AUDITING WGU C240 1-5
"False, misleading, or deceptive advertising are expressly prohibited under Rule 502. Code defines false, misleading, or deceptive advertising practices as activities that:
1 Create false or unjustified expectations of favorable results. 2 Imply the ability to influence any court, tribunal, regulatory agency, or similar body or official. 3 Contain a representation that specific professional services in current or future periods will be performed for a stated fee, estimated fee or fee range when it was likely at the time of the representation that such fees would be substantially increased and the prospective client was not advised of that likelihood. 4 Contain any other representations that would be likely to cause a reasonable person to misunderstand or be deceived.
" "6 Principals of Professional Conduct
1. Responsibilities: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. 2. The Public Interest: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. 3. Integrity: To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. 4. Objectivity and Independence: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. 5. Due Care: A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best o
" "General Auditing Standards:
1. Technical training and proficiency 2. Independence 3. Due professional care
" "General Auditing Standards:
1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. 3. Due professional care is to be exercised in the performance of the audit and the preparation of the report.
" "Field Work Auditing Standards:
4. Adequate planning and supervision 5. Sufficient understanding of internal control 6. Sufficient appropriate evidential matter
" "Field Work Auditing Standards:
4. The work is to be adequately planned and assistants, if any, are to be properly supervised. 5. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. 6. Sufficient appropriate evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
" "Reporting Auditing Standards:
7. Conformity with GAAP 8. Consistency in application of accounting principles 9. Adequate disclosures 10. Express an opinion
" "Reporting Auditing Standards:
7. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP). 8. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. 9. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 10. The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor's name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor's work, if any, and the degree of responsibility the auditor is taking.
"The Department of Labor (DOL) most frequently conducts financial and performance audits following a. Government Auditing Standards. b. Sarbanes-Oxley Requirements. c. Generally Accepted Auditing Standards. d. Financial Accounting Standards Board pronouncements.
A Option "a" is correct because the DOL conducts most of its financial and performance audits following Government Auditing Standards, including audits of compliance with laws, evaluation of economy and efficiency of operations, and evaluation of effectiveness in achieving program results. Option "b" is incorrect because DOL audits do not tie directly to Sarbanes-Oxley Act requirements. Option "c" is incorrect because most DOL audits follow Government Auditing Standards, not generally accepted auditing standards. Option "d" is incorrect because Financial Accounting Standards Board pronouncements relate to accounting requirements rather than audit requirements.
" "The Public Company Accounting Oversight Board (PCAOB) has authority to establish which of the following relating to public companies? a. Both Attestation standards AND Independence standards b. Attestation standards but not Independence standards c. Independence standards but not Attestation standards d. Neither Attestation standards nor Independence standards
A Option "a" is correct because the PCAOB may establish attestation standards, independence standards, auditing standards, and quality control standards. Option "b" is incorrect because one of the replies is incorrect. Option "c" is incorrect because one of the replies is incorrect. Option "d" is incorrect because one or both of the replies are incorrect.
" "A review of a nonpublic company's financial statements is considered: a. An assurance engagement AND an attest engagement b. An assurance engagement, but not an attest engagement c. An attest engagement, but not an assurance engagement d. Neither an assurance engagement nor an attest engagemen
A Option "a" is correct because the professional standards consider review to be both assurance and attest engagements. Option "b" is incorrect because a review is considered to be an attest engagement. Option "c" is incorrect because a review is considered to be an assurance engagement. Option "d" is incorrect because a review is considered to be both an assurance engagement and an attest engagement.
" "The AICPA allows an auditor to perform which of the following services for an audit client? a. Performance of bookkeeping services for the client. b. Authorization of transactions for the client. c. Preparation of client source documents. d. Preparation and posting of journal entries without the client's approval.
A Option "a" is correct in that the AICPA allows performance of bookkeeping services for an audit client. Option "b" is incorrect because the AICPA considers authorization of transactions as impairing auditor independence. Option "c" is incorrect because the AICPA considers preparation of client source documents as impairing auditor independence. Option "d" is incorrect because, since the financial statements are those of management, the CPA should not prepare and post journal entries without client approval.
" "The PCAOB suggested all of the following ways to improve the application of professional skepticism except: A Limiting personal relationships with clients B Improvements in quality control C Proper tone at the top D Appropriate audit documentation
A The PCAOB suggested that improvements in the application of professional skepticism could come through 1- improvements in quality control, 2- proper tone at the top, 3- proper assignments of personnel to audit engagements, and 4- appropriate audit documentation.
" "A negligence law suit brought under which of the following laws results in the burden of proof being shifted more heavily to the auditor? A Securities Act of 1933 B Securities Exchange Act of 1934 C Sarbanes-Oxley Act D The burden of proof is equal under each of these laws
A The Securities Act of 1933 results in the highest standard of care for auditors due to the fact that investors are more heavily reliant on audited financial statements of companies issuing initial filings than they are for companies that have a long record of audited financial statements.
"An auditing firm audits 89 public companies that are issuers and 210 private companies. How often can this firm expect to be the subject of a PCAOB inspection? A Every three years B Never, they are not subject to PCAOB inspections C Every year D Every other year
A This firm would be subject to a PCAOB every three years since they audit fewer than 100 issuers.
" "Indicate below whether or not you believe the following situation would be considered a violation of one of the 4 SEC principles for determining auditor independence: The auditor of ADCS Co. has a substantial investment in ADCS's major competitor. Stock returns are such that when ADCS performs well, their competitor's stock price decreases and when ADCS does poorly their competitor's stock price increases. This violates the SEC's principle indicating that the auditor should not have a mutual
A This is a violation of the SEC's principle that the auditor should not have a mutual or conflicting interest with the client. Specifically, the auditor has a conflicting interest meaning that when the client does poorly, the auditor will benefit.
" "Which standard setter issues auditing standards for audits of non-public companies in the U.S.? ASB PCAOB FASB None of the above
ASB The ASB issues auditing standards for audits of nonpublic companies in the U.S.
