Connect Questions
Whenever the audit opinion is qualified for a GAAP departure, the opinion paragraph will include the qualifying words
"except for"
Management Participation threat
CPA becomes involved in decision making for the client and loses objectivity
Familiarity threat
CPA has close, long-standing relationship with client, and it becomes difficult to remain objective
A fee that depends on the finding or result attained as a result of the member's work is called a(n
Contingent fee
True or false: In a going concern evaluation, "substantial doubt" means is it reasonably possible that the entity will be unable to continue for a reasonable period of time.
False
An ASB audit report ______.
Indicates the audit was conducted in accordance with GAAS
To perform an audit of an entity's financial statements, a CPA ______ be independent.
Must
Part 1 of the AICPA Code of Professional Conduct applies to all ______.
Public practice CPAs
If the auditor wishes to draw special attention to a particular matter that is properly presented or disclosed in the financial statements, the auditor may choose to include a(n) ________ paragraph in the auditor's report.
emphasis
The Sarbanes-Oxley Act ______.
ended decades of self-regulation by the accounting profession; created the PCAOB; brought about stricter independence rules
Under the AICPA's PRP, CPA firms that don't perform audits or similar engagements, but perform other work such as reviews and compilations undergo
engagement reviews
A code of conduct based on moral duties and obligations that indicate how an individual should interact with others in society is known as
ethics
Under PCAOB standards ______.
explanatory paragraphs are sometimes required, but emphasis paragraphs are always optional
True or false: An auditor can be held liable to clients for fraud whether or not he or she acted with knowledge and intent to deceive.
false
When an auditor acts with knowledge and intent to deceive, they can be held liable to clients for
fraud
A letter of audit inquiry sent to the entity's attorneys is often referred to as a(n)
legal letters
Section 18 of the Securities and Exchange Act of 1934 imposes liability on any person who ______.
makes a false or misleading statement in documents filed with the SEC
The engagement quality reviewer is a(n) ______.
partner not associated with the details of the engagement
Liability for negligence represents a deviation from a standard of behavior that is consistent with that of a(n)
reasonable person
When an insurance company reports in compliance with the rules of a state insurance commission, the financial statements have been prepared under a(n) _______ basis.
regulatory
With respect to the audit of internal control over financial reporting, the auditor communicates in writing to management and the audit committee ______.
significant deficiencies material weaknesses
Written law enacted by the legislative branch of federal and state governments is called
statutory law
The General Standards Rule of the Code of Professional Conduct addresses ______.
sufficient relevant data; professional competence; planning and supervision
When an entity issues comparative financial statements, the date on the auditor's report is normally ______.
the date of the most recently completed audit
The principal auditor is sharing responsibility for the audit report with other auditors when ______.
there is a reference to the other auditors in the audit report
To hold an accountant liable for fraud, a third-party plaintiff must prove the ______.
third party suffered damages; accountant intended to induce the third party to rely on false representation; third party relied on the false representation
Elements of quality control identified by SQCS No. 8 include ______.
tone at the top; monitoring; engagement performance; human resources; monitoring
A wrongful act, other than a breach of contract, for which civil action may be taken is a(n)
tort
True or false: Prior period statements received a qualified or adverse opinion because the entity did not follow GAAP. If the entity conforms to GAAP in the current year and restates the prior period results, the auditor should express an unqualified opinion on the restated prior period financial statements presented as comparatives.
true
A private, nongovernmental association which only has the authority to require its members to comply with the Code of Professional Conduct as a condition of continued membership is the ______.
AICPA
self-interest threat
CPA is forced to choose between actions that further the CPA's interest and actions that serve the investing public's interest.
Self-review threat
CPA is in a position to be evaluating his or her own judgements
Final analytical procedures provide a "smell test". Which of the following explains the meaning of this phrase?
Do the financial statement amounts make sense?
According to the Confidential Client information rule the auditor ______ the entity's consent to disclose confidential information to comply with an investigative or disciplinary proceeding.
Does not need
The successful functioning of nearly every aspect of society, from law to medicine, family life to government is underpinned by ______.
Ethics
In order to be identified as a CAM, a matter must _______.
Have involved especially challenging, subjective, or complex auditor judgement; relate to accounts or disclosures that are material to the financial statements
A CPA who is honest and candid and honors both the form and the spirit of ethical standards is said to have ______.
Integrity
A PCAOB report ______.
Is titled "report of independent registered public accounting firm"
When a scope limitation exists but overall the financial statements present fairly in conformity with GAAP, the auditor will ______.
