AUD-CPA: Audit - General Issues

The CPA firm of Coach and Talbot is auditing the financial statements of Mays Corporation. LeAnn Jones is a close relative of a covered member of this audit engagement. Which of the following would cause the CPA firm to have a problem with its independence? A. Jones is employed by Mays as head of payroll accounting. B. Jones works for Coach and Talbot as a senior auditor in a different office of the firm. C. Jones is employed by Mays as vice-president in charge of advertising. D. Jones owns 100 shares of Mays although the amount is viewed as immaterial.

A A close relative can have a financial interest in an audit client as long as that interest is immaterial to the person. A close relative can work for the audit client as long as the position is not in accounting or financial reporting (such as head of payroll accounting). If the close relative works for the audit firm, the person is not a covered member unless the person works on the engagement team or is in a position to influence the members of the engagement team or the audit.

Which of the following factors most likely would cause an auditor not to accept a new audit engagement? A. Concluding that the entity's management probably lacks integrity. B. The close proximity to the end of the entity's fiscal year. C. An inability to perform preliminary analytical procedures before assessing control risk. D. An inadequate understanding of the entity's internal control structure.

A CPA firms should have quality control systems that include policies and procedures for deciding whether to accept or continue a client in order to minimize the likelihood of association with a client whose management lacks integrity. Accordingly, if a new client's management probably lacks integrity, an auditor would likely not accept the new audit engagement.

What is the meaning of the generally accepted auditing standard which requires that the auditor be independent? A. The auditor must be without bias with respect to the client under audit. B. The auditor may have a direct ownership interest in his client's business if it is not material. C. The auditor's sole obligation is to third parties. D. The auditor must adopt a critical attitude during the audit.

A Like an umpire in a baseball game, the auditor needs to be able to do the work necessary without a bias toward or against any of the parties. The best way to achieve that unbiased attitude is to be completely independent. Every judgment must be made in a totally independent fashion so that every judgment is made appropriately. The auditor's goal is to be fair to all parties and an unbiased attitude is the best way to achieve that goal.

Which one of the following is not one of the three general standards? A. Proper planning and supervision. B. Due professional care. C. Adequate training and proficiency. D. Independence of mental attitude.

A Proper planning and supervision is one of the three fieldwork standards. The three general standards are (1) Adequate training and proficiency; (2) Independence of mental attitude; and (3) Due professional care.

Jane Eyre works as a staff auditor for the CPA firm of East & West. She is currently working on the audit engagement of the Hitchcock Corporation. Her daughter is employed by Hitchcock. Her daughter is 27 years old and not a dependent of Jane Eyre. The firm is trying to determine whether Jane Eyre must be removed from the audit team because of a lack of independence. In applying these rules, which designation is applied to the daughter? A. Close Relative. B. Distant Relative. C. Member of Immediate Family. D. General Member of Family.

A The AICPA defines a close relative as a parent, sibling, or nondependent child. A dependent child would be considered a member of the staff auditor's immediate family.

Suzanne Lewis-Horning is a new CPA with the firm of Adamant & Chastain. The firm has been approached by the WyinongCorporation about taking over the independent audit of this publicly-held corporation. Lewis-Horning has been asked by one of the firm's partners to study this company's filings with the SEC for the past 3 years. What Internet system can she use to retrieve these filings electronically? A. EDGAR B. TADADOR C. HOUSTON-BLUE D. SEC-9

A The SEC filings made by publicly-held companies can be accessed over the Internet using a system known as EDGAR (which stands for Electronic Data Gathering, Analysis, and Retrieval System). This system enables investors, potential investors, or others (such as the employees of this auditing firm) to have access to the files and forms that have been conveyed by a company to the SEC. More information can be found about Edgar at www.sec.gov.

The members of the Public Company Accounting Oversight Board are appointed and overseen by: A. The Securities and Exchange Commission. B. By U.S. Congress. C. The Auditing Standards Board. D. The American Institute of Certified Public Accountants.

A The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB), appointed and overseen by the Securities and Exchange Commission (SEC).

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? A. The entity's financial statements of the prior year. B. The results of the initial assessment of control risk. C. The assertions that are embodied in the financial statements. D. The anticipated sample size for planned substantive tests.

