Chapter 2

Who issues international standards on auditing?

IAASB

What is the worldwide organization of national accounting bodies called?

IFAC

What is a requirement for all CPA firms with issuer clients?

Inspections

The PCAOB has adopted the AICPA standards as its _______ quality control standards.

Interim

Preparing proper FS for the use of stockholders and creditors is the responsibility of __________.

Management

_________ is (are) responsible for the financial statements.

Management

Even a small, $500 error could be deemed __________ when auditing a small client.

Material

An opinion includes an introduction, management's and the auditor's responsibility, and a(n) __________.

Opinion

Auditors of a company's FS are retained to express a(n) __________ on the FS.

Opinion

What was established by the Sarbanes-Oxley Act of 2002?

PCAOB

QC standards help to ensure that CPA firms meet their responsibilities to their clients and the ________.

Public

What is the subject of a peer review?

Quality control policies

An audit report that includes an unmodified (unqualified) opinion is generally referred to as a(n) __________ report.

Standard

Type of attestation standard: Adequate planning, assistance, and supervision is required.

Standards of Fieldwork

Type of attestation standard: The report must identify the subject matter and character of an audit.

Standards of Reporting

Type of attestation standard: The report must state the conclusion of the practitioner.

Standards of Reporting

An audit report indicates that the audit evidence we have obtained is _______ to provide a basis for the opinion.

Sufficient

What is the correct order of the components in an auditor's report?

Title --> Introduction --> Management's Responsibility --> Auditor's Responsibility --> Auditor's Opinion

T or F: All accounting firms that audit SEC registrants must register with the PCAOB.

True

T or F: An audit can be relied on to provide reasonable assurance of detecting noncompliance with laws that have a material and direct effect on financial statement amounts and related disclosures.

True

T or F: An audit report for an issuer refers to PCAOB standards rather than generally accepted auditing standards.

True

T or F: Audits of financial statements by a CPA include obtaining evidence from sources outside the client company as well as from internal sources.

True

T or F: Fraud is a term that is used to refer to intentional misstatements of financial statements.

True

T or F: GAAP are the most frequently reporting framework in the US.

True

T or F: GAAP represents a financial reporting framework.

True

T or F: The Public Company Accounting Oversight Board performs inspections of CPA firms that audit SEC registrants.

True

T or F: The audit is designed to assess risks of material misstatements due to errors or fraud; the term "illegal acts" is incorrect (second paragraph under auditor's responsibility).

True

T or F: The auditors are responsible for having appropriate competence and capabilities to perform the audit.

True

T or F: The auditors are unable to obtain absolute assurance that the financial statements are free from material misstatement.

True

T or F: The auditors have a responsibility to design their audit to obtain reasonable assurance of detecting material misstatements in the financial statements due to fraud or errors.

True

T or F: The evidence should be sufficient and appropriate rather than "adequate" (third paragraph under auditor's responsibility).

True

T or F: The international audit report may be signed using the name of the auditor, the firm, or both.

True

T or F: The opinion should be on "accounting principles generally accepted in the United States of America," not on auditing standards (opinion paragraph).

True

T or F: The opinion states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

True

T or F: The pronouncements of the AICPA do not specify the percentage of purchase invoices to be examined or other quantitative measures, but leave to the auditor's judgment the determination of what constitutes sufficient appropriate audit evidence.

True

T or F: The report indicates that management is responsible for the preparation of the financial statements.

True

T or F: The report indicates that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion.

True

T or F: The report indicates that the audit procedures selected depend on the auditors' judgment.

True

T or F: The report should indicate that we have "audited," rather than "examined" the financial statements.

True

T or F: The report should not be addressed to management.

True

T or F: The signature on the report should be that of the CPA firm, not that of the partner.

True

Statement of Quality Standards identify _____elements of quality control.