Issue a qualified opinion; use the word "exact" in the report
The auditor's standard unqualified audit report for a public company includes ______.
Opinion, critical audit matters section; name and signature of audit form; how long the auditor has served; report title; addressee; audit report date
The SEC delegates its authority to set standards for audits of public companies to the ______.
PCAOB
The Acts Discreditable Rule allows the AICPA to ______ a member for committing acts that may affect the profession's reputation.
Remove
Ultimate authority to set standards for audits of public companies belongs to the ______.
SEC
Investigation activities are performed by plaintiffs and their attorneys during the ______ stage in the initiation and disposition of audit-related disputes.
Second
When the audit has been performed in accordance with applicable auditing standards, the auditor has gathered sufficient evidence, and the auditor believes that the financial statements conform to GAAP, a(n) _______ ________ financial statement audit report is issued.
Standard Unqualified
The value of an action is determined solely by the consequences of the action on the welfare of individuals under the ______ approach.
Utilitarian theory
The new PCAOB reporting standards include ______.
a clearer description of management and auditor responsibilities; separate disclosure of critical audit matters; the retention of the binary, pass/fair reporting approach; laying out the key features of an audit more clearly; a basis of opinion section
Complying with the AICPA Code of Professional Conduct is ______.
a condition of membership in the AICPA; required by courts at the state and federal levels; required by most state-level boards of accountancy
The auditor's report does not refer to the work of other auditors when the principal auditor ______.
accepts full responsibility for the work done and conclusions drawn by other auditors; is satisfied as to the professional reputation and independence of the other auditor
When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must ______.
add an explanatory paragraph to the Basis for Opinion section
When there is a lack of consistency in the application of accounting principles due to accounting changes, an auditor ______.
adds an explanatory paragraph to a standard unqualified audit report
Under the Foreign Corrupt Practices Act, auditors may be subject to ______.
administrative proceedings; civil liability
Auditors express a qualified or adverse opinion for departures from GAAP including ______.
an unjustified change in accounting principle; inadequate disclosure; use of an unacceptable accounting principle
Audit procedures occurring after the balance sheet date that are performed specifically to detect subsequent events include ______.
asking legal counsel about any developments related to litigation, claims, and assessments reading any available interim financial statements that are available after year-end
With respect to the audit of internal control over financial reporting, the auditor must communicate all significant deficiencies and material weaknesses in writing to management and the
audit committee
A third party claiming ordinary negligence against an auditor must prove the ______.
auditor had a duty to the plaintiff to exercise due care; third party suffered an actual loss
A fee is not considered a contingent fee if it is ______.
based on the complexity of the audit; determined by judicial proceedings
Integrity requires that a CPA ______.
be honest; honor the form and spirit of ethical standards; be candid
An auditor who fails to carry out contractual arrangements with a client may be liable for
breach of contract
The auditor reviews the financial statements to ______.
check proper presentation of accounts verify the inclusion of all necessary disclosures ensure compliance with GAAP
Long-term agreements to purchase raw materials or sell products at a fixed price are called
commitments
Case law developed over time by judges who issue legal opinions which become precedent is called
common law
The primary purpose of a legal letter is to ______.
corroborate information provided by management about litigation, claims and assessments
The Advertising and Other Forms of Solicitation Rule prohibits members in public practice from ______.
creating false expectations of favorable results; implying an ability to influence a court or regulatory agency
Any matters arising from the audit of financial statements that are communicated or required to be communicated, to the audit committee, that relate to material financial statement accounts or disclosures and involved especially challenging, subjective, or complex auditor judgment are called
critical audit matters
All financial statements, including related notes, have been prepared and all significant audit documentation have been reviewed and approved by the ______.
date of the auditor's report
To ensure all required footnotes have been properly included, most public accounting firms use some type of financial statement
disclosure checklist
The PCAOB requires that the auditor retains all ______.
documents inconsistent with the final conclusion for significant matters documents that "form the basis of the audit or review"
An auditor is required to perform his or her professional services with the same degree of skill, knowledge, and judgment possessed by other members of the profession under the standard of
due care
The AICPA's Peer Review Program consists of ______.
engagement reviews; system reviews
The SEC can suspend any person the privilege of appearing and practicing before it for ______.
engaging in unethical or improper professional conduct; having a CPA license suspended or revoked; lacking in character or integrity
Auditing standards require auditors to communicate certain matters to "those charged with governance". For publicly traded companies, this includes the ______.