" "Which of the following is an example of an assurance service? Audit of Financial Statements Evaluation of Clients IT systems and reporting on the findings to the public Evaulating and reporting on a client's internal controls All of the above are examples of assurance services
All of the above are examples of assurance services Each of these is an example of a type of assurance service. Recall that audits and attest engagements are subsets of assurance services. Thus, some services will be assurance services, but not audit or attest services; but all services that are either audit or attest services are types of assurance services.
" "Which of the following is not one of the 10 Generally Accepted Auditing Standards Auditor must exercise due professional care in the performance of the audit Auditor must state if accounting principles have not been consistently observed Auditor must protect confidentiality of client records Auditor must obtain an understanding the client's internal controls
Auditor must protect confidentiality of client records Confidentiality of client records is not one of the 10 GAAS.
" "What is the key distinction between audit services and attest services? Audit services provide written reports to interested users while attest services do not. Audits provide assurance regarding subject matter that is the responsibility of others while attest services do not Audits are limited to economic actions and events while attest services are not None of the above is a distinction between audits and attest services
Audits are limited to economic actions and events while attest services are not Both audits and attest services provide written reports and both are regarding subject matter that is the responsibility of others.However, only audits are limited to economic actions and events.
" "Which of the following forms of payment to the external auditor would be prohibited under the AICPA's code of professional conduct? A The auditor is paid $4,000 up front and $3,000 more upon completion of the audit engagement B The auditor is paid $4,000 up front and between $3,000 and $5,000 upon completion of the engagement depending on the favorability of the audit opinion C The auditor is paid $7,000, payable at the completion of the audit engagement D None of the above would be prohibite
B Auditors are prohibited from receiving contingent fees which are defined as fees that are dependent on the outcome of the audit.
" "What term refers to the risk of loss associated with accepting an audit engagement? A Control risk B Engagement risk C Inherent risk D Audit risk
B Engagement risk refers to the risk of loss (e.g., litigation exposure, reputation impairment) associated with the acceptance of an audit engagement.
" "The series of international standards on auditing financial statements issued by the International Auditing and Assurance Standards Board are referred to as: a. Statements on Auditing Standards. b. International Standards on Auditing. c. International Standards on Attestation. d. International Assurance Standards.
B Option "a" is incorrect because Statements on Auditing Standards are those of the AICPA's Auditing Standards Board. Option "b" is correct because such standards are referred to as International Standards on Auditing (ISAs). Option "c" is incorrect because there is no series of Intentional Standards on Attestation. Option "d" is incorrect because there is no series titled International Assurance Standards. However, the IAASB does have a series titled International Standards on Assurance Engagements.
" "Within the context of quality control, a primary purpose of the engagement performance element is to help ensure that a. CPA firm personnel have adequate technical training. b. Engagements are adequately supervised. c. The CPA firm undertakes only those engagements it is competent to perform. d. CPA firm personnel comply with relevant ethical requirements.
B Option "a" is incorrect because it is an objective of the human resources element of quality control. Option "b" is correct because it is an objective of the engagement performance element of quality control. Option "c" is incorrect because it is an objective of the acceptance and continuance of client relationships and specific engagements element of quality control. Option "d" is incorrect because the emphasis of such education is not primarily on obtaining peer review skills.
" "Which of the following professional services would be considered an attest engagement? a. A management consulting engagement to provide computerized advice to a client. b. An engagement to report on compliance with statutory requirements. c. An income tax engagement to prepare federal and state tax returns. d. An engagement to prepare the tax returns of the company's CEO.
B Option "a" is incorrect because management consulting engagements are not considered attest engagements. Option "b" is correct because a report on compliance with statutory requirements might be structured as an attest engagement in which the required ""written assertion"" relates to such compliance. Option "c" is incorrect because tax returns preparations are not considered attest engagements. Option "d" is incorrect because an engagement to prepare the tax returns of the company's CEO is considered a nonattest engagement.
" "When an accountant is not independent, the accountant is precluded from issuing a: a. Compilation report. b. Review report. c. Management advisory report. d. Tax planning report.
B Option "a" is incorrect because non-independent accountants may perform compilations. Option "b" is correct since a review is an attest engagement that results in limited assurance; accordingly, independence is required. Option "c" is incorrect because independence is not required when issuing a management advisory report. Option "d" is incorrect because independence is not required when issuing a tax planning report.
" "What is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client? a. The successor auditor has no responsibility to contact the predecessor auditor. b. The successor auditor should obtain permission from the prospective client to contact the predecessor auditor. c. The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact. d. The successor a
B Option "a" is incorrect because the successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is obtained. Option "b" is correct because permission must be obtained from the prospective client before contact with the predecessor is attempted. The successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is received. Option "c" is incorrect because the successor auditor must receive permission from the prospective client before contact with the predecessor auditor is permitted. Option "d" is incorrect because the successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is obtained.
" "When establishing an understanding with an audit client, that understanding should be documented a. Through use of an engagement letter. b. Through a written communication with the client. c. Either orally or in writing with the client. d. In a manner completely based on the auditor's seasoned professional judgment.
B Option "a" is incorrect because while an engagement letter is frequently used, it is not required. Option "b" is correct because the professional standards state that the communication should be in writing. Option "c" is incorrect because the understanding should be written, not oral. Option "d" is incorrect because the professional standards allow only limited auditor use of professional judgment here.
" "Which of the following laws requires public companies to file 10-K's, 10-Q's and 8-K's with the SEC? A The Securities Act of 1933 B The Securities Exchange Act of 1934 C The Sarbanes-Oxley Act D None of the above
B The Securities Exchange Act of 1934 requires public companies to file these periodic reports with the SEC.
" "Which of the following is not a principle of the AICPA Code of Professional Conduct? A The Public Interest B Materiality C Due Care D Objectivity and Independence
B The six principles of professional conduct are: 1- Reponsibilities 2- The Public Interest 3- Integrity 4- Objectivity and Independence 5- Due Care 6- Scope and Nature of Services
"Which of the following best describes what is meant by the term 'independence in fact'? A The auditor does not have any investments in the client that might lead investors to doubt his or her independence B The auditor is unbiased and impartial in thought as he or she carries out the audit C The investors can't rely on the auditor's report since he or she is biased D None of the above describes the term 'independence in fact'
B The term independence in fact refers the auditor's state of mind, including the impartiality when conducting the audit.