6

A review of a public accounting firm by the PCAOB to ensure compliance with Sarbanes-Oxley Act of 2002 is called a(n): a. Inspections b. Systems review c. Peer review

A

An audit provides reasonable assurance of detecting material: Fraudulent Financial Reporting; Misappropriation of assets (a) Yes Yes (b) Yes No (c) No Yes (d) No No

A

During an audit, Jose becomes aware that the client has violated an environmental law by disposing of waste inappropriately. Jose feels the violation is intentional and material, and therefore has an obligation to communicate the matter to: a. Those charged with governance b. No communication is necessary since GAAS does not cover environmental laws c. Investors

A

In the event of an unresolvable difference of opinion between the client company and the CPA firm as to the valuation of an asset in the financial statements: a. The final decision rests with the client's management and the auditors can express their disapproval in the audit report if they deem it appropriate to do so. b. The auditors should change the financial statements to show the valuation they consider proper. c. The difference of opinion should be submitted to arbitration by the FASB. d. The auditors should withdraw from the engagement.

A

The general group of the 10 PCAOB Auditing Standards requires that: a. The auditors maintain an independent mental attitude. b. The audit be conducted in conformity with generally accepted accounting principles. c. Assistants, if any, be properly supervised. d. The auditors obtain an understanding of internal control.

A

The report shall state whether the FS are presented in accordance with GAAP is a PCAOB __________. a. Standard of Reporting b. Standard of Fieldwork c. Accounting Principle Standard d. General Standard

A

Type of auditor's report: The auditors are unable to determine the overall fairness of the financial statements. a. Disclaimer b. Standard unmodified c. qualified d. adverse

A

When the auditors discover that an audit client has committed an illegal act they will ordinarily report it to the: a. Audit committee of the company being audited. b. Securities and Exchange Commission on Form 8-M. c. Justice Department of the U.S. government. d. American Institute of Certified Public Accountants Division of Professional Ethics.

A

Which of the following is not included in an integrated audit report on the financial statements of a public company? a. The report states that the audit was performed in accordance with AICPA standards. b. The report indicates that the financial statements are the responsibility of management. c. The report indicates that the auditors have also audited the effectiveness of the company's internal control. d. The report is signed in the name of the CPA firm.

A

Which of the following statements concerning auditor identification of client noncompliance with laws is correct? a. An auditor's responsibility to detect noncompliance with laws that have an indirect effect on the financial statements differs from that for laws that have a direct effect. b. An audit in accordance with generally accepted auditing standards normally includes highly effective special substantive audit procedures specially designed to detect noncompliance with laws that have an indirect but immaterial effect on the financial statements. c. An auditor considers compliance with laws from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. d. An auditor has no responsibility to detect client noncompliance with laws that have a direct effect on the financial statements.

A

Match the AICPA guidance categories to the correct summary. a. Statements on Auditing Standards b. Interpretive Publications c. Other Auditing Publications 1. Highest level of authority; must be applied 2. Does not provide authoritative status, but helps the auditor understand and apply standards. 3. Provides recommendations on the application of standards.

A - 1 B - 3 C - 2

The PCAOB Auditing Standards are categorized into 3 categories. Match the category to the correct summary. a. General Standards b. Standards of Fieldwork c. Standards of Reporting 1. Guidance for auditor training and proficiency, auditor independence, and need for due professional care 2. Guidance for preparation of the auditors' report 3. Guidance for planning audit and accumulating evidence sufficient for auditors to obtain opinion on FS

A - 1 B - 3 C - 2

Match the following statements to the AICPA Generally Accepted Auditing Standards underlying principle. a. Purpose of an audit b. Premise of an audit c. Reporting results of an audit 1. Management is responsible for preparation of FS and must provide auditor with all related reports and documentation 2. Provide FS users with an opinion by the auditor on whether FS presented fairly 3. 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

A - 2 B - 1 C - 3

Match the types of auditors' reports to the correct statement. a. Unqualified opinion b. Qualified opinion c. Adverse opinion d. Disclaimer of opinion 1. States there are one or more items in the FS that are not presented in accordance with applicable accounting principles. 2. States the FS present fairly, in all material respects 3. States the auditors are unable to determine the overall fairness of the FS 4. States the FS are not fairly stated

A - 2 B - 1 C - 4 D - 3

Match the following elements of quality control to the appropriate statements. a. Monitoring b. Leadership responsibilities for quality c. Acceptance of client relationships 1. Firm will undertake engagements only where the firm is competent to perform engagement 2. Policies and procedures related to quality control are relevant, adequate and operating efficiently 3. Promotes an internal culture based on the recognition that quality is essential in performing engagements

