Test bank for Audit and assurance services by Alvin Alrens

Answer: A Terms: Auditing financial accounting data primary concern Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking skills 4 The trait that distinguishes auditors from accoun

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Auditing and Assurance Services, 14e (Arens)

Chapter 1 The Demand for Audit and Other Assurance Services

Auditor Observation

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3) Evidence is paramount to audit and attestation engagements List the four basic types of audit

evidence

Answer: The four types of audit and attestation evidence include:

1 Electronic and documentary data about economic transactions

2 Written and electronic communications with outsiders

3 Observations by the auditor

4 Oral testimony of the auditee (client)

Terms: Basic types if audit evidence

Diff: Easy

Objective: LO 1-1

AACSB: Reflective thinking skills

4) The criteria by which an auditor evaluates the information under audit may vary with the information being audited

5) The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards

6) The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies A) True

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7) The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting

8) Only companies that file annual statements with the Securities and Exchange Commission are required

to have an annual external audit

2) Which department provides quantitative information in order for management and others to make decisions?

A) management information systems

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3) In "auditing" financial accounting data, the primary concern is with:

A) determining whether recorded information properly reflects the economic events that occurred during the accounting period

B) determining if fraud has occurred

C) determining if taxable income has been calculated correctly

D) analyzing the financial information to be sure that it complies with government requirements

Answer: A

Terms: Auditing financial accounting data primary concern

Diff: Moderate

Objective: LO 1-2

4) The trait that distinguishes auditors from accountants is the:

A) auditor's ability to interpret accounting principles generally accepted in the United States

B) auditor's education beyond the Bachelor's degree

C) auditor's ability to interpret FASB Statements

D) auditor's accumulation and interpretation of evidence related to a company's financial statements Answer: D

Terms: Distinguishes auditors from accountants

Diff: Challenging

Objective: LO 1-2

5) Discuss the differences and similarities between the roles of accountants and auditors What additional expertise must an auditor possess beyond that of an accountant?

Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making To provide relevant information, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information In addition, accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost

The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period Because U.S or international standards provide the criteria for evaluating whether financial information is properly recorded, auditors must thoroughly understand those accounting standards In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence It is this

expertise that distinguishes auditors from accountants Determining the proper audit procedures,

deciding the number and types of items to test, and evaluating the results are unique to the auditor

Terms: Roles of accountants and auditors

Diff: Moderate

Objective: LO 1-2

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2) The use of the Certified Public Accountant title is regulated by:

A) the federal government

B) state law through a licensing department or agency of each state

C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees

D) the Securities and Exchange Commission

Answer: B

Terms: Certified Public Accountant title

Diff: Moderate

Objective: LO 1-3

3) Financial statement users often receive unreliable financial information from companies Which of the

following is not a common reason for this?

A) Complex exchange transactions

4) Explain what is meant by information risk, and list the four causes of this risk

Answer: Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate Four causes of information risk are:

• remoteness of information,

• biases and motives of the provider,

• voluminous data, and

• complex exchange transactions

Terms: Information risk definition and causes

Diff: Easy

Objective: LO 1-3

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Learning Objective 1-4

1) An audit of historical financial statements is most often performed to determine whether the:

A) organization is operating efficiently and effectively

B) entity is following specific procedures or rules set down by some higher authority

C) management team is fulfilling its fiduciary responsibilities to shareholders

D) none of these choices

1) In the audit of historical financial statements, what accounting criteria is most common?

A) Regulatory accounting principles

B) International financial reporting standards

C) Generally accepted accounting principles

2) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made

by another party is a(n):

A) accounting and bookkeeping service

3) Three common types of attestation services are:

A) audits, reviews, and attestations regarding internal controls

B) audits, verifications, and attestations regarding internal controls

C) reviews, verifications, and attestations regarding internal controls

D) audits, reviews, and verifications

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4) Which of the following services provides the lowest level of assurance on a financial statement? A) A review

B) An audit

C) Neither service provides assurance on financial statements

D) Each service provides the same level of assurance on financial statements

Answer: A

Terms: Service provides lowest level of assurance on a financial statement

Diff: Moderate

Objective: LO 1-5

5) Which of the following is not a SysTrust Services principle as defined by the AICPA?