" "Which of the following is a distinguishing factor of attest services? A written Report is issued The assurance is provided on a subject matter that is someone else's responibility Both of the above are distinguishing factors of attest services Neither of the above are distinguishing factors of attest services
BOTH Attest services involve a written report being issued regarding a subject matter that is the responsibility of someone else.
" "The McKesson & Robbins fraud led to the addition of the following auditing standards A Requirement to confirm accounts receivable B Requirement to confirm cash C Requirement to observe the inventory count D All of the above E Both A and C
Both A and C The McKesson & Robbins fraud led to the addition of the requirement to send confirmations for Accounts Receivables as well as the requirement to observe the physical count of inventory.
" "Which of the following is one of the 10 Generally Accepted Auditing Standards A Auditor must detail test every account balance B Auditor must test all of the clients internal controls for effectiveness C Auditor must obtain an understanding of the client's internal controls D Auditor must protect confidentiality of client records
C Obtaining an understanding of the clients internal controls is one of the 10 GAAS.
" "An auditor's independence is considered impaired if the auditor has a. An immaterial, indirect financial interest in a client b. An automobile loan from a client bank, collateralized by the automobile. c. A joint, closely held business investment with the client that is material to the auditor's net worth. d. A mortgage loan, executed with a financial institution client on March 1, 1990, that is material to the auditor's net worth.
C Option "a" is incorrect because immaterial indirect financial interests are allowed by Interpretation 101-1. Option "b" is incorrect because automobile loans from a client bank collateralized by the automobile do not impair independence based on Interpretation 101-5. Option "c" is correct because Interpretation 101-1 prohibits joint closely held investments that are material to the auditor. Option "d" is incorrect because mortgage loans that existed at January 1, 1992, were grandfathered and are not considered an impairment of the auditor's independence.
" "When making a review of interim financial information the auditor's work consists primarily of a. Studying and evaluating limited amounts of documentation supporting the interim financial information. b. Scanning and reviewing client-prepared, internal financial statements. c. Making inquiries and performing analytical procedures concerning significant accounting matters. d. Confirming and verifying significant account balances at the interim date.
C Option "a" is incorrect because interim reviews are not undertaken to express an opinion on the financial statements. Accordingly, tests of accounting records and other procedures to obtain corroborating evidential matter are generally not performed. Option "b" is incorrect because a review contemplates more than scanning and reviewing the client's financial statements. Option "c" is correct because a review of interim financial information consists primarily of inquiries and analytical procedures concerning significant accounting matters relating to the financial data being reported. Option "d" is incorrect because interim reviews are not undertaken to express an opinion on the financial statements. Accordingly, tests of accounting records and other procedures to obtain corroborating evidential matter are generally not performed.
" "In performing an attestation engagement, a CPA typically a. Supplies litigation support services. b. Assesses control risk at a low level. c. Expresses a conclusion about the assertion on the subject matter. d. Provides management consulting advice.
C Option "a" is incorrect because most litigation support services are not attest engagements. Option "b" is incorrect because control risk need not generally be assessed at a low level on attestation engagements; also, control may not be of major importance on some attest engagements. Option "c" is correct because, when performing an attest engagement, a CPA expresses a conclusion about the assertion on the subject matter. Option "d" is incorrect because most management consulting engagements are not attestation engagements.
" "The profession's ethical standards would most likely be considered to have been violated when a CPA a. Continued an audit engagement after the commencement of litigation against the CPA alleging excessive fees filed in a stockholder's derivative action. b. Represented to a potential client that the CPA's fees were substantially lower than the fees charged by other CPAs for comparable services. c. Issued a report on a financial forecast that omitted a caution regarding achievability. d. Accep
C Option "a" is incorrect because stockholder commencement of litigation against the CPA will not always be deemed to have an adverse impact on independence (Ethics Interpretation 101-6). Option "b" is incorrect because a representation as to fees does not violate the ethical standards if it is based on verifiable facts and is not false, misleading, or deceptive (Ethics Rule 502, Interpretation 502-2). Option "c" is correct because the professional standards on forecasts require the inclusion of a caution statement as to achievability. Omission of such a caution statement would be a violation of the Code of Professional Conduct which requires that CPAs comply with the appropriate professional standards (Ethics Rule 202). Option "d" is incorrect because independence is not required for consulting engagements.
" "The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to a. Monitor the risk factors concerning misstatements arising from the misappropriation of assets. b. Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. c. Minimize the likelihood of associating with clients whose management lacks integrity. d. Document objective criteria for the CPA firm's responses to pe
C Option "a" is incorrect because such a client acceptance/continuance policy is not aimed primarily at monitoring risk factors relating to misappropriation of assets. Option "b" is incorrect because the human resources quality control element deals with personnel training. Option "c" is correct because the quality control element on accepting or continuing a client relationship has the purposes of (1) considering the integrity of the client, (2) determining that the firm is competent to perform the engagement, and (3) determining that the firm can comply with legal and ethical requirements. Option "d" is incorrect because a client acceptance/continuance policy is not aimed primarily at responding to peer review comments.
" "International Standards on Auditing are issued by a. The American Institute of Certified Public Accountants. b. The International Organization of Securities Commissions. c. The International Federation of Accountants. d. The International Auditing Society.
C Option "a" is incorrect because the AICPA does not issue International Standards on Auditing. Option "b" is incorrect because the International Organization of Securities Commissions does not issue International Standards on Auditing. Option "c" is correct because International Auditing Standards are issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. Option "d" is incorrect because there is no group titled the International Auditing Society that issues International Standards on Auditing.