entity's audit committee entity's board of directors
An auditor issued a qualified opinion on prior period financial statements due to lack of conformity with GAAP. The entity has fixed the issue in the current year and appropriately restated the prior period financial statements. If the restated prior period statements are presented with the current statements as comparatives, the auditor should ______.
express an unmodified opinion on the restated financial statements; disclose that the previously issued financial statements have been corrected and restated
Discreditable acts under the Acts Discreditable Rule include ______.
failure to comply with records requests; failure to file a tax return; solicitation of CPA Examination questions and answers
True or false: A firm's system of quality control should not consider the organization of the practice.
false
True or false: AICPA professional standards require a public accounting firm and all of the accounting firm's partners, professional and administrative employees to be independent whenever the firm performs an attest service.
false
The Advertising and Other Forms of Solicitation Rule prohibits members in public practice from advertising in a manner that is
false, misleading, or deceptive
When a CPA has such a close, long-standing relationship with a client that it has become difficult to maintain objectivity, it is called a(n) ______ threat.
familiarity
The SEC has the authority to establish standards for ______.
financial accounting; professional conduct of public accountants; audits of public companies
An auditor is reviewing tax returns and the minutes of the board of directors' meetings. The auditor is most likely trying to ______.
identify contingent liabilities
The Foreign Corrupt Practices Act ______.
imposes record-keeping requirements on public companies; prohibits corporate officers from participating in bribing foreign officials
When other information in a document containing audited financial statements is materially inconsistent with information appearing in the financial statements the auditor must ______.
include an explanatory paragraph in the audit report
Generally, the materiality in an audit of an element, account, or item is set in relation to the ______.
individual element, account, or item
The "nitty gritty" details in implementing the rules in Part 1 of the Code of Professional Conduct are found in the ________ of each rule
interpretations
If an auditor is not independent, the auditor ______.
issues a two-sentence report; must withdraw from the engagement or disclaim an opinion
Virtually all states have passed laws that allow CPAs to practice as
limited liability partnerships
The auditor makes recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues by preparing a(n) ______.
management letter
To make recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues, the auditor normally prepares a(n)
management letter
Two of the primary concerns during the evaluation of the audit results are _____ accumulated during the audit and conditions that relate to _____ risk.
misstatements; fraud
When significant changes are made to the planned audit approach at any point during the audit, the final documentation should indicate ______.
modifications to the plan the original plan rationale for the change in plan
The auditor assesses the entity's ability to continue as a going concern ______.
near the end of the engagement during the planning of the engagement
When an auditor reports on an entity's compliance with certain contractual agreements or regulatory requirements, the auditor provides ______ _______ as to the entity's compliance with the requirements.
negative assurance
If an engagement is performed without due care, the public accountant may be held liable for an actionable tort in
negligence
An auditor has read the minutes of board of directors meetings, inquired of legal counsel regarding litigation, read the interim financial statements, and made inquiries of management. The auditor is most likely ______.
performing audit procedures for subsequent events
Auditing standards use the term _______ to describe the potential effects of a scope limitation or departure from GAAP on the auditor's report.
pervasive
The second stage in the initiation and disposition of audit-related disputes relates to the investigation done by ________ and their attorneys before filing suit
plaintiffs
A predecessor auditor should obtain a letter of representations from the current year, successor auditor when the predecessor auditor ______.
plans to reissue a report on the financial statements of prior periods presented for comparative purposes
Part 1 of the Code of Professional Conduct has the most stringent rules because it applies to CPAs who ______.
provide assurance to the broader public
The Racketeer Influenced and Corrupt Organizations Act ______.
provides for treble damages in civil cases;provides for both civil and criminal sanctions
Damages awarded to punish outrageous conduct are called
punitive damages
The AICPA can discipline members for violating the Code of Professional Conduct by ______.
referring the case to a hearing panel of the Trial Board; suspending or revoking membership in the AICPA
The engagement partner generally reviews working papers ______.
related to critical audit areas prepared by the manager
Part 1 of the AICPA Code of Professional Conduct ______
requires independence; applies to governmental auditors
The Sarbanes-Oxley Act makes it a felony punishable by 10-year imprisonment to ______.
retaliate against anyone who comes forward to report suspected violations of federal laws
An inability to collect sufficient appropriate evidence is considered a(n) ______.
scope limitation
If an accountant is found to have engaged in unethical or improper professional conduct, the SEC can ______.
suspend the person from appearing and practicing before it
The representation letter is addressed to ______.
the auditor
True or false: Catastrophic legal liability is generally believed to be the single greatest threat to large firms and the audit profession.
true
S.M. Mintz suggested three overlapping theories of ethical behavior including the ________ theory which recognizes that decision making involves trade-offs between the benefits and burdens of alternative actions.
utilitarian
All audit work should be reviewed by an audit team member who is senior to the person preparing the audit _______
work papers
Auditors can add explanatory language to the standard unqualified audit report by ______.
