Internal Auditing- Ch. 2

Unlike auditors of nonpublic companies, auditors of large public companies are required to ______. provide assurance on the effectiveness of internal controls state management's responsibilities in the audit report provide an opinion on the financial statements

provide assurance on the effectiveness of internal controls

Auditors are responsible to obtain reasonable assurance that clients are in compliance with ______. only laws having a direct effect on financial statements laws having a direct effect on financial statements and other compliance laws only other compliance type of laws

only laws having a direct effect on financial statements

It is implied that there is a low level of risk remaining that auditors express an opinion that the financial statements are properly stated when they are not by the concept of ____________ ___________________

reasonable assurance

Select all that apply Identify the reasons why auditors cannot guarantee the correctness of financial statements. 1. There are inherent limitations in the accounting process. 2. The statements include absolute facts. 3. The auditors do not examine any transaction in detail. 4. The statements include many estimates.

1 & 4

To obtain reasonable assurance, the auditor should ______. 1. plan the work and properly supervise assistants 2. determine and apply appropriate materiality levels throughout the audit 3. review all transactions that occurred during the period

1&3

Select all that apply Which of the following items are the same for public and nonpublic company standard audit reports? 1. The rules for proper dating of the report. 2. The word "Independent" is included in the title. 3. The name used to sign the report. 4. The standards followed to conduct the audit. 5. The year the CPA firm begins auditing the company.

1, 2, & 3 *4-PCAOB for public companies and GAAP for nonpublic 5-this only appears on the report of a public company.*

Select all that apply Engagement reviews ______. 1. are of a lesser scope than system reviews 2. are only available for CPA firms that do not perform audits 3. emphasize the overall system of quality control

1,2

Select all that apply The PCAOB ______. 1. requires all firms that audit SEC registrants to register with them 2. may make referrals to the Justice Department to consider criminal cases 3. performs inspections of audit practices of registered public accounting firms 4. may impose monetary fines but not suspend firms or accountants from working on publicly traded company audit engagements 5. members are appointed by the AICPA for no more than two five-year terms

1,2,3 *4-They may impose fines and issue suspensions. 5-Members are appointed by the SEC.*

Select all that apply Which of the following areas are addressed in quality control standards? 1. Generally accepted accounting principles 2. Leadership responsibilities 3. Relevant ethical requirements 4. Generally accepted auditing standards 5. Human resources

2,3, & 5

A financial reporting framework is a set of criteria used to prepare ______. A. financial statements B. audits of nonpublic companies C. reviews of publicly traded companies

A

An auditor's personal responsibility to maintain a questioning mind, be alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence is called ______. . A. professional skepticism B. professional judgment C. independence D. reasonable assurance

A

Auditors are responsible to obtain reasonable assurance that clients are in compliance with ______. A. only laws having a direct effect on financial statements B. only other compliance type of laws C laws having a direct effect on financial statements and other compliance laws

A

Champ Electric, Inc. is a publicly traded company located in the United States. Auditors of Champ follow ______ standards when conducting an audit. A. PCAOB B. AICPA C. IAASB

A

Select all that apply Which of the following items are the same for public and nonpublic company standard audit reports? . The name used to sign the report. The year the CPA firm begins auditing the company. The word "Independent" is included in the title. The rules for proper dating of the report. The standards followed to conduct the audit.

The name used to sign the report. The word "Independent" is included in the title. The rules for proper dating of the report

True or false: If additional information is required, an auditor cannot issue an unmodified opinion.

false *In some situations, auditors include additional information in a report with an unmodified opinion.*

Select all that apply The report on the financial statements of a public company should ______. . 1. be signed in the name of the CPA firm with address 2. state when the firm began serving as the auditor 3. be dated as of the date the report is issued

1 & 2

The auditors' opinion paragraph ______. 1. does not guarantee accuracy 2. is based on an informed opinion, not absolute fact 3. includes the phrase "we certify that"

1 & 2

Members of the AICPA who are in public practice with a firm that performs accounting services in the scope of the AICPA's practice-monitoring standards ______. 1. are encouraged, not required to practice in a firm enrolled in the AICPA Peer Review Program 2. are required to practice in a firm enrolled in the AICPA Peer Review Program 3. may enroll in the AICPA Peer Review program even if their firm is not a member

2

Select all that apply The PCAOB audit "Basis for Opinion" paragraph describes or alludes to ______. 1. only the responsibilities of the auditor 2. registration requirements 3. the nature of a PCAOB audit 4. independence requirements

2, 3, & 4

Select all that apply The PCAOB audit "Basis for Opinion" paragraph describes or alludes to ______. 1. only the responsibilities of the auditor 2. the nature of a PCAOB audit 3. registration requirements 4. independence requirements

2,3, & 4

A sample of the CPA's firm's engagements is selected for review in ______. A. both system and engagement reviews B. system reviews only C. engagement reviews only