A - 2 B - 3 C - 1

AICPA's Auditing Standards are organized under which of the following types of numbering systems? (Select all that apply) a. SAS number (dates) b. AU-C number (topic) c. AS (alphabetically)

A, B

Identify which of the following are required only in a publicly traded company. (Select all that apply) a. Regulation by PCAOB b. Provide assurance on the effectiveness of internal controls c. Provide assurance on FS

A, B

Professional skepticism includes which of the following traits? (Select all that apply) a. Critical assessment of audit evidence b. A questioning mind c. Unconditional responsibility for situations, which cause misstatement due to fraud d. Being alert to conditions that may indicate possible misstatement due to error

A, B, D

Auditors obtain reasonable assurance that financial statements are free from material misstatements because of inherent limitations, which arise from: (Select all that apply) a. Nature of audit procedures b. Client lack of cooperation c. Nature of financial reporting

A, C

There are multiple types of peer reviews, including which of the following? (Select all that apply) a. System review b. AICPA review c. Engagement review

A, C

Place the following sources for GAAP in order from highest authority to lowest. a. FASB Codification b. Accounting Textbooks c. FASB Concepts Statements

A, C, B

Place the levels of GAAP Authority for Federal Governmental entities in order from highest to lowest authority. a. GASB Statements b. Accounting textbooks c. GASB Technical Bulletins

A, C, B

An auditor can find guidance in SASs under which of the following sections: a. Definitions of important terms b. Summary of GAAP c. Objectives d. Introduction, including scope e. PCAOB standards

A, C, D

PCAOB Auditing Standards are classified into which categories? (Select all that apply) a. Standards of Fieldwork b. Client Standards c. General Standards d. Standards of Reporting

A, C, D

FS are prepared following what?

Applicable financial framework

Reasonable assurance is achieved when __________ risk is at an acceptably low level.

Audit

A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: a. Compliance with generally accepted reporting standards. b. A system of quality control. c. A system of peer review. d. Continuing professional education.

B

An auditors' unmodified (unqualified) standard report: a. Explicitly states that disclosure is adequate in the financial statements. b. Implies that disclosure is adequate in the financial statements. c. Explicitly states that all material facts have been disclosed in conformity with generally accepted accounting principles. d. Takes no position, explicit or implicit, with respect to the adequacy of disclosures.

B

By understanding and testing __________, the auditors can assess whether it offers assurance that the FS will be free from material errors and fraud. a. Fraud b. Internal control c. Independence

B

Champ Electric, Inc. is a publicly traded company located in the United States. Auditors of Champ would follow which standards when conducting an audit. a. IAS b. PCAOB Standards c. AICPA Standards

B

Financial statement audits performed under PCAOB requirements are designed to provide which type(s) of assurance with respect to the detection of material misstatements due to errors or fraud? Reasonable Absolute a. Yes Yes b. Yes No c. No Yes d. No No

B

If the auditors deem the FS are not fairly presented, they will issue a(n) _________ opinion. a. Qualified b. Adverse c. Disclaimer

B

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 maintain objective skepticism when performing the audit.

B

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 GASB promulgates standards for: a. The federal government. b. State and local governments. c. All governmental organizations. d. General-purpose entities.

B

Type of auditor's report: This is the report most clients prefer. a. Disclaimer b. Standard unmodified c. qualified d. adverse

B

Which of the following does the FASB consider a source of nonauthoritative guidance for use when there is no authoritative guidance available? a. The FASB Codification. b. FASB Concepts Statements. c. SEC Rules. d. SEC Interpretive Releases

B

Which of the following is accurate? As indicated in principles underlying audit. a. Management is expected to provide auditors with all needed evidence prior to beginning of audit. b.Auditor unable to obtain absolute assurance.

B

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 auditors' 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

Which of the following sections are not included in the AICPA Statements on Auditing Standards? a. Introduction, including scope b. Summary of GAAP c. Objectives d. Application and other explanatory material

B

Place GAAS authoritative guidance in order from highest level of authority to lowest. a. Other Auditing Publications b. Standards c. Interpretive Publications

B, C, A

An audit report that includes an unmodified opinion that the FS present fairly the financial position, results of operations, and CF in conformity with GAAP is called a(n) __________ report. a. Disclaimer b. Qualified c. Standard d. Adverse

C

Audit firms that are subject to inspections by the PCAOB staff include: a. All audit firms. b. Audit firms that are registered with the SEC. c. Audit firms that are registered with the PCAOB. d. Audit firms that are registered with a state board of accountancy.