6) The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company?

A) Reviews of quarterly financial statements

B) Preparation of corporate tax returns

C) Most consulting services

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7) Which of the following are required to have a written report regarding the assertion of another party? A)

Financial

Statement

Audit

Operational Audit

Compliance Audit

Attestation Engagement

Assurance Engagement

Compliance Audit

8) Attestation services on information technology include WebTrust services and SysTrust services Which

of the following statements most accurately describes SysTrust services?

A) SysTrust services provide assurance on business processes, transaction integrity and information

processes

B) SysTrust services provide assurance on system reliability in critical areas such as security and data

integrity

C) SysTrust services provide assurance on internal control over financial reporting

D) SysTrust services provide assurance as to whether accounting personnel are following procedures

prescribed by the company controller

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9) Two types of attestation services provided by CPA firms are audits and reviews Discuss the

similarities and differences between these two types of attestation services Which type provides the least assurance?

Answer: In both the review and audit of the historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards The CPA provides a lower level of assurance for reviews of financial statements compared to the high level for audits, therefore less

evidence is needed A review is often adequate to meet financial statement users' needs It can be

provided by a CPA firm at a much lower fee than an audit because less evidence is needed

Terms: Attestation services; Audits and reviews of historical financial statements

Diff: Moderate

Objective: LO 1-5

10) What is an engagement to attest on internal control over financial reporting?

Answer: For an audit of internal control over financial reporting, management asserts that internal controls have been developed and implemented following well established criteria Section 404 of the Sarbanes-Oxley Act requires public companies to report management's assessment of the effectiveness of internal control over financial reporting The Act also requires auditors to attest to the effectiveness of internal control over financial reporting This evaluation, which is integrated with the audit of financial statements, increases user confidence about future financial reporting, because effective internal controls reduce the likelihood of future misstatements in the financial statements

Terms: Engagement to attest on internal control over financial reporting

Diff: Moderate

Objective: LO 1-5

Topic: SOX

11) What are the five categories of attestation services?

Answer: The five categories of attestation services include:

• audit of historical financial statements,

• attestation on internal control over financial reporting,

• review of historical financial statements,

• attestation services on information technology, and

• other attestation services that may be applied to a broad range of subject matter

Terms: Categories of attestation services

Diff: Moderate

Objective: LO 1-5

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12) What is a WebTrust engagement? What is a SysTrust engagement? How do they differ?

Answer: WebTrust is a service provided by a CPA where the CPA provides assurance that the Web Site

owner has met established criteria related to business practices, transaction integrity, and information processes

SysTrust is a service provided by a CPA to evaluate and test a system reliability in areas such as security

and data integrity There are five principles that must be addressed on a SysTrust engagement: security,

availability, processing integrity, online privacy, and confidentiality

WebTrust is primarily designed to provide assurance to third party users of a Web site SysTrust provides

assurance to management, the board of directors or third parties about the reliability of information systems used to generate real-time information

Terms: WebTrust and SysTrust engagements

Diff: Challenging

Objective: LO 1-5

13) CPA firms are never allowed to provide bookkeeping services for clients

14) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting

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1) One objective of an operational audit is to:

A) determine whether the financial statements fairly present the entity's operations

B) evaluate the feasibility of attaining the entity's operational objectives

C) make recommendations for improving performance

D) report on the entity's relative success in attaining profit maximization

Answer: C

Terms: Objective of operational audit

Diff: Moderate

Objective: LO 1-6

2) An examination of part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit?

3) An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n):

A) audit of financial statements

4) Which one of the following is more difficult to evaluate objectively?

A) Presentation of financial statements in accordance with generally accepted accounting principles B) Compliance with government regulations

C) Efficiency and effectiveness of operations

D) All three of the above are equally difficult

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5) Which of the following audits can be regarded as generally being a compliance audit?

