Auditing Chapter 1
12. Compilation of quarterly financial statements for a small business that does not have any accounting personnel capable of preparing financial statements.
CPA/Accounting services
1. Financial statements of a small business to be submitted to a bank in support of a loan application.
CPA/Audit of financial statements
2. Financial statements of a large bank listed on the New York Stock Exchange to be distributed to stockholders.
CPA/Audit of financial statements
7. Determination of fairness of financial statements for public distribution by a corporation that has a professional-level internal auditing staff.
CPA/Audit of financial statements
Accounting and Reporting Standards for Corporate Financial Statements
Financial Accounting Standards Board (FASB)
presentation, and disclosure of all material items appearing in the financial statements.
Financial reporting framework
Which of the following types of services is generally provided only by CPA firms? 1)Tax audits. 2)Financial statement audits. 3)Compliance audits. 4)Operational audits.
Financial statement audits.
Which of the following is correct about forensic audits? 1)All audit engagements are forensic in nature. 2)Forensic audits are performed by law firms; they are not performed by CPA firms. 3)Forensic audits are equivalent to compliance audits. 4)Forensic audits are usually performed in situations in which fraud has been found or is suspected.
Forensic audits are usually performed in situations in which fraud has been found or is suspected.
9.Review of the tax return of the corporate president to determine whether charitable contributions are adequately substantiated.
IRS/Compliance audit
An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? 1)The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement. 2)Operational audits are more subjective and often involve evaluating efficiency and effectiveness of operations. 3)Operational audits do not ordinarily result in the preparation of a report. 4)The operational audit deals with pre-tax income.
Operational audits are more subjective and often involve evaluating efficiency and effectiveness of operations.
Audited financial Statements
Opinion
A government agency authorized to regulate companies seeking approval to issue securities for sale to the public.
Securities and Exchange Commission
Financial Reporting Releases (FRRs)
Securities and Exchange Commission (SEC)
Regulation S-X, Form and Content of Financial Statements.
Securities and Exchange Commission (SEC)
The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: 1)Auditing Standards Board. 2)Financial Accounting Standards Board. 3)Government Accounting Standards Boards. 4)Securities and Exchange Commission.
Securities and Exchange Commission.
the AICPA. Generally accepted auditing standards are developed and issued in the form of these statements.
Statements on Auditing Standards
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.
Suitable criteria
The risk that a company will not be able to meet its commitments is referred to as: 1)inherent risk. 2)information risk. 3)risk of collapse. 4)business risk.
business risk.
Compilation of financial statements
Accounting service
The procedures followed are agreed upon with the specified user or users.
Agreed-upon procedures
The report issued provides a summary of procedures performed (determined by the user) and findings.
Agreed-upon procedures
An attest engagement in which the CPAs agree to perform procedures for a specified party and issue a report that is restricted to use by that party.
Agreed-upon procedures engagement
Which of the following is a type of attest engagement? 1)Internal audit services. 2)Consulting services. 3)Tax advisory services. 4)Agreed-upon procedures.
Agreed-upon procedures.
The national professional organization of CPAs engaged in promoting high professional standards to ensure that CPAs serve the public interest.
American Institute of Certified Public Accountants
Audit Risk Alerts
American Institute of Certified Public Accountants (AICPA)
Industry Audit and Accounting Guides
American Institute of Certified Public Accountants (AICPA)
Statements on Auditing Standards (SASs)
American Institute of Certified Public Accountants (AICPA)
Statements on Standards for Accounting and Review Services (SSARSs)
American Institute of Certified Public Accountants (AICPA)
The Journal of Accountancy
American Institute of Certified Public Accountants (AICPA)
The Tax Advisor
American Institute of Certified Public Accountants (AICPA)
Which of the following is an example of a compliance audit? 1)An audit of financial statements. 2)An audit of a company's policies and procedures for adhering to environmental laws and regulations. 3)An audit of a company's internal control over financial reporting. 4)An audit of the efficiency and effectiveness of a company's legal department.
An audit of a company's policies and procedures for adhering to environmental laws and regulations.
Which of the following best describes the reason why independent auditors report on financial statements? 1)A management fraud may exist and it is more likely to be detected by independent auditors. 2)An audit provides credibility to the financial statements. 3)A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work. 4)Poorly designed internal control may be in existence.
An audit provides credibility to the financial statements.
A representation or declaration made by the responsible party, typically management of the entity.