A The auditor is directed by auditing standards to consider, among other things, prior periods' financial results and financial positions.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the... A. Schedules and analyses to be prepared by the client's staff. B. Methods of statistical sampling to be used in confirming accounts receivable. C. Pending legal matters to be included in the inquiry of the client's attorney. D. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

A The other answers involve judgment by the auditor only and as such the decision process only involves the auditor. Schedules and analyses to be prepared by the client's staff, however, would necessarily have to involve the client since the client will be preparing the schedules.

The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and changes in cash flow is applied within the framework of: A. Generally accepted accounting principles. B. The auditor's evaluation of the audited company's internal control. C. Generally accepted auditing standards. D. Generally accepted standards of quality control.

A The question is asking what standards or criteria must be followed in a financial statement audit? In a financial statement audit, the standards applied are generally accepted accounting principles (GAAP); the CPAs performs an audit to gather sufficient evidence their audit report which attests to the fairness of the financial statements.

To succeed in an action against the auditor, the client company must be able to show that: A. There is a close causal connection between the auditor's behavior and the damages suffered by the client. B. The auditor was grossly negligent. C. The auditor was fraudulent. D. There was a written contract.

A To succeed in an action against the auditor, the client must be able to show that: (1) the CPA had a duty to perform, (2) the CPA breached the contract, (3) the client suffered losses and (4) there is a close causal connection between the auditor's behavior and the damages suffered by the client.

Lana Lily and Jill Jazz are in a debate about the appropriate attitude an auditor should have when interacting with client personnel during an audit. Each claims that the other is misconstruing the definition of professional skepticism in the AICPA standards. The definition of professional skepticism includes all of the following elements EXCEPT: A. Possessing a questioning mind during the audit. B. Assuming that material misstatement due to fraud is present in the financial statements. C. Objective and critical assessment of audit evidence. D. Not being influenced by past experience with the entity and beliefs about management's integrity and honesty.

B According to AICPA and the Public Company Accounting Oversight Board (PCAOB) professional standards, the auditor should recognize the possibility that a material misstatement due to fraud could be present, regardless of past experience with the client or belief about management's honesty. However, the auditor is not required to assume that fraud is present. All other statements are true. Professional skepticism involves having a questioning mind and objectively assessing evidence without influence from experience with or beliefs about the honesty of the client and its management.

Which one of the following is not a fieldwork standard? A. Sufficient appropriate audit evidence. B. Due professional care. C. Understanding the entity and its environment including internal control. D. Adequate planning and supervision.

B Due professional care is one of the three general standards. The three fieldwork standards are (1) Adequate planning and supervision; (2) Understanding the entity and its environment including internal control; and (3) Sufficient appropriate audit evidence.

Which of the following is an illustration of a liability to clients under common law? A. Federal government prosecutes auditor for knowingly issuing an incorrect audit report. B. Client sues auditor for not discovering a theft of assets by an employee. C. Bank sues auditor for not discovering that borrower's financial statements are misstated. D. Combined group of stockholders sue auditor for not discovering materially misstated financial statements.

B The client sues auditor for not discovering a theft of assets by an employee is an example of a liability under common law. Since the CPA had a duty to perform, which require him/her to exercise 'due profession care', the misappropriation of assets by one employee should have been uncovered through an audit program which revealed the lack of separation of duties with regard to the employee.

A CPA is subject to criminal liability if the CPA... A. Willfully breaches a contract with a client. B. Willfully omits a material fact from a set of financial statements. C. Performs an audit in a negligent manner. D. Refuses to turn over requested audit document to a client.

B Willfully omitting a material fact from a set of financial statements by the CPA constitutes fraud on the part of the CPA. When a material misstatement is made and there is both knowledge of its falsity and intent to deceive, especially if in the opinion of the financial statements, the CPA attests to the financial statements being fairly presented and in accordance with GAAP, then the CPA has committed a fraudulent act. Relevant laws specifically covering this are Securities Acts of 1933 and 1934.

Independence of mind, as defined in the AICPA's conceptual framework, is the state of mind that permits an individual to act with all of the following EXCEPT: A. Objectivity B. Professional skepticism C. Reasonable suspicion D. Integrity

C According to the Conceptual Framework for AICPA Independence Standards, independence of mind is the state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? A. Adequate disclosure. B. Quality control. C. Materiality and Audit Risk. D. Client Acceptance.

