Auditing and Attestation 1-4

False. A management specialist helps management prepare the financial statements.

A management specialist helps the auditor prepare the financial statements.

The CPA authorizes client transactions and reports them to management. Management responsibilities related to nonattest services that impair independence include (1) exercise or possession of authority over transactions on a client's behalf (e.g., authorizing or executing transactions or making policy decisions); (2) preparing source documents evidencing transactions (e.g., changing source documents without client approval); (3) custody of client assets (e.g., signing checks or holding client securities); (4) supervision of client employees in normal activities (e.g., supervising client personnel in daily operation of the financial information system); (5) determining the CPA's recommendations to be implemented (e.g., hiring or terminating employees); (6) reporting to those charged with governance on behalf of management (e.g., presenting business risk considerations); (7) service as a stock transfer or escrow agent, registrar, or general counsel; (8) designing, implementing, or maintaining controls for a client, such as performing ongoing monitoring; (9) accepting responsibility for a client's project or preparing financial statements; or (10) setting responsibilities.

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?

Having an appropriate system of quality control. A system of quality control should provide reasonable assurance that the firm's personnel comply with professional standards and applicable regulatory and legal requirements. However, deficiencies in individual engagements covered by the quality control standards do not, by themselves, signify that the firm's system of quality control is insufficient to provide it with reasonable assurance of compliance with the relevant standards. GAAS apply to individual audit engagements. Quality control standards apply to the firm's practice as a whole.

A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by

True. The independence rules for an alternative practice structure (APS) apply to all structures in which "the 'traditional firm' engaged in attest services is closely aligned with another organization, public or private, that performs other professional services." A CPA firm providing attest services may be closely aligned with another organization. For example, a new CPA firm may be formed to offer attest services subsequent to the acquisition of its predecessor. The new CPA firm may not perform a service requiring independence if the client is any entity in the consolidated group.

A CPA firm providing attest services may be closely aligned with another organization. For example, a new CPA firm may be formed to offer attest services subsequent to the acquisition of its predecessor.

Reviewing documentation of the work performed and reports issued. The engagement performance element of quality control includes policies and procedures that cover planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement. Objectives of supervision include establishing procedures for (1) planning engagements, (2) maintaining the firm's standards of quality, and (3) reviewing documentation of the work performed and reports issued.

A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure. A CPA firm must have a system of quality control to provide reasonable assurance that the firm and its personnel (1) comply with professional standards, (2) comply with applicable legal and regulatory requirements, and (3) issue appropriate reports. The nature and extent of the quality control system developed by an individual firm depends on factors such as the size and operating characteristics of the firm.

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

Consideration of the business reputation of the client's principal owners, key management, related parties, and those charged with governance. CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm's policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with the applicable requirements (QC 10).

A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include

No;Yes The SSAEs apply to attest engagements. An attestation engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Litigation support services are transaction services, a category of consulting services. The Statement on Standards for Consulting Services applies.

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAEs) when Testifying as an expert witness in accounting and auditing matters given stipulated facts; Examining a client's financial projection that presents a hypothetical course of action

True. Under Rule 503, Commissions and Referral Fees, a member in public practice shall not accept a commission for recommending or referring to a client any product or service, or for recommending or referring any product or service to be supplied by a client, if the member performs for that client an audit, a review, a compilation when a third party will use the financial statement and the report does not disclose the CPA's lack of independence, or an examination of prospective financial information. Any member who accepts a referral fee for recommending services of a CPA or who pays a referral fee to obtain a client must disclose the arrangement to the client.

A CPA in public practice may accept referral fees if they are disclosed.

Statements on Standards for Attestation Engagements (SSAEs). The AICPA's Statements on Standards for Attestation Engagements (SSAEs) cover attest engagements. Examining management's assertion that the entity's schedule of investment returns is an example of an examination engagement that falls under the guidelines of the SSAEs.

A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of

II Only. Under Conduct Rule 301, Confidential Client Information, a CPA may reveal confidential information without the client's permission for a state board- or state society-sponsored peer review. Identifying information revealed to the review team is precluded from disclosure. However, a CPA may not disclose information to another CPA firm without the client's permission or unless pursuant to a valid subpoena.

A CPA is permitted to disclose confidential client information without the consent of the client to I.Another CPA firm if the information concerns suspected tax return irregularities II.A state CPA society voluntary peer review board

True. Rule 501, Acts Discreditable, states that a member shall not commit an act that is discreditable to the profession. Client-provided records must be returned after a client's request even if (1) fees have not been paid, or (2) the state in which the member practices grants a lien on certain records. Client-provided records are "accounting or other records belonging to the client that were provided to the member by or on behalf of the client."

A CPA must return a client's records. Failure to return these records upon request is an act discreditable to the profession.

Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor. Interpretation 101-1 states that independence is impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. With some exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member is subject to Conduct Rule 101 and its interpretations and rulings. Because the covered member is a grantor of a revocable trust, the trust and its underlying investments are direct financial interest. Given that the securities were stock in an audit client, independence is impaired (Interpretation 101-15).

A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Is the independence of the CPA considered to be impaired with respect to the client?

Integrity and objectivity. Under Conduct Rule 102, Integrity and Objectivity, all members must maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his/her judgment to others when performing professional services.

A CPA who is not in public practice is obligated to follow which of the following rules of conduct?

AICPA Accounting Trends and Techniques. Practical guidance for conducting accounting and audit engagements can be found in various nonauthoritative publications, such as Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.

A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?

True. Under Rule 301, Confidential Client Information, a member in public practice cannot disclose confidential client information without the client's consent. However, this Rule does not affect a CPA's obligations to comply with a validly issued and enforceable subpoena or summons or with applicable laws and regulations.

A CPA's obligation of confidentiality regarding confidential client information does not prevent compliance with a valid and enforceable subpoena.

Prohibited under the AICPA Code of Professional Conduct. The Code defines client-provided records as "accounting or other records belonging to the client that were provided to the member by or on behalf of the client." The retention (after a request is made for them) of client-provided records to enforce payment or for any other purpose is prohibited. Such an act is deemed to be discreditable to the profession.

A CPA's retention of client-provided records as a means of enforcing payment of an overdue audit fee is an action that is

Written assertion. WebTrust was developed from the attestation standards and requires a written assertion by management for each principle reported on. When the assertion about a website complies with WebTrust principles, it is granted the CPA WebTrust seal to be displayed on the entity's web page. Consumers may access the examination report and CPA WebTrust principles and criteria through the entity's web page.

A WebTrust engagement on processing integrity requires from client management a

False. According to Rule 203, Accounting Principles, a member shall not express an opinion or make an affirmative statement about conformity with GAAP or state that (s)he is not aware of any material departure from an accounting principle promulgated by bodies designated by the AICPA Council to establish such principles that has a material effect on the financial statements or data taken as a whole. However, if the member can demonstrate that, due to unusual circumstances, the financial statements or data would have been misleading without a departure from GAAP, the member can comply with the rule by describing the departure; its approximate effects, if practicable; and the reasons compliance with the principle would be misleading.

A client's financial statements would be misleading if a material departure from GAAP was not included in the statements. Given the departure from GAAP, a member of the AICPA cannot express an unmodified opinion of the statements.

False. Rule 302, Contingent Fees, states that a contingent fee is established as part of an agreement under which the amount of the fee is dependent upon the finding or result. The receipt of contingent fees by a member in public practice is prohibited when the member performs (a) an audit, (b) a review, (c) a compilation when the report will be used by third parties and the report does not disclose the CPA's lack of independence, or (d) an examination of prospective financial information.

A contingent fee may be accepted by a CPA who performs an examination of prospective financial information.

One Year. The SEC prohibits a member of an issuer's audit engagement team from working for the registrant (the issuer) in a key position within 1 year of participating in the audit of that issuer.

A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position?

True. A decrease in the acceptable level of audit risk or in the amounts considered material will result in obtaining greater assurance from substantive testing by 1.Selecting more effective audit procedures 2.Applying procedures nearer to year end 3.Increasing the extent of particular tests

A decrease in the acceptable level of audit risk or in the amounts considered material might be addressed by the auditor's modifying the audit plan by applying audit procedures nearer to year end.

True. A forecast is based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take.

A financial forecast consists of prospective financial statements (PFSs) that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows.

Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken. According to AT 301, a financial forecast consists of prospective financial statements "that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows." A forecast is based on "the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take."

A financial forecast consists of prospective financial statements that present an entity's expected financial position, results of operations, and cash flows. A forecast

True. A projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, "What would happen if . . .?"

A financial projection differs from a forecast in that a projection is based on the responsible party's assumptions reflecting conditions it expects would exist and the course of action it expects would be taken given one or more hypothetical assumptions.

True. Rule 505, Form of Organization and Name, states that a member may practice public accounting only in a form of organization allowed by law or regulation that conforms with resolutions of the AICPA Council. Rule 505 allows members to practice not only in corporations and general partnerships but also in limited liability companies, limited liability partnerships, and other forms permitted by state law.

A firm may engage in the practice of public accounting in the form of a limited liability partnership.

True. Performing management functions or making management decisions impairs independence, but providing advice, research, and recommendations does not.

A firm's independence is impaired if it performs nonattest services for a client that include making management decisions.

True. Independence is impaired if, during the engagement or at the time of expressing an opinion, a member's firm had any material joint, closely held investment with the client.

A material joint, closely held investment between a member's firm and a client at the time of expressing an opinion impairs independence.

False. Independence is impaired when a member has a direct or material indirect financial interest in an affiliate of the client. Independence is not impaired if a member did not know about the financial interests described above.

A member has a financial interest in a nonclient who is an affiliate of the client. Independence is impaired if the member has an indirect financial interest in the affiliate that is immaterial to the member.

False. The following covered members and their immediate families must be independent in relation to the party responsible for the subject matter of restricted-use reports: •An individual on the attest engagement team. •An individual who directly supervises or manages the attest engagement partner. •Individuals who consult with the attest engagement team about technical or industry-related matters specific to the engagement. Independence is impaired if the firm had a material financial relationship with the responsible party prohibited under Rule 101.

A member may perform an engagement under the Statements on Standards for Attestation Engagements (SSAEs) that is not an examination or review. If the use of the report on such an engagement is restricted, the independence rules do not apply.

False. A team member's consideration of employment or association with the client impairs independence absent prompt reporting to the firm and removal from the team.

A member of an audit engagement team has received a job offer from the client. Independence is not impaired until the offer is accepted.

True. Rule 101, Independence, requires that a member in public practice should be independent when performing professional services as required by standards-setting bodies. To inspire public confidence, an auditor must not only be independent (intellectually honest) but also recognized as independent (free of any obligation to, or interest in, the client, management, or owners).

A member of the AICPA in public practice must not only be independent but also be recognized as independent.

The member only. A member in public practice may own an interest in a separate business that performs the services for which standards are established, e.g., if the member, individually or with his/her firm or members of the firm, controls the separate business (as defined by the FASB Codification), the entity and all its owners and employees must comply with the Code. Absent such control, the member, but not the separate business, its other owners, and its employees, would be subject to the Code.

A member of the AICPA owns an interest in a separate business that performs tax services. If the member does not control the business, who must comply with the Code of Professional Conduct?

True. Rule 102, Integrity and Objectivity, states that a member shall maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his/her judgment to others when performing professional services. If a conflict of interest arises that could impair objectivity when a member performs a professional service, Rule 102 will not prohibit the service if disclosure is made to and permission is obtained from the appropriate parties. However, an independence objection cannot be overcome by disclosure and consent.

A member of the AICPA should be free of conflicts of interest when performing professional services.

False. Independence is not impaired if the position is clearly honorary and the individual is not able to vote or participate in board or management decisions. Moreover, (s)he must be identified as an honorary director or trustee.

A partner of a firm always impairs independence if (s)he is an honorary director of a not-for-profit entity that is a client.

Serving on at least one other issuer's audit committee or disclosure committee of the board of directors. The attributes of a financial expert may be acquired in at least one of the following ways: (1) education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor, or experience in one or more positions that involve the performance of similar functions; (2) experience actively supervising such a person; (3) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or (4) other relevant experience. Mere service on a board committee of an issuer does not provide all of the following attributes of a financial expert: (1) an understanding of GAAP and financial statements; (2) the ability to assess the general application of GAAP to estimates, accruals, and reserves; (3) experience preparing, auditing, analyzing, or evaluating statements with the complexity of accounting issues expected to be raised by the registrant's statements; (4) an understanding of internal controls and the procedures for financial reporting; and (5) an understanding of audit committee functions.

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except

True. 1.The auditor should establish an understanding through an engagement letter to the client regarding the services to be performed. If the auditor believes such an understanding has not been reached, (s)he should not accept or perform the engagement. 2.The audit scope, limitations, expectations, and fees for services should be set forth in a contract evidenced by the engagement letter.

A written communication establishing an understanding about the services to be performed should be provided by the CPA to the prospective client on each audit engagement.

Determine whether the financial statements are consistent with the auditor's understanding. Analytical procedures should be applied to form an overall conclusion near the end of the audit. They may include reading the statements and considering (1) the adequacy of evidence regarding previously identified unusual or unexpected balances and (2) unusual or unexpected balances or relationships not previously noted.

A primary objective of analytical procedures used to form an overall conclusion is to

Received a fee for referring audit clients to a company that sells limited partnership interests. Conduct Rule 503 prohibits a member in public practice from accepting a commission for recommending any product or service to a client when the firm performs (1) an audit or review of financial statements, (2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not disclose the CPA's lack of independence, or (3) an examination of prospective financial information for that client.

A violation of the AICPA's ethical standards most likely would have occurred when a CPA

Expressed an unmodified opinion on the current year's financial statements when fees for the prior year's audit were unpaid. Audit fees that are long past due take on the characteristics of a loan under Conduct Rule 101. Independence is impaired if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current year's report date, remain unpaid when the current year's report is issued. However, this ruling does not apply if the client is in bankruptcy. Moreover, long overdue fees do not preclude the CPA from performing services not requiring independence.

A violation of the profession's ethical standards most likely would have occurred when a CPA

Is the sole shareholder in a professional accountancy corporation and uses the designation "and company" in the firm title. A firm name may not be misleading (Conduct Rule 505). The designations "and Company," "and Associates," or "& Co." are misleading when a member is a sole owner because they may be interpreted to mean more than one owner.

A violation of the profession's ethical standards would most likely occur when a CPA

Who has a dispute with his/her supervisor about statement preparation has an obligation to act if a material misstatement would otherwise result. If a member and his/her supervisor have a dispute about statement preparation or recording of transactions, the member should do nothing if the supervisor's position is an acceptable alternative and does not materially misrepresent the facts. If the member concludes that a material misstatement would result, (s)he should consult the appropriate higher level(s) of management and should consider documenting relevant matters. If, after such discussions, the member concludes that action was not taken, (s)he should consider the continuing relationship with the employer, the obligation to communicate with third parties, and the desirability of consulting legal counsel.

