Auditing: Chapter 2

IFRS (International Financial Reporting Standards) was developed by the ______

IASB (International Accounting Standards Board)

IAASB

International Auditing and Assurance Standards Board

A $500 error would most likely be considered material for ______

a school fundraising organization

The auditors' opinion paragraph in a public company audit report addresses ______

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 the ______ concept. -First Company relies on one customer for the majority of its revenues each year. First Company's financial statements must acknowledge this relationship to financial statement users under the concept of

adequate disclosure

what would an investor be able to observe from financial statements that are accompanied by an unmodified auditors report?

any disputes over significant accounting issues have been settled to the auditors satisfaction

Which of the following is NOT included as a level of service in the AICPA attestation standards? -audit -selected procedures -review -examination

audit

The risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated is known as

audit risk

disclaimer opinon

auditors decline to provide opinion on fair presentation of FS which is called scope limitations

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

Materiality

depends on the dollar amount and nature of the item

when it comes to foreign companies that issue their securities in U.S. markets, the SEC _____

does not require reconciliation with GAAP when statements are prepared using IRFS

A peer review in which the evaluator selects a sample of the CPA firm's actual accounting work to evaluate whether the reports are procedures are appropriate is called a(n) ______ review

engagement review

Auditing standards define unintentional misstatements or omissions of amounts or disclosures in the financial statements as ___

errors

Because of the various types of evidence obtained, it is appropriate for the auditors to state they have audited the ______ of a company.

financial statements

The auditor's standard of independence is violated when an auditor ______.

holds shares of stock in the company that he audits

A sample of the CPA's firm's engagements is selected for review in ____

in both system and engagement reviews

Auditors of large publicly traded companies perform a(n) ___ audit, which includes providing assurance on both the financial statements and the effectiveness of internal control over financial reporting

integrated audit

what is explicitly stated in the managements responsibility in a nonpublic company unmodified audit report?

management is responsible for the maintenance of internal control

which is not covered in the auditors' report of a nonpublic company?

managements opinion

The auditor's opinion in the Independent Auditors' Report states that "In our opinion, the financial statements referred to above present fairly, in all ____ respects, the financial position of the Company..."

material respects because we are not 100% sure

Auditors are responsible to obtain reasonable assurance that clients are in compliance with ______.

only laws having a direct and material effect on financial statements

Unlike auditors of nonpublic companies, auditors of large public companies are required to ______

provide assurance on the effectiveness of internal controls

When an item in the financial statements is not presented in accordance with GAAP and GAAS, but not significant or material enough to overshadow an overall opinion or misstate the financial statements, the auditor will issue a(n) __

qualified opinion

As alternatives to a report with an unmodified or unqualified opinion, auditors may issue a report with a(n) ___ opinion, a(n) __ opinion or a disclaimer of opinion

qualified opinion adverse opinion

A CPA firm should establish adequate ____ policies and procedures to provide reasonable assurance that it follows professional standards on every engagement

quality control

board of directors

representation of shareholders

audit committee

sub committee of board of directors they are responsible for governors

A peer review in which the evaluator considers the CPA firm's system of quality control to perform accounting and auditing work is called a

system review

what is not included in an audit report with an unqualified opinion for a nonpublic company?

that all material instances of fraud have been identified

In the audit report for a public company, the responsibilities of management are described in _____

the Basis for Opinion paragraph

which organization can revoke the right to practice as a CPA?

the applicable state board of accountancy

what is not included in an integrated audit report for a public company?

the report stating that the audit was performed in accordance with AICPA standards

Under PCAOB standards, when auditors are taking no exceptions and inserting no modifications in the report, a(n) ______ opinion is issued.

unqualified/unmodified opinion

what is an adverse audit opinion?

when financial statements are not fairly presented in that they are pervasively misstated in correlation w GAAP

GAAS (Generally Accepted Auditing Standards) pre-sox

-AICPA is responsible for both public and nonpublic

GAAS (Generally Accepted Auditing Standards) post-sox

-AICPA is responsible for non public while PCAOB is for public companies -big public companies were called accelerated firms and require internal control opinion -smaller public firms were called non accelerated and they don't need internal control opinion

purpose of an audit

-AICPA, nonpublic companies -auditors responsible for information risk -provide opinion on if FS are presented fairly (in all material respects) to enhance degree of confidence

items that are the same for public and nonpublic company standard audit reports?

