Connect Ch1-4

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) 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 dependabl

A representation or declaration made by the responsible party, typically management of the entity.

Assertion

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.

B. 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.

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. Stockholders.

C. 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.

A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proved fraud or negligence by the CPA. B. The investor did not actually rely upon the false statement. C. The CPA detected the false statement after the audit date. D. The false statement is immaterial in the overall context of the financial statements.

D. A CPA may avoid liability under the 1933 Act by proving that their negligence was not the proximate cause of the plaintiff's loss. Accordingly, a finding that the false statement is immaterial would in all circumstances represent a viable defense.

Is the following an error or a fraud: Unreasonable estimates from misinterpretation of facts

Error

Is the following an error or a fraud: Misappropriation of assets

Fraud

Is the following an error or a fraud: Fraudulent financial reporting

Fraud:

If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for:

Gross Negligence

Auditors may be restricted from holding an investment in a client. This violates which ethical rule?

Independence

Determine if the CPA is liable or not: Loss sustained by a bank named as a third-party beneficiary in the engagement letter; suit brought under common law

Liable

Determine if the CPA is liable or not: Loss sustained by client; suit brought under common law.

Liable

Determine if the CPA is liable or not: Losses to stockholders purchasing shares at a public offering; suit brought under the Securities Act of 1933

Liable

Determine if the CPA is liable or not: Loss sustained by trade creditor, not in privity of contract; suit brought in a state court that adheres to the Ultramares v. Touche Company precedent.

Not liable

The five-member board established in 2002 to oversee the audit of public (issuer) companies that are subject to the securities laws. The board has authority to establish or adopt (or both) rules for auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports.

PCAOB

The concept of independence in appearance states that CPAs must evaluate whether a situation would threaten independence from the viewpoint of which type of person?

Reasonable and informed third party

Securites Act of 1933

Regulates interstate offerings of securities to the public

A government agency authorized to regulate companies seeking approval to issue securities for sale to the public.

SEC

A set of reforms that toughened penalties for corporate fraud, restricted the kinds of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board to oversee CPAs and public accounting firms.

Sox of 2002

An audit opinion that states that the financial statements are not fairly presented is referred to as a(n) a. Adverse opinion. b. Limited assurance opinion. c. Negative opinion. d. Qualified opinion.

a. Adverse opinion.

Which of the following is not prohibited by the AICPA Code of Professional Conduct? a. Advertising in newspapers. b. Payment of commission to obtain an audit client. c. Acceptance of a contingent fee for a review of financial statements. d. Engaging in discriminatory employment practices.

a. Advertising in newspapers is an acceptable practice. The other three options are all prohibited by the Code of Professional Conduct.

Financial statements are prepared following a(an): a. Applicable financial reporting framework b. Appropriate financial statement assertion c. Auditing standards generally accepted in the United States d. Set of quality control standards.

a. Applicable financial reporting framework

The right to practice as a CPA is given by what organization: a. State board of accountancy b. AICPA c. SEC d. GAO

a. State boards

Which of the following statements is true with respect to the PCAOB independence standards when an auditor both prepares and audits financial statements for a client? a. The auditor is not independent. b. The auditor is independent if he or she is able to maintain a level of professional detachment. c.The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. d.The auditor cannot audit the financial statements since a lack of integrity exists.

a. The auditor is not independent.

Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do? a. Disclaim an opinion. b. Issue an adverse opinion. c. Suggest that Kelly Company engage another CPA to perform the audit. d. Rely on the competence of client personnel.

c. The General Standards Rule prohibits a public accounting firm from accepting an engagement that the firm is not competent to perform

Generally accepted auditing standards established by the AICPA through April of 2003: a. Were accepted as interim standards by the Public Company Accounting Oversight Board. b. Provide accounting guidance for nonpublic companies c. Were also adopted as international auditing standards at that date. d. Are now developed by the Securities and Exchange Commission.

a. Were accepted as interim standards by the Public Company Accounting Oversight Board.

Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will: a. Win because there was no privity of contract between Hark and Third. b. Lose because Hark knew that a bank would be relaying the financial statements. c. Win because Third was contributory negligent in granting the loan. d. Lose because Hark was negligent in performing the audit.

a. Win because there was no privity of contract between Hark and Third.

An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n): a. Peer Review Engagement. b. Quality Control Engagement c. Quality Assurance Engagement d. Attestation Engagement.

a. peer review engagement

How can an accountant avoid liability to show they are not negligent

asserting the "due diligence" defense

In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? a. The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information. b. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. c. Confidential client information is made available as part of a quality review of the CPA's practice by a review team authorized by the AICPA. d. An inquiry by a disciplinary body of a state CPA society requests confidential client information.

b. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.

Which of the following best describes the reason why independent auditors report on financial statements? a. A management fraud may exist and it is more likely to be detected by independent auditors b. An audit provides credibility to the financial statements c. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work d. Poorly designed internal control may be in existence

b. An audit provides credibility to the financial statements

CPAs should not be liable to any party if they perform their services with: a. Ordinary negligence. b. Regulatory providence. c. Due professional care d. Good diligence.

c. due professional care

Which of the following is accurate, as indicated in the principles underlying an audit? a. Management is expected to provide the auditors with all needed evidence prior to the beginning of audit work b. An auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement. c. Auditors are responsible for having appropriate competence to perform the audit without the assistance of outside specialists d. Management is responsible for preparing accurate financial statement amounts, while auditors are responsible for auditing those amounts and for preparing note disclosures related to those amounts.

b. An auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement.

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on: a. Ordinary negligence. b. Gross negligence. c. Strict liability. d. Criminal deceit.

b. Gross negligence.

Which of the following is not an underlying premise of an audit? a. Management must provide the auditor with all information relevant to the preparation and fair presentation of the financial statements b. Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework. c. Where appropriate, the auditor may obtain information from those charged with governance d. The auditors should be provided unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.

b. Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework.

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the: a. Partner assigned to the audit engagement. b. Management of the company. c. Auditor in charge of the fieldwork. d. Securities and Exchange Commission

b. Management of the company.

The AICPA Principles Underlying a GAAS audit, include a requirement that: a. Auditors only use CPAs on an engagement. b. Management provides the auditors with unrestricted access to individuals within the entity from whom the auditor determines it necessary to obtain audit evidence. c. Auditors provide an opinion with limited assurance about whether the financial statements are free from material misstatement. d. Auditors limit the exercise of skepticism to evaluating management representations when performing the audit.

b. Management provides the auditors with unrestricted access to individuals within the entity from whom the auditor determines it necessary to obtain audit evidence.

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatements, and a critical assessment of audit evidence is referred to as: a. Reasonable assurance b. Professional skepticism c. Audit neutralism d. Auditing mindset.

b. Professional skepticism

The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA? a. Accounting standards applicable to nonpublic companies. b. Auditing standards applicable to audits of nonpublic companies. c. Quality control standards applicable to audits of public companies. d. Standards for reviews of the interim financial information issued by public companies.

b. The AICPA has authority to establish auditing standard for nonpublic companies **PCAOB can set for public and nonpublic

Which of the following is not a reason why auditors provide reasonable assurance, and not absolute assurance? a. The nature of financial reporting. b. The nature of auditor independence requirements. c. The nature of audit procedures. d. The need to conduct an audit within a reasonable period of time at a reasonable cost.

b. The nature of auditor independence requirements.

In cases of breach of contract, plaintiffs generally have to prove all of the following, except: a.The CPAs had a duty. b. The CPAs made a false statement. c. The client incurred losses related to the CPAs' performance. d. The CPAs breached their duty.

b. The plaintiffs need not prove that the CPA made a false statement, it is enough to prove losses and breach of a duty that the CPA had.