According to Conduct Rule 102, Integrity and Objectivity, a member of the AICPA

False. According to Rule 202, Compliance with Standards, a member who performs professional services must comply with promulgated standards. According to Rule 201, General Standards, a member shall comply with the following: •Undertake only those services that the member can reasonably expect to complete with professional competence. •Exercise due professional care when performing professional services. •Adequately plan and supervise performance of professional services. •Obtain sufficient relevant data to provide a reasonable basis for conclusions in relation to any professional services.

According to Conduct Rule 201, General Standards, a member of the AICPA who performs an audit must comply with standards issued by bodies designated by the AICPA Council.

Indicate the CPA's educational and professional attainments. Advertising and solicitation are acceptable as long as they do not involve falsehood or deception.

According to Conduct Rule 502, advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that

Preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit. Audit committees ordinarily must preapprove the services performed by accountants (permissible nonaudit services and all audit, review, and attest engagements). Approval must be either explicit or in accordance with detailed policies and procedures. If approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed.

According to SEC independence regulations,

The CPA does not audit the company and has no other business connection with the company. A member in public practice shall be independent when performing professional services. Independence is impaired if the CPA is a director of the client during the period covered by the financial statements or the period of the engagement. A CPA also is not independent if (s)he serves as an officer, employee, or in any capacity equivalent to that of a member of management. Accordingly, serving as a director is incompatible with performing the attest function, e.g., an audit. Certain other business connections also may impair independence. But a CPA may serve as a director and have any business connection with the entity if (s)he does not perform for it any service requiring independence. If the CPA does not audit the company and has no other business connection with company, the CPA can remain independent.

According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors?

False. An accountant may examine or review pro forma financial information.

According to the AICPA, pro forma financial information cannot be examined.

Seeking a private letter ruling. A contingent fee is dependent upon the finding or result. Fees are not considered to be contingent in tax matters if based on the results of judicial proceedings or the findings of government agencies. A fee is based on the findings of government agencies if the member can show a reasonable expectation at the time of the fee arrangement of substantive consideration by an agency with respect to the client. Thus, a contingent fee is allowed for representation of a client who is obtaining a private-letter ruling. A private letter ruling is a conclusion by the IRS for an individual taxpayer.

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?

The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed. A firm is not independent of its audit client if, during the audit and engagement period, it provides any nonaudit service related to marketing, planning, or expressing an opinion in favor of the tax treatment of aggressive tax-position transactions for the purpose of tax avoidance. However, this Rule does not apply if the tax treatment is at least more likely than not to be allowable under tax law.

According to the PCAOB, an accounting firm is most likely to be independent of its audit client if

The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client. Under SEC independence rules, certain financial relationships prevent an auditor from being independent of the client. For example, an auditor is not independent if 1.The auditor has a direct (or material indirect) investment in an entity, 2.The entity has an investment in the client that is material to the entity, and 3.The entity can exercise significant influence over the client. Under AICPA independence rules, an auditor is not independent if 1.The auditor has a direct (or material indirect) investment in an entity and 2.The entity has an investment in the client that is material to the entity. In these circumstances, the AICPA rules are more restrictive than the SEC rules. The auditor is considered not to be independent even though the entity cannot exercise significant influence over the client.

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?

True. According to the Statements on Quality Control Standards (SQCSs), the following are the six elements of a system of quality control: 1.Leadership responsibilities for quality within the firm 2.Relevant ethical requirements 3.Acceptance and continuance of client relationships and specific engagements 4.Human Resources 5.Engagement performance 6.Monitoring

According to the Statements on Quality Control Standards (SQCSs), the following are the six elements of a system of quality control: 1.Leadership responsibilities for quality within the firm 2.Relevant ethical requirements 3.Acceptance and continuance of client relationships and specific engagements 4.Human Resources 5.Engagement performance 6.Monitoring

False. No specific percentage is required. The difference between the estimate best supported by the evidence and the estimate in the financial statements must be reasonable.

According to the auditing standards, the difference between the estimate best supported by the evidence and the estimate in the financial statements must be less than 10% of the total.

Retaining client-provided records after the client has demanded their return. Retention of client-provided records after the client has demanded their return is an act discreditable to the profession. Even if the state in which a member practices grants a lien on certain records, the ethical standard still applies.

According to the ethical standards of the profession, which of the following acts generally is prohibited?

Accepting a commission for recommending a product to an audit client. Conduct Rule 503, Commissions and Referral Fees, prohibits a member in public practice from recommending any product or service to a client when the firm performs (1) an audit or review of financial statements, (2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not disclose the CPA's lack of independence, or (3) an examination of prospective financial information for that client.

According to the ethical standards of the profession, which of the following acts is generally prohibited?

Retaining client-provided records after an engagement is terminated prior to completion and the client has demanded their return. Retention of client-provided records after the client has demanded their return is an act discreditable to the profession. Even if the state in which a member practices grants a lien on certain records, this ethical standard is still applicable.

According to the ethical standards of the profession, which of the following acts is generally prohibited?

The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. A CPA's independence is not impaired with respect to a financial institution if checking accounts, savings accounts, or certificates of deposit are fully insured. Moreover, uninsured amounts do not impair independence if they are immaterial.

According to the profession's ethical standards, an auditor is considered independent in which of the following instances?

Yes; Yes In general, strict compliance with accounting principles is required. However, Conduct Rule 203 recognizes that, due to unusual circumstances, adhering to GAAP may cause financial statements to be misleading. New legislation and the evolution of a new form of business transaction are events that may justify departure from an established accounting principle.

According to the profession's ethical standards, which of the following events may justify a departure from an established accounting principle? New Legislation; Evolution of a New Form of Business Transaction

Employment of the CPA's spouse as a client's director of internal audit. With certain exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member (e.g., an individual on an attest engagement team) is subject to Conduct Rule 101. One exception is permitted for the employment by the client of an individual in the covered member's immediate family. However, this exception does not apply if the employment was in a key position. A director of internal audit holds a key position.

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?

True. 1.Primary emphasis should be on the adequacy of disclosure. 2.Furthermore, the auditor should understand that the substance of a transaction could differ significantly from its form. Financial statements should recognize substance, not legal form.

Accounting principles ordinarily do not require transactions with related parties to be accounted for differently from those with unrelated parties.

Evaluate the business purpose of the transaction. The auditor should inspect any contracts or agreements to evaluate whether (1) the business purpose (or lack of a business purpose) implies that the transaction's intent was fraudulent, (2) the terms are consistent with management's explanations, and (3) the accounting and disclosure are appropriate. The auditor also should obtain evidence of appropriate authorization and approval.

After identifying a significant related party transaction outside the entity's normal course of business, an auditor should

Determine whether the transactions were approved by the board of directors or other appropriate officials. After identifying significant related party transactions outside the normal course of business, an auditor should obtain evidence that they have been appropriately authorized and approved by management, those charged with governance, or (in a proper case) the shareholders. Appropriate authorization and approval reduce but do not eliminate the risks of material misstatement due to fraud or error (AU-C 550).

After identifying related party transactions, an auditor most likely would

True. 1.Obtain an understanding of the business purpose of the transaction. 2.Examine invoices, executed copies of agreements, contracts, and other documents. 3.Determine whether the transaction has been approved by the board or other officials. 4.Test for reasonableness the compilation of amounts to be disclosed or considered for disclosure. 5.Arrange for the audits of intercompany balances to be performed as of concurrent dates, even if the fiscal years differ, and for the examination of specified, important, and representative related party transactions by the auditors for each of the parties, with appropriate exchange of relevant information. 6.Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral.

After identifying related party transactions, the auditor should become satisfied about their purpose, nature, extent, and effect.

Increase the assessment of control risk and increase the extent of substantive tests. When an auditor discovers significant deficiencies, the risk is higher that internal control will not timely prevent, or detect and correct, a material misstatement that could occur in an assertion. This discovery increases the assessment of the risks of material misstatement. The result is less reliance on tests of controls and more reliance on substantive procedures.

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances, the auditor most likely would

Undertake to apply the omitted procedure or alternate procedures that would provide a satisfactory basis for the opinion. (1) The auditor determined that the omission impairs his/her current ability to support the opinion, and (2) (s)he believes persons are currently relying or are likely to rely on the report. Thus, the auditor should promptly perform the omitted procedure or alternative procedures to determine whether the previous opinion has a satisfactory basis (AU-C 585).

Ajax Company's auditor concludes that the omission of an audit procedure considered necessary at the time of the prior audit impairs the auditor's ability to support the previously expressed unmodified opinion. If the auditor believes shareholders are currently relying on the opinion, the auditor should promptly

False. Planning is not necessarily discrete or sequential because changes may result.

All audit planning should be complete before the evidence collection phase begins.

Knowingly makes false and misleading journal entries in the records if some are material. Knowing misrepresentations of facts include (1) knowingly making materially false and misleading entries in financial statements or records, (2) failing to make corrections in materially false or misleading statements or records when the member has such authority, or (3) signing a document with materially false and misleading information.

Among other things, Conduct Rule 102, Integrity and Objectivity, prohibits knowing misrepresentation of facts. A member of the AICPA violates this element of the rule when (s)he

Tax planning services. Audit firms are prohibited from offering certain nonaudit services to their attest clients. Preapproved compliance tax engagements are not prohibited.

An accountant can perform, with preapproval of the audit committee of the board of directors, which of the following non-audit services during the audit of an issuer?

Not independent and may not perform a review. Independence is impaired if, during the period of the professional engagement, a covered member has any direct or any material indirect financial interest in the client. Materiality is therefore irrelevant when the interest is direct. Thus, the accountant is not independent, and a review or audit may not be performed.

An accountant has an immaterial direct financial interest in a nonpublic entity. The accountant is

True. Failure to obtain a representation letter from management is typically considered a scope limitation.

An accountant should obtain a representation letter in an attest engagement.

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. According to AT 101, Attestation Standards, an attest engagement is one in which a practitioner is engaged to issue or does 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. The conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter.

An attest engagement is one in which a CPA is engaged to

True. 1. A practitioner is a CPA in the practice of public accounting, which is the performance for a client while holding out as a CPA of accounting, tax, personal financial planning, litigation support, and those professional services for which standards are issued by bodies designated by the AICPA Council. 2. Because the attestation standards apply only to attest engagements involving a practitioner as defined above, it follows that they apply only to the rendering by a CPA in public accounting of those professional services that are considered attest services (attest engagements).

An attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party.

True. The auditor should be aware of the possible existence of material related party transactions and of certain relationships that must be disclosed even in the absence of transactions.

An audit cannot provide assurance that all related party transactions will be detected.

Analytical procedures. According to AU-C 520, Analytical Procedures, analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. Unrealized gains from increases in the value of available-for-sale securities should be recorded directly in other comprehensive income (a component of equity). Unrealized gains from increases in the value of trading securities should be included in income. Thus, a more-than-10% increase in income could have been caused by improper accounting for available-for-sale securities.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that

Should assess the actuary's competence and objectivity. When deciding whether to use an auditor's specialist, the auditor should evaluate whether the auditor's specialist has the needed competence, capabilities, and objectivity. For an external specialist, the evaluation should include inquiries about threats to objectivity (AU-C 620). Consideration should be given to the specialist's professional certification, license, or other recognition of competence and the specialist's reputation and standing.

An auditor intends to use the work of an actuary. Under these circumstances, the auditor

Results of other procedures that were applied tend to compensate for the procedure omitted. When the auditor decides that a necessary audit procedure was omitted, (s)he should assess its importance to his/her current ability to support the previously expressed opinion. The results of other procedures applied or audit evidence obtained in a later audit, possibly at an interim date, may compensate for the omitted procedure.

An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor's present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if the

The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention. The understanding with the client regarding services to be performed is typically documented in an engagement letter. An engagement letter should indicate that a traditional financial statement audit is not designed to provide assurance on internal control. However, the auditor is responsible for ensuring that those charged with governance are aware of any significant deficiencies or material weaknesses in control, that come to his or her attention.

An auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes

To assist the auditor to accurately interpret information obtained during an audit. The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment-including its internal control-to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, at the financial statement and relevant assertion levels. Among other things, the understanding addresses (1) external factors (including the reporting framework); (2) the nature of the entity; (3) the accounting principles applied; (4) the entity's objectives, strategies, and business risks; and (5) the measurement and review of financial performance. For example, understanding performance measures may help the auditor to understand the pressures on management and indicate that risks of misstatement may exist (AU-C 315).

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

True. 1.An auditor has no responsibility to carry out a retrospective review of the work once (s)he has reported. 2.When the auditor decides that a necessary procedure was omitted, (s)he should assess its importance to his/her current ability to support the previously expressed opinion.

An auditor may determine, subsequent to the date of the report, that auditing procedures considered necessary at the time of the audit were omitted, but that there is no indication that the financial statements are not fairly presented.

Auditor expresses a disclaimer of an opinion as a result of the specialist's findings. The auditor may refer to an auditor's external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor's report with such a reference should state that it does not reduce the auditor's responsibility (AU-C 620).

An auditor may refer to and identify an auditor's external specialist in the auditor's report if the

They are employees whose work may affect the nature, timing, and extent of audit procedures. The internal audit function is part of the monitoring component of internal control. Consequently, the auditor should obtain an understanding of the internal audit function sufficient to identify activities relevant to planning the audit. The auditor may decide that the activities of the internal auditors are relevant to planning the audit and that it would be efficient to consider further how their work might affect the nature, timing, and extent of audit procedures. In this case, (s)he should assess their competence and objectivity. If that assessment is favorable, the auditor then considers how the internal auditors' work may affect the audit. If it significantly affects the audit procedures, the auditor should evaluate and test that work.

An auditor might consider the procedures performed by the internal auditors because

Determine whether additional audit evidence may be needed. Analytical procedures should be used to assist the audit to form an overall conclusion. The purpose of those procedures is to determine whether the statements are consistent with the auditor's understanding of the entity (AU-C 520). When analytical procedures reveal inconsistent fluctuations or relationships or significant differences, the auditor should investigate the results. Thus, the auditor should (1) make inquires of management, (2) corroborate the responses with other audit evidence, and (3) perform other necessary procedures.

An auditor most likely will use analytical procedures to form an overall conclusion to

No Yes The existence assertion relates to whether the related balance exists at the balance sheet date. Observation of the mailing of monthly statements as well as observing the correction of reported errors provides evidence that controls may be effective in ensuring that client customers are genuine.

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of Classification and Understandability, Existence

True. A financial reporting entity's basic financial statements (BFS) issued in accordance with GAAP include the government-wide financial statements, fund financial statements, and other entities disclosed in the notes. An auditor of the BFS of the entity must be independent of it. Nevertheless, a primary auditor need not be independent with respect to any fund, component unit, or disclosed entity if (s)he explicitly relies on reports by other auditors on such fund, etc.

An auditor of a fund included in governmental financial statements who is not auditing the primary government need not be independent of that government.

True. 1.The auditor must make judgments about audit risk in determining the nature, timing, and extent of procedures to apply and in evaluating the results. 2.Audit risk should be distinguished from risk of malpractice litigation, adverse publicity, or erroneously concluding that financial statements are materially misstated.

Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

The business structure may be deliberately designed to obscure related party transactions. The nature of related party relationships and transactions may result in greater risks of material misstatement than transactions with unrelated parties. Thus, related parties may operate through a complex set of relationships and structures, with increased complexity of related party transactions. For example, a transaction may involve multiple related parties in a consolidated group. Accordingly, in an audit of group statements, the group engagement team should request each component auditor to communicate with related parties not previously identified by group management or the group engagement team.

An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because

Auditor expresses a qualified opinion or an adverse opinion related to the work of the specialist. The auditor may refer to an auditor's external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor's report with such a reference should state that it does not reduce the auditor's responsibility (AU-C 620).

An auditor who uses the work of an auditor's external specialist may refer to and identify the specialist in the auditor's report if the

Reference is needed for an understanding of a modification of the opinion. The auditor may refer to an auditor's external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor's report with such a reference should state that it does not reduce the auditor's responsibility (AU-C 620).

An auditor who uses the work of an auditor's external specialist may refer to the specialist in the auditor's report if the

Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties. It is most often not possible to determine whether a particular transaction would have occurred if the parties had not been related or what the terms and manner of settlement would have been. Accordingly, assertions about such matters are difficult to substantiate. The auditor may (1) believe that the assertion is unsubstantiated or (2) not be able to obtain sufficient appropriate evidence. In these cases, the auditor considers the implications for the audit, including whether to modify the opinion (AU-C 550). (S)he should consider including in the report a comment to that effect and expressing a qualified or adverse opinion.

An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client's financial statements include a note on related party transactions

Limits the auditor's responsibility to detect fraud and error. The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise. Because of the inherent limitations of the audit and of internal control, the risk of not detecting some material misstatements, whether due to fraud or error, is unavoidable. This risk exists even if the audit is in accordance with GAAS.

An auditor's engagement letter most likely would include a statement that

Statements on Standards for Attestation Engagements. An attest engagement involves reporting on subject matter, or an assurance about subject matter, that is the responsibility of another party. When providing WebTrust assurance, the accountant must address written assertions by management. Thus, Statements on Standards for Attestation Engagements are applicable.

An entity engaged a CPA to determine whether the client's web sites comply with defined WebTrust principles and criteria. In performing this engagement, the CPA should apply the provisions of

Evaluating accounting estimates. The auditor has the ultimate responsibility to express an opinion on the financial statements. Judgments about (1) assessments of the risks of material misstatement, (2) materiality of misstatements, (3) sufficiency of tests performed, (4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor's report always should be those of the auditor.

An internal auditor would least likely provide direct assistance to the auditor in

Existence of fixed asset additions. Assertions may relate to material financial statement amounts for which the risks of material misstatement or the degree of subjectivity involved in the evaluation of the audit evidence is high. In these cases, reliance on the internal auditor is less effective. However, certain assertions may relate to less material financial statement amounts for which the risks of material misstatement or the degree of subjectivity involved is low. For example, the auditor may be able to rely on the internal auditor's work regarding assertions about the existence of cash, prepaid assets, and fixed asset additions.

An internal auditor's work would most likely affect the nature, timing, and extent of an independent auditor's auditing procedures when the internal auditor's work relates to assertions about the

Staff Accountant. Under SEC independence regulations, an accounting firm may not be independent with respect to an audit client if a former partner, principal, shareholder, or professional employee accepts employment with a client. Independence is impaired if (s)he (1) has a continuing financial interest in the firm or (2) is in a position to influence the firm's operations or financial policies. Moreover, an accounting firm is not independent if a CEO, CFO, controller, or person in an equivalent position for an issuer was (1) employed by that firm and (2) participated in any capacity in the audit of that issuer during the year before the beginning of the audit. Accordingly, a staff accountant's employment by the client does not impair independence. Such an individual does not have a continuing financial interest in the firm or the ability to influence its operations or policies.

An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?

False. Analytical procedures are permitted, but not required, to be applied as substantive tests.

Analytical procedures are required to be applied as substantive tests to achieve an audit objective related to a specific financial statement assertion.

True. Analytical procedures assist the auditor in assessing risk and determining the nature, timing, and extent of other auditing procedures.

Analytical procedures are required to be used in planning all financial statement audits.

True. Analytical procedures used as a final review assess conclusions and overall financial statement presentation.

Analytical procedures are required to be used in the final stage of the audit as a review.

Additional audit procedures are required. Analytical procedures used to form an overall conclusion ordinarily include reading the financial statements and considering (1) the adequacy of evidence regarding unusual or unexpected balances detected during the audit and (2) such balances or relationships not detected previously. If analytical procedures detect a previously unrecognized risk of material misstatement, the auditor must revise the assessments of the RMMs and modify the further planned procedures. Inconsistent fluctuations or relationships or significant differences should result in (1) inquiries of management, (2) corroboration of responses with other audit evidence, and (3) performance of any necessary other procedures. Moreover, the RMM due to fraud should be considered.

Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

Inquiries of management are required. When analytical procedures reveal inconsistent fluctuations or relationships or significant differences, the auditor should investigate the results. Thus, the auditor should (1) make inquires of management, (2) corroborate the responses with other audit evidence, and (3) perform other necessary procedures.

Analytical procedures performed to assist the auditor to form an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that

Not auditing standards. Auditing Interpretations of the SASs are numbered in the AU-C 9000 series and immediately follow the related sections in the codification of professional standards. They are interpretive publications and therefore are not auditing standards. Interpretive publications are recommendations for applying GAAS in specific situations. Other interpretive publications include AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position.

Auditing Interpretations are issued by the Audit Issues Task Force of the Auditing Standards Board (ASB) to provide timely guidance on the application of pronouncements of the ASB. They are

False. 1. A failure to obtain a written assertion is considered a scope limitation when the responsible party is the client. 2. In addition, a representation letter is typically obtained by the practitioner from the responsible party. A failure of the responsible party or client to provide written representations is normally considered a scope limitation.

As part of the attestation procedures for examinations and reviews, the practitioner would not normally obtain a written assertion provided by the responsible party.

True. 1.The auditor also considers the need to test the effectiveness of the objectivity and competency factors. 2.If the auditor determines that the internal auditors are sufficiently competent and objective, (s)he should consider how their work may affect the audit.

Assessing competence and objectivity may include considering information from (1) previous experience with the internal audit function, (2) discussions with management, and (3) a recent external quality review.

True. Many factors during the conduct of the audit may increase the risk assessment, for example, 1.Discrepancies in the accounting records 2.Conflicting or missing evidential matter 3.Problematic or unusual relationships between the auditor and client 4.Tips or complaints to the auditor about fraud

Assessment of risk is a cumulative process and includes consideration of risk factors individually and in combination throughout the audit process.

False. 1.Assurance services do not encompass consulting services. 2.Assurance services differ from consulting services in two ways: a.They focus on improving information rather than providing advice, and b.They usually involve situations in which one party wants to monitor another (often within the same company) rather than the two-party arrangements common in consulting engagements.

Assurance and consulting services are synonymous.

Independent professional services that improve the quality of information, or its context, for decision makers. The AICPA defines assurance services as "independent professional services that improve the quality of information, or its context, for decision makers." Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.

Assurance services are best described as

True. Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.

Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.

No; Yes Assurance services encompass attestation services but not consulting services. Assurance services differ from consulting services in two ways: (1) They focus on improving information rather than providing advice, and (2) they usually involve situations in which one party wants to monitor another rather than the two-party arrangements common in consulting engagements.

Assurance services differ from consulting services in that they Focus on Providing Advice; Involve Monitoring of One Party by Another

False. Assurance services do not include consulting services. However, assurance and consulting services have similarities because they are delivered using a similar body of knowledge and skills.

Assurance services include consulting services.

True. Agreed-upon procedures reports are restricted to the specified parties who have agreed to the specific procedures and taken responsibility for their sufficiency.

Attest engagements include reporting on findings based on agreed-upon procedures performed on the subject matter.

True. 1.Audit committees ordinarily must preapprove the services performed by accountants. 2.Approval must either be explicit or in accordance with detailed policies and procedures. 3.If approval is based on policies and procedures, the audit committee must be informed and no delegation of its authority to management is allowed.

Audit committees of issuers must preapprove services to be provided by the auditors.

True. 1.An assessment of the risk of material misstatement (whether caused by error or fraud) should be made during planning. 2.The risk of material misstatement due to fraud should be specifically assessed.

Audit risk and materiality should be considered in planning the audit and designing audit procedures as well as in evaluating whether the financial statements are fairly presented, in all material respects, in conformity with GAAP.

Should understand how management developed the estimate but may adopt a variety of approaches to evaluating its reasonableness. In evaluating the reasonableness of an accounting estimate, the auditor should obtain an understanding of how it was developed. The auditor then may use one of several approaches, or a combination, to evaluate reasonableness. One approach is to review and test management's process. A second approach is to develop an independent expectation to corroborate the reasonableness of management's estimate. A third approach is to review subsequent events or transactions.

Auditors should evaluate significant accounting estimates included in the financial statements. The auditor

True. 1.An accounting estimate is an approximation of a monetary amount in the absence of a precise means of measurement. Estimates are often necessary because measurement or valuation may be uncertain pending future events and relevant data for past events cannot be accumulated on a timely, cost-effective basis. 2.The auditor's objective in evaluating accounting estimates is to obtain sufficient appropriate evidence to provide reasonable assurance that a.All material accounting estimates have been developed. b.Those estimates are reasonable (free from bias). c.Presentation and disclosure conform with the applicable reporting framework.

Auditors should obtain and evaluate sufficient appropriate evidence to support significant accounting estimates.

May be individually reasonable but collectively indicate possible bias. If the amount in the financial statements is not reasonable, it should be treated as fraud or error and accumulated with other identified misstatements. If the differences between the best estimates and those in the financial statements are individually reasonable but collectively indicate possible bias (for example, when the effect of each difference is to increase income), the auditor should reconsider the estimates as a whole.

Auditors should obtain and evaluate sufficient appropriate evidence to support significant accounting estimates. Differences between the estimates best supported by the evidence and those in the financial statements

Professional skepticism. The auditor should maintain professional skepticism throughout the audit. Professional skepticism is an "attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and critical assessment of audit evidence" (AU-C 200).

Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of

The prospective client's consent to make inquiries of the predecessor, if any. The auditor should communicate with the predecessor auditor before accepting the engagement. Initiation of the communication is the responsibility of the auditor. Moreover, the auditor should seek permission from the prospective client to inquire of the predecessor before final engagement acceptance. Thus, the auditor should ask the client to authorize the predecessor to make a full response.

Before accepting an engagement to audit a new client, a CPA is required to obtain

Warranting the infallibility of the work performed. The auditor is not a guarantor. The auditor's responsibility is to express (or disclaim) an opinion on whether the financial statements, taken as a whole, are presented fairly. The audit is planned and performed to provide reasonable, but not absolute, assurance that the financial statements are not materially misstated.

Competence as an independent auditor includes all of the following except

Withholding as a result of nonpayment of fees for a completed engagement adjusting and closing journal entries not reflected in the client's books. The member's duty to return client-provided records is absolute. However, the duty to return other information not reflected in the client's books and records is not absolute. For example, the duty to return supporting records for an issued work product is conditional upon payment of fees with respect to information such as adjusting, closing, combining, or consolidating entries. Supporting records contain information not in the client's books and records without which its financial information is incomplete. They are produced by the member and are not otherwise available to the client.

Conduct Rule 501 states that a member of the AICPA shall not commit an act discreditable to the profession. Which of the following most likely is not considered such an act?

False. The internal auditors' work may affect the nature, timing, and extent of the audit, including the procedures performed in obtaining the understanding of internal control and assessing control risk.

The internal auditor's work should never be considered in assessing internal control risk.

False. Data are considered more reliable when 1.Obtained from independent sources outside the entity 2.Obtained from sources inside the entity independent of those responsible for the amount being audited 3.Developed under reliable internal control 4.Subjected to audit testing in current or prior years 5.Obtained from a variety of sources

Data are considered more reliable when obtained from sources inside the entity.

False. 1.Representations by management that a transaction was consummated on terms equivalent to those that prevail in arm's-length transactions are difficult to substantiate. 2.If the auditor believes that a representation is unsubstantiated, (s)he should express a qualified or adverse opinion because of a departure from the applicable reporting framework, depending on materiality.

Determining whether a transaction would have occurred if the parties had not been related, or what the terms and manner of settlement would have been, is typically a simple process.

True. Disclosure of possible noncompliance with laws and regulations to outside parties ordinarily is not the auditor's responsibility and would violate the duty of confidentiality. However, the auditor may need to disclose noncompliance with laws and regulations to outside parties to 1.Comply with certain legal and regulatory requirements 2.Communicate with a successor auditor 3.Respond to a subpoena 4.Report to a funding or other specified agency in accordance with governmental audit requirements

Disclosure of possible noncompliance with laws and regulations to outside parties ordinarily is not the auditor's responsibility and would violate the duty of confidentiality.

Yes Yes Yes The auditor may request direct assistance from the internal auditor when performing the audit. Thus, the auditor may appropriately request the internal auditor's assistance in obtaining the understanding of internal control, performing tests of controls, or performing substantive procedures (AU-C 610). The internal auditor may provide assistance in all phases of the audit as long as (1) the internal auditor's competence and objectivity have been tested, and (2) the independent auditor supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.

During an audit, an internal auditor may provide direct assistance to an independent CPA in Obtaining an Understanding of Internal Control; Performing Tests of Controls;Performing Substantive Tests

Consider withdrawing from the audit engagement and disassociating from future relationships with the client. If the client does not take the remedial action considered necessary by the auditor, the auditor should consider withdrawal from the engagement even when the illegal bribes are not material. The auditor should weigh the effects on the ability to rely on management's representations and the possible results of continued association with the client. The auditor may wish to seek legal advice (AU-C 250).

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should

Use the understanding of the audited entity's process for determining fair value estimates to assess the risks of material misstatement. To meet its responsibility to make the fair value estimates included in the financial statements, management must adopt financial reporting processes that include (1) adequate internal control, (2) selecting appropriate accounting policies, (3) prescribing estimation processes (e.g., valuation methods, including models), (4) determining data and assumptions, (5) reviewing the circumstances requiring estimation, and (6) making necessary reestimates. The auditor should obtain an understanding of these processes and the relevant controls. It should be sufficient for an effective audit of fair value estimates. The understanding is used to assess the risks of material misstatement. Assessing these risks includes evaluating (1) estimation uncertainty (inherent lack of measurement precision) and (2) determining whether the risks are significant.

During the audit of fair value estimates and disclosures, the auditor most likely should

False. 1.The auditor should obtain an understanding of management's process for determining fair values. 2.Management's process includes a.Choosing appropriate valuation methods (but no one specific method is required) b.Identifying significant assumptions c.Preparing the valuations d.Ensuring conformity with the applicable financial reporting framework 3.The auditor's understanding of the process is used to assess the risk of material misstatement and to determine the nature, timing, and extent of audit procedures.

During the audit of fair value estimates and disclosures, the auditor should determine that the entity has measured fair values using discounted cash flows whenever feasible.

Is based on evaluating whether the entity's related controls have been suitably designed and implemented. Identified and assessed fraud risks are treated as significant risks. Thus, the auditor obtains an understanding of the related controls relevant to the risks. This process includes evaluating whether the controls have been suitably designed and implemented to mitigate the fraud risks.

