Chapter 1 MC

Which of the following has primary responsibility for the fairness of the representations made in financial statements? (a) Client's management. (b) Independent auditor. (c) Audit committee. (d) AICPA.

(a) Client's management. The client's management is primarily responsible for representations contained in the financial statements. The independent auditors are responsible for performing their audit in accordance with generally accepted auditing standards.

Which of the following is correct about forensic audits? (a) All audit engagements are forensic in nature. (b) Forensic audits are performed by law firms; they are not performed by CPA firms. (c) Forensic audits are equivalent to compliance audits. (d) Forensic audits are usually performed in situations in which fraud has been found or is suspected.

(d) Forensic audits are usually performed in situations in which fraud has been found or is suspected. Forensic audits are usually performed when fraud has been found or is suspected. Answer (1) is incorrect because it overstates the nature of most audits by suggesting that all audits are forensic in nature. Answer (2) is wrong in that CPA firms (or law firms) may perform forensic audits. Answer (3) is incorrect because while compliance audits may find fraud, they are not directed at fraud, as are forensic audits.

Which of these organizations has the responsibility to perform inspections of auditors of public companies? (a) American Institute of Certified Public Accountants. (b) Securities and Exchange Commission. (c) Financial Accounting Standards Board. (d) Public Company Accounting Oversight Board.

(d) Public Company Accounting Oversight Board. The Public Company Accounting Oversight Board was given the authority by the Sarbanes-Oxley Act of 2002 to establish or adopt auditing standards for audits of public companies.

The most important benefit of having an annual audit by a public accounting firm is to: (a) Provide assurance to investors and other outsiders that the financial statements are reliable. (b) Enable officers and directors to avoid personal responsibility for any misstatements in the financial statements. (c) Meet the requirements of government agencies. (d) Provide assurance that illegal acts, if any exist, will be brought to light.

(a) Provide assurance to investors and other outsiders that the financial statements are reliable. The most important benefit of having an annual audit by a public accounting firm is to provide assurance to investors and other outsiders that the financial statements are dependable. The expansion of the securities markets has tremendously increased the need for verification of financial statements performed by competent, independent persons. Answer (2) is incorrect because management cannot avoid responsibility for the financial statements by retaining independent auditors. Answer (3) gives no recognition to the fact that many nonpublic corporations and other business entities have no obligation to file audited financial statements with governmental agencies. It also disregards the fact that large corporations which that secure capital from the general public would continue to provide audited statements even though there were no such requirements by governmental agencies. Answer (4) is unacceptable because it implies that an audit is designed to detect illegal acts without regard to type or size.

What best describes the purpose of the auditors' consideration of internal control in a financial statement audit for a nonpublic company? (a) To determine the nature, timing, and extent of audit testing. (b) To make recommendations to the client regarding improvements in internal control. (c) To train new auditors on accounting and control systems. (d) To identify opportunities for fraud within the client's operations.

(a) To determine the nature, timing, and extent of audit testing. Because the auditors' purposes for considering internal control are to (a) plan the audit and (b) to determine the nature, timing, and extent of the tests to be performed, answer (1) is correct.

Which of the following is an example of a compliance audit? (a) An audit of financial statements. (b) An audit of a company's policies and procedures for adhering to environmental laws and regulations. (c) An audit of a company's internal control over financial reporting. (d) An audit of the efficiency and effectiveness of a company's legal department.

(b) An audit of a company's policies and procedures for adhering to environmental laws and regulations. A compliance audit measures the compliance of an organization with established criteria such as laws and regulations. Answer (2) is correct because it addresses policies and procedures on environmental laws and regulations.

The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB). Which of the following is not one of the responsibilities of that board? (a) Establish independence standards for auditors of public companies. (b) Review financial reports filed with the SEC. (c) Establish auditing standards for audits of public companies. (d) Sanction registered audit firms.

(b) Review financial reports filed with the SEC. The PCAOB ordinarily does not review financial reports filed with the Securities and Exchange Commission—although, if they so desire, they may review such reports to accomplish their other responsibilities. The other three replies are all explicit responsibilities of the PCAOB.

In general, internal auditors' independence will be greatest when they report directly to the: (a) Financial vice president. (b) Corporate controller. (c) Audit committee of the board of directors. (d) Chief executive officer.

(c) Audit committee of the board of directors. Normally, the higher in an organization an internal auditor reports, the greater the degree of independence. Accordingly, reporting to the audit committee of the board of directors increases the likelihood that the internal auditor will be able to act independently of those being audited. Answers (1) and (2) may lead to a lesser degree of independence because when an internal auditor reports to the financial vice-president or the controller they cannot objectively review their work. Answer (4) is incorrect because it is generally not practical or effective for the internal auditor to report to stockholders on a timely basis.

Which of the following best describes the relationship between assurance services and attest services? (a) While attest services involve financial data, assurance services involve nonfinancial data. (b) While attest services require objectivity, assurance services do not require objectivity. (c) Both attest and assurance services require independence. (d) Attest and assurance services are different terms referring to the same types of services.

(c) Both attest and assurance services require independence.

Which of the following organizations establishes accounting standards for U.S. government agencies? (a) The Financial Accounting Standards Board. (b) The Governmental Accounting Standards Board. (c) The Federal Accounting Standards Advisory Board. (d) The Public Company Accounting Oversight Board.

(c) The Federal Accounting Standards Advisory Board. The Federal Accounting Standards Advisory Board establishes accounting standards for United States governmental agencies. The Governmental Accounting Standards Board establishes accounting standards for state and local government entities.

Governmental auditing, in addition to including audits of financial statements, often includes audits of efficiency, effectiveness, and: (a) Adequacy. (b) Evaluation. (c) Accuracy. (d) Compliance.

(d) Compliance. Governmental auditing often extends to audits of efficiency, effectiveness, and compliance (with laws, regulations, etc.). The other responses, adequacy, evaluation, and accuracy, are terms not typically used to summarize the scope of governmental auditing.

Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting firms: (a) Disclosures related to accounting irregularities at Enron and WorldCom. (b) Restatements of financial statements by a number of public companies. (c) Conviction of the accounting firm of Arthur Andersen LLP. (d) Ethical scandals at the AICPA.

(d) Ethical scandals at the AICPA. Ethical scandals at the AICPA was not one of the causes of the passage of the Sarbanes-Oxley Act of 2002. All of the other responses contributed to passage of the Act.