Advertising by CPAs: a. is presently prohibited by the Code of Professional Conduct. b. is permissible as long as it is not false, misleading, or deceptive. c. may include statements that the CPA is able to influence decisions by tax courts and other official bodies as long as names of officials are not used. d. must not mention fees for services.

b. is permissible as long as it is not false, misleading, or deceptive.

Which of the following fee arrangements for an audit would constitute a violation of the AICPA Code of Professional Conduct? a. A fixed fee. b. A fee that is based on the number of hours spent on the engagement. c. A fee that is computed as a percentage of audited net income. d. A fee that is based on the difficulty of the engagement.

c. A fee that is computed as a percentage of audited net income

Which of the following is a correct statement related to CPA legal liability under common law? a. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. b. CPAs may escape all personal liability through incorporation as a limited liability partnership. c. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed d. CPAs are guilty until they prove that they performed the audit with "due diligence."

c. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed

If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence, the auditor should: a. Conclude that the threat is not significant unless proven so. b. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. c. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information. d. Consult the Statements on Auditing Standards for guidance.

c. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information.

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that: a. He is not guilty of gross negligence b. He performed the audit with good faith. c. He performed the audit with due diligence. d. The plaintiffs did not show him to be negligent.

c. He performed the audit with due diligence.

Assume that $1,000,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 25%, while others are responsible for the other 75%. Also assume the others have no financial resources. As a result the CPA has been required to pay the entire $1,000,000. The auditor's liability is most likely based upon which approach to assessing liability? a. Absolute liability. b. Contributory negligence. c. Joint and Several Liability d. Proportional liability.

c. Joint and Several Liability

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? a. The CPA is liable only to third parties in privity of contract with the CPA. b. The CPA is liable only to known users of the financial statements. c. The CPA probably is liable to any person who suffered a loss as a result of the fraud. d.The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

c. The CPA probably is liable to any person who suffered a loss as a result of the fraud.

The burden of proof to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be: a. Less than the Securities Act of 1933. b. The same as the Securities Act of 1933. c.Greater than the Securities Act of 1933. d. Indeterminate in relation to the Securities Act of 1933.

c.Greater than the Securities Act of 1933.

Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards? a. The audit provides reasonable assurance the client will remain in business for at least one year b. The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement c. Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation d. An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.

d. An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach, the auditor is generally liable to the bank which subsequently grants the loan for: a. Lack of due diligence. b. Lack of good faith. c. Gross negligence, but not ordinary negligence. d. Either ordinary or gross negligence.

d. Either ordinary or gross negligence.

Which of the following is correct concerning the Sarbanes-Oxley Act? a. Effective January 1, 2003, it eliminated the Auditing Standards Board. b. It applies to all audits conducted in the United States. c. It prohibits providing any consulting services for an audit client d. It requires all accounting firms that audit SEC registrants to register with the Public Company Accounting Oversight Board.

d. It requires all accounting firms that audit SEC registrants to register with the Public Company Accounting Oversight Board.

An "audit committee" of a publicly held company ordinarily should be made up of: a. Major stakeholders, including management and representatives of equity interests b. The audit partner, the chief financial officers, the legal counsel, and at least one outsider c. Representatives from the client's management d. Members of the board of directors who are not officers or employees.

d. Members of the board of directors who are not officers or employees.

Assume that $1,000,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 25%, while others are responsible for the other 75%. Assume the others have no financial resources. The CPA has been required to pay $250,000. The auditor's liability is most likely based upon which approach to assessing liability? a. Absolute liability. b. Contributory negligence. c. Joint and several liability d. Proportional Liability

d. Proportional Liability

A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proven CPA negligence. b. The investor did not rely upon the financial statement. c. The CPA detected the misstatement after the audit report date. d. The audit work was performed with due diligence

d. the audit work was performed with due dilligence

Is the following an error or a fraud: Mistake in gathering data

error