During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment

An appropriate part of the professional conduct of the engagement. An Interpretation of Conduct Rule 201 states that in many cases additional research and consultation with others may be necessary during an engagement. The auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence.

During the course of an audit, an auditor required additional research and consultation with others. This additional research and consultation is considered to be

Discuss the timing of the audit procedures with the client's management. The first step in the audit process is the auditor's decision whether to accept a client. After having decided to perform an audit, the auditor enters the initial planning phase. During initial planning, an auditor should, among other things, meet with the client to agree on the type, scope, and timing of certain aspects of the engagement (e.g., observation of inventory).

During the initial planning phase of an audit, a CPA most likely would

Differences between management and the auditor's judgment regarding estimates. Known misstatements are specifically identified during the audit. In contrast with known misstatements, the amount of likely misstatements cannot be specifically identified. A likely misstatement may derive from differences between the auditor's and management's judgments about accounting estimates or extrapolations from audit evidence.

Each of the following is a type of known misstatement, except

True. Services provided to the elderly include accumulation of information, financial management, and assessment of nursing care.

ElderCare (PrimePlus) Services assess whether specified goals regarding care for the elderly are being met by various caregivers.

True. The auditor considers estimation uncertainty in assessing the risks of material misstatement.

Estimation uncertainty is the susceptibility of an accounting estimate to an inherent lack of precision in its measurement.

True. An auditor cannot obtain absolute assurance that material misstatements will be detected because of the concealment aspects of fraudulent activity (e.g., collusion or falsification of documents) and the need to apply professional judgment in identification and evaluation of fraud risk factors.

Even a properly planned audit may not detect a material misstatement resulting from fraud.

False. If the auditor concludes that the internal auditors' activities are not relevant, (s)he need not further consider their function unless the auditor requests direct assistance from the internal auditors.

Even if the auditor concludes the work of the internal auditors to be irrelevant, (s)he must consider it beyond gaining an understanding.

False. 1.Only sufficient appropriate evidence is necessary to support an auditor's understanding. 2.The auditor should evaluate the transactions or relationships and become satisfied on the basis of professional judgment that they are adequately disclosed in the notes to the financial statements.

For transactions or relationships for which accounting principles concerning related parties requires disclosure, the auditor should be convinced that (s)he has conducted a thoroughly exhaustive search for evidence to understand the relationships and the effects of the transactions.

No No The responsibility to report on financial statements rests solely with the auditor and cannot be shared with internal auditors. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about (1) assessments of RMMs, (2) materiality of misstatements, (3) sufficiency of tests performed, (4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor's report always should be those of the auditor.

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Materiality of Misstatements; Evaluation of Accounting Estimates

Susceptible to bias. In evaluating the reasonableness of an estimate, the auditor normally concentrates on key factors and assumptions that are (1) significant to the accounting estimate, (2) sensitive to variations, (3) deviations from historical patterns, and (4) subjective and susceptible to misstatement and bias.

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally is concerned about assumptions that are

No; No The auditor may use the internal auditor to provide direct assistance in the audit as long as the auditor supervises, reviews, evaluates, and tests the work of the internal auditor. However, an internal auditor, regardless of his/her competence and objectivity, should never make judgments about the audit work being conducted. All judgments, including assessments of the risks of material misstatement (inherent and control risk), should be made by the auditor.

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Assessment of Inherent Risk; Assessment of Control Risk

True. Fraud typically involves pressures or incentives to commit fraud, a perceived opportunity, and the capacity to rationalize misconduct.

Fraud differs from error because it is intentional.

False. GAAS are concerned with the conduct of the audit. Auditors are expected to exercise judgment in connection with audit engagements.

Generally accepted auditing standards are a step-by-step guide for auditors to follow in an audit engagement.

Hill's business structure might be designed in such a way as to deliberately obscure related party transactions. Under U.S. GAAP, transactions between a parent and its subsidiaries are related party transactions. Thus, Jones should obtain an understanding of Hill's subsidiary relationships to assess whether Hill's ownership and governance structures were designed to obscure related party transactions. The auditor's risk assessment procedures should inquire about (1) the identity of related parties, (2) the relationship of the entity with each party, (3) whether transactions with them have occurred, and (4) the nature and purpose of the transactions. Jones also should be aware that business structure and operating style are occasionally deliberately designed to obscure related party transactions.

Hill Corporation has hired Jones, a CPA, to audit its financial statements for year end. Jones, when searching for related party transactions, should seek information to obtain an understanding about each of Hill's subsidiary's relationships because

Hill, the auditor. AU-C 210 indicates that the auditor should communicate with the predecessor auditor before accepting the engagement. Initiation of the communication is the responsibility of the auditor. Moreover, the auditor should seek permission from the prospective client to inquire of the predecessor before final engagement acceptance. Thus, the auditor should ask the client to authorize the predecessor to make a full response.

Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?

Perform the planned auditing procedures closer to the balance sheet date. A decrease in the acceptable level of detection risk or in the amount considered material will result in the auditor's modifying the audit plan to obtain greater assurance from substantive testing by (1) selecting a more effective audit procedure, (2) applying procedures nearer to year-end, or (3) increasing the extent of particular tests. The reduction in materiality requires greater assurance from substantive testing.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to

True. When the auditor concludes that an act of noncompliance has or is likely to have occurred, (s)he should discuss the matter with the appropriate level of management and request that any necessary remedial actions be taken. If the alleged act has a material effect on the financial statements or the client does not take the remedial action that the auditor considers necessary, the auditor should express a qualified or adverse opinion, depending on the level of materiality, or withdraw from the engagement.

If an act of noncompliance with laws and regulations has not been accounted for properly, resulting in a material misstatement, the auditor should express a qualified or adverse opinion.

Revenue. Revenue is an account for which expectations can be developed by the auditor. It is a key account that should be predictable.

If not already done to form an overall conclusion, the auditor should perform analytical procedures relating to which of the following transaction cycles?

Apply audit procedures specifically directed to ascertaining whether noncompliance has occurred. The auditor should apply audit procedures specifically directed to ascertaining whether noncompliance has occurred. When the auditor becomes aware of information concerning possible noncompliance, the auditor should obtain (1) an understanding of the nature of the act and the circumstances in which it occurred and (2) further information to evaluate the effect on the financial statements.

If specific information that implies the existence of possible noncompliance with laws and regulations that could have a material effect on the financial statements comes to an auditor's attention, the auditor should next

True. 1.When assessing competence, the auditor should obtain information about an internal auditor's educational level and professional experience; professional certification and continuing education; audit policies, programs, and procedures; practices regarding assignment of internal auditors; supervision and review; quality of audit documentation, reports, and recommendations; and performance evaluation. 2.When assessing objectivity, the auditor should obtain information about the organizational status of the director of internal auditing and policies used to maintain objectivity about the areas audited.

If the auditor decides that it is efficient to consider how the internal auditors' work might affect the nature, timing, and extent of audit procedures, the auditor should assess the competence and objectivity of the internal auditors in light of the intended effect of their work on the audit.

Competence and objectivity. If the auditors decide that it is efficient to consider how the internal auditors' work may affect the nature, timing, and extent of audit procedures, the competence and objectivity of the internal auditors should be assessed. Assessing competence involves obtaining information about (1) education and experience; (2) professional certification and CPE; (3) audit policies, programs, and procedures; (4) practices regarding assignment of internal auditors; (5) supervision and review of their activities; (6) quality of audit documentation, reports, and recommendations; and (7) evaluation of internal auditors' performance. Assessing objectivity includes obtaining information about (1) organizational status (the level to which the internal auditors report, access to those charged with governance, and whether these individuals oversee employment decisions related to the internal auditors) and (2) policies to maintain internal auditors' objectivity concerning the areas audited (AU-C 610).

If the auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors'

False. 1.The auditor should determine how the audit evidence affects the assessment of the risk of material misstatement due to fraud. 2.Even if the result of a discovered fraud is not material to the financial statements, the auditor should evaluate the implications for the reliability of the audit evidence.

If the result of a discovered fraud is not material to the financial statements, the auditor does not need to evaluate the implications of the perpetrator's organizational position on the reliability of audit evidence.

False. 1.If the risk of fraud is significant, the auditor should consider withdrawing, consulting legal counsel, and communicating with the audit committee, not the client's shareholders. 2.The assessment of the risk of material misstatement due to fraud should be documented in the working papers.

If the risk of fraud is significant, the auditor should also consider withdrawing from the engagement, consulting legal counsel, and communicating the reasons for withdrawal to the client's shareholders.

True. When developing evaluation procedures, the auditor should consider whether the internal auditors' 1.Scope of work is appropriate 2.Audit programs are adequate 3.Working papers provide adequate documentation of the work, including supervision and review 4.Conclusions are appropriate 5.Reports are consistent with results

If the work of the internal auditors significantly affects the auditor's work, the auditor should evaluate the quality and effectiveness of the internal auditors' work.

True. The auditor should obtain an understanding of the methods or assumptions used to determine whether the findings are suitable for corroborative purposes. The auditor should consider whether the specialist's findings support the assertions and should test the accounting data provided by the client to the specialist.

If there is a material difference between the specialist's findings and the assertions being tested, the auditor should apply additional procedures.

True. Although no assurance is offered, the practitioner must be independent.

In an agreed-upon procedures engagement, the practitioner must be independent.

False. Attest documentation should be prepared and maintained. Its form and content will vary with the circumstances. The procedures performed, evidence gathered, and the findings reached should be documented.

In an attest engagement, the practitioner need not prepare working papers.

Reviewing the predecessor's working papers. Under the ISAs, an auditor may obtain sufficient appropriate evidence about opening balances by reviewing the predecessor's working papers. In this case, the auditor should consider the competence and independence of the predecessor.

In an audit based on International Standards on Auditing (ISAs), a successor auditor would normally become satisfied with opening balances by

True. In both audits and examinations, the practitioner offers positive assurance in the form of an opinion.

In an audit of historical financial information, as in an examination under the attestation standards, the practitioner expresses an opinion.

Internal auditor's compliance with professional internal auditing standards. The external auditor customarily inquires about the application of professional standards by the internal auditors. If the internal audit function is relevant to the audit, and if it is efficient to consider how it may affect the audit, the external auditor must assess the competence and objectivity of the internal auditors. This assessment also is made if direct assistance from the internal auditors is sought. Compliance with the internal auditing standards developed by The Institute of Internal Auditors or by the Government Accountability Office is one measure of the competence and objectivity of internal auditors.

In assessing the competence of a client's internal auditor, an auditor most likely would consider the

Quality of the internal auditors' working paper documentation. In assessing the competence of an internal auditor, the CPA should consider such factors as (1) educational level and professional experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures; (4) departmental practices regarding assignments; (5) quality of working paper documentation, reports, and recommendations; and (6) evaluation of the internal auditor's performance.

In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the

Determine the organizational level to which the internal auditors report. If the auditor decides that it is efficient to consider how the internal auditors' work may affect the nature, timing, and extent of audit procedures, the competence and objectivity of the internal auditors should be assessed. Assessing objectivity includes obtaining information about (1) organizational status (the level to which the internal auditors report, access to those charged with governance, and whether these individuals oversee employment decisions related to the internal auditors) and (2) policies to maintain internal auditors' objectivity concerning the areas audited (AU-C 610).

In assessing the objectivity of internal auditors, an independent auditor should

Yes;Yes Before accepting an engagement, the CPA should consider the risks of being associated with the client. Auditor business risk relates to potential loss or injury to the auditor's professional practice from litigation and adverse publicity from the relationship with the client. The successful outcome of an audit and the ability to control auditor business risk often depends on the client's business risk. The auditor's understanding of the entity's business risks increases the likelihood of identifying risks of material misstatement. Thus, QC 10 states that policies and procedures should be established regarding acceptance and continuance of clients and specific engagements. They should provide reasonable assurance that the firm will undertake or continue relationships only when it does not have information leading to the conclusion that the client lacks integrity.

In assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Business Risk; CPA's Business Risk

The adequacy of the disclosure of the related party transactions. Accounting principles ordinarily do not require transactions with related parties to be accounted for differently from those with unrelated parties. Primary emphasis should be on the adequacy of disclosure.

In auditing related party transactions, an auditor ordinarily places primary emphasis on

True. For some assertions, analytical procedures alone may provide the necessary assurance.

In certain circumstances, analytical procedures alone may be able to provide the necessary assurance for certain management assertions.

Preparation of schedules for negative accounts receivable responses. Internal auditors may provide direct assistance in performing both substantive procedures and tests of controls provided that the auditor assesses their competence and objectivity; supervises, reviews, evaluates, and tests their work; and makes all judgments regarding matters that affect the report on the financial statements. Preparing schedules for negative accounts receivable responses is a clerical activity related to a substantive procedure that an internal auditor may perform under the supervision of the auditor.

In connection with the audit of financial statements by an auditor, the client suggests that members of the internal audit staff be used to minimize audit costs. For which of the following tasks may the auditor most appropriately request direct assistance from the internal audit staff?

Participate in professional development activities that enable them to fulfill responsibilities assigned. The firm's policies and procedures should provide for all personnel to receive general and industry-specific CPE and engage in other professional development activities. The purpose is to enable personnel to carry out assigned responsibilities and satisfy CPE requirements of the AICPA and regulatory agencies, such as the GAO and state boards of accountancy (QC 10).

In connection with the element of human resources, a CPA firm's system of quality control should ordinarily provide that all personnel

Documentation to demonstrate compliance with its policies and procedures. Monitoring is concerned with providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued. Documentation of monitoring includes procedures, evaluations, deficiencies, and the bases for taking or not taking further action. Documentation of all elements of quality control should be retained for a period of time sufficient to enable those performing monitoring procedures and a peer review to evaluate the extent of the firm's compliance with its quality control standards, or for a longer period if required by law or regulation (QC 10).

In connection with the element of monitoring, a CPA firm's system of quality control ordinarily should provide for the maintenance of

Financial statement assertions. Most audit work consists of obtaining and evaluating evidence about relevant financial statement assertions. They are management representations embodied in the financial statements that are used by the auditor to consider the types of possible material misstatements.

In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

Reasonable in the circumstances. The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the applicable reporting framework.

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are

Includes brainstorming about how assets can be misappropriated. Key engagement personnel should discuss the risk of fraud. The discussion should emphasize professional skepticism and continual alertness to potential fraud. The discussion may occur before or during information gathering, and communication should be ongoing. The discussion should include brainstorming about (1) factors that might create the conditions for errors or fraud, (2) how and where the statements might be misappropriated, (3) how assets might be misappropriated or financial reports misstated, (4) how fraud could be concealed, and (5) how the auditors might respond to fraud risks.

In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion

True. In judging the extent of the effect of the internal auditors' work, consideration should be given to materiality, inherent and control risk, and the degree of subjectivity involved in the evaluation of audit evidence.

In judging the extent of the effect of the internal auditors' work, consideration should be given to materiality, inherent and control risk, and the degree of subjectivity involved in the evaluation of audit evidence.