A

Registration with the PCAOB is ______. A. required for all CPA firms that audit SEC registrants B. optional, but recommended for all CPA firms that perform audits C. required for all CPA firms that perform audits D. optional, but recommended for all CPA firms that audit SEC registrants

A

Ron oversees inventory reporting at A+ Fabricating. Ron unintentionally forgets to record a receipt of inventory on December 30, right before the company's year-end causing an understatement in net income. This oversight is considered ______. A. an error B. fraud C. embezzlement

A

The AICPA establishes ______. A. GAAS standards only B. neither GAAS or PCAOB standards C. PCAOB standards only D. both GAAS and PCAOB standards

A

The auditors state that there is a limitation on the scope of the audit, but not so far as to overshadow an overall opinion when issuing a(n) ______ opinion. A. qualified B. adverse C. disclaimer of

A

When auditors determine that the financial statements follow GAAP and raise no other issues or concerns, the auditors will issue a(n) Blank______ opinion under PCAOB standards. A. unqualified B. unmodified C. qualified D. modified

A

Maria needs to research an issue for a nonpublic company. She is most likely to search the ______ first. A. FASB Codification B. Technical Practice Aids C. FASB Concepts Statements

A FASB Codification is the highest level of authority of GAAP and would be used first.

Professional skepticism includes ______. Select all that apply A. critical assessment of audit evidence B. being alert to conditions that may indicate possible misstatement due to error C. a questioning mind D. unconditional responsibility for situations, which cause misstatement due to fraud

A,B,C

The firm will undertake engagements only where the firm is competent to perform the engagement

Acceptance of client relationships

An intentional misstatement of inventory to overstate net income is considered ______. A. an error B. fraud C. skepticism

B

Auditors have the same responsibility regarding ______ as they have for material errors and fraud. A. both laws having a direct effect and other laws B. laws having a direct effect on the financial statements C. compliance laws that do not have a direct effect but are required to stay in business

B

In the audit report for a public company, the responsibilities of management are described in ______. A. the Opinion paragraph B. the Basis for Opinion paragraph C. both the Basis for Opinion and the Opinion paragraph

B

The auditors' opinion paragraph in a public company audit report addresses ______. A. management's opinion B. accounting principles C. accounting records

B

The most frequently used financial reporting framework in the United States is ______. A. Federal Accounting Standards B. Generally Accepted Accounting Principles C. International Financial Reporting Standards

B

Unlike auditors of nonpublic companies, auditors of large public companies are required to ______. A. state management's responsibilities in the audit report B. provide assurance on the effectiveness of internal controls C. provide an opinion on the financial statements

B

Select all that apply To obtain reasonable assurance, the auditor should ______. A. review all transactions that occurred during the period B. determine and apply appropriate materiality levels throughout the audit C. plan the work and properly supervise assistants

B,C

Select all that apply Blane, an auditor for Femi & Co. LLP, has been asked to draft an auditors' report for Sole Shoes Inc., a nonpublic company. The report should include ______. A. Management's Opinion B. Auditor's Opinion C. Management's Responsibility D. Auditor's Responsibility

B,C & D

Auditors are required to ______. A. design procedures to obtain reasonable assurance of detecting any violations of other laws regardless of the effect B. perform audit procedures that may identify noncompliance with other laws that may have a material effect on financial statements

B.

During the planning of an audit, auditors must assess the risk of material misstatements due to ______. A. errors only B. both errors and fraud C. fraud only D. neither errors nor fraud

B.

A company failed to report in its financial statements a current lawsuit with a probable negative outcome that will harm the company. This is a violation of the ______ concept. A. internal control B. materiality C. adequate disclosure

C

Standards that provide CPA firms with guidance to provide reasonable assurance that the firm's engagements are conducted in accordance with applicable professional standards are called ______. A. internal control standards B. general purpose financial reporting framework C. quality control standards

C

During an audit, Jose becomes aware that the client has violated an environmental law by disposing of waste inappropriately. Jose feels that the violation is intentional and material and therefore has an obligation to communicate the matter to ______. A. no one since it does not have a direct effect on the financial statements B. investors C. the proper authorities D. those charged with governance

D

he standards of the Financial Accounting Standards Boards may be referred to in the audit of ______. A. private, nongovernmental companies only B. all companies whether or not associated with a government C. public, nongovernmental companies only D. all nongovernmental companies

D

True or false: An auditor is allowed to own an immaterial number of shares of stock in a company that she audits without affecting independence principles

False

True or false: In most areas the current General Auditing Standards in use by the PCAOB differ significantly from AICPA standards.

False

True or false: The AICPA requires specific quality control procedures.

False *The AICPA states that specific procedures depend upon the size and nature of the firm's practice.*

True or false: If additional information is required, an auditor cannot issue an unmodified opinion.

False In some situations, auditors include additional information in a report with an unmodified opinion.

True or false: The date on the audit report should be no earlier than the date that the auditors have obtained sufficient appropriate evidence to support their opinion

True

Auditors of large publicly traded companies perform a(n) _________ audit, which includes providing assurance on both the financial statements and the effectiveness of ______ _______ over financial reporting

Integrated Internal control

Promotes an internal culture based on the recognition that quality is essential in performing engagements.