Adding explanatory wording to the existing paragraphs of the report; inserting an additional explanatory paragraph
The Private Securities Litigation Reform Act of 1995 ______.
Amends the Securities Exchange Act of 1934 to provide for proportionate liability; reduced auditor liability by creating a "safe harbor" for auditors who detect fraud; requires auditors to notify the SEC within on business day when management fails to take action in response to reports of material fraud
advocacy threat
CPA is inclined to advocate for the client's preferred outcome.
Undue influence threat
CPA is pressured due to another party's aggressiveness or dominant personality
adverse interest threat
CPA's interest runs contrary to the client's.
Auditing standards define special purpose financial statements are those prepared under a(n) ______ basis.
Cash; contractual; tax; regulatory
If the client breaches its obligations under the engagement letter, the auditor is ______.
Excused from their contractual obligations
The auditor's treatment of subsequent events relating to internal control is not dependent on whether the change in internal control reveals information about a material weakness that existed as of the end of the reporting period or whether the event creates or reveals information about a new condition that did not exist as of the end of the reporting period.
False
Which of the following parts of the AICPA Code of Professional Conduct applies only to CPAs in public practice?
Part 1
An auditor issues a standard unqualified audit report when the auditor has ______.
Reasonable assurance the financial statements conform to GAAP in all material respects; performed the audit in accordance with applicable auditing standards; gathered sufficient appropriate evidence
The most sweeping securities law since the 1933 and 1934 Acts is the ______.
Sarbanes-Oxley Act of 2002
Which of the following was enacted by Congress in 1970 to combat the infiltration of legitimate businesses by organized crime?
The Racketeer Influenced and Corrupt Organizations Act
An auditor issues a qualified opinion when there is ______.
a scope limitation when the overall financial statements are presented fairly in accordance with GAAP; a specific departure from GAAP but overall the financial statements present fairly in conformity with GAAP
Under the Form of Organization and Name Rule, a firm may designate itself "Members of the American Institute of Certified Public Accountants" if ______.
all of its CPA owners are members of the Institute
The Confidential Client Information rule prohibits the auditor from disclosing confidential client information without the specific consent of the client. However, information can be disclosed without the client's consent to ______.
allow a review of the member's professional practice under the authority of the AICPA; allow a review of the member's professional practice in conjunction with the sale or merger of the practice; comply with a valid subpoena
Regarding responsibility for reporting changes in internal controls that might adversely affect financial reporting between the end of the reporting period and the date of the auditor report, auditors are ______.
always responsible for reporting these types of changes in internal controls
The auditor is required to read the other information and consider whether such information is consistent with the information in the audited financial statements when ______.
an entity publishes documents that contain other information in addition to the audited financial statements
To consider the overall reasonableness of the financial statement amounts, the auditor performs final
analytical procedures
Commitments entered into to obtain a favorable or predictable pricing agreement or to secure the availability of raw materials are known as
cash flows
It is generally believed that the single greatest threat to large firms and the audit profession is ______.
catastrophic legal liability
The objectives of communication with the audit committee are to ______.
communicate the auditor's responsibilities establish an understanding of the terms of the audit engagement with the committee communicate an overview of the overall audit strategy and timing
Before reissuing a report on the financial statements of prior periods which will be presented for comparative purposes, a predecessor auditor should ______.
compare the prior period financial statements on which the predecessor reported with the current year statements on which the successor will report; read the current period financial statements
With regard to other information in documents containing audited financial statements, the auditor is required to ______.
consider whether such information is consistent with the information in the audited financial statements; read the other information
When facts are encountered that may affect the auditor's previously issued report, the auditor should ______.
consult with their attorney inquire how management intends to address the issue discuss the matter with those charged with governance determine whether the facts are reliable
An existing condition or set of circumstances involving uncertainty about a possible loss that will ultimately be resolved when some future event occurs or fails to occur is a(n)
contingent liability
True or false: Under the Securities Act of 1933, financial misstatement must be the result of gross negligence.
false
True or false: When an auditor reports on an entity's compliance with certain contractual agreements or regulatory requirements, the auditor uses the words "In our opinion...." in the audit report.
false
A number of cases have limited the auditor's Section 18 good-faith defense when the auditor's actions have been judged to be ______.
