exam 1 - chapters 1 thru 3
public accounting firms range in size from ___ to ____ employees in the US
1 to 120,000+
associate/staff audit duties
1-3 yeard perform the audit procedures assigned to the them prepare adequate and appropriate documentation of completed work inform the senior about any auditing or accounting problems encountered
enrons audit fees accounted for ___% of the audit feed for all public clients in the auditors entire houston office
27%
senior / in charge audit duties
3-6 years assist in the development of the audit plan assign tasks to associates and direct the day to day performance of the audit perform procedures , gather and evaluate evidence supervise and review the work of associates inform the manager of any audit or accounting problems encountered
Manager duties on audit team
6-10 years ensure the audit is properly planned, including scheduling of team members supervise the prep and approve audit program review the working papers, financial statements, and audit report recommend key audit judgements to partner, oversee work of seniors and staff deal with invoiceing and ensure collection of payment for services inform the partner about any auditing or accounting problems encountered
big 4 audit _% of public companies whose market cap is over $700 milllion
90%
in 2000, Enron paid audit ees of $25M and non audit fees of ___ to its independendent auditor
27M
partner selected duties on audit team
> 10 years reach agreement with the auditee on the scope of the service to be provided ensure that the audit is PROPERLY PLANNED and that the audit is conducted in accordance with applicable auditing standards ASSEMBLE AN AUDIT TEAM that ha the required skills and experience SUPERVISE the audit team and review the working papers conclude on the adequacy of the audit evidence and SIGN the audit report
Independent auditing can best be described as
A discipline that provides assurance regarding the results of accounting and other functional operations and data.
What is an audit?
A systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and (2) communicating the results to interested users.
Which of the following organizations affect the environment that CPAs work in?
AICPA SEC PCAOB
at time of collapse, Enron was audited by
Arthur Andersen
Which of the following best describes the relationship between attestation services and audit services?
Auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements.
Which of the following best describes the reason why an independent auditor is often retained to report on financial statements?
Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.
Audit Evidence
Evidence that assists the auditor in evaluating management's financial statement assertions consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.
financial statements are prepared using
GAAP - applicable financial reporting framework
established criteria
GAAP, IFRS
Governmental Auditors
Government Accountability Office (GAO) and Internal Revenue Service (IRS)
assurance services defintion
INDEPENDENT professional services that IMPROVE THE QUALITY of information, or its context, for decision makers
___ perform complicance audits of income tax returns of individuals or corporations to determine that income has been computed and taxes paid as required
IRS
larger regional, national, and international firms are typically structured as
LLP or LLC
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?
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.
The Sarbanes-Oxley Act of 2002
Mandates integrated audits for large public companies.
The audit committee of a company which is responsible for the appointment of the independent audit firm should consist of
Members of the board of directors who are not officers or employees.
American Institute of Certified Public Accountants
Private professional association conducts voluntary peer review on member firms
Which of the following statements regarding the Public Company Accounting Oversight Board (PCAOB) is correct?
Public accounting firms must register with the PCAOB before performing audits of public companies.
Watt & Foster LLC is a CPA firm that wants to ensure that it only associates with clients whose management has integrity. To achieve this, Watt & Foster need not:
Refuse to accept a client who has been issued an adverse opinion sometime during the last three years.
Mandates integrated audits for large public companies.
SEC
The regulatory organization that affect public accounting firms
SEC - securities and exchange commission PCAOB AICPA IAASB FASB IASB
sarbanes oxley act of 2002
Sarbanes Oxley Public Accounting Reform and Investor Protection Act (SOX) regulation of audit profession creation of PCAOB (public company accounting oversight board) prohibits non audit services to audit clients mandatory audit partner rotation integrated audits: financial statements and internal controls over financial reporting
Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards?
Standards issued by the PCAOB are called "Auditing Standards" and standards issued by the AICPA Auditing Standards Board are called "Statements on Auditing Standards". The AICPA sets auditing standards for use in audits of nonpublic entities. The PCAOB sets auditing standards for use in audits of publicly held companie
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?
Tax compliance services.
The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except
The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.
In deciding whether to accept a prospective audit client, which of the following would have the biggest impact on the auditor's decision?
The client's predecessor auditor indicated that the client's management lacks integrity.
Securities Act of 1933
The first major federal law regulating the securities industry. It requires firms issuing new stock in a public offering to file a registration statement with the SEC. regualtes disclosure of material info for IPOs
Financial statement users' demand for assurance is similar to that of a potential home buyer who hires a home inspector in that
There are often information asymmetry and conflicts of interest.
Audits of which of the following organizations are subject to the Sarbanes-Oxley Act?
all public companies
corporate governance consists of
all the people, processes, and activites in place to help ensure stewardship over an entity's assets
how frequent are PCAOB inspectins?
annually - if the audit firm provides audit reports for more than 100 issuers triennially - if the audit firm provides audit reports for 100 or fewer issuers
examination (audit)
attest engagement : yes level of assurance provided: high , reasonable risk of material misstatement: low nature of the assurance in report : "in our opinion" procedures: select from all available procedures any combination that can limit attestation risk to a low leve;
Agreed-upon procedures
attest engagement: YES level of assurance provided: Summary of findings risk of material misstatement: varies by specific engagement nature of assurance in report: include a summary of procedures performed and findings procedures: procedures agreed upon with the specified users or user
compilations
attest engagement: NO level of assurance provided: NONE risk of material misstatement: nature of assurance in report: NO ASSURANCE procedures: preparation of financial statements
Review
attest engagement: YES level of assurance provided: moderate, limited risk of material misstatement: moderate nature of assurance in report: "We are not aware of any material modifications that should be made.." procedures: generally limited to inquiry and limited analytical procedures
what are the two categories assurance service break into
attest services and other assurance services
Communicate Results
audit report and other communications
which of the following best describes the relationship between auditing and attestation engagements?