" "Which of the following AICPA standards did the PCAOB not adopt as a part of its interim standards? a. Auditing Standards Board Standards. b. Attestation Standards. c. Accounting and Review Services Standards. d. Quality Control Standards.
C Option "a" is incorrect because the PCAOB adopted the Statements on Auditing Standards of the Auditing Standards Board. Option "b" is incorrect because the PCAOB adopted the AICPA's Attestation Standards. Option "c" is correct because the PCAOB did not adopt the AICPA's Accounting and Review Services Standards because they only apply to nonpublic companies (""non-issuers""). Option "d" is incorrect because the PCAOB did adopt the AICPA's Quality Control Standards.
"Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? a. A close relative has a material investment in that client of which the CPA is not aware. b. A cousin has an immaterial investment in the client of which the CPA is aware. c. The CPA's father is president of the audit client. d. The CPA's spouse participates in a savings plan sponsored by the client.
C Option "a" is incorrect because the relative's interest of which the CPA is unaware does not impair independence. Option "b" is incorrect because it is doubtful that a reasonable person aware of all relevant facts relating to the cousin's immaterial investment would conclude that there is an unacceptable threat to independence. Option "c" is correct because the CPA's father is in what is considered a key position, and as such the CPA is not independent. Option "d" is incorrect because participation in such a savings plan is considered acceptable.
" "Which of the following represents an act discreditable which is prohibited under the code of professional conduct? A A CPA fails to file a tax return or pay a tax liability B A CPA fails to follow the expectations outlined in the code of professional conduct C An auditor fails to follow auditing standards developed by the AICPA D Each of the above is an example of acts discreditable
D
" "Which auditing firms are subject to annual PCAOB inspections? A Auditing firms auditing private company clients B All auditing firms C Auditing firms auditing one or more public issuers D Auditing firms auditing 100 or more public issuers
D Auditing firms registered with the PCAOB and audit 100 or more public issuers are subject to annual inspections.
" "Which auditing firms are subject to PCAOB inspections? A Auditing firms auditing 100 or more clients B All auditing firms C Auditing firms auditing private company clients D Auditing firms auditing one or more issuers
D Auditing firms that are registered with the PCAOB are subject to inspections. Since all auditing firms that audit one ore more issuers are required to register with the PCAOB, firms auditing one or more issuers are subject to PCAOB inspections.
" "Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? a. Establish procedures that comply with the standards of the Sarbanes-Oxley Act. b. Use attributes sampling techniques in testing internal controls. c. Consider inherent risk and control risk before determining detection risk. d. Establish policies to ensure that the audit work meets applicable professional standards.
D Option "a" is incorrect because the quality control standards do not require that a CPA firm establish procedures to comply with the standards of the Sarbanes-Oxley Act when that client has no public (""issuer"") clients. Option "b" is incorrect because the AICPA quality control standards do not directly address attributes sampling. Option "c" is incorrect because the quality control standards do not directly address the auditor's requirements relating to inherent risk, control risk and detection risk. Option "d" is correct because the engagement performance element of quality control standards require that the firm establish policies and procedures to provide it with reasonable assurance that engagements are consistently performed in accordance with professional standards and regulatory and legal requirements.
" "In an accountant's review of interim financial information, the accountant typically performs each of the following, except a. Reading the available minutes of the latest stockholders' meeting. b. Applying financial ratios to the interim financial information. c. Inquiring of the accounting department's management. d. Obtaining corroborating external evidence.
D Option "a" is incorrect because the reading of minutes is ordinarily a part of a review. Option "b" is incorrect because ""applying financial ratios"" is a form of analytical procedures that may be included in a review. Option "c" is incorrect because inquiries of accounting department management personnel are appropriate in a review. Option "d" is correct because reviews consist largely of inquiries of management and analytical procedures and not corroborating external evidence.
" "Which of the following laws established the SEC in the U.S.? A The Securities Act of 1933 B The AFCA of 2003 C The Sarbanes-Oxley Act D None of the above
D The Securities Exchange Act of 1934 established the SEC.
" "Indicate below whether or not you believe the following situation would be considered a violation of one of the 4 SEC principles for determining auditor independence: The auditor of ADCS Co. has a substantial investment in ADCS's major competitor. Stock returns are such that when ADCS performs well, there is no impact on the competitor's stock price and when ADCS does poorly there is not impact on the competitor's stock price. A This violates the SEC's principle indicating that the auditor
D This is not a violation of the SEC's principle of auditor independence as there is no impact one way of the other on the stock of the competitior regardless of how ADCS performs.
TRUE OR FALSE Auditors need to be independent in fact, but they are not required to be independent in appearance when conducting the audit.
FALSE
" "TRUE OR FALSE An auditor has a reputation of providing unqualified audit opinions to their clients and uses this fact to solicit new clients. This is not a violation of the code of professional conduct because it is true.
FALSE This is a violation of the code of professional conduct's prohibition against false, misleading, or deceptive advertising. Specifically, this form of advertising creates false or unjustified expectations for favorable results in the audit.
" "TRUE OR FALSE An auditor has a direct financial interest in the client, but it is not material to either the auditor or the client. This does not violate the auditor's independence.
FALSE All direct financial interests, whether material or not, are prohibited by auditor independence rules.
" "TRUE OR FALSE Attest services do not involve the issuance of a report regarding the subject matter being examined.
FALSE Attest services do involve issuing a report regarding the subject matter examined.
" "TRUE OR FALSE The private portion of PCAOB inspection reports are never made available to the public.
FALSE Audit firms are given 12 months to rectify and address specific issues identified in the public portions of PCAOB inspections. If the firm does not remedy the defects within the 12 months, the private portion of the report is made public by the PCAOB.
" "TRUE OR FALSE Audit partners in the U.S. can serve a particular client for no more than 7 years consecutively.
FALSE Audit partners are limited to serving a particular client for 5 years consecutively.
" "TRUE OR FALSE When auditing financial statements, auditors seek to identify all misstatements in the financial statements, regardless of size.
FALSE Auditors seek to identify only material misstatements. While they may identify misstatements that are not material in nature, they do not design their audit procedures to identify non-material misstatements.