-The word "Independent" is included in the title. -The name used to sign the report. -The rules for proper dating of the report.

Auditor actions in performing the audit

-To express an opinion, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from fraud or error

Professional Skepticism includes:

-a questioning mind -being alert to conditions that may indicate possible misstatement due to error -critical assessment of audit evidence

premise of an audit

-an audit in accordance to GAAP (nonpublic companies dont have to follow GAAP) a.prep and fair presentation of FS in accordance with the applicable financial reporting framework: design, implement, and maintenance control of internal control b. to provide auditors with all records they need, any additional info auditor might request about management and those charged with governance (audit committee and board of directors)

Engagement reviews

-are of a lesser scope than system reviews -are only available for CPA firms that do not perform audits

Reporting the results of an audit

-creates a report based on an opinion in accordance with the auditors findings, or states that an opinion cant be expressed - states whether the FS are presented fairly, in all material aspects

personal responsibilities of the auditor

-for having appropriate competence and capabilities to perform audit -complying w ethical requirements -exercising professional skepticism - analyzing the financial statements

The PCAOB ______

-may make referrals to the Justice Department to consider criminal cases -requires all firms that audit SEC registrants to register with them -performs inspections of audit practices of registered public accounting firms

two types of fraud?

-misappropriation of assets (stealing, individual) -fraudulent financial reporting (systemic weakness, weak internal control)

AICPA (American Institute of Certified Public Accountants) standards for public and nonpublic companies

-no standard or regulatory for public companies but AICPA Code of Professional Conduct does apply to AICPA members -establishes standards for nonpublic companies 1. auditing 2. attestation 3. accounting and review (prep, compile, review) 4. quality control 5. independence 6. ethical behavior

How do auditors obtain reasonable assurance?

-plans work and supervises assistants -applies appropriate materially levels -identify and asses risk of material misstatement -obtain sufficient appropriate audit evidence

what is audit evidence?

-sufficient (enough time, quantity) and appropriate (quality) info used by the auditor to come to the audit opinion

The PCAOB audit "Basis for Opinion" paragraph describes or alludes to _____

-the nature of a PCAOB audit -registration requirements -independence requirements

Obtaining absolute assurance is not possible due to:

-time and cost constraints -the nature of financial reporting -he nature of audit procedures

When auditors determine that the financial statements follow GAAP and raise no other issues or concerns, the auditors will issue a(n) ____ opinion under PCAOB standards or a(n) ____ opinion under AICPA standards

-unqualified opinion -unmodified opinion

PCAOB (Public Company Accounting Oversight Board) standards for public and non-public companies

1. establishes standards of PUBLIC companies -auditing -quality control -independence -ethical behavior 2. registers CPA firms but can also revoke firms registration 3. performs inspections on public company audit practices -no standard setting for nonpublic companies

State Board of Accountancy

1. license CPAs and CPA firms to practice accounting in their state and can revoke license 2. have regulatory for both public and nonpublic companies 3. state board adopt AICPA and PCAOB standards but might have their own standards

order of the auditor's report for a nonpublic company

1. title 2. management responsibility 3. auditors responsibility 4. opinion

which opinion is the best to worst

1. unmodified because it means that nothing was wrong 2. qualified/modified 3. adverse 4. disclaimer is the worst

Which of the following is NOT included in the current PCAOB framework? -Other Matters Associated with Audits -AICPA Auditing Standards -Matters Relating to Filings under Federal Securities Laws -Auditor Reporting

AICPA Auditing Standards Reason: The PCAOB has its own General Auditing Standards.

who writes GAAP and who prepares using GAAP

FASB (Financial Accounting Standards Board) writes it and managers need to apply to GAAP when preparing FS for auditors

A source of nonauthorative guidance for use when when there is no authoritative guidance available

FASB Concepts Statements