Expresses a conclusion about a written assertion. When a CPA in the practice of public accounting performs an attest engagement, the engagement is subject to the attestation standards. An attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, according to the second attestation standard of reporting, the report shall state the practitioner's conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated. However, the conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter.

In performing an attest engagement, a CPA typically

True. 1.An audit plan aids in instructing assistants and sets forth in reasonable detail the audit procedures necessary to accomplish audit objectives. 2.The audit plan's form and detail will vary. 3.Development of the audit plan is guided by risk assessment and materiality considerations. 4.As the audit progresses, changed conditions may require modification of planned procedures.

In planning, the auditor should consider the nature, extent, and timing of work to be performed and is required to prepare a written audit plan.

Accounting records to the supporting evidence. The existence assertion concerns whether assets, liabilities, or equity interests of the entity exist at a given time. The direction of testing is ordinarily from the accounting records to the supporting evidence, often including direct observation of the asset. Thus, the auditor selects from items contained in a financial statement amount and searches for appropriate (relevant and reliable) evidence that is sufficient.

In testing the existence assertion for an asset, an auditor ordinarily works from the

True. It is normal for an entity to conduct business with related parties. However, the auditor should be aware that related party transactions may have been motivated solely by lack of sufficient working capital or credit to continue the business; an overly optimistic earnings forecast; dependence on one or a few products, customers, or transactions for success; a declining industry with many business failures; excess capacity; significant litigation, especially between shareholders and management; and significant obsolescence dangers because the company is in a high-technology industry.

In the absence of contrary evidence, transactions with related parties should not be assumed to be outside the ordinary course of business.

The applicability of the same confidentiality requirements to the auditor and the specialist. The agreement should be documented and should cover (1) the nature, objectives, and scope of the work; (2) the roles of the auditor and specialist; (3) the nature, timing, and extent of communications between the auditor and specialist; and (4) the need for the specialist to observe confidentiality requirements. The agreement between the auditor and the auditor's external specialist generally is documented in an engagement letter. A matter that should be included is the need for the confidentiality provisions of the relevant ethical requirements that apply to the auditor also to apply to the specialist. For example, a member of the AICPA may use a third-party service provider to render professional services to clients. The member should have a contract with the third-party service provider to maintain the confidentiality of the information (Ethics Ruling). Other requirements may be imposed by law or regulation.

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

Modifies the opinion because of a material misstatement with effects that are not pervasive. The auditor may refer to an auditor's external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor's report with such a reference should state that it does not reduce the auditor's responsibility (AU-C 620).

In using the work of an auditor's external specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor

The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth. Independence is impaired if a covered member has a direct financial interest in a client, e.g., ownership of equity, debt securities (such as bonds issued by an attest client), or other investments in a client. A direct financial interest impairs independence even if it is not material to the member's wealth.

In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?

Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion. When the auditor discovers that a procedure considered necessary at the time of the audit was omitted, (s)he should assess the importance of the omitted procedure to his/her ability to support the previously expressed opinion regarding the financial statements (AU-C 585).

Six months after expressing an unmodified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first

An adverse opinion is expressed based on a difference of opinion between the client and the auditor's external specialist about the value of certain assets. An auditor's external specialist has expertise in a field other than accounting or auditing. Expertise in a field other than accounting or auditing may include valuation of nonfinancial assets, such as land and buildings, jewelry, or antiques. If, after considering the work of the auditor's external specialist, the auditor concludes that managements' assertions are materially misstated, a qualified or adverse opinion should be expressed. When the opinion is modified, the auditor may report the work of the external specialist when it is relevant to understanding the opinion modification (AU-C 620).

In which of the following instances would it be appropriate for the auditor to refer to the work of an appraiser in the auditor's report?

A member whose practice is primarily bankruptcy discloses a client's name. A member shall not disclose confidential client information without the client's consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his/her professional obligations, (3) cooperate in an official review of his/her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his/her name confidential information. If no exception applies, client confidentiality has been violated.

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?

True. Independence is impaired if an individual who is participating on the engagement team, who can influence the engagement, or who is a partner in the office where the lead engagement partner primarily practices has a close relative who •Occupied a key position with the client, •Held a material financial interest in the client that was known to the individual, or •Held a financial interest that permitted significant influence over the client.

Independence is impaired if a parent of a person participating on the engagement team occupies a key position with the client.

True. A practitioner appears to be an advocate or a decision maker for an attest client when performing certain nonattest services. In these circumstances, the practitioner is not independent. Independence is impaired by providing tax advisory services to an attest client. However, the practitioner may prepare the client's tax return but must not testify as an advocate of the client in a tax case.

Independence is impaired if a practitioner provides tax advisory services to an attest client.

False. Independence is impaired if, during the period of the professional engagement, a firm partner or professional employee, such individual's immediate family, or a group of these individuals acting together owned more than 5% of the client. However, a covered member or such individual's immediate family could have no interest in an attest client.

Independence is impaired if, during the period of the professional engagement, a close relative of a professional employee owned 1% of the client.

False. A covered member's immediate family (spouse, equivalent of a spouse, or dependents) is subject to Rule 101. However, independence is not impaired solely because an immediate family member was employed by the client in a non-key position, or as part of his or her employment, an immediate family member of one of the following participated in a benefit plan that is a client, is sponsored by a client, or invests in a client if the plan is offered to all similarly situated employees: a partner or manager who provided at least 10 hours of nonattest services to the client, and any partner in the office where the lead engagement partner primarily practiced in relation to the engagement.

Independence of a covered member is impaired whenever his/her spouse is employed by the client.

A discipline that enhances the degree of confidence that users can place in financial statements. The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework (e.g., GAAP, cash basis, etc.). An auditor's opinion enhances the degree of confidence that users can place in financial statements.

Independent auditing can best be described as

False. Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion. It is the only risk that can be changed at the auditor's discretion.

Inherent risk and control risk can be changed by the auditor.

Exist independently of the financial statement audit. Inherent risk is the susceptibility of a relevant assertion to a material misstatement before considering related controls. Control risk is the risk that internal control will not timely prevent, or detect and correct, a material misstatement of a relevant assertion that could occur. Inherent risk and control risk are the entity's risks. They exist independently of the audit and cannot be changed by the auditor. GAAS ordinarily do not refer to inherent risk and control risk separately but instead to a combined assessment of the risks of material misstatement. This assessment may change as more evidence is collected, but the entity's risks do not. Detection risk is the risk that the auditor's procedures performed to reduce audit risk to an acceptably low level will not detect a material misstatement that exists in a relevant assertion. It can be changed at the auditor's discretion by altering the nature, timing, or extent of the audit procedures.

Inherent risk and control risk differ from detection risk in that they

Kar's sibling is the director of internal auditing for Fort. Independence is impaired if an individual participating in the audit engagement has a close relative who has a key position with the client. A close relative is a parent, sibling, or independent child. A key position is one in which an individual has primary responsibility for significant accounting functions that support material components of the financial statements, has primary responsibility for the preparation of the financial statements, or has the ability to exercise influence over the contents of the financial statements. Thus, because Kar's sibling is the director of internal auditing for Fort, Inc., auditor independence is impaired.

Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances most likely impairs Kar's independence?

True. Management is responsible for adjusting the statements to correct material misstatements. 1. The responsibility for the fairness of the financial statements is typically documented in the engagement letter.

Management is responsible for adjusting the statements to correct material misstatements.

False. The auditor, not management of the client, should be satisfied with the specialist's qualifications.

Management should become satisfied about the qualifications and reputation of a specialist who has been retained by the auditor.

A significant portion of management compensation is represented by stock options. The control environment is the foundation for all other control components. It provides discipline and structure, sets the tone of the organization, and influences the control consciousness of employees. It includes, among other things, integrity and ethical values. This element of the control environment may be significantly influenced when a significant portion of management compensation consists of stock options. Such compensation creates an incentive to engage in earnings management.

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

True. The concept of materiality recognizes that some matters, but not all, are important for fair presentation of the financial statements in conformity with GAAP.

Materiality is a matter of professional judgment influenced by the needs of reasonable people who will rely on the financial statements.

Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high. The auditor has the sole reporting responsibility and makes all judgments about matters affecting the report. When amounts are material and the risks of material misstatement are high or the evaluation of the evidence is highly subjective, the consideration of the internal auditors' work cannot alone reduce audit risk to an acceptable level. Thus, direct testing of those assertions by the auditor cannot be eliminated (AU-C 610).

Miller Retailing, Inc., maintains a staff of three full-time internal auditors. The independent auditor has found that they are competent and objective. Moreover, the work of the internal auditors is relevant to the audit, and it is efficient to consider how that work may affect the audit. The independent auditor most likely will

True. Most audit work consists of obtaining and evaluating evidence about financial statement assertions. The measure of the validity of assertions lies in the auditor's judgment. The assertions are representations by management that are embodied in financial statement components and can be either explicit or implicit.

Most audit work consists of obtaining and evaluating evidence about financial statement assertions.

No; No; No CPAs in public practice must be independent in fact and appearance when providing attestation services. Attestation services provide assurances about assertions and include audits, examinations, reviews, and applying agreed-upon procedures.

Must a CPA in public practice be independent in fact and appearance when providing the following services? Compilation of Personal Financial Statements; Preparation of a Tax Return; Compilation of a Financial Forecast

Statements on Standards for Accounting and Review Services. The Statements on Standards for Accounting and Review Services apply to compilations and reviews performed by practitioners. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.

North Co., a nonissuer, asked its tax accountant, King, a CPA in public practice, to generate North's interim financial statements on King's personal computer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of

Smith is a director of Hometown Bank. Independence is impaired if a firm or one of its partners is associated with the client as an officer, director, manager, employee, etc.

Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith's independence would be impaired under which of the following circumstances?

Yes, because the CPA was not required to be independent at the time the loan was granted. An attest engagement requires independence as required by AICPA standards (ET 92). Accountants who perform audits and reviews are required by AICPA standards to be independent. However, a compilation merely assists management in presenting information in the form of financial statements. It does not provide any assurance that no material modifications should be made for them to be in accordance with the applicable reporting framework. Although a compilation is not an assurance engagement, it is an attest engagement (AR 60). Furthermore, AICPA standards do not require an accountant to be independent to perform a compilation. But if (s)he is not independent, a final paragraph of the report should so state (AR 80). Thus, the CPA was not required to be, and was not, independent during Year 1. Because the loan was paid in full during Year 1, the CPA is considered independent with respect to the audit of the client's Year 2 financial statements. The CPA had no loan from the client during the engagement.

On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client's financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client's December 31, Year 2, financial statements?

Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion. The auditor determines whether (1) the omission impairs his/her current ability to support the opinion, and (2) persons are currently relying or are likely to rely on the report. If these conditions currently exist, the auditor should promptly undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the opinion (AU-C 585).

On March 15, Year 2, Kent, CPA, expressed an unmodified opinion on a client's audited financial statements for the year ended December 31, Year 1. On May 4, Year 2, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unmodified opinion. If the shareholders are currently relying on the opinion, Kent should first

A system of quality control. A CPA firm must have a system of quality control that ensures that its personnel comply with professional standards applicable to its audit and accounting practice. However, a deficiency in an engagement, by itself, does not necessarily indicate that the firm's system of quality control is not sufficient. GAAS apply to individual engagements, and Statements on Quality Control Standards (SQCSs) apply to the firm's practice as a whole.

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through

Provide reasonable assurance that the firm has the resources to undertake new engagements. CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm's policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with applicable requirements (QC 10).

One purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to

False. 1.Limited (moderate-level) assurance should be given in reports that express conclusions on the basis of a review. 2.Positive (high-level) assurance should be given in reports that express conclusions on the basis of an examination.

Positive (high-level) assurance is offered in a review.

False. Primary concern by the auditor should be given to known related party transactions.

Special investigative efforts beyond traditional audit procedures should be made to uncover all possible related party transactions.

The coordination of the assistance of the client's personnel in data preparation. The auditor should, among other things, consider (1) the work of the internal auditors and the extent of use of that work and (2) the availability of client personnel and data (AU-C 300). Moreover, the premise of the audit includes management's responsibility to provide unrestricted access to persons having necessary audit evidence (AU-C 200). Planning activities also include determining the nature and amount of audit resources to allocate to specific audit areas (AU-C 300). Thus, the coordination of the assistance of the client's personnel in data preparation is considered an overall audit strategy.

Prior to the audit, an auditor usually discusses the overall audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time?

False. A practitioner may accept an engagement to examine, compile, or apply agreed-upon procedures to PFSs. The practitioner must be independent.

Prospective financial statements (PFSs) cannot be the focus of agreed-upon procedures engagements.

False. The five sources of information used to develop analytical procedures are: 1.Financial information from comparable prior period(s) 2.Anticipated results, such as budgets or forecasts prepared by management (or others) prior to the end of the period 3.Relationships among data, such as the interrelations among the balances on the financial statements 4.Comparable information from the client's industry 5.Related nonfinancial information

Related nonfinancial information is not a source of information used to develop analytical procedures.

False. 1.Judgments about assessments of risk, materiality, the sufficiency of tests, the evaluation of estimates, and other matters affecting the report should always be those of the external auditor. 2.This responsibility cannot be shared with the internal auditors.

Reporting on the financial statements is the shared responsibility of the auditor and internal auditors.

False. Risk assessment at the financial-statement level involves an overall assessment of the risk of material misstatement and thus may affect overall audit strategy.

Risk assessment at the financial-statement level involves obtaining and evaluating substantive evidence about specific assertions.

False. SSAEs do not cover services for which explicit standards apply, for example, SASs, SSARSs, and SSCSs. Other professional services to which the SSAEs explicitly do not apply include engagements in which the practitioner advocates a client's position, prepares tax returns or gives tax advice, has the sole function of assisting the client (e.g., to prepare information other than financial statements), or testifies as an expert witness given certain stipulated facts

SSAEs cover services for which explicit standards apply, for example, Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARSs), and the Statements on Standards for Consulting Services (SSCSs).

False. 1.Sarbanes-Oxley prohibits the following nonaudit services: a.Appraisal and other valuation services b.Designing and implementing financial information systems c.Internal auditing or actuarial functions d.Management services e.Human resource services f.Bookkeeping g.Expert services not pertaining to the audit h.Investment banking or advisory services i.Broker-dealer services 2.Nonaudit services such as compliance tax engagements are not prohibited.

Sarbanes-Oxley prohibits the audit firm of an issuer from providing any nonaudit services.

True. 1.Significant differences between expectations and recorded amounts should result in inquiries to management. 2.Responses to inquiries to management should be corroborated with other evidential matter.

Significant differences between expectations and recorded amounts discovered when performing analytical procedures should be investigated and evaluated.

True. SASs are considered generally accepted auditing standards.

Statements on Auditing Standards (SASs) are generally accepted auditing standards.

True. SQCSs require that a CPA firm have a system of quality control.

Statements on Quality Control Standards (SQCSs) require that a CPA firm have a quality control system.

False. 1.This definition is for CPA business performance review. 2.SysTrust assesses whether an entity's internal information systems (financial and nonfinancial) provide reliable information for operating and financial decisions.