" "TRUE OR FALSE Audits of financial statements provide absolute assurance that the financial statements are free of material misstatements.
FALSE Audits of financial statements provide reasonable, but not absolute, assurance that the financial statements are free of material misstatement.
" "TRUE OR FALSE In order to maximize long-term profitability, audit firms generally seek to engage every client that becomes available.
FALSE Becasue engagement risk is a significant factor, audit firms use a systematic process to selectively choose which clients to engage with.
" "TRUE OR FALSE CPAs provide reasonable assurance when performing a review of financial statements.
FALSE CPAs provide only limited assurance when reviewing financial statements.
" "TRUE OR FALSE While clients are very particular about which auditor they will select, auditors are willing to accept any client due to the financial benefits they receive.
FALSE Clients are very careful in accepting clients because of the financial or reputational losses they may be exposed to with unethical clients.
" "TRUE OR FALSE Incoming (i.e., new) auditors should contact the prior year's auditor without informing the client in order to inquire about management integrity, potential disagreements with management, and other sensitive issues that could influence the incoming auditor's decision of whether or not to accept the client.
FALSE Contacting the predecessor auditor is required under GAAS. However, the current (successor) auditor should obtain management's permission before contacting the prior auditor.
" "TRUE OR FALSE A CPA was engaged to complete the financial statement audit for a small privately-held company. Two months into their work, the auditor was dismissed from service and paid for the work up to that point. The client requested that all client-produced documents be returned to the client without delay. The auditor, being busy with other matters, failed to return the documents to the client. This is not an example of an act discreditable to the profession because the auditor has resp
FALSE Failure to return client-provided documents to the client at their request is an example of an act discreditable to the profession.
" "TRUE OR FALSE ISA auditing standards are issued by the PCAOB
FALSE ISA auditing standards are issued by the IAASB.
" "TRUE OR FALSE Independence in mental attitude is among the 10 GAAS that falls under the Fieldwork Standards category.
FALSE Independence in mental attitude is one of the 10 GAAS that falls under the general standards category.
" "TRUE OR FALSE If there were no way to gain assurance regarding the accuracy of financial statement information provided by management, investors would typically assume it was low quality.
FALSE Investors would typically assume average quality if they could not gain assurance regarding the accuracy of financial information.
" "TRUE OR FALSE Auditors provide value to the financial statements through preventing, but not usually through detecting material misstatements.
FALSE Knowing that the auditor will be evaluating the financial statements will cause management to be more careful in preparing them, reducing the likelihood of both intentional and unintentional misstatements. In addition, auditors frequently find material misstatements in the course of the audit which can then be corrected by management.
"TRUE OR FALSE Risk premium is the difference between the return demanded by investors and the return that would be demanded in the absence of risk.
FALSE Risk premium is the difference between the return demanded by investors and the return that would be demanded in the absence of risk.
" "TRUE OR FALSE AICPA peer review policies require that the largest audit firms be inspected annually.
FALSE The AICPA requires a peer review every three years.
" "TRUE OR FALSE Unlike the PCAOB rules, the AICPA requires a peer review to be performed every year.
FALSE The AICPA requires a peer review every three years.
" "TRUE OR FALSE The FASB issues auditing standards for audits of non-public companies in the U.S.
FALSE The ASB issues auditing standards for audits of nonpublic companies in the U.S.
" "TRUE OR FALSE SAS standards are issued by the IAASB
FALSE The Auditing Standards Board of the AICPA issues SAS auditing standards.
" "TRUE OR FALSE The PCAOB randomly selects which audit engagements to inspect in its annual inspection process.
FALSE The PCAOB strategically selects audit engagements that are most likely to contain deficiences when performing its annual inspections.
" "TRUE OR FALSE Generally Accepted Auditing Standards of the PCAOB are broken into the following three categories: Fieldwork, General, and Independence.
FALSE The PCAOB's 10 GAAS are broken into the following three categories: Fieldowork, General, and Reporting Standards
" "TRUE OR FALSE The AICPA has congressional authority to set auditing standards in the U.S.
FALSE The SEC has congressional authority, not the AICPA
" "TRUE OR FALSE The Securities Act of 1933 requires audited financial statements to be filed with the SEC after the initial sale of securities?
FALSE The Securities Exchange Act of 1934 requires periodic filings (including audited financial statements) with the SEC following the initial sale of securities.
" "TRUE OR FALSE In order to properly exercise professional skepticism, the auditor should assume that management is not telling the truth and should treat them and the information they provide as if it were fraudulent.
FALSE The auditor does not automatically assume that management is committing fraud, nor should he treat management as if they were committing fraud. The auditor should not, however, treat information as if it were completely accurate but should verify the information provided to them by management.
" "TRUE OR FALSE An auditor owns 2% of a diversified mutual fund, but the mutual fund invests in one of the auditor's clients. The auditor does not control the investment decisions of the mutual fund. The auditor would not be considered independent in this scenario.
FALSE The auditor would be considered independent in this scenario since she owns less than 5% of the mutual fund shares, the fund is diversified, and the auditor does not control the investment decisions of the mutual fund.
" "TRUE OR FALSE An audit client is permitted to hire their former auditor to work in a key position (such as the controller or CFO position) at their company immediately following an audit engagement.
FALSE The client can hire their former auditor to work in these positions, but there is a one-year cooling off period before the individual can occupy one of those positions.
" "TRUE OR FALSE The best definition of materiality is that an item is material if the client thinks it is important.
FALSE The concept of materiality relates to whether users of the financial statements believe it is important/significant enough to impact their judgments.
" "TRUE OR FALSE The engagement letter should include a copy of the audit program outlining how the auditor intends to perform the audit.
FALSE The engagement letter contains general overview of the agreement between the client and the auditor, but the auditor does not generally share the audit program with the client.
" "TRUE OR FALSE The engagement quality control review should be performed promptly following the audit report release date.
FALSE The engagement quality control review should be completed prior to the release of the auditor report.
