AC 470 CH 2 Study

True or false: Generally, auditors who do not follow the guidance provided by the AICPA are presumed to have performed deficient audits.

False Reason: This is true when auditors do not follow the guidance provided in GAAS.

True or false: Auditors can read business periodicals and textbooks to help obtain an understanding of a client's business.

True

A list of the procedures auditors need to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements is a(n) ______ _______

audit plan

The probability that a material misstatement caused by error or fraud will not be prevented or detected on a timely basis of the entity's internal controls is ______.

control risk

Due to multiple and sometimes conflicting standards, auditors and regulators have much interest in _________ which is making the standards coordinated or uniform throughout the world.

convergence

The goal of convergence is to make auditing standards issued by the ASB, PCAOB, and IAASB and others ______.

coordinated

For quality control standards to be effective it is important that firm management ______.

demonstrates its commitment to quality control ensures that financial considerations do not override work quality devotes sufficient resources to quality control policies and procedures

The chance that the audit team's substantive procedures will fail to uncover a material misstatement is called ______ risk.

detection risk

The possibility that the audit team's substantive procedures will fail to find a material misstatement is defined as

detection risk

The most reliable evidence is ______.

direct personal knowledge

The need for auditors to plan and perform the audit with an appropriate level of professional skepticism is one specific element of _______ _______ that is noted in the standards.

due care

An engagement quality control review ______.

evaluates significant audit team judgements and the conclusions reached in formulating the report

The PCAOB recently indicated that it is considering shifting the focus of its investigations from ______.

evaluating audit deficiencies to assessing the firms' systems of quality control

Auditors are expected to be unbiased and impartial with respect to information they audit which is referred to as independence in ______.

fact

The two general types of relationships that are believed to compromise independence are ______.

financial and managerial

PCAOB inspections are conducted on an annual basis for ______.

firms performing audits of more than 100 public entities

Generally accepted auditing standards (GAAS) ______.

guide the conduct of audit examinations have a purpose to meet the objectives of audit examinations identify necessary qualifications and characteristics of auditors

As of December 31, 2016, PCAOB standards ______.

have been reorganized and combined with AICPA standards into a single body of pronouncements

To ensure personnel assigned to engagements are independent in both fact and appearance, firms should ______.

identify threats to independence and take actions to eliminate or reduce them to an acceptable level communicate independence requirements to personnel

In the audit report the term "financial statements" ______.

includes all footnote disclosures and additional information required by GAAP

A written audit report regarding whether the financial statements are presented fairly ______.

is based on the evidence obtained is based on the applicable financial reporting framework presents an opinion of the auditor's findings

In response to a 1938 scandal, the accounting profession tasked the AICPA to develop standards that served as the basis for audits of ______.

issuers and non-issuers

Providing the firm with reasonable assurance that policies and procedures composing the system of quality control are operating effectively and complied with in practice is the purpose of the SQCS 8 element of

monitoring

Professional judgment ______.

must be demonstrated throughout the entire audit process relates to evidence obtained and conclusions reached is particularly important when evaluating management estimates used in financial statements

Interpretive publications ______.

must be followed unless an auditor can justify any departures provide guidance on the application of GAAS in specific circumstances are part of auditing standards

With regards to evidence ______.

original source documents provide more reliable evidence than electronic documents the effectiveness of an external entity's internal control system affects the reliability of information received direct external evidence is more reliable than external-internal evidence

Auditors are required to plan the work and "obtain and evaluate evidence" as part of the GAAS ______ principle.

performance

General quality criteria for conducting an audit is set forth in the fundamental principle of

performance

Reasonable assurance, planning and supervision, materiality, risk assessment, and audit evidence are the five elements of the _______ principle.

performance

The auditor must obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error under the fundamental principle of ______.

performance

The application of relevant training, knowledge and experience in making informed decisions during the audit engagement is

professional judgment

Pressures to keep audit fees low and the desire to achieve high levels of client satisfaction present challenges for auditors in maintaining appropriate levels of

professional skepticism

PCAOB Auditing Standards apply to ______,

public entities only

The fact that a small dollar misstatement (in absolute terms) is likely to influence investment decisions is referred to as _______ ________ factors.

qualitative materiality

An important component of the SQCS 8 element of engagement performance is the practice of conducing engagement _______ _______ reviews.

quality control

Providing reasonable assurance that a firm and its personnel issue appropriate reports and comply with professional standards and applicable regulatory and legal requirements is the purpose of a system of _______ _________.

quality control

AICPA Statements on Auditing Procedures ______.

served as the basis for audits of public and nonpublic companies were developed in response to an auditing scandal

The PCAOB ______.

can require reviews of work for all of a firm's clients can impose monetary penalties on both firms and individuals

GAAP, IFRS and special purpose (cash or tax bases) are examples of __________ _________ frameworks.

financial reporting

The PCAOB can impose sanctions and penalties on ______.

firms and individual CPAs

The objectives of an audit are to issue a report on financial statements and obtain ______ assurance about whether the financial statements as a whole are free of material misstatements due to fraud or error.

reasonable

The fact that auditors are not "insurers" or "guarantors" regarding the fairness of the entity's financial statements is recognized by the concept of _______ ________.

reasonable assurance

Substantive procedures are ______.

used to obtain evidence about account balances reflected in the determination of detection risk

An audit plan is ______.

a list of the audit procedures auditors need to perform stated in enough detail to understand about the work to be done

Evidence must be reliable and relevant to be considered

appropriate

5 elements of performance principle

1. reasonable assurance 2. planning and supervision 3. materiality 4. risk assessment 5. audit evidence

Prior to the year 2002, standards governing audits were established through the ______.