SysTrust is a service that evaluates whether an entity's performance measurement system contains relevant and reliable measures for assessing the degree to which the entity's goals and objectives are achieved or how its performance compares to its competitors.

Increase the comfort of management and other stakeholders relative to an information system. The objective of SysTrust is an attestation report on management's assertion about the reliability of an information system that supports a business or a given activity. The CPA also may report directly on the reliability of the system. This assurance service is designed to increase the stakeholders' comfort relative to the system's satisfaction of the SysTrust principles: online privacy, security, processing integrity, availability, and confidentiality. The practitioner may provide assurance about any or all of these principles.

SysTrust is an assurance service designed to

True. A covered member is (1) an individual on the attest engagement team or who is able to influence the engagement, (2) a partner or manager who provides nonattest services to a client, (3) a partner in the office where the lead engagement partner primarily practices in relation to the engagement, and (4) the firm (including its benefit plans).

The AICPA Code of Professional Conduct defines a covered member as any individual participating in the attest engagement or able to influence it.

False. Rule 502, Advertising and Other Forms of Solicitation, states that a member in public practice shall not seek to obtain clients by advertising or other forms of solicitation done in a false, misleading, or deceptive manner. Solicitation through coercion, overreaching, or harassing conduct is prohibited. False, misleading, or deceptive acts are prohibited because they are against public interest.

The AICPA Code of Professional Conduct prohibits advertising by a member in public practice.

To maintain an impartial attitude on all matters that come under the CPA's review. According to the Principles, "Objectivity is a state of mind, a quality that lends itself to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest."

The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA's ability

An evaluation of whether an entity has reliable measures of performance beyond the traditional financial statements. CPA Performance Review evaluates whether an entity's performance measurement system contains relevant and reliable measures for assessing the degree to which the entity's goals and objectives are achieved. It attempts to provide a more balanced scorecard than just the traditional financial statements.

The AICPA assurance service, called CPA Performance Review, attempts to provide users with

Reporting whether specified objectives are being met by caregivers. The AICPA committee on assurance services has developed business plans for a number of assurance services, one of which involves elder care. The fundamental purpose of ElderCare services is to gather evidence and report to concerned parties (e.g., adult children of an elderly parent) as to whether agreed-upon objectives have been met with regard to care delivery, such as medical, household, and financial services. Related services provided directly to the elderly person or to the other concerned parties may include oversight of investment of funds (but not making an investment of funds), assistance in the choice of caregivers, accounting for the elderly person's income and expenses, and arranging for care and services, such as transportation, meal delivery, or placement in a retirement facility.

The AICPA committee on assurance services has identified a professional service called ElderCare (PrimePlus) services. One fundamental purpose of this assurance service is to assist the elderly and their families by

False. A peer review is not a substitute for a firm's own internal monitoring system.

The AICPA peer review program is designed to substitute for a firm's monitoring activities.

True. The PCAOB was established by the Sarbanes-Oxley Act of 2002. One of the numerous provisions of the act is the PCAOB has rule-making authority regarding quality control, ethics, and auditing standards. These rules, especially those governing quality control, have great relevance to enforcement actions.

The Public Company Accounting Oversight Board (PCAOB) has rule-making authority regarding quality control, ethics, and auditing standards.

Report the nature of disagreements with former auditors. The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing Form 8-K. Such disclosure inhibits management from changing auditors to gain acceptance of a questionable accounting principle. Also, a potential auditor must inquire of the predecessor auditor before accepting an engagement (AU-C 210). Thus, the inquiry provides an opportunity to confirm the information given in the 8-K report. However, confidential client information may only be communicated with the client's consent.

The SEC has strengthened auditor independence by requiring that management

Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation. According to Interpretation 101-1, independence is impaired with regard to the client if, during the period of the professional engagement, a covered member was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client, and the value of the estate's holdings in the client exceeded 10% of the estate's assets. An Ethics Ruling states that mere designation as trustee or executor does not impair independence but that actual service does.

The appearance of independence of a CPA, or that CPA's firm, is most likely to be impaired if the CPA

True. Inquiries can be used to 1.Obtain management's understanding about the risk of fraud. 2.Determine whether management knows of fraud perpetrated on or within the organization.

The assessment of the risk of material misstatement due to fraud includes inquiries of management.

False. Expert knowledge of a foreign subject is not required; however, the auditor should have an introductory knowledge of the client's business.

The auditor is expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation relevant to his/her client.

True. The auditor is required to communicate with the predecessor auditor before accepting the engagement. The successor auditor is responsible for initiating the communication.

The auditor is required to communicate with the predecessor auditor before accepting the engagement.

False. Final responsibility for judgments on estimates rests with management.

The auditor is responsible for determining which accounting estimates should be used in the financial statements.

False. The auditor may request direct assistance from the internal auditors when performing an audit.

The auditor may not request direct assistance from the internal auditors when performing an audit.

False. 1.Obtaining an understanding of the entity and its environment, including its internal control, is an essential part of planning and performing the audit in accordance with generally accepted auditing standards (AU-C 315). 2.The auditor need not acquire this understanding prior to acceptance of the engagement but must achieve it prior to completion of the engagement.

The auditor must acquire an understanding of the client's business prior to acceptance of the engagement.

False. 1.Materiality levels include an overall judgment for each financial statement. 2.Because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements.

The auditor ordinarily considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be considered material to any one of the balances.

True. The auditor should also consider: 1.Industry conditions and the economic and regulatory environment 2.Operating characteristics and financial stability of the organization, including its nature and complexity, transactions, financial condition, and profitability

The auditor should consider management characteristics and influence over the control environment, including management's abilities, pressures, style, and attitude when assessing the risk of material misstatement due to fraud.

Accounting and Review Services Committee. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.

The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the

Yes Yes Yes The client varies with the engagement. The practitioner must understand who the client is and who has final authority to resolve issues during the engagement. If the client is a family member or some third party, that person must have power of attorney over the elderly person involved.

The client of the practitioner providing ElderCare (PrimePlus) services may be The Elderly Person, The Elderly Person's Attorney, A Family Member

Allow the internal auditor to perform tests of internal controls. The auditor may request direct assistance from the internal auditor when performing the audit. Thus, the auditor may appropriately request the internal auditor's assistance in obtaining the understanding of internal control, performing tests of controls, or performing substantive procedures. The internal auditor may provide assistance in all phases of the audit if (1) the internal auditor's competence and objectivity have been assessed, and (2) the auditor supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.

The company being audited has an internal auditor that is both competent and objective. The auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the auditor may

Effects of a direct financial interest in the client on the CPA's independence. Independence is impaired if a CPA has any direct financial interest in a client. Whether this direct financial interest is material is irrelevant. The test of materiality is applied, however, if the financial interest is indirect.

The concept of materiality is least important to an auditor when considering the

Independent for purposes of examining financial information required to be filed annually with the DOL. The Department of Labor requires auditors to be independent for audits of pension funds administered under the Employee Retirement Income Security Act of 1974 (ERISA).

The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the selected auditor must be

True. 1.Relationships in stable environments are more predictable than those in unstable environments. 2.Income statement accounts tend to be more predictable than balance sheet accounts. 3.Accounts subject to management discretion may be less predictable.

The effectiveness and efficiency of analytical procedures depend on plausibility and predictability of the relationship.

The CPA expresses an opinion relating to one or more of the following principles: security, privacy, availability, processing integrity, and confidentiality.

The examination report issued under the WebTrust service includes all of the following except

Exercise professional skepticism. The Code of Professional Conduct requires the member to exercise due professional care, which includes exercising professional skepticism.

The exercise of due professional care requires that an auditor

True. Inquiries should be made about the internal auditors' 1.Organizational status 2.Application of professional standards 3.Audit plan, including the nature, timing, and extent of audit work 4.Access to records and limitations on the scope of their work

The external auditor should obtain an understanding of the internal audit function sufficient to identify activities relevant to audit planning.

False. According to Rule 101, a covered member must not •Have a direct financial interest in a client •Have loans to or from a client •Have a material indirect financial interest in a client •Be a trustee of a trust or executor of an estate that has a direct or material indirect financial interest in a client •Have a material joint, closely held, investment with a client

The independence of a covered member is impaired if, during the period of the professional engagement, (s)he had any financial interest in the client.

The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. The auditor should obtain an understanding of the internal audit function when obtaining an understanding of the client's internal control. The understanding should be sufficient to identify internal audit activities relevant to audit planning. Thus, an internal audit function is one of many factors to be considered in determining the nature, timing, and extent of audit procedures.

The independent auditor should understand the internal audit function as it relates to internal control because

True. 1.The external auditor must remain independent of the entity. Internal auditors are not. However, they should be independent of audited activities. 2.Internal auditors provide analyses, evaluations, assurances, recommendations, and other information to the management and the board. To meet this responsibility, internal auditors should be objective with respect to audited activities.

The independent, external auditor would consider the existence of an internal audit function in determining the nature, timing, and extent of audit procedures.

Yes Yes Yes The nature and extent of a firm's quality control policies and procedures depend on a number of factors, such as the firm's size, the degree of operating autonomy allowed, its human resources policies, the nature of its practice and organization, and appropriate cost-benefit considerations.

The nature and extent of a CPA firm's quality control policies and procedures depend on The CPA Firm's Size, The Nature of the CPA Firm's Practice, and Cost-Benefit Considerations

False. 1. The attestation standards do not replace GAAS.

The need to provide standards for the growing range of attest services resulted in the issuance of the attestation standards, which replace GAAS.

True. 1.An audit performed by an independent, external auditor provides assurance to external users of the financial statements. 2.The auditor may make suggestions about the form or content of the financial statements or draft them based on management's information. However, the auditor's responsibility for the financial statements is confined to the expression of an opinion.

The objective of an independent, external audit in accordance with generally accepted auditing standards (GAAS) is to express an opinion on (attest to) whether an issuing entity's financial statements present fairly, in all material respects, its financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP).

Enhance decision making. The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.

The objective of assurance services is to

The client's management. Management is usually the responsible party, that is, the person(s) responsible for the assumptions underlying prospective financial statements. However, the responsible party may be a party outside the entity, such as a possible acquirer.

The party responsible for assumptions identified in the preparation of prospective financial statements is usually

True. An attestation standard describes the engagement for a practitioner to examine or review the assertions made by management in their MD&A.

The practitioner may attest to the assertions made by management in their management discussion and analysis (MD&A).

Actual fee would be substantially higher. Rule 502 prohibits forms of solicitation that are false, misleading, or deceptive. A representation that specific services will be performed for a stated fee, when it is likely at the time that the actual fee will be substantially higher, is a prohibited form of solicitation.

The profession's ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the

A manufacturer's compliance with the occupational and safety code. The auditor is responsible for providing reasonable assurance that the financial statements are free from material misstatements. These include material misstatements resulting from noncompliance with laws and regulations generally recognized to have a direct effect on the determination of amounts and disclosures in the financial statements. Occupational and safety laws and regulations do not directly affect the determination of financial statement amounts and disclosures.

The provisions of some laws and regulations have a direct effect on the financial statements in determining the reported amounts and disclosures in the financial statements. Which of the following is least likely to have a direct effect on the financial statements of the entity identified?

True. A review does not contemplate consideration of internal control, tests of transactions and account balances, and other auditing procedures.

The purpose of a review of financial statements is to perform inquiries and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements for them to be in conformity with GAAP or, if applicable, with another comprehensive basis of accounting.

Minimize the likelihood of associating with clients whose management lacks integrity. The procedures pertaining to client acceptance or continuation should provide reasonable assurance that the likelihood of association with a client whose management lacks integrity is minimized. They include consideration of the business reputation of the client's principal owners, key management, related parties, and those charged with governance.

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to

False. 1.The scope of the audit is determined in part by the consideration of audit risk, and audit risk includes the risk of material misstatement due to fraud. 2.Thus, the risk of material misstatement due to fraud must be specifically addressed. 3.As part of the assessment, the auditor considers fraud risk factors relating to misstatements arising from fraudulent reporting and misappropriation of assets.

The risk of material misstatement due to fraud need not be specifically assessed.

False. The risk of material misstatement of accounting estimates is related to estimation uncertainty. This varies with the 1.Complexity and subjectivity of the process 2.Availability and reliability of relevant data 3.Number, significance, and degree of uncertainty of the assumptions

The risk of material misstatement of accounting estimates varies with the competence of the auditor.

Investors in Donley securities. An audit's primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.

The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley's financial statements. The primary objective of this audit is to provide assurance to the

Material misstatements may exist in the financial statements. An auditor obtains an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement (RMMs), whether due to fraud or error, at the financial statement and relevant assertion levels. The RMMs consist of inherent risk and control risk. Thus, an auditor must assess control risk to assess the RMMs. The assessed level of control risk is an evaluation of the effectiveness of internal control in preventing or detecting material misstatements.

The ultimate purpose of assessing control risk in a financial statement audit is to contribute to the auditor's evaluation of the risk that

The responsibilities of the auditor. The auditor should establish an understanding with the client through a written communication regarding the services to be performed. The objectives and limitations of the audit as well as the responsibilities of the auditor and management should be described in a contract stated in an engagement letter.

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

I.Procedures performed in obtaining an understanding of internal control II.Procedures performed in assessing the risks of material misstatement III.Substantive procedures performed in gathering direct evidence I, II, and III. The internal audit function is part of the client's internal control. The auditor should obtain an understanding of this function when obtaining an understanding of internal control. The auditor also may use the internal auditors to provide direct assistance under certain conditions. A primary purpose of internal auditors is to review, assess, and monitor internal control. Thus, their work is relevant to the understanding of internal control and the assessment of risk. Moreover, some procedures performed by internal auditors, such as confirmations, may provide direct evidence about material misstatements.

The work of internal auditors may affect the independent auditor's

False. The eight unique assertions (use the mnemonic CAVE CROC) include: 1.C - Completeness 2.A - Accuracy 3.V - Valuation and Allocation 4.E - Existence 5.C - Cutoff 6.R - Rights and Obligations 7.O - Occurrence 8.C - Classification and Understandability

There are eight unique assertions related to the financial statements and disclosures of nonissuers: Completeness, Correctness, Valuation and Allocation, Existence, Cutoff, Rights and Obligations, Occurrence, and Classification and Understandability.

Read internal audit reports. The auditor performs risk assessment procedures to obtain the understanding of the entity and its environment, including its internal control. These include, for example, reading (1) internal audit reports, (2) interim statements, (3) quarterly reports, and (4) minutes of board meetings.

To obtain an understanding of a continuing client in planning an audit, an auditor most likely would

Any surviving partner(s) on the death of a partner. Audit documentation may be disclosed to another partner of the accounting firm without the client's consent because such information has not been communicated to outsiders. A partner of the CPA has a fiduciary obligation to the client not to disclose confidential information without consent.

To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client's consent?

A CPA in public practice providing auditing and other attestation services. According to the Principles of Professional Conduct, Article IV - Objectivity and Independence, "A member in public practice should be independent in fact and appearance when providing audit and other attestation services."

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

False. If an inadvertent violation occurs, it generally does not compromise independence provided the firm has appropriate quality control policies and procedures, and the violation is corrected promptly.