Assertion
Professional services that enhance the quality of information, or its context, for decision makers.
Assurance services
An engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g., management).
Attest engagement
In general, internal auditors' independence will be greatest when they report directly to the: 1)Financial vice president. 2)Corporate controller. 3)Audit committee of the board of directors. 4)Stockholders.
Audit committee of the board of directors.
An examination designed to provide an opinion that is the CPA's highest level of assurance that the financial statements follow generally accepted accounting principles, or another acceptable basis of accounting.
Audit of financial statements
Audit procedures to prevent or detect fraud on the part of all employees and managers. today/1900
Audit performed in 1900
Auditors' attention concentrated on balance sheet. today/1900
Audit performed in 1900
Bankers and short-term creditors as principal users of audit reports. today/1900
Audit performed in 1900
Complete review of all transactions. today/1900
Audit performed in 1900.
Auditing for compliance with laws and regulations. today/1900
Audit performed today
Concern about fraudulent financial reporting. today/1900
Audit performed today
Determination of fairness of financial statements. today/1900
Audit performed today
Emphasis upon use of sampling techniques. today/1900
Audit performed today
Fairness of reported earnings per share. today/1900
Audit performed today
Generally accepted auditing standards. today/1900
Audit performed today
Influence of stock exchanges and the investing public upon use of independent auditors. today/1900
Audit performed today
Pressure for more disclosure. today/1900
Audit performed today
Registration statement. today/1900
Audit performed today
Assessment of internal control. today/1900
Audit performed today.
Government Accountability Office
Auditing staff reporting to Congress
5. Examination on a surprise basis of Midtown State Bank. Emphasis placed on verification of cash, marketable securities, and loans receivable and on consistent observation of the banking code.
Bank examiner/Compliance audit
Internal control
Basis for sampling and testing
Which of the following best describes the relationship between assurance services and attest services? 1)While attest services involve financial data, assurance services involve nonfinancial data. 2)While attest services require objectivity, assurance services do not require objectivity. 3)Both attest and assurance services require independence. 4)Attest and assurance services are different terms referring to the same types of services.
Both attest and assurance services require independence.
10.Review of daily attendance during spring term at Blue Ridge Consolidated School District to ascertain whether payments received from the state were substantiated by pupil-day data and whether disbursements by the district were within authorized limits.
CPA/Compliance audit
6. Analysis of the accounting system of a small business with the objective of making recommendations concerning installation of a computer-based system.
CPA/Consulting services
Which of the following has primary responsibility for the fairness of the representations made in financial statements? 1)Client's management. 2)Independent auditor. 3)Audit committee. 4)AICPA.
Client's management.
Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor? 1)Operational audit. 2)Internal audit. 3)Compliance audit. 4)Government audit.
Compliance audit.
Governmental auditing, in addition to including audits of financial statements, often includes audits of efficiency, effectiveness, and: 1)Adequacy. 2)Evaluation. 3)Accuracy. 4)Compliance.
Compliance.
Critical characteristic that must be maintained by the accounting profession
Credibility
Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting firms: 1)Disclosures related to accounting irregularities at Enron and WorldCom. 2)Restatements of financial statements by a number of public companies. 3)Conviction of the accounting firm of Arthur Andersen LLP. 4)Ethical scandals at the AICPA.
Ethical scandals at the AICPA.
An attest engagement designed to provide the highest level of assurance that CPAs provide on an assertion.
Examination
The report issued provides "reasonable assurance."
Examinations
This type of engagement provides more assurance than a review.
Examinations
When financial statements are involved, this is referred to as an audit.
Examinations
11. Review of transactions of a government agency to determine whether disbursements under the Payment-In-Kind program of the U.S. Department of Agriculture followed the intent of Congress.
GAO/Compliance audit
4. Review of costs and accomplishments of a military research program carried on within the air force to determine whether the program was cost-effective.
GAO/Operational audit
Financial accounting standards for cities are developed primarily by the 1)FASB. 2)IFAC. 3)GASB. 4)SEC.
GASB
Accounting and Reporting Standards for Governmental Entities
Governmental Accounting Standards Board (GASB)
The attest function: 1) Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services. 2) Includes the preparation of a report of the CPA's findings. 3) Requires a consideration of internal control. 4) Requires a complete review of all transactions during the period under examination.
Includes the preparation of a report of the CPA's findings.
