Chapter 2

Evaluate the policies and procedures of the Food and Drug Administration in terms of bringing new drugs to market. Type of Audit and Auditor?

Operational; Government

Evaluate the feasibility of forecasted rental income for a planned low-income public housing project Type of Audit and Auditor?

Operational; Government, external, or internal

Evaluate a company's computer services department in terms of the efficient and effective use of corporate resources. Type of Audit and Auditor?

Operational; Internal or External

2-15 Which of the following is not part of the role of internal auditors? a. Assisting the external auditors b. Providing reports on the reliability of financial statements to investors and creditors c. Consulting activities d. Operational audits

a

2-16 Operational auditing is oriented primarily toward a. Efficiency and improvements to accomplish the goals of management b. The accuracy of data reflected in management's financial records c. Verification that an entity's financial statements are fairly presented d. Past protection provided by existing internal control

a

2-18 Which of the following best places the events of the last decade in proper sequence? a. Sarbanes-Oxley Act, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB b. Increased consulting services to auditees, Sarbanes-Oxley Act, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB c. Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to auditees, prohibition of most consulting work for auditees, establishment of PCAOB d. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB

d

The largest public accounting firms typically are structured as a. S Corporations. b. C corporations. c. Limited liability corporations (LLCs). d. Limited liability partnerships (LLPs).

d

The movie "Bigger than Enron" discussed frauds that occurred at several companies. Which of the following includes two companies that were both discussed in the movie? a. Enron and Kmart b. Sunbeam and Tyco c. Exxon and Enron d. Waste Management and Sunbeam

d

Which of the following statements regarding the PCAOB is NOT correct? a. It is a public-sector, nonprofit corporation. b. It is overseen by the SEC. c. It sets standards for public company audits. d. It has delegated all of its standard-setting authority to the AICPA (ASB).

d

2-17 Which of the following would be considered a non-attest assurance service engagement? I. Expressing an opinion about the reliability of an entity's financial statements II. Reporting that a company's sustainability metrics are complete and accurate a. I only b. Both I and II c. II only d. Neither I nor II

d

Investigate the possibility of payroll fraud in a labor union pension fund. Type of Audit and Auditor?

Compliance or Forensic; Government, external, or forensic

Review the payment procedures of the accounts payable department for a large manufacturer. Type of Audit and Auditor?

Compliance or operational or possibly internal control, Internal or External

Go to the SEC's website (www.sec.gov) and click on the "What We Do" link (located under the "About" menu).Read the material under the link "Creation of the SEC," describing the SEC's creation in the 1930s.Write a brief paragraph summarizing when and why the SEC was formed.What were the triggering events leading up to the SEC's formation?

During the 1920s, many people began investing heavily in the stock market without fully thinking about the risk that they were taking upon themselves. As a result of poor investment choices and unreliable information, the stock market crashed in 1929. In an attempt to restore confidence in the capital markets, Congress passed the Securities Act of 1933. One year later, the SEC was created by the Securities Exchange Act of 1934.

Determine the fair presentation of Ajax Chemical's balance sheet, income statement, and statement of cash flows. Type of Audit and Auditor?

Financial Statement; External

Examine the financial records of a division of a corporation to determine if any accounting irregularities have occurred. Type of Audit and Auditor?

Forensic or Financial Statement; Internal, External, or Forensic

Why is independence such an important standard for auditors? How does auditor independence relate to the agency relationship between owners and managers discussed in Chapter 1?

Independence is a fundamental principle for auditors. If an auditor is not independent of the client, users may lose confidence in the auditor's ability to report objectively and truthfully on the financial statements, and the auditor's work loses its value. From an agency perspective, if the principal (owner) knows that the auditor is not independent, the owner will not trust the auditor's work. Thus, the agent will not hire the auditor because the auditor's report will not be effective in reducing information risk from the perspective of the owner.

Briefly compare and contrast management's responsibility for the entity's financial statements with the auditor's responsibilities for detecting errors and fraud in the financial statements.

Management is responsible to prepare financial statements that fairly present the company's financial condition and operations in accordance with established accounting standards. Note that the auditor's opinion explicitly states that the financial statements are the responsibility of management. The auditor is responsible to issue an opinion in regards to the financial statements prepared by management. In order to issue this opinion, the auditor must plan and perform the audit in accordance with established standards to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud. However, it is important to note that an auditor's unqualified opinion does not mean that errors or fraud do not exist but rather that there is reasonable assurance that they do not exist in material amounts

Audit the partnership tax return of a real estate development company. Type of Audit and Auditor?

