Chapter 2 Principles of Auditing & Other Assurance Services

An audit provides reasonable assurance of detecting material: Fraudulent Financial Misappropriation Reporting of Assets (1) Yes Yes (2) Yes No (3) No Yes (4) No No

(1) Yes Yes

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 (1) Yes Yes (2) Yes No (3) No Yes (4) No No

(2) Yes No

Which of the following statements concerning auditor identification of client noncompliance with laws is correct? 1. 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. 2. 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. 3. An auditor considers compliance with laws from the perspective of the reliability of management's representations rather than their relation to audit objectives derived rom financial statement assertions. 4. An auditor has no responsibility to detect client noncompliance with laws that have a direct effect on the financial statements.

1. 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.

The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA?

Auditing standards applicable to audits of nonpublic companies.

Blane, an auditor for Femi & Co. LLP, has been asked to draft an auditors' report for Sole Shoes Inc., a nonpublic company. The report should include:

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

An attestation engagement: A) Has as its primary source of standards the assurance standards. B) Includes a report on subject matter, or on an assertion about subject matter. C) Includes search and verification procedures for all major accounts. D) Is ordinarily an examination, review or compilation engagement.

B.) Includes a report on subject matter, or on an assertion about subject matter.

Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients?

If audit procedures reveal noncompliance, the auditors should take appropriate actions

Which of the following is not one of the forms of attestation presented in the AICPA Statements on Standards for Attestation Services:

Inspection

Auditing standards define unintentional misstatements or omissions of amounts or disclosures in the financial statements as_______.

errors

True or false: The only difference between a public company and nonpublic company standard audit report is the identification of the standards used to conduct the audit (PCAOB vs. GAAP)

false: this is one difference but there are other organizational and detail differences

A financial reporting framework is a set of criteria used to prepare:

financial statements

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

An intentional misstatement of inventory to overstate net income is considered:

fraud

The auditor's standard of independence is violated when an auditor:

holds shares of stock in the company that he audits

Materiality depends on the _______ and the nature of the item.

dollar amount

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

integrated internal control

Auditors have the same responsibility regarding ______ as they have for material errors and fraud.

laws having a direct effect on the financial statements

Preparing proper financial statements for the use of stockholders and creditors is the responsibility of _______ .

management

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

registration requirements independence requirements the nature of a PCAOB audit

If the auditors deem that the financial statement are not fairly presented, they will issue a(n) _______ opinion.

adverse

When the auditors discover that an audit client has committed an illegal act they will ordinarily report it to the: 1. Audit committee of the company being audited. 2. Securities and Exchange Commission on Form 8-M. 3. Justice Department of the U.S. government. 4. American Institute of Certified Public Accountants Division of Professional Ethics.

1. Audit committee of the company being audited

Select the term that matches with the appropriate description. No reply is used more than once. 1. PCAOB 2. Quality control policies 3. IAASB 4. Inspections 5. IFAC 6. KAMs 7 CAMs 8. Financial reporting framework 9. Professional skepticism 10. Fraud

1. PCAOB - Established by the Sarbanes-Oxley Act of 2002 2. Quality control policies - The subject of peer review 3. IAASB - Issues international standards on auditing 4. Inspections - Requirement for all CPA firms with issuer clients 5. IFAC - A worldwide organization of national accounting bodies 6. KAMs - Matters of most significant in the audit of the financial statements. 7. CAMs - Matters involving especially challenging, subjective, or complex auditor judgement. 8. Financial reporting framework - Criteria used to determine, measurement, recognition, representation and disclosure of material items 9. Professional skepticism - Questioning mind 10. Fraud - Intentional misstatement

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: 1. 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. 2. The auditors should change the financial statements to show the valuation they consider proper. 3. The difference of opinion should be submitted to arbitration by the FASB. 4. The auditors should withdraw from the engagement.

1. The financial 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.

A public company unqualified audit report is least likely to have which of the following titled sections? 1. Opinion 2. Generally accepted auditing standards 3. Basis for opinion 4. Critical audit matters

2. Generally accepted auditing standards

The AICPA Principles Underlying a GAAS audit, include a requirement that: 1. Auditors only use CPAs on an engagement 2. Management provides the auditors with unrestricted access to individuals within the entity from whom the auditor determines it necessary to obtain audit evidence. 3. Auditors provide an opinion with limited assurance about whether the financial statements are free from material misstatement. 4. Auditors maintain objective skepticism when performing the audit.

2. Management provides the auditors with unrestricted access to individuals within the entity from whom the auditor determines it necessary to obtain audit evidence.

The GASB promulgates standards for: 1. The federal government 2. State and local governments 3. All governmental organizations 4. General-purpose entities

2. State and local governments

Which of the following is not a reason why auditors provide reasonable assurance, and not absolute assurance? 1. The nature of financial reporting 2. The nature of auditors' independence requirements. 3. The nature of audit procedures. 4. The need to conduct an audit within a reasonable period of time at a reasonable cost.

2. The nature of auditors' independence requirements

Which of the following is an element of quality control for a CPA firm? 1. Independence and freedom from bias. 2. Acceptance and continuance of personnel. 3. Engagement performance. 4. Supervision.

3. Engagement performance

Which is correct concerning an audit requirement that is "unconditional"? 1. The word "should" precedes it. 2. The auditor must comply with the requirement unless the auditor demonstrates and documents that alternative actions were sufficient. 3. The auditor must fulfill the requirement in all cases where that requirement is relevant. 4. Not performing the requirement will ordinarily result in permanent revocation of the auditor's CPA license.

3. The auditor must fulfill the requirement in all cases where that requirement is relevant.

Which of the following statements is most accurate in describing an auditor's responsibility to detect errors and fraud? 1. The auditor should consider the client's internal control, and design the audit to provide reasonable assurance of detecting all errors and fraud. 2. 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. 3. 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. 4. 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.