" "TRUE OR FALSE Auditing standards allow the engagement partner assigned to a particular client to oversee the performance of the quality control review at the conclusion of the audit.
FALSE The quality control review must be performed and overseen by those who are independent of the audit engagement team.
" "TRUE OR FALSE The term 'assertion' refers to the process of testing internal controls in an audit.
FALSE The term 'assertion' refers to implicit or explicit claims made by management in the preparation of the financial statements.
" "TRUE OR FALSE Attest services performed by an auditor only include analyzing historical finanancial information, not prospective (forward-looking) financial information.
FALSE This statement is false, attest services do include prospective (forward-looking) information.
" "TRUE OR FALSE The fact that Mr. Musica knew what the auditors would do during the course of the audit had nothing to do with the reason the McKesson & Robbins fraud was able to be carried out for so long.
FALSE This statement is false. Mr. Musica knew in advance what the auditors would do and was therefore able to avoid detection.
" "TRUE OR FALSE One result of the market for lemons in the capital markets is that products sold by the companies are often less expensive.
FALSE This statement is false. Products would generally be more expensive because of the market for lemons. Companies in this environment have a more difficult time obtaining financing so they cannot invest in efficient manufacturing processes and often cannot take advantage of economies of scale causing products to be more expensive.
"TRUE OR FALSE The Securities Exchange Act of 1934 requires that the AICPA set rigorous auditing standards.
FALSE This statement is false. The AICPA is not named at all in the Securities Exchange Act of 1934. Rather, the requirement to develop rigorous auditing standards is given to the SEC.
" "TRUE OR FALSE PCAOB standards require auditing firms to establish formal sytems of quality controls, but AICPA standards are silent on this issue.
FALSE both AICPA and PCAOB standards require that audit firms establish formal systems of quality control to ensure an acceptable level of audit quality.
" "TRUE OR FALSE The engagement partner is one who has no engagement responsibilities with the client other than to review the work performed by the engagement team.
FALSE it describes the concurring partner's role.
" "TRUE OR FALSE The AICPA peer review program is an optional quality control mechanism for audit firms using AICPA auditing standards.
FALSE the AICPA peer review program is mandatory for firms using the AICPA's auditing standards.
" "The American Institute of Certified Public Accountants (AICPA) defines ""objectivity"" as a state of mind, a quality that imposes all of the following obligations except: Free of conflicts of interest Familiarity Intellectual honesty Impartiality
Familiarity Familiarity, while not a bad thing, can have a potential impact on objectivity as it can create complacency. The AICPA does not list familiarity as an obligation for objectivity.
" "Which of the following is the "established criteria" against which the financial statements in the United States are evaluated? GAAP The COSO framework GAAS PCAOB
GAAP GAAP is the established criteria used in the U.S. for an audit of financial statements. The COSO framework would be the established criteria used for an audit of internal controls over financial reporting.
" "Independence in mental attitude is among the 10 GAAS that falls under which of the following three categories? Reporting Standards Fieldwork Standards General Standards
General Standards Independence in mental attitude is one of the 10 GAAS that falls under the general standards category.
" "Which of the following is NOT one of the indicators of audit quality identified by the IAASB in its "Framework for Audit Quality"? Understanding their role as an auditor Exercising professional skepticism Having no experience in auditing a particular client Having the knowledge necessary to conduct a proper audit Each of the above is an indicator of audit quality identified by the IAASB
Having no experience in auditing a particular client The IAASB identified experience with a particular client as an indicator of audit quality.
" "Which of the following is not an example of an assurance service? Evaluating and reporting on a client's internal controls Evaluation of client's IT systems and reporting on the findings to the public IT system implementations. Audit of financial statements
IT systems implemenations IT systems implemenations are a form of consulting that does not provide assurance, it provides original system implemenation.
" "Which level of quality of information would eventually exist in the market for lemons assuming there was no way to gain assurance regarding the accuracy of the information? HIGH QUALITY ONLY MEDIUM and LOW QUALITY ONLY LOW QUALITY ONLY LOW, MEDIUM, and HIGH QUALITY
LOW QUALITY ONLY Eventually, all financial statements would be low quality since companies would not be willing to invest in above average information if they were paying the cost of capital associated with average quality information. Thus, the average would continue to decline until all information was low quality.
" "Which type of business organization do each of the Big 4 firms use? Limited Liability Company (LLC) Sole Proprietorship General Partnership Corporation Limited Liability Partnership (LLP)
Limited Liability Partnership (LLP) The Big 4 firms each use an LLP business form.
" "An audit partner of ACE Auditors who practices in the Salt Lake City, Utah office of the firm performs the audit of TCE Co. Partner B practices in the Boise, Idaho office of the firm. She is not in an oversight role in the firm, but provides around 5-7 hours of tax-related services per year to TCE Co. Is Partner B considered a 'Covered Member' under AICPA rules? Yes, partner B is considered a covered member No, partner B is not considered a covered member There is not enough information to an
NO Partner B is not considered a covered member. If her tax services increase to 10 or more hours per year then she would be considered a covered member.
" "Which level of quality of information would eventually exist in the market for lemons assuming there was no way to gain assurance regarding the accuracy of the information? Medium quality only Medium and low quality only Low, Medium, and High quality High quality only None of the above
None of the above Eventually, all financial statements would be low quality since companies would not be willing to invest in above average information if they were paying the cost of capital associated with average quality information. Thus, the average would continue to decline until all information was low quality.
"Which standard setter issues auditing standards for audits of public companies in the U.S.? ASB SEC IAASB None of the above
None of the above The PCAOB issues auditing standards for audits of public companies in the U.S.
" "Which of the following best describes what is meant by professional skepticism? Being skeptical of professionals Having a questioning mind while accusing others of wrongdoing Assuming others are lying to you until you prove them right or wrong None of the above accurately describe professional skepticism
None of the above accurately describe professional skepticism Professional skepticism includes having a questioning mind without accusing others of wrongdoing. It is similar to the concept used by Ronald Reagan to ""Trust, but verify.""