C

Auditors are responsible to obtain reasonable assurance that clients are in compliance with which of the following types of laws. a. All laws, including laws with a direct effect on FS and other compliance laws. b. Only other compliance type of laws c. Only laws having a direct effect on FS

C

Auditors of nonpublic companies are not required to: a. Provide an opinion on the FS b. State management's responsibilities in the audit report c. Provide assurance on effectiveness of internal controls

C

Best Company has accounted for inventory using FIFO for the past three years. This application is an example of the __________ principle. a. Independence b. Quality control c. Consistency

C

In the US the financial reporting framework most commonly used is? a. IFRS b. GAAS c. GAAP

C

The auditors' opinion paragraph addresses which of the following elements? a. Accounting records b. Management's opinion c. Accounting principles

C

Type of auditor's report: A limitation on the scope of the audit is significant, but not so as to overshadow an overall opinion. a. Disclaimer b. Standard unmodified c. qualified d. adverse

C

Type of auditor's report: A material departure from GAAP exists, but not so material as to overshadow an overall opinion. a. Disclaimer b. Standard unmodified c. qualified d. adverse

C

Which AICPA quality control standard would most likely be satisfied when a CPA firm maintains records indicating which partners or employees of the firm were previously employed by the CPA firm's clients? a. Professional relationship. b. Engagement performance. c. Relevant ethical requirements. d. Monitoring.

C

Which is correct concerning an audit requirement that is "unconditional"? a. The word "should" precedes it. b. The auditor must comply with the requirement unless the auditor demonstrates and documents that alternative actions were sufficient. c. The auditor must fulfill the requirement in all cases where that requirement is relevant. d. Not performing the requirement will ordinarily result in permanent revocation of the auditor's CPA license.

C

Which of the following is an element of quality control for a CPA firm? a. Independence and freedom from bias. b. Acceptance and continuance of personnel. c. Engagement performance. d. Supervision.

C

Which of the following is not a type of auditors' opinion? a. Unmodified. b. Qualified. c. Advisory. d. Disclaimer.

C

Which of the following is not explicitly included in a standard report for a nonpublic company? a. The CPA's opinion that the financial statements comply with generally accepted accounting principles. b. That generally accepted auditing standards were followed during the audit. c. That internal control of the client was satisfactory. d. An identification of the financial statements audited.

C

Which of the following would violate the auditor's standard of independence? a. Auditor who brings in donuts for the client during the audit b. Auditor who advises the client on how to make a journal entry, which increases estimated warranty liability c. Auditor who holds shares of stock in the company that he audits

C

An adverse opinion is most likely to be included in an audit report when: a. A standard unmodified opinion is necessary. b. A public company is involved. c. A client refuses to allow an auditor to perform a particular procedure. d. The financial statements depart from GAAP.

D

Type of auditor's report: The financial statements are not fairly presented. a. Disclaimer b. Standard unmodified c. qualified d. adverse

D

Which of the following is not a difference noted when comparing the AICPA audit report to the international audit report? a. The international audit report may use the phrase "true and fair view." b. The international audit report may be signed using the personal name of the audit partner, the audit firm, or both. c. The international audit report requires inclusion of the city of the CPA firm office that performed the audit. d. The international audit report includes an opinion on internal control.

D

Which of the following organizations can revoke the right of an individual to practice as a CPA? a. The Public Company Accounting Oversight Board. b. The American Institute of Certified Public Accountants. c. The Securities and Exchange Commission. d. The applicable state board of accountancy.

D

Which of the following statements is most accurate in describing an auditor's responsibility to detect errors and fraud? a. The auditor should consider the client's internal control, and design the audit to provide reasonable assurance of detecting all errors and fraud. b. The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements, and determine whether the necessary controls are prescribed and are being followed. c. The auditor should consider the types of errors and fraud that could occur, and determine whether the necessary controls are prescribed and are being followed. d. The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements, and design the audit to obtain reasonable assurance of detecting material errors and fraud.