Under the IFAC Code for Professional Accountants, an inadvertent violation of independence will cause the audit firm to forfeit fees and to withdraw from the engagement.

True. Safeguards are created by the profession, legislation, or regulation. Safeguards are also fostered in the work environment by providing leadership and review of the work product.

Under the IFAC Code for Professional Accountants, safeguards are expected to eliminate or reduce the threats to compliance with fundamental principles.

False. The threat would be that of "intimidation."

Under the IFAC Code for Professional Accountants, the threat of "advocacy" would be created if a client threatened to replace the auditor if the auditor disagrees with the client's choice of an accounting principle.

Deliver a report concerning the noncompliance to the SEC within 1 business day. Disclosure of noncompliance with laws and regulations to outside parties is not normally the auditor's responsibility. However, under the Private Securities Litigation Reform Act of 1995, accountants must report noncompliance to the appropriate level of management and the audit committee unless it is clearly inconsequential. If senior management and the board fail to take action on reported material noncompliance, and this failure will result in a departure from a standard report or resignation from the audit, the accountants should report their conclusions to the board immediately. The board must then, within 1 business day, notify the SEC. If the accountants do not receive a copy of the notice within the 1-day period, they must furnish the SEC with a copy of their report within 1 business day.

Under the Private Securities Litigation Reform Act of 1995, Baker, CPA, reported certain noncompliance with laws and regulations to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the noncompliance had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to

Five Years. The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5-year time-out period.

Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?

Online privacy. WebTrust provides assurance about compliance with the principles of online privacy, security, processing integrity, availability, and confidentiality. It is a modular service that allows the practitioner to express an opinion and grant the corresponding seal with respect to individual principles or combinations of principles.

Under the assurance service WebTrust, the broad principles relating to websites are security, availability, confidentiality, processing integrity, and

An investment held through a regulated mutual fund. Independence is impaired if, during the period of the professional engagement, a covered member had a direct or material indirect financial interest in the client. Ownership of fund shares is a direct financial interest in the fund. Underlying investments in the fund are indirect interests.

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?

Secured automobile loan. Independence is generally impaired if a covered member has loans to or from a client. However, certain exceptions apply. One such exception is for an automobile loan collateralized by the vehicle.

Under the ethical standards of the profession, which of the following is a "permitted loan" regardless of the date it was obtained?

If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings. A contingent fee is established as part of an agreement under which the amount of the fee is dependent upon the finding or result. Fees are not deemed to be contingent if fixed by courts or other public authorities, or in tax matters, if they are based on the results of judicial proceedings or the finding of governmental agencies.

Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?

True. A WebTrust practitioner uses the same criteria as outlined for SysTrust. 1.A SysTrust seal provides Internet users, including businesses and Internet service providers, assurance about any or all of the following: a.Online Privacy. Personal information obtained is collected, used, disclosed, and retained as committed or agreed. b.Security. The system is protected against unauthorized access (both physical and logical). c.Processing Integrity. System processing is complete, accurate, timely, and authorized. d.Availability. The system is available for operation and used as committed or agreed. e.Confidentiality. Information designated as confidential is protected as committed or agreed.

WebTrust is a service that assesses whether systems and tools used in electronic commerce provide appropriate data integrity, security, privacy, and reliability.

The reason the departure does not have a material effect on the statements. Under Conduct Rule 203, a CPA who performs services that require representations of conformity with promulgated GAAP is required to describe (1) the departure, (2) the approximate effects of the departure (if practicable), and (3) the reasons compliance would result in misleading financial statements. But this requirement applies only if the effect on the statements or data is material.

When a CPA is associated with financial statements that do not comply with promulgated GAAP because the statements would be misleading without the departure, the CPA is not required to disclose

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory. The auditor is responsible for the observation of inventories. The auditor performs this procedure whether the client or an external specialist takes the physical inventory. The auditor should (1) examine the specialist's program, (2) observe its procedures and controls, (3) make or observe some physical counts, (4) recompute calculations, and (5) test intervening transactions.

When a management's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if

Evaluate the effect on the financial statements. When the auditor becomes aware of information concerning possible noncompliance with laws or regulations, the auditor should obtain (1) an understanding of the nature of the act and the circumstances in which it occurred and (2) further information to evaluate the effect on the financial statements.

When an auditor becomes aware of a possible act of noncompliance with laws or regulations, the auditor should obtain an understanding of the nature of the act to

Quality of the internal auditors' working paper documentation. Concerning the competence of the internal auditor, it is important to establish the quality of the work. The auditor should obtain information about (1) educational level and professional experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures (related to competence); (4) practices regarding assignment of internal auditors; (5) supervision and review of the internal auditor's activities; (6) quality of documentation; and (7) performance evaluation.

When assessing the competence of the internal auditors, an auditor should obtain information about the

Educational background and professional certification of the internal auditors. If the auditor decides that it is efficient to consider how the internal auditors' work may affect the nature, timing, and extent of audit procedures, the competence and objectivity of the internal auditors should be assessed. The factors in assessing the competence of internal auditors include (1) educational level and experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures; (4) practices regarding assignment of internal auditors; (5) supervision and review; (6) quality of working paper documentation, reports, and recommendations; and (7) performance evaluation.

When assessing the internal auditors' competence, the auditor should obtain information about the

Assessing the risks of material misstatement of related party transactions. The auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entity's failure to appropriately account for or disclose related party relationships, transactions, or balances.

When auditing related party transactions, an auditor places primary emphasis on

True. 1.A reference in an unmodified report to the specialist might be misunderstood to be a qualification of the opinion or a division of responsibility. 2.In certain circumstances, the auditor may express an unmodified opinion and refer to the specialist. A specialist may be referred to and identified in the report if the auditor believes the reference will facilitate an understanding of the reason for an additional paragraph, for example, when a.Describing a substantial doubt about the entity's ability to continue as a going concern. b.Emphasizing a matter. 3.The auditor may also refer to the work of a specialist if (s)he departs from an unmodified opinion.

When expressing an unmodified opinion, the auditor ordinarily should not refer to the work or findings of the specialist.

Determine materiality for the financial statements as a whole. Planning involves establishing an overall audit strategy. For this purpose, the auditor determines materiality for the financial statements as a whole. Circumstances also may indicate that misstatements of classes of transactions, balances, or disclosures of lesser amounts could influence the economic decisions of users. In those cases, the auditor also determines materiality for particular classes of transactions, balances, and disclosures.

When planning an audit, an auditor should

A member begins a public accounting firm with the trade name "Pay Less Tax Service." Members may use a trade name as long as it is not deceptive or misleading. "Pay Less" may be construed as misleading for a tax service.

Which is most likely a violation of the AICPA Code of Professional Conduct?

Establish policies to ensure that the audit work meets applicable professional standards. One of the elements of a system of quality control is engagement performance. Thus, policies and procedures should be established to provide reasonable assurance that (1) engagements are consistently performed in accordance with professional standards and legal and regulatory requirements and (2) the firm issues appropriate reports. Matters addressed include responsibilities for performance, supervision, and review.

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards?

Releasing financial information to a local bank with the approval of the client's mail clerk. Conduct Rule 301 states, "A member in public practice shall not disclose any confidential client information without the specific consent of the client." The consent of the client was not obtained because a mail clerk is not the client. A client is (1) a person or entity that engages the CPA to perform services or (2) a person or entity with respect to which the services are performed.

Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?

Comparing current-year to prior-year sales volumes. Analytical procedures are required to be used as risk assessment procedures (analytical procedures used to plan the audit) in all financial statement audits. Analytical procedures are evaluations of financial statement information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. The basic premise is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Analytical procedures also include investigating fluctuations or relationships that are (1) inconsistent with other information or (2) differ significantly from expectations (AU-C 315). Thus, the sources of information for the expectations generally are not developed by the auditor. For example, they include information for comparable prior periods and ratios typical for the client's industry.

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

All CPA owners must be members. Conduct Rule 505, Form of Organization and Name, states that a firm may not use the quoted designation unless all of its CPA owners are members of the AICPA.

Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead?

Yes Yes Yes The quality control element of human resources relates to ensuring that employees have the skills needed for the responsibilities they are called upon to assume. The quality control element of monitoring is concerned with providing reasonable assurance that procedures related to the other elements are suitably designed and are being effectively applied. The quality control element of engagement performance requires the firm to establish policies and procedures to ensure proper planning, performing, supervising, reviewing, documenting, and communicating the results of engagements.

Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures? Human Resources, Monitoring, Engagement Performance

Completeness. SysTrust is designed to increase the comfort of management, customers, creditors, bankers, and business partners with the systems that support a business or a particular activity. The CPA tests and expresses an opinion on management's assertions or directly on the system concerning any or all of the following: online privacy, availability, security, processing integrity, and confidentiality.

Which of the following assertions would not be tested when performing the SysTrust assurance service?

Comparing the current year's financial statements with those of the prior year. Analytical procedures used to form an overall conclusion ordinarily include reading the financial statements and notes and considering (1) the adequacy of evidence regarding unusual or unexpected balances detected in planning or performing the audit and (2) such balances or relationships not detected previously.

Which of the following audit activities is an analytical procedure used to form an overall conclusion to ensure that the financial statements are free from material misstatement?

Understand the controls over authorization and approval of such transactions. The auditor performs appropriate risk assessment procedures to obtain an understanding of the entity's controls over related party relationships and transactions. The substantive procedures performed on newly identified transactions are further audit procedures at the relevant assertion level.

Which of the following audit procedures is an auditor most likely not to perform related to newly identified related party transactions outside the normal course of business?

Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date. Related party transactions may involve window dressing at the end of the period. For example, a shareholder may repay a loan just before the balance sheet date, and the entity may then lend the same amount to the same party after the beginning of the next period (AU-C 550).

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Reviewing confirmations of loans receivable and payable. An auditor should be alert during the audit for related party information. Thus, the auditor should inspect records and documents, especially (1) bank and legal confirmations, (2) minutes of meetings of shareholders and directors, and (3) any other records or documents considered necessary. Other records and documents may include third-party confirmations.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

The company preparing the statements and the persons using the statements may have different interests. Management and financial statement users may have an adversary relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.

Which of the following best describes the reason an independent auditor reports on financial statements?

Management had frequent disputes with the auditor on accounting matters. Fraudulent financial reporting is intentional misstatement or omission to deceive users, such as altering accounting records or documents, misrepresenting or omitting significant information, and misapplying accounting principles. Frequent disputes between management and auditor regarding accounting matters signals that accounting principles may be misapplied. The misapplication of accounting principles is a form of fraudulent financial reporting.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices. Fraud risk factors relate to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. Each of these categories may be further classified according to the three conditions that ordinarily exist when fraud occurs: (1) incentives or pressures, (2) opportunities, and (3) attitudes or rationalizations. For example, excessive pressure may exist to meet the expectations of third parties (e.g., analysts, investors, and creditors) regarding profitability or trends (AU-C 240).

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

A list of the procedures performed, as agreed to by the specified parties identified in the report. In an agreed-upon procedures engagement, the practitioner is engaged to report on the results of performing specific procedures agreed upon with specified parties. The report lists the procedures performed and provides the results of those procedures but provides no form of positive or negative assurance.

Which of the following components is appropriate in a practitioner's report on the results of applying agreed-upon procedures?

Making a loan without scheduled terms for repayment of the funds. The following suggest possible related party transactions: (1) exchanging property for similar property in a nonmonetary transaction, (2) borrowing or lending at rates significantly above or below market rates, (3) selling realty at a price materially different from its appraised value, and (4) making loans with no scheduled repayment terms.

Which of the following events most likely indicates the existence of related parties?

Selling real estate at a price significantly different from appraised value. The following suggest the existence of related party transactions: (1) exchanging property for similar property in a nonmonetary transaction, (2) borrowing or lending at rates significantly above or below market rates, (3) selling realty at a price materially different from its appraised value, and (4) making loans with no scheduled repayment terms.

Which of the following events most likely would indicate the existence of related parties?

The risk that the financial statements are not fairly presented in all material respects, in accordance with the applicable reporting framework. The auditor has a responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by fraud or error. Thus, the consideration of fraud should be logically integrated into the overall audit process in a manner consistent with other pronouncements, e.g., those on planning, audit risk and materiality, and internal control. This consideration entails (1) understanding fraud, (2) discussing fraud risks with members of the engagement team, (3) obtaining information needed to identify fraud risks, (4) identifying those risks, (5) assessing fraud risks, (6) responding to the assessments, (7) evaluating evidence at the end of the audit, (8) making appropriate communications about fraud, and (9) documenting the consideration.

Which of the following factors is most important concerning an auditor's responsibility for considering fraud?

Management is unwilling to permit inquiry of its legal counsel. Client acceptance includes the continued evaluation of existing clients and the evaluation of new clients. Concluding that management lacks integrity or is uncooperative is one case in which the auditor should reject a potential client or end a relationship with an existing client. If management is unwilling to permit inquiry of its legal counsel, the auditor will most likely decline acceptance because of the scope limitation (inability to obtain sufficient appropriate evidence).

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

The prospective client is unwilling to make all financial records available to the CPA. The terms of the engagement should include management's responsibility to provide access to all information and persons deemed necessary to the audit. If the prospective client is unwilling to make all financial records available to the CPA, the result may be a scope limitation that would require qualification of the opinion or a disclaimer of an opinion should the engagement be accepted.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

An overly complex organizational structure involving unusual lines of authority. Certain risk factors are related to misstatements arising from fraudulent reporting. One of the risk factors relating to the opportunity to commit fraud is an overly complex organizational structure involving numerous or unusual legal entities or managerial lines of authority.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. The terms of the engagement should include management's responsibility to provide access to all information and persons deemed necessary to the audit. Depending on the pervasiveness of the potential effects of the inability to obtain sufficient appropriate evidence, the result may be a qualification of the opinion or a disclaimer of an opinion if the engagement is accepted.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

The entity prepared several large checks payable to cash during the year. Some examples of information raising questions about possible noncompliance with laws and regulations are unauthorized or improperly recorded transactions, a governmental investigation, violations reported by regulators, large payments for unspecified services to consultants, excessive commissions or fees, unusual cash payments or checks payable to cash, unexplained payments to government officials or employees, and failure to file tax returns or pay governmental duties or similar fees.

Which of the following information discovered during an audit most likely would raise a question concerning possible noncompliance with laws and regulations?

The discovery of unexplained payments made to government employees. According to AU-C 250, the discovery of unexplained payments made to government officials or employees is specific information that may raise a question about possible noncompliance with laws and regulations.

Which of the following information that comes to an auditor's attention most likely would raise a question about noncompliance with laws and regulations?

The attestation standards provide a framework for the attest function beyond historical financial statements. Two principal conceptual differences exist between the attestation standards and GAAS. First, the attestation standards provide a framework for the attest function beyond historical financial statements. Second, the attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit (an opinion).

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards

The attestation standards provide a framework for the attest function beyond historical financial statements. Two principal conceptual differences exist between the attestation standards and GAAS. First, the attestation standards provide a framework for the attest function beyond historical financial statements. Second, the attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit (an opinion).