"Which of the following standard-setting bodies have worked to converge their auditing standards with one another? The PCAOB and the ASB The PCAOB and the IAASB The IAASB and the SEC None of the above have been working to converge their standards with one another
None of the above are correct. The ASB and IAASB have been working to converge standards. The PCAOB has not worked to converge standards with either of the other two standard-setting bodies.
"Which of the following best describes what is meant by the term 'risk premium'? The best interest rate available to the company when borrowing funds The highest amount the law allows an investor or lender to charge. The highest level of risk that could be faced by an investor or creditor None of the above is a definition of risk premium
None of the above is a definition of risk premium The risk premium is the amount charged by an investor or lender that exceeds what they would have charged in the absence of risk. It is essentially like an insurance premium they charge in to help cover any potential loss on their investment.
" "The Auditing Standards (AS's) are issued by which standard setter? SEC Auditing Standards Board PCAOB IAASB
PCAOB The PCAOB issues AS auditing standards.
" "Process for creating a new or revised standard generally follows:
Research important topics Request for public discussion Issuance of exposure draft Consideration of Comments Final Approval and Issuance
" "Categories of guidelines and rules with specific applications
Section 100: Independence, Integrity and Objectivity Section 200: General Standards Accounting Principles Section 300: Responsibilities to Clients Section 400: Responsibilities to Colleagues Section 500: Other Responsibilities and Practices
" "A business is formed with the following characteristics: The individual and the business are treated as a single entity. 1. There is no legal liability protection for the business owner 2. This type of business is most likely which of the following: Limited Liability partnership General partnership Corporation Limited Liability Company Sole proprietorship
Sole proprietorship
" TRUE OR FALSE A CPA who fails to file a personal tax return or pay a personal tax liability is an act discreditable which is prohibited under the code of professional conduct?
TRUE
" TRUE OR FALSE Auditing firms are required to maintain a system of quality control within the firm.
TRUE
" TRUE OR FALSE Auditing standards need to evolve and change with the needs present at any given time.
TRUE
" TRUE OR FALSE Auditors are responsible to ensure that management accepts its responsibility for the preparation of the financial statements before accepting an audit engagement.
TRUE
" TRUE OR FALSE Audits are a subset of attest services and attest services are a subset of assurance services.
TRUE
" TRUE OR FALSE In the audit context moral hazard refers the the risk that, being sheltered from the majority of negative consequences, management may misstate the financial statements in order to profit from gains in the stock price.
TRUE
" TRUE OR FALSE Professional skepticism requires a critical assessment of audit evidence.
TRUE
" TRUE OR FALSE The ASB and IAASB have been actively working toward converging their auditing standards.
TRUE
" TRUE OR FALSE The Securities Exchange Act of 1934 requires that the SEC ensure that rigorous auditing standards are set and adhered to.
TRUE
" TRUE OR FALSE The demonstration of a commitment to professionalism is part of the Public Interest principle of professional conduct.
TRUE
" TRUE OR FALSE The standards of independence, proficiency and training, and due professional care are included in the general standards category
TRUE
TRUE OR FALSE Assigning people to the audit engagement team is one way auditors can exercise control over the quality of the audit.
TRUE
TRUE OR FALSE The concurring partner is one who has no engagement responsibilities with the client other than to review the work performed by the engagement team.
TRUE
" "TRUE OR FALSE A negligence lawsuit brought against the auditor under The Securities Act of 1933 would result in a higher burden of proof for the auditor than the same lawsuit brought under the Securities Exchange Act of 1934.
TRUE A negligence lawsuit brought against the auditor under the Securities Act of 1933 would result in a higher burden of proof for the auditor than the same lawsuit brought under the The Securities Exchange Act of 1934.
" "TRUE OR FALSE AS 7 requires engagement quality control reviews to be conducted and overseen by a concurring partner on every public company audit.
TRUE AS 7 applies to all audits of public companies and, thus, requires engagement quality control reviews to be conducted on every audit of public companies.
" "TRUE OR FALSE An unqualified (unmodified) audit opinion is a negative opinion regarding the financial statements indicating that the financial statements are not fairly stated.
TRUE An unqualified (unmodified) audit opinion is positive in nature indicating that the auditor can state that they believe the financial statements are fairly stated without qualification.
" "TRUE OR FALSE A predecessor auditor requires permission from the client's management prior to responding to inquiries from the incoming auditor regarding the predecessor auditor's experiences in auditing the client.
TRUE Auditing standards prescribe that authorization should be obtained from management for the prior auditor ""to respond fully to the auditor's inquiries regarding matters that will assist the auditor in determining whether to accept the engagement.""
" "TRUE OR FALSE Prior to accepting an audit client, the auditor is required to determine whether the financial statements have been prepared according to an acceptable framework.
TRUE Auditing standards require that the auditor determine that ""preconditions for an audit"" exist prior to accepting an engagement. These preconditions include the fact that the financial statements have been prepared according to an acceptable framework.
" "TRUE OR FALSE Auditors are not required to determine whether or not their client has complied with all laws and regulations.
TRUE Auditors are not responsible to evaluate their client's compliance with all laws and regulations. However, if they determine that a client has not complied with a law or regulation, they should determine if and how the noncompliance impacts the financial statements. In some cases, the auditor has a responsibility to report illegal acts to others outside of the client organization.
" "TRUE OR FALSE Independence in fact and independence in apperance are absolutely essential to the audit.
TRUE Both independence in appearance and independence in fact are essential to the audit. Investors will not be willing to rely on the audit report if they believe the auditor is not independent, whether she is or is not.Thus, if an auditor lacks either independence in appearance or independence in fact, they are not in compliance with independence rules.
" "TRUE OR FALSE Auditors provide value to the financial statements through both preventing and detecting material misstatements.
TRUE Knowing that the auditor will be evaluating the financial statements will cause management to be more careful in preparing them, reducing the likelihood of both intentional and unintentional misstatements.
" "TRUE OR FALSE The fact that Mr. Musica knew what the auditors would do during the course of the audit is one of the reasons the McKesson & Robbins fraud was able to be carried out for so long.