AICPA

True or false: The PCAOB recently indicated that it is considering shifting the focus of its investigations from assessing the firms' systems of quality control to evaluating audit deficiencies.

False

True or false: The competence and capabilities required to become an auditor are developed and maintained strictly through the auditor's college education and CPE (continuing professional education).

False

SQCS 8 indicates that the integrity and business reputation of the client and the firm's ability to adequately perform the engagement with an appropriate level of professional competence are components of the element of ____________ and __________ of client relationships and specific engagements.

acceptance continuance

The relevant pronouncements of the AICPA and PCOAB are collectively referred to as generally

accepted auditing standards

Perceptions of auditors' independence is the focus of independence in ______.

appearance

Evidence quality relates to the concept of __________ and evidence quantity relates to the concept of _________.

appropriateness sufficiency

A system of quality control provides reasonable assurance that an audit firm ______.

complies with regulatory and legal requirements issues appropriate reports complies with professional standards

Auditors are responsible for ______.

complying with relevant ethical requirements having appropriate competence and capabilities to perform the audit maintaining professional skepticism throughout audit planning and performance

The elements of competence and capabilities are ______.

continuing professional education education in accounting experience

Ineffective internal controls ______ the necessary effectiveness of further audit procedures.

increases control risk and

Owning shares of stock in a client or acting in a decision-making capacity for a client are relationships that are believed to jeopardize or compromise __________.

independence

When making a decision to accept a new client engagement or continuing to perform an engagement for an existing client, the most important issues that firms should focus on are ______.

integrity and business reputation of the client firm's ability to comply with legal and ethical requirements related to the engagement firm's ability to adequately perform the engagement

Policies and procedures implemented to prevent or detect material accounting frauds and errors and provide for timely correction is the definition of

internal control

The risk assessment process requires an understanding of ______.

internal controls in the accounting information system the client's operating environment

AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position are examples of ______ ______ included in the auditing standards.

interpretive publications

SQCS 8 indicates that firm's management must clearly and consistently demonstrate its own commitment to quality control and high-quality work as part of the element of __________ responsibilities for quality within the firm.

leadership

Knowledge of the client's business and industry helps auditors ______.

make judgments about the client's accounting principle choices evaluate the reasonableness of management estimates identify areas for special attention

The likelihood that an error or fraud will exist in the financial statements prior to considering the auditors' work is the risk of

material misstatement

The fact that auditors should focus on matters important to financial statement users based on the dollar amount that would influence lending or investing decisions is the concept of

materiality

The primary purpose of assessing the risk of material misstatement is to help auditors determine the ______ , _______ and ________ of further audit procedures needed to gather evidence about the fairness of the entity's financial statements.

nature, timing, and extent of further audit procedures

Materiality ______.

recognizes auditors do not expect account balances to be accurate to the penny recognizes auditors should focus on matters important to financial statement users is part of the objective of the audit

When auditors confirm accounts receivables with customers, evidence is provided about the legitimacy of the sales, but does not provide evidence the accounts are collectible. This addresses the issue of ______.

relevance

Which of the following refers to the nature of information provided by the audit evidence?

relevance

SQCS 8 indicates that firms must ensure that personnel assigned to engagements are both independent in fact and independent in appearance with as part of the element of ________ __________ requirements.

relevant ethical

Guidance for "communicating the results" are covered under the GAAS ________ principle.

reporting

A set of criteria used to determine the measurement, recognition, presentation, and disclosure of material items in the financial statements is referred to as a financial

reporting framework

Due care ______.

requires an appropriate level of professional skepticism reflects a reasonable level of performance relates to auditor competence and capabilities

Reasonable assurance ______.

requires auditors to consider various material misstatement risks recognizes a GAAS audit may not detect all material misstatements

The fundamental principle of _________ relates to auditors' personal integrity and professional qualifications.

responsibilities

An understanding of the client, its operating environment, industry and internal controls within the accounting information system is required to complete the _______ ________ process

risk assessment

Audit reports refer to an audit being conducted in accordance with ______ of the Public Company Accounting Oversight Board.

standards

Prior to the year 2002, ______.

standards governing audits were established by members of the accounting profession the accounting profession was self-regulated

Auditing ______ indicate auditors must verify the inventory balance stated on the financial statement is correct and an auditing ______ is to do a physical count of inventory items.

standards, procedure

All footnote disclosures and additional information such as earnings per share that are integral elements required by GAAP are encompassed in the term financial

statement

In the audit report, an audit opinion ______.

states if the financial statements are presented fairly in all material respects is expressed in accordance with the applicable financial reporting framework

Audit procedures used to obtain evidence with respect to the fairness of an account balance are referred to as __________ procedures.

substantive

When auditing large entities, a sample of transactions is examined when drawing conclusions. The number of transactions evaluated relates to the issue of ______.

sufficiency

Conditions that present challenges to an auditor's professional skepticism include ______.

time deadlines for completing the audit personal relationships developed with clients financial incentives and pressures

When an auditor concludes that the financial statements are presented fairly in all material respects, a(n) ________ opinion will be issued.

unmodified unqualified