Leadership responsibilities for quality

Identify which of the following is not covered in the auditors' report of a nonpublic company. Management's opinion Auditors' responsibility Management's responsibility Auditor's opinion

Management's opinion

The policies and procedures related to quality control are relevant, adequate, and operating efficiently

Monitoring

As alternatives to a report with an unmodified or unqualified opinion, auditors may issue a report with a(n) _______ opinion, a(n) __________ opinion or a disclaimer of opinion.

Qualified Adverse

The two types of peer reviews are:

System and engagement

A peer review in which the evaluator selects a sample of the CPA firm's actual accounting work to evaluate whether the reports are procedures are appropriate is called a(n) ______ review. A. engagement B. AICPA C. peer analysis D. system

a

A review of a public accounting firm by the PCAOB to ensure compliance with the Sarbanes-Oxley Act of 2002 is called a(n) ______. A. inspection B. systems review C. engagement review D. peer review

a

A $500 error would most likely be considered material for ______. a school fund raising organization no organizations all organizations large U.S. manufacturers global corporations

a school fund raising organization

The standards of the Financial Accounting Standards Boards may be referred to in the audit of ______. private, nongovernmental companies only public, nongovernmental companies only all nongovernmental companies all companies whether or not associated with a government

all nongovernmental companies

Reasonable assurance is achieved when _________ risk is at an acceptably low level.

audit

A PCAOB inspection focuses primarily on evaluating ______. A. and testing compliance with the firm's quality control system B. the performance of a sample of individual audit and review engagements

b

Auditors have the same responsibility regarding ______ as they have for material errors and fraud. A. both laws having a direct effect and other laws B. laws having a direct effect on the financial statements C. compliance laws that do not have a direct effect but are required D. to stay in business

b

Inspections completed by the PCAOB performed to assess an accounting firm's compliance are provided for in ______. A. Generally Accepted Auditing Standards B. the Sarbanes-Oxley Act C. SEC rules and regulations D. the AICPA Peer Review Program

b

As a practical matter, quality procedures should be established that are applicable to ______. A. only auditing, other attestation and accounting services with established AICPA professional standard B. every CPA firm, regardless of size or nature C. every aspect of a CPA firm's practice

c

If the auditors deem that the financial statements are not fairly presented, they will issue a(n) ______ opinion. A. disclaimer of B. qualified C. adverse

c

Lee needs to research an accounting issue for a company. The source he would most likely reference first would be the FASB ____

codification

If the auditors are unable to determine the overall fairness of the financial statements, they will issue a(n) ______ opinion. A. adverse B. standard unmodified C. qualified D. disclaimer of

d

If the auditors are unable to determine the overall fairness of the financial statements, they will issue a(n)

disclaimer of opinions

Because of the various types of evidence obtained, it is appropriate for the auditors to state they have audited the ______ of a company. financial statements and accounting records accounting records financial statements

financial statements

First Company relies on one customer for the majority of its revenues each year. First Company's financial statements must acknowledge this relationship to financial statement users under the concept of adequate ______

disclosure

Auditing standards define unintentional misstatements or omissions of amounts or disclosures in the financial statements as ______

errors

Auditors ______ to make changes to the financial statements. have no right must get the permission of the board of directors have every right

have no right

Grace Chin serves on the board of directors of Bliss Company. The standard that prohibits Grace from also auditing the financial statements of Bliss is known as ______. independence assurance adequate planning

independence

Auditing firms attempt to keep their audit risk at a ______ level. high moderate low

low

Select all that apply According to the FASB, if, in light of surrounding circumstances, the magnitude of an item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item, the omission of the item in a financial report is considered a(n) ______ deficiency. (Enter only one word per blank.) circumstances omission material

material

The auditor's opinion in the Independent Auditors' Report states that "In our opinion, the financial statements referred to above present fairly, in all ________ respects, the financial position of the Company..."

material

When an item in the financial statements is not presented in accordance with applicable accounting principles, but not significant or material enough to overshadow an overall opinion or misstate the financial statements, the auditor will issue a(n)

qualified opinion

In performing an audit, the auditors determine that the allowance for uncollectible accounts is not sufficient. If management does not agree, the auditors will likely ______. qualify their opinion make the change and note the disagreement in their opinion withdraw from the engagement do nothing and issue an unmodified or unqualified opinion

qualify their opinion

A CPA firm should establish adequate _______ ______ policies and procedures to provide reasonable assurance that it follows professional standards on every engagement

quality control

A peer review in which the evaluator considers the CPA firm's system of quality control to perform accounting and auditing work is called a(n) _____ review.

system

In the audit report for a public company, the responsibilities of management are described in ______. both the Basis for Opinion and the Opinion paragraph the Opinion paragraph the Basis for Opinion paragraph

the Basis for Opinion paragraph