auditing is a subset of attestation engagements that focuses on the certification of financial statements
which of the following best describes the relationship between attestation services and audit services?
auditing is a subset of attestation that involves the issuance of an opinion regarding the fairness of financial statements
attest services are
auditing: historical financial statement related information other than historia=cal financial statement related
The auditor must be independent of the auditee unless:
auditor cant lack independence
what assertions do managers make?
cash (at period end): existence, rights and obligations, completeness, accuracy valuation and allocation, classification, presentation
Which of the following best describes the general character of the section of the "Principles Underlying an Audit of Financial Statements," titled "Performance"?
criteria for audit planning and evidence gathering
scandals in 1990s and 200s
enron, worldcom, tyco, madoff
auditors are responsible for
expressing an opinion on the financial statements
____ are required to be public accountants
external auditors
types of auditors
external, internal, governmental, forensic
securities and exchange comission (SEC)
federal agency administers securities act of 1933 and securities exchange act of 1934
auditing is a ...
fundamentally logical process of thinking and reasoning - common sense and reasoning skills sometimes to be a good auditor u must use your imagination and innovation
Headed by the Auditor General, the work of _________includes compliance, operational, and financial audits.
governmental
auditing standards
guidelines for and measures of the quality of the auditor's performance
why do we need to study the business entity?
helps auditors organize how they approach financial statement audits
Management Assertions
in the financial statements
Which of the following best places the events of the last decade in proper sequence?
increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB Correct
assurance services qualities
independence objectivity integrity
Audit committees of public companies consist of
independent directors
the agency problem
information risk: the risk that information circulated by a company's management will be false or misleading principal (shareholders) have different interests than the agent (manager) and so the shareholders give the manager power in the company and the auditor verifies the acts and decisions by the managers are in best interest of company and that the manager is telling the truth
___ onyl auditors that work for compnay they are auditing
internal
international accounting standards board
international edition of FASB source of IFRS
international auditing and assurance standards board
issues international standards on auditing sets standard outside us
public accounting profession development
late 1990s and early 2000s --> firms aggressively sought opportnities to make a variety of high margin non audit services to their auditees
an independent audit adds value to the communication of financial information because the audit
lends credibility to the financial statements
which of the following properly describes the auditor's responsibilities as oppoosed to managements responsibilities?
management is responsible for affirming thatthe effects of any uncorrected misstatements in the FS are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement
external auditors
not employees of the entity being audited
Non-assurance services qualities
objectivity and integrity
attestastion services defintion
occurs when a practitioner is engaged to issue.... a report on SUBJECT MATTER, or an ASSERTION about subject matter, that is the responsibility of another party
structure of audit teams
partner, manager, senior, staff
steps in audit
plan audit obtain understanding of client and environment and internal controls assess risk for misstatement perform further audit processes complete the audit form opinion
auditing is demanded because
plays a valuable role in monitoring agency-principal relationships
Public Company Accounting Oversight Board
quasi governmental organization overseen by the SEC oversees the audits of public companies if your audit firm provides public companies it must register with the PCAOB and undergo regular (mandatory) inspections
because of the nature of audit evidence and characteristics of fraud, the auditor is able to obtain ___ nut not ____ assurance that material mistatements are detected
reasonable but not absolute
Securities Exchange Act of 1934
regulates ongoing reporting by companies whose securities are listed and traded on a stock exchnage or possess assets > 10M or are held by over 500 investors 10Q - quarterly 10K - annually 8K - when significant event occurs
The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the
senior management
financial accounting standards board
source of us gaap
Forensic Auditors
specialists at investigating fraud and crime
who issues cpa license?
state board of accountancy
information asymmetry refers to an imbalance of information between
stockholders and management of a company
non assurance services include
tax services consulting services bookkeeping
materiality
the amount by which a set of financial statements could be misstated without affecting the judgement of reasonable people
auditor's responsibilities
the auditor has a responsibility to: plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error, fraud, or illegal acts
information risk refers to the risk that
the client's financial statements may be materially false and misleading.
which of the following best describes the main reason that independent auditors report on management's financial statements?
the management team that prepares the statements and the persons who use the statements may have conflicting interests
audit risk
the risk that the auditor mistakenly expresses a clean audit opinion when the financial statements are materially misstated
corporate governance
the way in which a corporation is structured and the effect that structure has on the corporation's behavior due to the way resources are investigated and managed in the business, corporate governance is necessary and so managers must be overseen and supervised
Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because
they generally see a potential conflict of interest between company managers who want to get loans and the banks need for reliable financial statements
obtain and evaluate evidence
understand the business, inspection of documents
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
understanding as to the reasons for the change of auditors.
Who is ultimately responsible for financial statements?
while auditors have important responsibilities, MANAGEMENT is primarily responsible for 1- ensuring the fairness of the company's financial statements and 1- establishing and maintaining effective internal control
audits and conducted folowing
auditing standards (PCAOB auditing standards)
internal auditors
employee of the entity
variation in legal organization
proprietorship, general or limited partnership, corporation (some states do not allow)