C Audit planning involves developing an overall strategy related to collecting and evaluating the evidence to be obtained. By testing and understanding internal control, the auditors can assess whether it offers assurance that the financial statements will be free from material errors and fraud. These assessments enable the auditors to evaluate the risks of material misstatement of the financial statements.

The Securities and Exchange Commission can impose all but which of the following sanctions? A. Suspend a CPA from auditing SEC clients. B. Prohibit a CPA from accepting new SEC clients for a period of time. C. Revoke a CPA license. D. Require a CPA to participate in continuing professional educations programs and make changes in their practice.

C CPA licenses are issued by State Boards, hence, only the state has the judicial power to revoke the license.

A CPA is most likely to refer to one or more of the three general auditing standards in determining A. The integrity of the client. B. The scope of the CPA's auditing procedures. C. Whether the CPA should undertake an audit engagement. D. The nature of the CPA's report qualification.

C General standards refer to the training and proficiency of the auditor. The training and proficiency of the auditor are important in trying to determine whether to accept an audit engagement because the auditor must be certain that he or she has the ability to make the critical judgments that are necessary. If that ability is lacking (or cannot be obtained in a reasnable time), the engagement should not be taken.

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods A. Affect the auditor's preliminary judgment about materiality levels. B. Assist in evaluating the planned audit objectives. C. Influence the design of internal control. D. Determine the auditor's acceptable level of audit risk.

C Official standards state that the auditor should consider the methods the entity uses to process accounting information because such methods influence the design of the internal control structure. The extent to which computer processing is used in accounting applications, as well as the complexity of that processing, may also influence the nature, timing, and extent of audit procedures. The other answer choices are incorrect because materiality, audit objectives, and acceptable level of audit risk are not based on the methods used to process accounting information.

The CPA firm of Wilson and Pickett has finished the audit of Eastern South Corporation (ESC). ESC is not viewed as an issuer of securities. Its stock is not publicly traded. The CPA firm is now preparing an unmodified audit opinion. Which of the following is described in the opening paragraph of that report? A. The auditor's responsibility and the management's responsibility are both described. B. The term "audit" is defined. C. The audited financial statements are identified. D. An indication is made of the auditing standards that were followed.

C Recently, the unmodified audit report for a non-public company has been changed. The opening, or introductory, paragraph simply identifies the financial statements that were examined. Other paragraphs outline the responsibilities of the parties, identify the standards that were followed, and describe the nature and scope of an audit.

Which of the following is the basic fundamental concept that underlies the audit process? A. Skepticism. B. Materiality. C. Risk. D. All of the above.

C Risk is the basic fundamental concept that underlies the audit process. It is the acceptance by auditors that there is some level of uncertainty in performing the audit function.

Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC? A. Every corporation which is chartered by a state government. B. Every corporation with securities traded on national and over-the-counter exchanges. C. Every company issuing new securities. D. Every corporation.

C The SEC 1934 Act requires every company with securities traded on national and over-the-counter exchanges and others to file detailed annual audited financial reports with the commission.

Which of the following correctly denotes the revised wording of the first general standard of auditing? A. The audit must be performed by a person or persons with a college degree in accounting. B. The audit must be performed by a person or persons who are partners in a CPA firm. C. The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor. D. The audit should be performed by a person or persons having adequate technical training and proficiency as an auditor.

C The auditing standards have been revised to clarify the terminology used in describing the professional requirements imposed on auditors. General Standards #1: The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor.

Historically, most major lawsuits against CPA firms have dealt with: A. Disputes over the accuracy of bookkeeping services. B. Disputes over income tax preparation services. C. Disputes arising in the performance of MAS contracts. D. Audited and unaudited financial statements.

D A CPA is responsible for every aspect of his/her public work, including auditing, taxes, management advisory service, and accounting and bookkeeping services. A CPA can be held liable for lack of performance in any of these areas. However, historically, most major lawsuits against CPA firms have dealt with audited and unaudited financial statements.

In planning an audit, an auditor would most likely obtain an understanding of a continuing client's business by A. Reevaluate the client's internal control environment. B. Performing tests of details of transactions and balances. C. Reading specialized industry journals. D. Reviewing prior-year working papers and the permanent file for the client.