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties. A member shall not disclose confidential client information without the client's consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his/her professional obligations, (3) cooperate in an official review of his/her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his/her name confidential information. If no exception applies, client confidentiality has been violated.

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission?

Financial oriented support staff may not require specific ElderCare (PrimePlus) training. Because support staff are primarily involved in the financial aspects of the engagement, they may not need specific ElderCare (PrimePlus) training.

Which of the following is true regarding CPA training for ElderCare (PrimePlus) services?

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. Before accepting an initial engagement under PCAOB standards, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm if it becomes the auditor; and (3) document the substance of the discussion. At least annually for each issuer audit client, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm; (3) document the substance of the discussion; and (4) affirm to the audit committee in writing that the firm is independent.

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. Materiality is defined for planning purposes at three levels. Materiality for the financial statements as a whole is determined when designing the overall audit strategy. Materiality is also set for specific account balances, transaction classes, or disclosures. In certain cases, these amounts could influence users. Performance materiality is less than that for the statements as a whole or for specific balances, etc. Performance materiality is an adjustment for (1) individually immaterial misstatements and (2) possible uncorrected misstatements. But materiality for planning purposes ordinarily is not set for one financial statement. When designing audit procedures to be applied at the balance, transaction class, or disclosure level, the auditor plans to obtain reasonable assurance of detecting misstatements that, when aggregated with misstatements in other balances, etc., could be material to the statements as a whole.

Which of the following is a false statement about materiality?

CPA SysTrust. The objective of SysTrust is an attestation report on management's assertion about the reliability of an information system that supports a business or a given activity. A CPA may also report directly on the reliability of the system. This assurance service is designed to increase the stakeholders' comfort relative to the system's satisfaction of the SysTrust principles. Although SysTrust and WebTrust share the same principles of security, availability, processing integrity, online privacy, and confidentiality, SysTrust can be applied to any system environment. WebTrust relates to websites. The service is modular, and the practitioner can be engaged to report on any one or more of the five principles.

Which of the following is a professional engagement that a CPA may perform to provide assurance on a system's reliability?

WebTrust. The WebTrust seal provides assurance about compliance with the principles of online privacy, security, processing integrity, availability, and confidentiality. It is a modular service that allows the practitioner to express an opinion about compliance with individual principles or combinations of principles. Online privacy is the protection of the collection, use, disclosure, and retention of personal information. Security is the protection against unauthorized access to the system (both physical and logical). Processing integrity is the assurance that system processing is complete, accurate, timely, and authorized. Availability is the assertion that the system is available for operation and used as agreed. Confidentiality is the protection of information from being viewed by unauthorized parties.

Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for compliance with principles, such as online privacy, security, and confidentiality?

Solicitation of Uniform CPA Examination questions without AICPA authorization. Solicitation or knowing disclosure of May 1996 or later CPA examination questions or answers without written authorization by the AICPA is an act discreditable to the profession.

Which of the following is an act discreditable to the accounting profession?

Comparing the current-year account balances for conformity with predictable patterns. Analytical procedures applied as risk assessment procedures (analytical procedures used to plan the audit) at the beginning of the audit may improve the understanding of the client's business and significant transactions and events since the last audit. They also may identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications (AU-C 315).

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Managing human resources. The quality control element of human resources requires establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work.

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?

A sufficient understanding of internal control shall be obtained to plan the engagement. No attestation standard mentions internal control. However, the audit standards state, "The auditor should obtain an understanding of internal control relevant to the audit" (AU-C 315).

Which of the following is not an attestation standard?

Internal auditor. For the purposes of AU-C 620, an auditor's specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The external auditor should consider the work of internal auditors but should not deem them to be specialists in the sense contemplated by AU-C 620.

Which of the following is not considered an auditor's specialist?

An audit plan documenting the procedures to be used to reduce audit risk. An audit plan should be developed and documented based on the overall audit strategy. This strategy, the audit plan, significant changes in them, and the reasons for changes are documented. The audit plan records the nature, timing, and extent of risk assessment procedures and further procedures performed at the assertion level to respond to assessed risks. It also records other planned procedures required by GAAS. Thus, the audit plan is a record of the planning of the audit procedures that can be reviewed prior to their performance (AU-C 300 and AS No. 9).

Which of the following is required documentation in an audit in accordance with auditing standards?

Borrowing money at an interest rate significantly below the market rate. The following suggest possible related party transactions: (1) exchanging property for similar property in a nonmonetary transaction, (2) borrowing or lending at rates significantly above or below market rates, (3) selling realty at a price materially different from its appraised value, and (4) making loans with no scheduled repayment terms.

Which of the following most likely would indicate the existence of related parties?

Reasons for not identifying improper revenue recognition as a fraud risk. The auditor presumes the existence of a risk of material misstatement due to fraud related to revenue recognition. If the auditor concludes that the presumption is overcome in the circumstances of the engagement, the auditor should document the reasons for the conclusion (AU-C 240).

Which of the following must an auditor document with respect to the consideration of fraud in a financial statement audit?

Square footage of selling space. Although analytical procedures used in planning the audit often use only financial data, sometimes relevant nonfinancial information is considered as well. For example, number of employees, square footage of selling space, volume of goods produced, and similar information may contribute to accomplishing the purpose of the procedures.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Pro forma financial information. Pro forma information shows what the significant effects on historical financial information would have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples of these transactions include a business combination, disposal of a segment, a change in the form or status of an entity, and a change in capitalization.

Which of the following presents what the effects on historical financial data might have been if a consummated transaction had occurred at an earlier date?

Compare financial information with nonfinancial operating data. Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. They should be used to some extent for risk assessment purposes in planning all financial audits.

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Compare recorded financial information with anticipated results from budgets and forecasts. Analytical procedures are required to be used as risk assessment procedures (analytical procedures used to plan the audit) in all financial statement audits. Analytical procedures are evaluations of financial statement information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. The basic premise is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Analytical procedures also include investigating fluctuations or relationships that are (1) inconsistent with other information or (2) differ significantly from expectations.

Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?

Make a preliminary judgment about materiality. Materiality should be established for planning purposes. The concept of materiality recognizes that some but not all matters are important for fair presentation of the financial statements. The auditor is responsible for planning and performing the audit to obtain reasonable assurance that material misstatements are detected.

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Examination of evidence. To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.

Which of the following procedures would be most effective in reducing attestation risk?

An engagement to report on compliance with statutory requirements. Attest services have traditionally been limited to expressing an opinion on historical financial statements on the basis of an audit in accordance with GAAS. But CPAs increasingly provide assurance on representations other than historical statements and in forms other than an opinion. Thus, attest services may extend to engagements related to management's compliance with specified requirements or the effectiveness of internal control over compliance.

Which of the following professional services is considered an attest engagement?

Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions. Statements on Standards for Attestation Engagements (SSAEs) apply generally to performance of an examination, review, or agreed-upon procedures engagement to report on subject matter, or an assertion about it, that is the responsibility of another party. Accordingly, the SSAEs apply to engagements to assemble or report on prospective financial statements (PFSs) that reasonably might be expected to be used by third parties. PFSs present expected financial position, results of operations, and cash flows. They include forecasts and projections. A forecast is based on the responsible party's assumptions reflecting the conditions it expects to exist and the course of action it expects to take. Furthermore, a review is not permitted to be performed with regard to a forecast or projection. However, a practitioner may compile, examine, or apply agreed-upon procedures to a partial presentation, that is, a presentation of prospective financial information that omits one or more items required by the minimum presentation guidelines for PFSs. Failure to present significant cash flows is such an omission, although a statement of cash flows is not required. Thus, preparing the income statement and balance sheet for one year in the future based on client expectations and predictions is an attestation engagement to assemble a partial presentation of a forecast. The presentation is not partial if the omitted information may be derived from the presentation (AT 101 and AT 301).

Which of the following professional services would be considered an attestation engagement?

Prior experience. Prior experience is not required because ElderCare (PrimePlus) services are relatively new to the CPA market. Personal skills and knowledge of issues are fundamental to providing this service to the elderly.

Which of the following qualifications is least likely required to provide CPA ElderCare (PrimePlus) services?

I, II, and III. Each of the three services may be performed as a consulting service. AICPA standards describe analysis of an accounting system as an advisory service, review of a client's prepared business plan as a consultation, and preparation of information for obtaining financing as a transaction service. Other possible services are implementation services, staff and other support services, and product services.

Which of the following services may a CPA perform in carrying out a consulting service for a client? I.Analysis of the client's accounting system II.Review of the client's prepared business plan III.Preparation of information for obtaining financing

Compilations but not reviews. Attest services provide assurance and require the accountant to be independent. However, a compilation provides no assurance. Thus, the accountant need not be independent. The report describes the compilation service and disclaims an opinion or any other form of assurance on the financial statements. The accountant also states in the report that (s)he is not independent.

Which of the following services, if any, may an accountant who is not independent provide?

A large number of bearer bonds on hand. Large purchases of bank checks or bonds payable to bearer are often an indication of illegal or suspicious activity. Bearer instruments are negotiable by delivery alone, that is, without a signature. They are equivalent to cash. Thus, the holder has anonymity. They can be used to evade taxes or conceal business transactions.

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets?

They are generally accepted auditing standards. Generally accepted auditing standards are defined as SASs. Conduct Rule 202 requires members who perform professional services to comply with standards promulgated by bodies designated by the AICPA Council. Thus, an AICPA member who performs an audit of a nonissuer must comply with SASs promulgated by the Auditing Standards Board (ASB).

Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)?

A distinguishing mark of a profession is its acceptance of responsibility to the public. According to Article II of the Principles section of the AICPA Code of Professional Conduct, "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." According to the accompanying explanation, "A distinguishing mark of a profession is acceptance of its responsibility to the public."

Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance?

The auditor's specialist should observe the same confidentiality requirements as the auditor. An agreement between the auditor and the auditor's external specialist generally is documented in an engagement letter. A matter that should be included is the need for the confidentiality provisions of the relevant ethical requirements that apply to the auditor to also apply to the specialist. For example, a member of the AICPA may use a third-party service provider to render professional services to clients. The member should have a contract with the third-party service provider to maintain the confidentiality of the information (Ethics Ruling). Other requirements may be imposed by law or regulation.

Which of the following statements concerning the auditor's use of the work of an auditor's external specialist is true?

Neither I nor II. Conduct Rule 501 states that a member shall not commit an act discreditable to the profession. After the relationship of a member who is not an owner of the firm is terminated, the member may not take or retain copies or originals from the firm's client files or proprietary information without permission.

Which of the following statements is (are) true regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm? I.A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client. II.A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise.

They usually use financial and nonfinancial data aggregated at a high level. Analytical procedures are required to be used as risk assessment procedures (analytical procedures used to plan the audit) in all financial statement audits. Analytical procedures are evaluations of financial statement information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. The basic premise is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Analytical procedures also include investigating fluctuations or relationships that are (1) inconsistent with other information or (2) differ significantly from expectations (AU-C 315). Moreover, they ordinarily use highly aggregated data.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed. The auditor should inspect any contracts or agreements to evaluate whether (1) the business purpose (or lack of a business purpose) implies that the transaction's intent was fraudulent, (2) the terms are consistent with management's explanations, and (3) the accounting and disclosure are appropriate. The auditor also should obtain evidence of appropriate authorization and approval.

Which of the following statements is true about related party transactions?

An auditor may draft an entity's financial statements based on information from management's accounting system. The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management's accounting system. However, the auditor's responsibility for the financial statements (s)he has audited is confined to the expression of his/her opinion on them.

Which of the following statements is true concerning an auditor's responsibilities regarding financial statements?

An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion. GAAS require the audit report to state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.

Which of the following statements is true concerning an auditor's responsibilities regarding financial statements?

An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statements. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by fraud or error. Thus, the auditor should (1) identify and assess the risks of material misstatement due to fraud at the financial statement and assertion levels, (2) obtain sufficient appropriate audit evidence regarding those risks through implementing responses, and (3) respond to identified fraud or suspected fraud. Moreover, the consideration of fraud should be logically integrated into the overall audit process in a manner consistent with other pronouncements, e.g., those on (1) planning and supervision, (2) audit risk and materiality, and (3) internal control.

Which of the following statements reflects an auditor's responsibility for detecting fraud and errors?

Inquire about the existence of related parties from management. When obtaining an understanding of the entity's related party relationships and transactions, the auditor should inquire of management regarding (1) the identity of the entity's related parties, including changes from the prior period; (2) the relationships of the entity with those parties; and (3) the types and purposes of transactions with them.

Which of the following steps should an auditor perform first to determine the existence of related parties?

Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. However, statistical sampling applies an audit procedure to a portion of the items under audit for the purpose of drawing a conclusion about a characteristic of a balance or transaction class. It is applicable to tests of controls and substantive testing. It is not an analytical procedure.

Which of the following would not be considered an analytical procedure?

A sale to another corporation with a similar name. A related party is a party defined as such in the applicable financial reporting framework. For example, U.S. GAAP define related parties to include (1) affiliates; (2) equity-method investees or investees that would be equity-method investees if the fair value option had not been elected; (3) employee trusts; (4) management, principal owners, and their immediate families; (5) other parties with which the entity may deal if one party controls or can be significantly influenced by the other to the extent that a party may be prevented from pursuing its separate interests; and (6) other parties that can significantly influence the transacting parties to the extent that a party may be prevented from pursuing its separate interests. A corporation that merely has a similar name is not necessarily related.

Which of the following would not necessarily be a related party transaction?

All of the answers are permitted by the AICPA Code of Professional Conduct. None of the responses state conduct prohibited by the Code.

Which of the following, if any, is prohibited by the AICPA Code of Professional Conduct?

Auditing Standards Board and the Public Company Accounting Oversight Board. AICPA Conduct Rule 202, Compliance with Standards, requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opinions on internal control for public companies.

Who establishes generally accepted auditing standards?

Extensive analyses of inventory prepared by the client at the auditor's request are working papers that belong to the auditor and need not be furnished to the client upon request. A member's working papers include, among other items, audit programs, analytical review schedules, statistical sampling results, analyses, and schedules prepared by the client at the request of the member. Working papers are the property of the member and need not be provided to the client unless required by (1) statute, (2) regulation, or (3) contract.

With respect to records in a CPA's possession, the Code of Professional Conduct provides that

Professional development activities that allow employees to fulfill assigned responsibilities. Policies and procedures should be established to provide reasonable assurance that the firm has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform engagements in accordance with professional standards and legal and regulatory requirements as well as to issue appropriate reports.

Within its system of quality control, the objectives of the firm's policies and procedures related to the element of human resources include providing

The ability to fulfill assigned responsibilities and the qualifications for advancement. According to QC 10, the firm should adopt policies and procedures to obtain reasonable assurance that personnel at all levels participate in general and industry-specific CPE and other professional development activities that enable them to fulfill responsibilities assigned and satisfy applicable CPE requirements of the AICPA and regulatory agencies. Furthermore, personnel chosen for advancement should "have the qualifications necessary for fulfillment of the responsibilities they will be called on to assume."

Within the context of quality control, the primary purpose of continuing professional education (CPE) and training activities is to provide a CPA firm with reasonable assurance that personnel within the firm have