case was that it:
Created a more general awareness of the possibility of auditor criminal prosecution.
A landmark case in which the auditors were held liable under Section 11 of the Securities Act of 1933
Escott v. BarChris Construction Corp.
For auditing matters relating to a public company an auditor is most likely to use standards issued by the: - Auditing Standards Board - Financial Accounting Standards Board - Federal Trade Commission - Public Company Accounting Oversight Board
Public Company Accounting Oversight Board
i. Which of the following elements is most frequently necessary to hold a CPA liable to a client?
Failed to exercise due care.
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. State whether the following statement is true or false relating to original purchasers of the stock. c. An insider who had knowledge of all the facts regarding the loans to the two paper corporations could nevertheless recover from the accounting firm.
False
T / F Statements on Auditing Standards apply to a CPA's auditing practice, while Statements on Quality Control Standards apply to aspects of a CPA firm's practice other than auditing
False
T / F Professional standards permit a CPA firm to own shares of stock in corporations that they audit if such stock holdings are not material
False
A case that established that auditors should not be held liable under the Securities Exchange Act of 1934 unless there was intent to deceive
Hochfelder v. Ernst
Which of the following is an element of quality control for a CPA firm? - Independence and freedom from bias - Acceptance and continuance of personnel - Engagement engineering - Human Resources
Human Resources
Which of the following attributes is more essential for an auditor than of management? - Integrity - Competence - Independence - Keeping informed on current professional developments
Independence
International Standards on Auditing are issued by: - International Standards Board - International Auditing and Assurance Standards Board - Public Company Accounting Oversight Board - International Auditing Education Standards Board
International Auditing and Assurance Standards Board
International Standards on Auditing are issued by: - International Standards Board - International Auditing and Assurance Standards Board - Public Company Accounting Oversight Board. - International Auditing Education Standards Board
International Auditing and Assurance Standards Board
Which of the following is correct concerning the Sarbanes-Oxley Act? - Effective January 1, 2003, it eliminated the Auditing Standards Board - It applies to all audits conducted in the United States - It prohibits providing any consulting services for an audit client - It requires all accounting firms that audit SEC registrants to register with the Public Company Accounting Oversight Board
It requires all accounting firms that audit SEC registrants to register with the Public Company Accounting Oversight Board
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: c. Loss sustained by a bank known to the auditors to be relying on the financial statements for a loan; suit brought in a state court that adheres to the Credit Alliance v. Arthur Andersen precedent.
Liable
An "audit committee" of a publicly held company ordinarily should be made up of: - Major stakeholders, including management and representatives of equity interests - The audit partner, the chief financial officers, the legal counsel, and at least one outsider - Representatives from the client's management - Members of the board of directors who are not officers or employees
Members of the board of directors who are not officers or employees
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: g. Losses sustained by stockholders; suit brought under Sections 18(a) and 10(b) of the Securities Exchange Act of 1934.
Not Liable
Item below relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. e. The plaintiff security purchaser must prove reliance on the document.
Only applies to Section 10(b) of the Securities Exchange Act.
Accountants are regulated by a variety of organizations. Match the following statements with the most directly related organizations. Organizations may be used once or not at all Statements: A. Develops accounting standards for public and nonpublic companies B. Develops accounting standards for the U.S. Government C. Improves standards of financial accounting for state and local government entities D. Issues auditing standards for public companies E. Issues CPA certificates F. Prepares the CPA exam
Organizations: A. Financial Accounting Standards Board B. Federal Accounting Standards Advisory Board C. Government Accounting Standards Boards D. Public Company Accounting Oversight Board E. State Boards of Accountancy F. American Institute of Certified Public Accountants
Which of the following is the American Institute of Certified public Accountants least involved with? - Contributing to the profession's self-regulation - Promulgating auditing standards for nonpublic companies - Promulgating auditing standards for public companies - Promoting continuing professional education.
Promulgating auditing standards for public companies
A case that established the precedent that auditors should be held liable under common law for ordinary negligence for all foreseeable third parties
Rosenblum v. Adler
A case that established the precedent that auditors should be held liable under common law for ordinary negligence to all foreseeable third parties
Rosenblum v. Adler
A case in which the court used the guidance of the Second Restatement of the Law of Torts to decide the auditors' liability to third parties under common law
Rusch Factors, Inc. v. Levin
The right to practice as a CPA is given by which of the following organizations? - State Boards of Accountancy - The AICPA - The SEC - The General Accounting Office
State Boards of Accountancy
The GASB promulgates standards for: - The federal government - State and local governments - All governmental organizations - General-purpose entities
State and local governments
Which statement is correct with respect to continuing professional education (CPE) requirements of CPAs? - Only CPAs in public practice are required to meet such requirements - Only CPAs in public practice or business are required to meet such requirements - State laws require CPAs to participate in continuing education programs as a condition for license renewal - Participation in continuing professional education is voluntary of all CPAs.
State laws require CPAs to participate in continuing education programs as a condition for license renewal
Attest engagements always have: - A written subject title - An examination report - Reasonable assurance - Subject matter
Subject matter
c. In cases of breach of contract, plaintiffs generally have to prove all of the following, except:
The CPAs made a false statement.
In cases of a publicly traded company audit in the United States, when International Standards on Auditing (ISAs) conflict with the PCAOB, standards, which of the following is correct? - The ISA is applicable - The PCAOB standard is applicable - The substance of the conflict should be analyzed, and the ISA or PCAOB treatment that seems more appropriate is applicable - Both sets of standards have equal applicability
The PCAOB standard is applicable
b. Which of the following approaches to auditors' liability is least desirable from the CPA's perspective?
The Rosenblum approach.
