Principles of Auditing & Other Assurance Issues Chapter 2
An auditor has concluded that the financial statements are not fairly presented in that they are pervasively misstated. The most appropriate type of audit opinion is: (1) adverse (2) disclaimer (3) qualified (4) unmodified
(1) adverse
Which of the following is not one of the forms of attestation presented in the AICPA Statements on Standards for Attestation Services: (1) Agreed-Upon Procedures. (2) Examination. (3) Inspection (4) Review.
(3) Inspection
Which of the following is not included in an integrated audit report on the financial statements of a public company? (a) The report states that the audit was performed in accordance with AICPA standards. (b) The report indicates that the financial statements are the responsibility of management. (c) The report indicates that the auditors have also audited the effectiveness of the company's internal control. (d) The report is signed in the name of the CPA firm.
(a) The report states that the audit was performed in accordance with AICPA standards.
An audit provides reasonable assurance of detecting material: Fraudulent Misappropriation of Financial Reporting assets (a) Yes Yes (b) Yes No (c) No Yes (d) No No
(a) Yes Yes
A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: (a) Compliance with generally accepted reporting standards. (b) A system of quality control. (c) A system of peer review. (d) Continuing professional education.
(b) A system of quality control.
The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA? (a) Accounting standards applicable to nonpublic companies. (b) Auditing standards applicable to audits of nonpublic companies. (c) Quality control standards applicable to audits of public companies. (d) Standards for reviews of the interim financial information issued by public companies.
(b) Auditing standards applicable to audits of nonpublic companies
Which of the following does the FASB consider a source of nonauthoritative guidance for use when there is no authoritative guidance available? (a) The FASB Codification. (b) FASB Concepts Statements. (c) SEC Rules. (d) SEC Interpretive Releases
(b) FASB Concepts Statements.
Financial statement audits performed under PCAOB requirements are designed to provide which type(s) of assurance with respect to the detection of material misstatements due to errors or fraud? Reasonable Absolute (a) Yes Yes (b) Yes No (c) No Yes (d) No No
(b) Yes No
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 AICPA quality control standard would most likely be satisfied when a CPA firm maintains records indicating which partners or employees of the firm were previously employed by the CPA firm's clients? (a) Professional relationship. (b) Engagement performance. (c) Relevant ethical requirements. (d) Monitoring.
(c) Relevant ethical requirements.
Registered public accounting firm
A public accounting firm registered with the PCAOB in accordance with SOX of 2002. Any CPA firm auditing SEC reporting companies must be registered
Reasonable assurance
In the context of an audit of financial statements, a high, but not absolute, level of assurance that the financial statements do not contain material misstatements due to errors or fraud. Low level of audit risk, the risk that the auditors express an inappropriate audit opinion when the financial statements are materially misstated
IASB
International Accounting Standards Board: An independent, privately funded accounting standard-setter that is committed to developing a single set of high-quality, understandable, and enforceable global accounting standards.
Which of the following is not explicitly included in a standard report for a nonpublic company? (a) The CPA's opinion that the financial statements comply with generally accepted accounting principles. (b) That generally accepted auditing standards were followed during the audit. (c) That internal control of the client was satisfactory. (d) An identification of the financial statements audited.
(c) That internal control of the client was satisfactory.
Inspection
(conducted by the PCAOB), a process that leads to an assessment of the degree of compliance of each registered public accounting firm and associated persons of the firm with the SOX of 2002 and the board's requirements in connection with its performance of audits, issuance of audit reports, and related matters
Which of the following organizations can revoke the right of an individual to practice as a CPA? (a) The Public Company Accounting Oversight Board. (b) The American Institute of Certified Public Accountants. (c) The Securities and Exchange Commission. (d) The applicable state board of accountancy.
(d) The applicable state board of accountancy.
Special purpose financial reporting framework
A financial reporting framework other than GAAP which is one of the following bases of accounting; cash basis, tax basis, regulatory basis, or contractual basis
Disclaimer of opinion
A form of report in which the auditors state that they do not express an opinion on the financial statements; it should include a separate paragraph stating the auditors' reasons for disclaiming an opinion and also disclosing any reservations they may have concerning the financial statements
Independence
A most important auditing standard, which prohibits CPAs from expressing an opinion on financial statements of an enterprises unless they are independent with respect to such enterprise; independence is impaired by a direct financial interest, services as an officer or trustee, certain loans to or from the enterprise and various other relationships
Internal control
A process, effected by the entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) reliability of financial reporting; (2) effectiveness and efficiency of operations; and (3) compliance with the applicable laws and regulations
Financial reporting framework
A set of criteria used to determine measurement recognition, representation, and disclosure of all material items appearing in the financial statements: for example, accounting principles generally accepted in the US and IFRS
Auditors report
A very precise document designed to communicate exactly the character and limitations of the responsibility being assumed by the auditors
Quality control standards
AICPA standards for establishing qualitiy control policies and procedures that provide reasonable assurance that all of a CPA firms engagements are conducted in accordance with applicable professional standards
Match each the following statements with the appropriate type of auditors' report (each auditors' report maybe used once, more than once, or not at all): d.The financial statements are not fairly presented.
Adverse
agree or disagree? The report indicates that management is responsible for the preparation of the financial statements.
agree
Adequate disclosure
All essential information as required by GAAP is included in the financial statements
Standard report
An audit report with (1) an unmodified opinion and (2) no additional matters emphasized (eg a change in accounting principles) beyond the information required in all audit reports. Not that while this term is frequently used in practice, the AICPA no longer formally uses it in its standards.