D Auditing standards state that knowledge of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of personnel of the entity. Working papers from prior years may contain useful information about the nature of the business, organizational structure, operating characteristics, and transactions that may require special consideration. Other sources may be audit guides, industry publications, financial statements of other entities in the industry, textbooks, periodicals, and individuals knowledgeable about the industry.

A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether individual meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the CPA firm's adherence to prescribed standards of... A. Fieldwork. B. Supervision and Review. C. Due Professional Care. D. Quality Control.

D Quality control standards apply to auditors of both public and private companies. The PCAOB has adopted the AICPA's quality control standards. The following is a list of the 5 quality control elements. Quality control is a process to provide the firm with reasonable assurance that its personnel comply with the applicable professional standards. The elements of a system of quality control are: 1. independence, integrity and objectivity; 2. personnel management; 3. acceptance and continuation of clients; 4. engagement performance; and 5. monitoring. Due professional care and fieldwork relate to GAAS. Supervision and review is a component of Quality Control (the engagement performance element.)

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to A. Anticipate before performing any field work whether an unmodified opinion can be expressed. B. Enable the CPA firm to attest to the reliability of the client. C. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients. D. Minimize the likelihood of association with clients whose management lacks integrity.

D Quality control standards states that policies and procedures should be established for deciding whether to accept or continue a client in order to minimize the likelihood of association with a client whose management lacks integrity. Suggesting that there should be procedures for this purpose does not imply that a firm vouches for the integrity or reliability of a client, nor does it imply that a firm has a duty to anyone but itself with respect to the acceptance, rejection, or retention of clients.

The audit committee of a company must be made up of: A. Representatives from the client's management, investors, suppliers, and customers. B. Representatives of the major equity interests, such as preferred and common stockholders. C. The audit partner, the chief financial officer, the legal counsel and at least one outsider. D. Members of the board of directors who are not officers or employees.

D The audit committee of the board of directors should be composed of independent directors who are not officers or employees of the organization and do not have other relationships that impair independence. This enables the audit committee to be effective at overseeing the quality of the organization's financial reports.

Eigen Von is working on the audit engagement of the Eppston Corporation for the CPA firm of York and Associates. As part of the engagement team, Eigen is a covered member on the audit. Which of the following situations would not cause the CPA firm to have an independence problem? A. A friend of Eigen, who is his dependent for tax purposes, works for Eppston as a member of the management. B. Eigens brother, who is not his dependent for tax purposes, works for Eppston as the assistant controller. C. Eigen holds a bond issued by Eppston. The amount is viewed as immaterial. D. Eigen's sister, who is his dependent for tax purposes, works for Eppston as a sales clerk, a position viewed as visible to the public.

D The covered member as well as a member of the person's immediate family can have no financial interest in the audit client. The immediate family includes the person's spouse and any dependents. Thus, the sister and friend both fall within this category. A member of the immediate family can work for the client but not in a position (such as management) that influences the financial statements. A sales clerk should not have any influence on the financial statements and, therefore, that employment is allowed. The brother, because he is not a dependent, is viewed as a close relative. A close relative can work for a client but not in an accounting or financial reporting position. Serving as the assistant controller would not be allowed.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the A. Audit has been performed by persons having adequate technical training and proficiency as auditors. B. Audit procedures performed are approved in the professional standards. C. Auditor's system of quality control has been maintained at a high level. D. Results are consistent with the conclusions to be presented in the auditor's report.

D The first standard of field work requires supervision of assistants, if any. Supervision involves directing the efforts of assistants who are involved in accomplishing the objectives of the audit and determining whether those objectives were accomplished. An element of supervision is reviewing the work performed by each assistant to determine whether it was adequately performed and to evaluate whether the results are consistent with the conclusions to be presented in the auditor's report.

The generally accepted audit standard that requires "Adequate technical training and proficiency" is normally interpreted as requiring the auditor to have: A. Continuing professional education. B. Adequate practical experience for the work to be performed. C. Formal education in auditing and accounting. D. All of the above.

D This requirement is usually interpreted to mean college or university education in accounting and auditing, participating in continuing education programs, and substantial public accounting experience. Technical knowledge of the industry in which the client operates is also part of the personal qualifications of the auditor.