Which is correct concerning an audit requirement that is "unconditional"? - The word "should" precedes it - The auditor must comply with the requirement unless the auditor demonstrates and documents that alternative actions were sufficient - The auditor must fulfill the requirement in all cases where that requirement is relevant - Not performing the requirement will ordinarily result in permanent revocation of the auditor's CPA license
The auditor must fulfill the requirement in all cases where that requirement is relevant
In the event of an unresolvable difference of opinion between the client company and the CPA firm as to the valuation of an asset in the financial statements: - The final decision rests with the client's management and the auditors can express their disapproval in the audit report if they deem it appropriate to do so - The auditors should change the financial statements to show the valuation they consider proper - The difference of opinion should be submitted to arbitration by the FASB - The auditors should withdraw from the engagement
The final decision rests with the client's management and the auditors can express their disapproval in the audit report if they deem it appropriate to do so
An adverse opinion is most likely to be included in an audit report when - A standard unmodified opinion is necessary - A public company is involved - A client refuses to allow an auditor to perform a particular procedure - The financial statements depart from GAAP
The financial statements depart from GAAP
Which of the following professionals has primary responsibility for the performance of an audit? - The managing partner of the firm - The senior assigned to the engagement - The manager assigned to the engagement - The partner in charge of the engagement
The partner in charge of the engagement
j. Which statement best expresses the factors that purchasers of securities registered under the Securities Act of 1933 need to prove to recover losses from the auditors?
The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence."
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. State whether the following statement is true or false relating to original purchasers of the stock. b. The accounting firm has potential liability to any person who acquired the stock.
True
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. State whether the following statement is true or false relating to original purchasers of the stock. d. In court, investors who bought shares in Dandy Container need only show that they sustained a loss and that failure to explain the nature of the loans in question constituted a false statement or misleading omission in the financial statements.
True
T / F An audit can be relied on to provide reasonable assurance of detecting noncompliance with laws that have a material and direct effect on financial statement amounts and related disclosures
True
T / F Although independent audits of today place more emphasis on sampling than did the audits of the 19th century, in increasing circumstances, changes in information technology are again making possible audits of aspects of all transactions in large populations.
True
T / F The Public Company Accounting Oversight Board performs inspections of CPA firms that audit SEC registrants
True
A landmark case establishing that auditors should be held liable to third parties not in privity of contract for gross negligence, but not for ordinary negligence
Ultramares v. Touche & Co.
A case in which auditors were held liable for criminal negligence
United States v. Simon
T / F Since all audits result in unmodified (unqualified) opinions, it is just an issue of what information the auditors disclose in the financial statement notes.
False
T / F When the scope of the audit is restricted by the client, the auditors should issue an adverse opinion
False
An audit of the financial statements of a company is referred to as a(n): - Financial audit - Compliance audit - Operational audit - Integrated financial audit
Financial audit
The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over: - Broker and dealer relationships - Financial reporting - Effectiveness of operations - Efficiency of operations
Financial reporting
The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over: - Broker and dealer relationships - Financial reporting - Effectiveness of operations - Efficiency of operations.
Financial reporting
Operational auditing is primarily oriented toward: - Future improvements to accomplish the goals of management - The accuracy of data reflected in management's financial records - The verification that a company's financial statements are fairly presented - Past protection provided by existing internal control
Future improvements to accomplish the goals of management
The financial statements of a United States public company are most likely to follow: - Generally accepted accounting principles - International Standards of Auditing - Public Company Accounting Oversight Board Principles - Quality control standards
Generally accepted accounting principles
a. If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for:
Gross negligence
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: e. Loss sustained by a bank named as a third-party beneficiary in the engagement letter; suit brought under common law.
Liable
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: f. Loss sustained by a lender not in privity of contract; suit brought in a state court that adheres to the Rosenblum v. Adler precedent.
Liable
A typical objective of an operational audit is for the auditor to: - Determine whether the financial statements fairly present the entity's operations - Evaluate the feasibility of attaining the entity's operational objectives - Make recommendations for improving performance - Report on the entity's relative success in attaining profit maximization
Make recommendations for improving performance
The AICPA Principles Underlying a GAAS audit, include a requirement that: - Auditors only use CPAs on an engagement - Management provides the auditors with unrestricted access to individuals within the entity from whom the auditor determines it necessary to obtain audit evidence - Auditors provide an opinion with limited assurance about whether the financial statements are free from material misstatement - Auditors limit the exercise of skepticism to evaluating management representations when performing the audit
Management provides the auditors with unrestricted access to individuals within the entity from whom the auditor determines it necessary to obtain audit evidence
In United States v. Arthur Young, the Supreme Court of the United States described the auditor's role as requiring independence, complete fidelity to the public trust and to serve as a(n): - Objective observer - Public watchdog - Independent detective - Inspector with high morals.
Public watchdog
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. State whether the following statement is true or false relating to original purchasers of the stock. e. The accountants could avoid liability if they could show they were not negligent.
True
T / F The American Institute of Certified Public Accountants creates the CPA Exam, while individual states issue CPA certificates and permits CPAs to practice.
True
The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors. a. Describe the events that led up to the passage of the Act. b. Describe the major changes made by the Act.
a. The first event that led to the passage of the act was when Enron filed for bankrupcy and admitted that there were accounting irregularities to inflate earnings. The second event shortly after, was the accounting fraud of WorldCom where they overstated their income. There were other companies that also reported previous period financial statements and there were too many investigations on company practices. The accounting firm of Arthur Anderson was also charged of destroying documents related to the Enron case. For these reasons, the Sarbanes-Oxley Act was created. b. Some of the major changes made by the Act were that the penalties of corporate fraud got tougher. It restricted the types of consulting CPAs may perform for public company audit clients. It also created the Public Accounting Oversight Board to develop and enforce standards for public accounting firms.