D

Place the following sections of the auditor's report in the appropriate order: a. Opinion b. Introductory sentence c. Auditor's responsibility d. Title e. Management's responsibility

D, B, E, C, A

First Company relies on one customer for the majority of its revenues each year. An accounting concept called adequate __________ requires that the First Company's FS acknowledge this relationship to FS users.

Disclosure

The AICPA _______ require(s) specific quality control procedures.

Does not

The auditor's report is the ________ of an audit.

End product

A mistake in gathering data is considered?

Error

Mistakes in data processing can easily result in __________.

Error

Omissions of amounts or disclosures is considered a(n) __________.

Error

Using unreasonable estimates from misinterpretation of facts is considered?

Error

Unintentional misstatements or omissions of amounts in the FS are called __________.

Errors

Quality control procedures exist to provide reasonable assurance that the firm follows professional standards on _______engagement(s).

Every

An opinion indicates that the financial statements are presented ___________.

Fairly

T or F: A peer review may be expected to analyze, to varying degrees, working papers for each attest engagement performed by the CPA firm.

False

T or F: An audit report for a nonpublic company includes three sections: planning, internal control, and reporting.

False

T or F: An ordinary opinion is a type of auditor's opinion.

False

T or F: Compliance with generally accepted auditing standards is considered by the AICPA as ideal audit performance rather than an attainable level for most audits.

False

T or F: International auditing standards have been developed by the AICPA.

False

T or F: Professional standards permit a CPA firm to own shares of stock in corporations that they audit if such stock holdings are not material.

False

T or F: Quality control policies and procedures are necessary for large CPA firms, but not for small CPA firms.

False

T or F: Since all audits result in unmodified (unqualified) opinions, it is just an issue of what information the auditors disclose in the financial statement notes.

False

T or F: Statements on Auditing Standards apply to a CPA's auditing practice, while Statements on Quality Control Standards apply to aspects of a CPA firm's practice other than auditing.

False

T or F: The Attestation Standards are primarily designed to provide guidance on the audit of financial statements.

False

T or F: The Public Company Accounting Oversight Board establishes auditing standards for the audits of all companies.

False

T or F: The opinion should not include "in all material respects" since the auditors are providing an opinion on the accuracy of the financial statements (opinion paragraph).

False

T or F: The report should not indicate anything concerning management's responsibility for internal control.

False

T or F: The report should not refer to the auditors "evaluating the appropriateness of accounting policies," since those are the responsibility of management.

False

T or F: The report should state that the auditor's responsibility is to express "reasonable assurance," not an opinion (first paragraph under auditor's responsibility).

False

T or F: When the scope of the audit is restricted by the client, the auditors should issue an adverse opinion.

False

T or F: The report indicates that the auditors' responsibility is to obtain particular assurance about whether the financial statements are free of material misstatements.

False - Reasonable assurance is obtained.

T or F: The report is ordinarily addressed "to whom it may concern."

False - addressed to the audit committee of the board of directors.

T or F: The report ordinarily concludes on whether the financial statements are in conformity with generally accepted auditing standards.

False - conformity with GAAP

T or F: The report indicates that the auditors consider and provide an opinion on internal control.

False - considered, but no opinion is provided on it.

T or F: The report should begin with "CPA's Report" at the top.

False - must have a title that includes the term "independent."

T or F: The purpose of an audit is to provide financial statement users with an opinion by the auditors on whether the financial statements are presented fairly, in all material and immaterial respects, in accordance with the applicable financial reporting framework.

False - not immaterial

T or F: Inherent limitations of an audit include the need to conduct an audit to achieve a balance between the benefit to management and the benefit to the auditors.

False - proper balance between benefit and cost

Financial statements can be misstated due to errors, _________, or noncompliance with laws or regulations.

Fraud

Fraudulent financial reporting is considered?

Fraud

In _________, the financial statements are intentionally misleading.

Fraud

Misappropriation of assets is considered?

Fraud

________ is another term for misappropriation of assets.

Fraud

Requirements for training, independence, and due professional care are included in which group of the Auditing Standards?

General

Type of attestation standard: Practitioner must have adequate knowledge in subject matter.

General

Type of attestation standard: Practitioner must have adequate technical training and attest function proficiency.

General

Type of attestation standard: Subject matter of engagement must be able to be evaluated.

General