Some of the following criteria are essential to satisfactory performance in several professions. Which one is unique to audit work by CPAs? 1)Due professional care. 2)Familiarity with a complex body of technical knowledge. 3)General competence. 4)Independence.
Independence.
As required by the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board, an audit that includes providing assurance on both the financial statements and internal control over financial reporting.
Integrated audit
3. Review of the management directive stating the goals and responsibilities of a corporation's mail-handling department.
Internal auditor/Operational audit
8. Review of the activities of the receiving department of a large manufacturing company, with special attention to efficiency of materials inspection and promptness of reports issued.
Internal auditor/Operational audit
When compared to an audit performed prior to 1900, an audit today: 1)Is more likely to use sampling. 2)Is less likely to include consideration of the effectiveness of internal control. 3)Has bank loan officers as the primary financial statement user group. 4)Includes a more detailed examination of all individual transactions.
Is more likely to use sampling
The CPA need not be independent to perform this service.
None
The report issued provides "absolute assurance."
None
The review of a company's financial statements by a CPA firm: 1)Is substantially less in scope of procedures than an audit. 2)Requires detailed analysis of the major accounts. 3)Is of similar scope as an audit and adds similar credibility to the statements. 4)Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.
Is substantially less in scope of procedures than an audit.
Disclosure
Material information
Operational audit
Measurement of effectiveness and efficiency of a unit of an organization
Quality control
Peer review
Which of the following is not an example of an assurance service? 1)Audit of financial statements. 2)Attesting to the reliability of a financial forecast. 3)Review of internal control over operations. 4)Preparation of a tax return.
Preparation of a tax return.
The most important benefit of having an annual audit by a public accounting firm is to: 1)Provide assurance to investors and other outsiders that the financial statements are reliable. 2)Enable officers and directors to avoid personal responsibility for any misstatements in the financial statements. 3)Meet the requirements of government agencies. 4)Provide assurance that illegal acts, if any exist, will be brought to light.
Provide assurance to investors and other outsiders that the financial statements are reliable.
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.
Public Company Accounting Oversight Board
Auditing Standards
Public Company Accounting Oversight Board (PCAOB)
Passage of the Sarbanes-Oxley Act led to the establishment of the: 1)Auditing Standards Board. 2)Public Company Accounting Oversight Board. 3)Public Accountancy Review Board. 4)Securities and Exchange Commission.
Public Company Accounting Oversight Board.
Which of these organizations has the responsibility to perform inspections of auditors of public companies? 1)American Institute of Certified Public Accountants. 2)Securities and Exchange Commission. 3)Financial Accounting Standards Board. 4)Public Company Accounting Oversight Board.
Public Company Accounting Oversight Board.
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.
Sarbanes-Oxley Act of 2002
Securities and Exchange Commission
Registration statement
Public Company Accounting Oversight Board
Regulation of auditors of public companies
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? 1)Establish independence standards for auditors of public companies. 2)Review financial reports filed with the SEC. 3)Establish auditing standards for audits of public companies. 4)Sanction registered audit firms.
Review financial reports filed with the SEC.
An engagement designed to express limited assurance relating to subject matter or an assertion.
Reviews
The procedures involved are generally limited to inquiry and analytical procedures.
Reviews
The report issued provides "limited assurance."
Reviews
The term "We are not aware of any material modifications that should be made" is often included in the report.
Reviews
Which of the following organizations establishes accounting standards for U.S. government agencies? 1)The Financial Accounting Standards Board. 2)The Governmental Accounting Standards Board. 3)The Federal Accounting Standards Advisory Board. 4)The Public Company Accounting Oversight Board.
The Federal Accounting Standards Advisory Board.
What best describes the purpose of the auditors' consideration of internal control in a financial statement audit for a nonpublic company? 1)To determine the nature, timing, and extent of audit testing. 2)To make recommendations to the client regarding improvements in internal control. 3)To train new auditors on accounting and control systems. 4)To identify opportunities for fraud within the client's operations.
To determine the nature, timing, and extent of audit testing.
The audit of an income tax return by an auditor of the Internal Revenue Service is considered a (an): 1)compliance audit. 2)operational audit. 3)financial statement audit. 4)internal audit.
compliance audit.
The CPA exam: 1)must be taken by all who wish to work for a CPA firm. 2)has four sections. 3)requires a peer review prior to a candidate admittance to the exam. 4)is administered and graded by the individual states.
has four sections.