4. 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.

An adverse opinion is most likely to be included in an audit report when: 1. A standard unmodified opinion is necessary. 2. A public company is involved. 3. A client refuses to allow an auditor to perform a particular procedure 4. The financial statements depart from GAAP

4. The financial statements depart from GAAP

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 system of quality control.

An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unmodified auditors' report. From this the investor may conclude that: A) Any disputes over significant accounting issues have been settled to the auditors' satisfaction. B) The auditors are satisfied that Sundby is operationally efficient. C) The auditors have ascertained that Sundby's financial statements have been prepared accurately. D) Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate.

A.) Any disputes over significant accounting issues have been settled to the auditors' satisfaction.

Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: Fraudulent Financial Reporting /Misappropriation of Assets A) Yes Yes B) Yes No C) No Yes D) No No

A.) Yes, Yes

An auditor has concluded that the financial statements are not fairly presented in that they are pervasively misstated. The most appropriate type of audition opinion is:

Adverse

Which of the following is not a type of auditors' opinion? 1. Unmodified 2. Qualified 3. Advisory 4. Disclaimer

Advisory

Audit firms that are subject to inspections by the PCAOB staff include:

Audit firms that are registered with the PCAOB

An audit should be designed to obtain reasonable assurance of detecting material misstatements due to: A) Errors. B) Errors and fraud. C) Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts. D) Errors, fraud and noncompliance with all laws.

C.) Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts and others

An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of: A) Compilation reports. B) Documentation of procedures followed on a review C) Overall system of quality control. D) Review reports.

C.) Overall system of quality control

Maria needs to research an issue for a nonpublic company. Identify which source she is most likely to search first:

FASB Codification

Which of the following does the FASB consider a source of nonauthoritative guidance for use when there is no authoritative guidance available?

FASB Concepts Statements

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

False

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

False

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

False

International auditing standards have be developed by the AICPA.

False

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

False

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

False

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

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

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

False

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

False

True or false: If additional information is required, an auditor cannot issue an unmodified opinion.

False

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

False

True or false: The AICPA requires specific quality control procedures.

False : The AICPA states that specific procedures depend upon the size and nature of the firm's practice.

Which is more difficult to detect during an audit?

Fraud

What are the appropriate standard use for audit guidance for: Nonpublic companies in the United States Public Company in the United States International companies

Nonpublic companies in the United States - AICPA Standards Public Company in the United States - PCAOB Standards International companies - IAASB Standards

An audit performed in accordance with generally accepted auditing standards generally should:

Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.

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.

Relevant ethical requirements

The highest authoritative guidance in the GAAS Hierarchy are:

Statements on Auditing Standards

Which of the following is not explicitly included in a standard report for a nonpublic company?

That internal control of the client was satisfactory.

Which of the following organizations can revoke the right of an individual to practice as a CPA?

The applicable state board of accountancy

Which of the following are PCAOB Attestation General Standards?

The engagement shall be performed by a practitioner having adequate knowledge of the subject matter. Due professional care shall be exercised in the planning and performance of the engagement.

Which of the following is not included in an integrated audit report on the financial statements of a public company?

The report states that the audit was performed in accordance with AICPA standards.

Which of the following is a PCAOB Attestation Standard of Fieldwork?

The work shall be adequately planned and assistants shall to be properly supervised.

Which of the following best describes the primary purpose of Statements on Auditing Standards?

They are authoritative statements, enforced through the Code of Professional Conduct.

A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is:

To minimize the likelihood of association with clients whose management lack integrity

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

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

True

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

True

Fraud is a term that is used to refer to intentional misstatements of financial statements.

True

GAAP represents a financial reporting framework.

True

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

True

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

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

True

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 judgement the determination of what constitutes sufficient appropriate audit evidence.

True

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

True

If the auditors are unable to determine the overall fairness of the financial statements, they will issue a(N) _______ opinion.

disclaimer of

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.

adequate disclosure

Jones, CPA samples a large amount of the clients invoices to reduce the risk that auditors may unknowingly fail to modify the opinion on financial statements that are materially misstated. This is known as _______ risk.

audit

Which of the following is not included as a level of service in the AICPA attestation standards?

audit

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

Effective in 2019 (large public companies) and 2020 (other public companies) the PCAOB requires the auditors to present _______ _______ matters in their report

critical audit

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

only laws having a direct effect on financial statements

To obtain reasonable assurance, the auditor should:

plan the work and properly supervise assistants determine and apply appropriate materiality levels throughout the audit.

An auditor's personal responsibility to maintain a questioning mind, be alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence is called:

professional skepticism

leadership responsibilities for Quality

promotes an internal culture based on the recognition that quality is essential in performing engagements

The auditors states that there is a limitation on the scope of the audit, but not so far as to overshadow an overall opinion when issuing a(n) _______ opinion

qualified

When an item in the financial statements is not presented in accordance with applicable accounting principles, but not significant or material enough to overshadow an overall opinion or misstate the financial statements, the auditor will issue a(n) _______ opinion.

qualified

In performing an audit, the auditors determine that the allowance for uncollectible accounts is not sufficient. If management does not agree, the auditors will likely:

qualify their opinion

Standards that provide CPA firms with guidance to provice reasonable assurance that the firm's engagements are conducted in accordance with applicable professional standards are called:

quality control standards

In a(n) _______ audit report the auditors are taking no exceptions and inserting no modifications in the report.

standard

acceptance of client relationships

the firm will undertake engagements only where the firm is competent to perform the engagement

monitoring

the policies and procedures related to quality control are relevant, adequate, and operating efficiently

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