Ch. 2

Audits of which of the following organizations are subject to the Sarbanes-Oxley Act? a. All public companies. b. All public companies and private companies with annual revenues of $100 million or more. c. All public companies and private companies with assets of $100 million or more. d. All public companies and private companies with equity of $100 million or more.

a. All public companies.

Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements? a. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement. b. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement. c. Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP. d. Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP.

a. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

Which of the following statements regarding the Public Company Accounting Oversight Board (PCAOB) is correct? a. Public accounting firms must register with the PCAOB before performing audits of public companies. b. The PCAOB is a private, nonprofit organization established in 1933. c. Two of the five board members of the PCAOB must be CPAs. d. The PCAOB reports the results of disciplinary proceedings to the SEC to sanction registered CPA firms not passing inspection.

a. Public accounting firms must register with the PCAOB before performing audits of public companies.

Select the appropriate service for each Definition (or Partial Definition) a. A government agency authorized to regulate companies seeking approval to issue securities for sale to the public. b. A representation or declaration made by the responsible party, typically management of the entity. c. A series of statements issued by the Auditing Standards Board of the AICPA. Generally accepted auditing standards are developed and issued in the form of these statements. d. A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements. e. A set of reforms that toughened penalties for corporate fraud, restricted the kinds of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board to oversee CPAs and public accounting firms. f. The five-member board established in 2002 to oversee the audit of public (issuer) companies that are subject to the securities laws. The board has authority to establish or adopt (or both) rules for auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports. g. The national professional organization of CPAs engaged in promoting high professional standards to ensure that CPAs serve the public interest. h. The standards or benchmarks used to measure and present the subject matter and against which the CPA evaluates the subject matter. They are criteria that are established or developed by groups composed of experts that follow due process procedures, including exposure of the proposed criteria for public comment.

a. Securities and Exchange Commission b. Assertion c. Statements on Auditing Standards d. Financial reporting framework e. Sarbanes-Oxley Act of 2002 f. Public Company Accounting Oversight Board g. American Institute of Certified Public Accountants h. Suitable criteria

Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? a. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed. b. To achieve its business processes, a business formulates objectives, which are carried out through the entity's strategies. The entity's information and internal control systems must be designed to ensure that the entity's strategies are properly executed, captured, and processed. c. To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity's information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed. d. To achieve its objectives, a business formulates strategies to implement its transactions, which are carried out through business processes. The entity's information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed.

a. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

Audit committees of public companies consist of a. Directors who are responsible for establishing and maintaining effective internal control. b. Independent directors. c. Members assigned from within the company to serve terms that usually last one year. d. Directors who are rotated out every five years.

b. Independent directors.

Which of the following is not a part of the role of internal auditors? a. Assisting the external auditors. b. Providing reports on the reliability of financial statements to investors and creditors. c. Consulting activities. d. Operational audits.

b. Providing reports on the reliability of financial statements to investors and creditors.

The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB). Which of the following is not one of the responsibilities of that board? a. Establish independence standards for auditors of public companies. b. Review financial reports filed with the SEC. c. Establish auditing standards for audits of public companies. d. Sanction registered audit firms.

b. Review financial reports filed with the SEC.

Which organization has oversight and enforcement authority over the Public Company Accounting Board (PCAOB) and its decisions? a. The AICPA b. The SEC c. The FASB d. Treasury Department

b. The SEC

Operational auditing is oriented primarily towards: a. past protection provided by existing internal control. b. verification that an entity's financial statements are fairly presented. c. efficiency and future improvements to accomplish the goals of management. d. the accuracy of data reflected in management's financial records.

c. efficiency and future improvements to accomplish the goals of management.

In general, internal auditors' independence will be greatest when they report directly to the: a. Financial vice president. b. Corporate controller. c. Audit committee of the board of directors. d. Stockholders.

c. Audit committee of the board of directors.

Audit firms that are subject to inspections by the PCAOB staff include: a. All audit firms. b. Audit firms that are registered with the SEC. c. Audit firms that are registered with the PCAOB. d. Audit firms that are registered with a state board of accountancy.

c. Audit firms that are registered with the PCAOB.

Which of the following best describes the general character of the section of the "Principles Underlying an Audit of Financial Statements," titled "Performance"? a. The need to maintain an independence of mental attitude in all matters relating to the audit. b. Description of the competence, independence, and professional care of persons performing the audit. c. Criteria for audit planning and evidence gathering. d. Criteria for the content of the auditor's report on financial statements and related footnote disclosures.

c. Criteria for audit planning and evidence gathering.

Which of the following best places the events of the last decade in proper sequence? a. Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to auditees, prohibition of most consulting work for auditees, establishment of PCAOB. b. Sarbanes-Oxley Act, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. c. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB. d. Increased consulting services to auditees, Sarbanes-Oxley Act, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB.

c. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB.

Which of the following organizations establishes accounting standards for U.S. government agencies? a. The Financial Accounting Standards Board. b. The Governmental Accounting Standards Board. c. The Federal Accounting Standards Advisory Board. d. The Public Company Accounting Oversight Board.

c. The Federal Accounting Standards Advisory Board.

The Sarbanes-Oxley Act of 2002 a. Requires the Public Company Accounting Oversight Board (PCAOB) be composed of seven members. b. Requires the Public Company Accounting Oversight Board (PCAOB) have CPAs for a majority of its members. c. Changes rules on auditor independence, adopting a more flexible, principles-based approach rather than one based on prohibitions of certain types of non-audit services to audit clients. d. Mandates integrated audits for public companies.

d. Mandates integrated audits for public companies.

Which of the following would be considered a nonattest assurance service engagement? |. Expressing an opinion about the reliability of an entity's financial statements. ||. Reporting that a company's sustainability metrics are complete and accurate. a. I only. b. II only. c. Both I and II. d. Neither I nor II

d. Neither I nor II

As specified in Title II of the Sarbanes Oxley Act (SOX), which of the following nonaudit services to audit clients are not prohibited from being performed by a registered public accounting firm if preapproved by the audit committee and disclosed to the SEC? a. Legal services or expert services unrelated to the audit. b. Human resource services. c. Internal audit outsourcing services. d. Tax compliance services.

d. Tax compliance services.

The Public Company Accounting Oversight Board: a. is a quasi-governmental organization that has legal authority to set accounting standards for public companies. b. is a quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards. c. is a quasi-governmental organization that is independent of the SEC in setting auditing standards. d. is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

d. is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.