TRUE Mr. Musica knew in advance what the auditors would do and was therefore able to avoid detection.
" "TRUE OR FALSE In order to properly exercise professional skepticism, the auditor should not assume that management is not telling the truth, but the auditor should validate what management says with supporting documentation.
TRUE The auditor does not automatically assume that management is not telling the truth. The auditor should not, however, treat information as if it were completely accurate but should verify the information provided to them by management.
" "TRUE OR FALSE In some circumstances, the auditor is justified in violating the client confidentiality rule.
TRUE The auditor may need to violate the client confidentiality rule in order to comply with a valid subpoena or when laws or regulations require the disclosure of client information.
" "TRUE OR FALSE The term ""Independence in Fact"" means the auditor is unbiased and impartial in thought as he or she carries out the audit.
TRUE The term independence in fact refers the auditor's state of mind, including the impartiality when conducting the audit.
" "TRUE OR FALSE An auditor assesses management's compliance with a federal regulation and reports the results to interested users through a written report. This is an example of an attest service.
TRUE This is an example of an attest service.
"TRUE OR FALSE One purpose of the firm's system of quality control is to ensure that a systematic process is used to evaluate potential new clients prior to acceptance of the engagement
TRUE This is one of the purposes of the firm's system of quality control.
" "TRUE OR FALSE An audit failure occurs when the auditor reports to the public their opinion that the financial statements are free of material misstatements when the financial statements actually contain a material misstatement.
TRUE This is the definition of an audit failure.
" "TRUE OR FALSE Most audit engagements include only one manager assigned to the audit engagement.
TRUE This is true. Most engagements include one partner, one manager, one senior, and multiple associates (staff).
" "TRUE OR FALSE Passing the CPA exam, or its equivalent in other countries, establishes only the minimum threshold of competence needed to conduct a high quality audit.
TRUE This statement is true. Auditors should continue to learn throughout their careers in order to provide high quality audits.
" "TRUE OR FALSE A common cause for unintentional misstatements is human judgment errors.
TRUE This statement is true. Human judgment errors often lead to unintentional errors in the financial statements.
" "TRUE OR FALSE If an auditor is an expert in the industry her client operates in, she will provide a higher quality audit on average than an auditor who is not an expert in their client's industry.
TRUE This statement is true. Knowing the client's industry well generally improves the quality of the audit.
" "TRUE OR FALSE When performing a review of a client's financial statements, the CPA would generally inquire of management regarding material matters relating to the financial statements.
TRUE This statement is true. This is one example of a procedure the CPA would perform when performing a review of financial statements.
"TRUE OR FALSE One result of the market for lemons in the capital markets is that products sold by the companies are often more expensive.
TRUE This statement is true. Companies in this environment have a more difficult time obtaining financing so they cannot invest in efficient manufacturing processes and often cannot take advantage of economies of scale causing products to be more expensive.
" "Which of the following standard-setting bodies have worked to converge their auditing standards with one another? The PCAOB and the ASB The PCAOB and the IAASB The IAASB and the ASB None of the above have been working to converge their standards with one another
The ASB and IAASB The ASB and IAASB have been working to converge standards. The PCAOB has not worked to converge standards with either of the other two standard-setting bodies.
" "What is meant by being "objective" as it relates to the financial statement audit? The Auditor and their client have an adversarial relationship The Auditor has a goal or purpose in mind as they conduct the audit The Auditor is unbiased and fail
The Auditor is unbiased and fail
" "What 3 key laws significantly impact the auditing profession
The Securities Act of 1933 Securities Exchange Act of 1934 Sarbanes-Oxley Act of 2002
" "TRUE OR FALSE Statements on Auditing Standards (SAS's) are issued by the AICPA Auditing Standards Board?
True The Auditing Standards Board of the AICPA issue Statements on Auditing Standards (SAS's).
" "Jon Jones is a partner in the Austin, Texas office of ACE Auditors. He is the manager of that office. Judy South who also works in the Austin, Texas office of the firm is the lead audit partner for the audit of TCE Co. Jon is in no way involved with the audit of TCE Co. According to AICPA rules, is Jon's wife required to be independent from TCE Co.? Yes, Jon's wife must comply with AICPA independence rules No, Jon's wife is not required to comply with AICPA independence rules There is not eno
YES Jon's wife is an immediate family member of a covered member and therefore must comply with AICPA auditor independence rules.
" "An audit partner of ACE Auditors who practices in the Salt Lake City, Utah office of the firm performs the audit of TCE Co. Partner B practices in the Boise, Idaho office of the firm. She is not in an oversight role in the firm, but provides around 15-20 hours of tax-related services per year to TCE Co. Is Partner B considered a 'Covered Member' under AICPA rules? Yes, partner B is considered a covered member No, partner B is not considered a covered member There is not enough information to
YES Partner B is considered a covered member because her tax services are more than 10 hours per year.
" "An auditor is proud of the fact that they have a reputation of providing unqualified audit opinions to their clients and uses this fact to solicit new clients. Is this a violation of the code of professional conduct? No, it is not a violation of the code of professional conduct, but it is probably not a good idea Yes, it is a violation of the code of professional conduct
YES This is a violation of the code of professional conduct's prohibition against false, misleading, or deceptive advertising. Specifically, this form of advertising creates false or unjustified expectations for favorable results in the audit.
" "Which of the following laws explicitly gives the audit committee of the board of directors the authority to hire, fire, compensate, and approve nonaudit services performed by the external auditor? A The Securities Act of 1933 B The Securities Exchange Act of 1934 C The Sarbanes-Oxley Act D None of the above
c The Sarbanes-Oxley Act explicitly gives audit committees these authorities.
" "The ten generally accepted auditing standards (GAAS) are broken up into?
three categories: general - high-level statements relevant to all aspects of an audit being performed by the auditor. field work - relate more specifically to the performance of a given audit engagement reporting standards - relate to the auditor's report, which is issued upon completion of the audit