Adverse opinion
An opinion issue by the auditors that the finanical statements they have audited DO NOT PRESENT FAIRLY the financial position, results of operation or cash flows in conformity with US GAAP
Error
An unintentional misstatement of financial statements or omission of an amount or disclosure
agree or disagree? The report is ordinarily addressed "to whom it may concern."
Disagree
agree or disagree? The report should begin with "CPA's Report" at the top.
Disagree
Match each the following statements with the appropriate type of auditors' report (each auditors' report maybe used once, more than once, or not at all): a.The auditors are unable to determine the overall fairness of the financial statements.
Disclaimer
Fraud
For financial statement audits, fraud includes two types of intentional misstatements of financial statements - misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets. Legally, fraud is the misrepresentation by a person of a material fact, known by that person to be untrue or make with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured
GAAS
Generally accepted auditing standards: issued be the AICPA's Audiding Standards Board. addresses the specific responsibilities of the auditors as well as the auditors' further considerations relevant to the application of those responsibilities.
IFAC
International Federation of Accountants: a Worldwide org of national accounting bodies established to help foster a coordinated worldwide accounting profession with harmonized standards
agree or disagree? The report indicates that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion.
agree
PCAOB
Public Company Accounting Oversight Board: a Board established by SOX of 2002 to provide oversight of accounting firms that audit public companies by (1) establishing or adopting professional and ethical standards (2) conducting inspection of CPA firms and (3) enforcing compliance with professional and ethical standards. The board is composed of five individuals appointed by the SEC
Match each the following statements with the appropriate type of auditors' report (each auditors' report maybe used once, more than once, or not at all): c.A limitation on the scope of the audit is significant, but not so asto overshadow an overall opinion
Qualified
Match each the following statements with the appropriate type of auditors' report (each auditors' report maybe used once, more than once, or not at all): e.A material departure from GAAP exists, but not so material as to over shadow an overall opinion
Qualified
agree or disagree? The report indicates that the audit procedures selected depend on the auditors' judgment.
agree
Match each the following statements with the appropriate type of auditors' report (each auditors' report maybe used once, more than once, or not at all): b.This is the report most clients prefer.
Standard unmodified
Qualified Opinion
The appropriate form of audit report when there is a limitation in the scope of the audit or when the financial statements depart from GAAP significantly enough to require mention in the auditors' report, but not so significantly as to necessitate disclaiming an opinion or expressing an adverse opinion.
Consistency
The concept of using the same accounting principles from year to year so that the successive financial statements issued by a business entity will be comparable
General Purpose financial reporting framework
a financial reporting framework designed to meet the common financial needs of a wide range of users
Peer Review
a study and appraisal by an independent evaluator of a CPA firm's work. In a system review, the evaluator considers the CPA firms' system of qualify control to perform accounting and auditing work. In a engagement review, the evaluator studies and evaluates a sample of CPA firm's actual accounting work, including accounting reports issued and documentation prepared by the CPA firm as well as other procedures that the firm performed. Engagement reviews are only available for CPA firms that do not perform audits or other similar engagements.
agree or disagree? The report indicates that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion.
disagree
agree or disagree? The report indicates that the auditors' responsibility is to obtain particular assurance about whether the financial statements are free of material misstatements.
disagree
agree or disagree? The report ordinarily concludes on whether the financial statements are in conformity with generally accepted auditing standards.
disagree
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: A.) the report should not include the word "Registered"
no
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: B.) the report must also be addressed to management
no
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: H.) "Accounts that are material" should be replaced by "accounts or disclosures that are material"
no
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: I.) "ying and company" should be replaced with "howard smythe"
no
Select whether each of the following is or is not a principle (or a portion of a principle) underlying an audit conducted in accordance with Generally Accepted Auditing Standards. 1. The purpose of an audit is to provide financial statement users with an opinion by the auditors on whether the financial statements are presented fairly, in all material and immaterial respects, in accordance with the applicable financial reporting framework.
no
Select whether each of the following is or is not a principle (or a portion of a principle) underlying an audit conducted in accordance with Generally Accepted Auditing Standards. 5. Inherent limitations of an audit include the need to conduct an audit to achieve a balance between the benefit to management and the benefit to the auditors.
no
Audit risk
the risk that auditors may unkowningly fail to appropriately modify their opinion on FS that are materially misstated
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: C.) the report should say in "all material respects"
yes
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: D.) the basis for opinion section should precede the opinion sections
yes
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: E.) "reasonable assurance" should be replaced by "an opinion"
yes
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: F.) Generally accepted auditing standards" should be replaced by "an opinion"
yes
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: G.) "All" should be replaced by "material"
yes
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the following comments made by the reviewer of the report: J.) the report should include a statement of when the firm began serving as the corps auditor.
yes
Select whether each of the following is or is not a principle (or a portion of a principle) underlying an audit conducted in accordance with Generally Accepted Auditing Standards. 2. The auditors are responsible for having appropriate competence and capabilities to perform the audit.
yes
Select whether each of the following is or is not a principle (or a portion of a principle) underlying an audit conducted in accordance with Generally Accepted Auditing Standards. 3. The auditors are unable to obtain absolute assurance that the financial statements are free from material misstatement.
yes
Select whether each of the following is or is not a principle (or a portion of a principle) underlying an audit conducted in accordance with Generally Accepted Auditing Standards. 4. The opinion states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
yes