Operational, Government

Go to the PCAOB's website (www.pcaobus.org). Find and briefly summarize the PCAOB's description of its standard-setting process (click on the "Standards" link along the top of the page; then click on the "About Standards and the Standard-Setting Process" link which should be located on the right side of the page.

The PCAOB's website provides information on the Board's organization, policies, and standards. It also indicates that the Board uses an expert advisory group to help the Board develop standards. Though many observers dispute this claim, the Board asserts that its standards are also developed in an open, public process to allow all parties of interest to comment. Section 103 of the Sarbanes-Oxley Act empowers the PCAOB to set auditing standards for audits of public companies. The Dodd-Frank Act amended the Sarbanes-Oxley Act to give the PCAOB the authority to establish auditing and related professional practice standards for audits of the financial statements and selected practices and procedures of broker-dealers. The Board's Office of the Chief Auditor is responsible for developing these standards.

2-20 Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? a. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed b. To achieve its strategies, a business formulates objectives and implements processes, which are carried out through the entity's information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed. c. To achieve its objectives, a business formulates strategies to implement its transactions, which are carried out through business processes. The entity's information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed d. To achieve its business processes, a business formulates objectives, which are carried out through the entity's strategies. The entity's information and internal control systems must be designed to ensure that the entity's strategies are properly executed, captured, and processed

a

2-21 The Public Company Accounting Oversight Board (PCAOB) is a: a. Quasi-governmental organization that has a legal authority to set auditing standards for audits of public companies b. Quasi-governmental organization that has legal authority to set accounting standards for public companies c. Quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards d. Quasi-governmental organization that is independent of the SEC in setting auditing standards

a

Which of the following best places the events of the last decade in proper sequence? a. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB. b. Sarbanes-Oxley Act, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. c. Increased consulting services to auditees, Sarbanes-Oxley Act, Enron and other scandals, prohibition of most consulting work for auditees, establishment of PCAOB. d. Enron and other scandals, Sarbanes-Oxley Act, increased consulting services to auditees, prohibition of most consulting work for auditees, establishment of PCAOB.

a

Which of the following is generally not considered one of the five business processes or cycles? a. Information technology b. Revenue [or sales]. c. Financing. d. Inventory management

a

Which of the following is not a part of the role of internal auditors? a. Assisting the external auditors. b. Providing reports on the reliability of financial statements to investors and creditors. c. Consulting activities. d. Operational audits.

b

2-19 Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements? a. Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP b. Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP c. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the misstatements are free of material misstatement d. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement

c

2-22 Which of the following is correct regarding the types of audits over which the ASB and PCAOB, respectively, have standard-setting authority in the US? ____ASB______________PCAOB_____ a. Private Audits; Private Audits b. Public Audits; Public Audits c. Private Audits; Public Audits d. Public Audits; Private Audits

c

2-23 Which of the following best describes the general character of the section of the "Principles Underlying an Audit of Financial Statements," titled "Performance"? a. Description of the competence, independence, and professional care of persons performing the audit b. Criteria for the content of the auditor's report on financial statements and related footnote disclosures c. Criteria for audit planning and evidence gathering d. The need to maintain an independence of mental attitude in all matters relating to the audit

c

An auditor reviews the payment procedures within the accounts payable department of a large manufacturing company to ensure that company policies are being followed and to make recommendations for improved performance. Which of the following best describes (1) the type of audit being performed, and (2) the type of auditor performing the work? a. Compliance audit; Government auditor. b. Financial statement audit; Forensic auditor. c. Operational audit; Internal auditor. d. Forensic audit; External auditor.

c

Prior to the Sarbanes-Oxley Act of 2002, the _________was responsible for creating all new auditing standards in the United States. Today, for publicly held companies, that responsibility rests with the _____________. a. Financial Accounting Standards Board [FASB]; Public Company Accounting Oversight Board [PCAOB]. b. AICPA Auditing Standards Board [ASB]; Securities and Exchange Commission [SEC]. c. AICPA Auditing Standards Board [ASB]; Public Company Accounting Oversight Board [PCAOB]. d. Financial Accounting Standards Board [FASB]; Securities and Exchange Commission [SEC].

c

Which of the following best describes the role of corporate governance? a. Management decides which accounting principles are the most appropriate. b. Shareholders vote to decide who should be members of the board of directors. c. Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources. d. Management often is compensated based on the company's profitability.

c

Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements? a. Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP. b. Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP. c. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement. d. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement.

c