Chapter 2

By understanding and testing __________________, the auditors can assess whether it offers assurance that the financial statements will be free from material errors and fraud.

Internal Control

Match the following statements to the AICPA GAAS underlying principle: Premise of an audit

Management is responsible for the preparations of financial statements and must provide auditor with all related reports and documentation.

Auditors are responsible to obtain reasonable assurance that clients are in compliance with which of the following types of laws

Only laws having a direct effect on financial statements ******Auditors are only responsible for identifying client noncompliance with laws that have a direct effect on financial statements.

Auditors of nonpublic companies are not required to:

Provide assurance on the effectiveness of internal control

Match the following statements to the AICPA GAAS underlying principle: Purpose of an audit

Provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly.

The auditors opinion states that there is a limitation on the scope of the audit, but not so far as to overshadow an overall opinion. The type of opinion that would be issued is called a(n):

Qualified opinion

An audit report that includes an unmodified opinion that the financial statements present fairly the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles is called a(n) __________ report.

Standard

The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP) is a PCAOB __________ ___ ___________

Standard of Reporting

Which of the following sections are not included in the AICPA Statements on Auditing Standards?

Summary of GAAP—GAAP is the financial reporting framework; SASs provide guidance on the audit

The Auditors' Report on a client's financial statements states that the auditors are responsible for expressing an opinion on:

The financial statements

During an audit, Jose becomes aware that the client has violated an environmental law by disposing of waste inappropriately. Jose feels that the violation is intentional and material; and therefore has an obligation to communicate the matter to:

Those charged with governance—the auditor is responsible to inform those charged with governance.

T/F: An audit is more likely to detect tax evasion than violations of antitrust laws.

True

T/F: Partners in CPA firms usually have the responsibility for signing the audit report.

True

T/F: The attestation standards do not supersede generally accepted auditing standards.

True

T/F: The pronouncements of the International Auditing and Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company.

True

T/F: To express an opinion on financial statements, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.

True

True or false: All accounting firms that audit SEC registrants must register with the PCAOB.

True

True or false: Generally Accepted Accounting Principles are the most frequently used financial reporting framework in the United States.

True

True or false: Management is responsible for maintaining adequate accounting records and preparing proper financial statements for the use of stockholders and creditors.

True

Auditing firms attempt to keep their audit risk at a _______ level.

low

Professional skepticism includes which of the following traits?

- A questioning mind - Critical assessment of audit evidence - Being alert to conditions that may indicate possible misstatement due to error

Blane, an auditor for Femi & Co. LLP, has been asked to draft an auditors' report for Sole Shoes Inc., a nonpublic company. Blane should include which of the following sections in the report?

- Auditor's Responsibility - Auditor's Opinion - Management's Responsibility

Auditors obtain reasonable assurance that financial statements are free from material misstatements because of inherent limitations, which arise from:

- Nature of financial reporting - Nature of audit procedures

AICPA's Auditing Standards are organized under which of the following types of numbering systems?

- SAS number (dates) - AU-C number (topic)

Place the following sources for GAAP in order from highest authority to lowest:

1. FASB Codification 2. FASB Concepts Statements 3. Accounting Textbooks

Place in order the highest level of GAAP Authority for Federal Governmental entities to the lowest level:

1. FASB Statements 2. FASAB Technical Bulletins 3. FASAB Concepts Statements

Place GAAS authoritative guidance in order from highest level of authority to lowest:

1. Standards 2. Interpretive Publications 3. Other Auditing Publications

A $500 error would most likely be considered material for which type of organization?

A school fund raising organization

Grey Landscaping Inc. is a family owned company located in the United States. Which standards would the company's auditors use to conduct their audit?

AICPA Standards

The auditors' opinion paragraph addresses which of the following elements:

Accounting Principles

A company failed to report in its financial statements a current lawsuit with a probable negative outcome that will harm the company. This is a violation of which accounting concept?

Adequate Disclosure

Which of the following would violate the auditor's standard of independence?

An auditor who holds shares of stock in the company that he audits.

Match the following statements to the AICPA GAAS underlying principle: Reporting results of an audit

Auditors express in the form of a written report an opinion whether the statements are presented fairly, in all material respects, in accordance with financial framework.

The concept of using the same accounting principles from year to year so that the successive financial statements issued by a business entity will be comparable is called _____________

Consistency

T/F: A peer review is generally performed by employees of the AICPA

False

T/F: If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement.

False

T/F: The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards.

False

T/F: The auditors' report on a corporation's financial statements usually is addressed to the president of the company.

False

T/F: An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws.

False; to detect material misstatements

Which is more difficult to detect during an audit?

Fraud

In the United States the financial reporting framework most commonly used is:

GAAP