grossly negligent
Membership in the AICPA can be terminated without a hearing if the member has ______.
had his or her CPA certificate suspended or revoked by a government agency; been convicted of certain criminal offenses
When required supplementary information (RSI) is omitted or departs materially from the requirements of the applicable financial reporting framework the auditor must ______.
include an explanatory paragraph in the audit report
The Private Securities Litigation Reform Act of 1995 amended earlier acts by ______.
including the auditor's responsibility to detect fraud in federal law; providing for proportionate liability
Ethics ______.
is a code of conduct based on moral duties and obligations that indicate how an individual should interact with others; underpins the successful functioning of nearly every aspect of society
An entity is issuing comparative financial statements. In prior years, the auditor expressed a standard unqualified report. This year the entity has inappropriately not capitalized certain lease obligations. The auditor should ______.
issue a qualified opinion for a GAAP departure clarifying the departure only affects the current year's statements
A firm's system of quality control should be designed to provide the firm with reasonable assurance that the firm and its personnel ______.
issue appropriate reports; comply with regulatory requirements
Circumstances that likely will result in an audit opinion that departs from an unqualified opinion include ______.
lack of auditor independence; a departure from GAAP; a scope limitation
The final evaluation of audit evidence from the financial statement audit is primarily concerned with _______.
misstatements accumulated during the audit conditions related to fraud risk sufficiency of the audit evidence
When an auditor adds explanatory wording to the existing paragraphs of the report, it is referred to as
modified wording
Generally, the procedures applied in an audit of an element, account, or item are ________ than if the same information were considered part of an audit of the overall financial statements.
more extenisve
When an auditor is not independent, the reason(s) for the lack of independence should ______ ASB standards.
not be stated under PCAOB standards, but may be stated under
The Sarbanes-Oxley Act includes criminal provisions for ______.
obstruction of justice; financial reporting fraud; defrauding shareholders
Professional competence as defined in the General Standards Rule states that a member should ______.
only undertake those professional services for which he or she has technical knowledge and skill
PCAOB inspections of registered firms focus on selected audit and quarterly review engagements to evaluate the sufficiency of the ______ systems of registered firms
quality control
The engagement quality control reviewer ______.
reads the financial statements evaluates significant judgments made by the engagement team considers the appropriateness of the audit report
To identify contingent liabilities, an auditor might ______.
review tax returns and IRS reports review contracts, loan agreements, and leases read the minutes of board of directors' meetings
When an entity has a departure from GAAP judged to be immaterial by the auditor, the auditor will most likely issue a(n) ______.
standard unqualified opinion
Transactions that occur after the balance sheet date but before the issuance of the financial statements are called
subsequent events
Transactions that occur after the balance sheet date but before the issuance of the financial statements are called ______.
subsequent events
Under the Securities Act of 1933, the plaintiff must prove ______.
the audited statements contained a material omission or misstatement; a loss was suffered by investing in the registered security
A third party claiming ordinary negligence against an auditor must prove ______.
the auditor breached duty by failing to act with due care; a direct causal connection between the negligence and third-party injury
When a circumstance such as a fire restricts the scope of the engagement, ______.
the auditor can issue a standard unqualified opinion; alternative procedures can be used to gather sufficient appropriate evidence
An auditor adds an explanatory paragraph to a standard unqualified report on an entity's financial statements when ______.
the auditor decides to refer to the report of other auditors as the basis, in part, for the opinion; there is substantial doubt about an entity's ability to continue as a going concern; the auditor performs an integrated audit and issues separate reports on the financial statements and internal control
When a client significantly restricts the scope of the engagement ______.
the auditor should consider disclaiming an opinion
When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must add an explanatory paragraph in the Basis for Opinion section indicating ______.
the company was not required to have an audit of its ICFR; no opinion on ICFR is being expressed
The date of the auditor's report is ______.
the date on which management must have explicitly taken responsibility for the financial statements the date on which all significant audit documentation must have been reviewed and approved no earlier than the date on which the auditor has obtained sufficient appropriate evidence
True or false: Common law does not require that a public accountant guarantee their work product.
true
True or false: When an entity issues comparative financial statements, the auditor can express a standard unmodified report on prior years' financial statements but qualify the opinion on the current-year financial statements.
true
Which of the following are characteristics of a contingent liability?
ultimate resolution when some future event occurs or fails to occur uncertainty about the amount of loss an existing condition or set of circumstances
Punitive damages may be awarded ______.
when the auditor is found guilty of fraud or constructive fraud; to punish outrageous conduct