A) IRS agents' examinations of taxpayer returns

B) GAO auditor's evaluation of the computer operations of governmental units

C) An internal auditor's review of a company's payroll authorization procedures

D) A CPA firm's audit of a public company

Answer: A

Terms: Compliance audit

Diff: Challenging

Objective: LO 1-6

6) Discuss the similarities and differences between financial statement audits, operational audits, and compliance audits Give an example of each type

Answer: Financial statement audits, operational audits, and compliance audits are similar in that each type of audit involves accumulating and evaluating evidence about information to ascertain and report

on the degree of correspondence between the information and established criteria and/or procedures, rules, or regulations The differences between each type of audit are the information being examined and the criteria used to evaluate the information An operational audit evaluates the efficiency and

effectiveness of and part of an organization's operating procedures and methods At completion of an operational audit, management normally expects recommendations for improving operations In

operational auditing, the reviews are not limited to accounting It is more difficult to objectively evaluate whether the efficiency and effectiveness of operations meets established criteria than it is for compliance and financial statement audits Also, establishing criteria for evaluating the information in an operational audit is extremely subjective Thus, operational auditing is more like management consulting than what

is usually considered auditing A compliance audit is conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority Results of compliance audits are typically reported to management, like in the operational audits, rather than to outside users as

is done with financial statement audits A financial statement audit is conducted to determine whether financial statements are stated in accordance with specified criteria, normally the U.S or international standards Auditors not only focus on accounting transactions, but also focus on an integrated approach

in which both the risk of misstatements and the operating controls are considered The auditor must have

a thorough understanding of the entity and its environment

An example of a financial statement audit would be the annual audit of IBM Corporation, in which the external auditors examine IBM's financial statements to determine the degree of correspondence between those financial statements and generally accepted accounting principles An example of an operational audit would be an internal auditor's evaluation of whether the company's computerized payroll-

processing system is operating efficiently and effectively An example of a compliance audit would be an IRS auditor's examination of an entity's federal tax return to determine the degree of compliance with the Internal Revenue Code

Terms: Financial statement audits, operational audits and compliance audits

Diff: Challenging

Objective: LO 1-6

AACSB: Analytic skills

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7) To do an audit, it is necessary for information to be in a verifiable form and some criteria by which the auditor can evaluate the information Detail the information and criteria that would be used for:

(A) an independent CPA firm audits a company's historical financial statements

(B) an Internal Revenue Service auditor who audits that same company's tax return

(C) an internal auditor use when performing an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively

Answer: (A) The information used by a CPA firm in a financial statement audit is the financial

information in the company's financial statements The most commonly used criteria are applicable U.S generally accepted accounting standards or International Financial Reporting Standards (IFRS)

(B) The information used by an IRS auditor is the financial information in the company's federal tax return The criteria are the internal revenue code and interpretations

(C) The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month The criteria would consist of company standards for departmental efficiency and effectiveness

Terms: Information and criteria used by CPA firm, Internal Revenue Service auditor, and internal auditor

Diff: Easy

Objective: LO 1-1 and LO 1-6

8) The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles

9) Results of compliance audits are typically reported to someone within the organizational unit being audited rather than to a broad spectrum of outside users

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1) Match the engagement described to the (A) type of audit and (B) auditor that would perform the engagement Each engagement will have an answer from List-A and List-B An answer can be used once, more than once, or not at all

List A - Type of Audit: List B - Type of Auditor:

1 Evaluate a company's payroll processing for economy

2 Evaluate/determine if bank covenants are being met

3 Evaluate financial statements that are to be submitted to a bank

4 Evaluate the promptness of materials inspection in a manufacturer's receiving department

5 Determine if Medicare reimbursements are in accordance with the Healthcare Financing

Administration (HCFA)

6 Determine if the tax return of a multinational corporation is in accordance with the tax code

7 Determine if a public school is properly applying their reimbursement for the payment-in-kind program

8 Determine the effectiveness of the department of defense starwars project

AACSB: Analytic skills

2) Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors

Answer: The roles of all four types of auditors are similar in that they involve the accumulation and evaluation of evidence about information to ascertain and report on the degree of correspondence between the information and established criteria The differences in their roles center around the

information audited and the criteria used to evaluate that information Independent auditors primarily audit companies' financial statements GAO auditors' primary responsibility is to perform the audit function for Congress IRS auditors are responsible for the enforcement of federal tax laws Internal auditors primarily perform operational and compliance audits for their employing company

Terms: Roles of independent auditors, GAO auditors, internal revenue agents and internal auditors

Diff: Moderate

Objective: LO 1-7

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3) The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts

1) The three requirements for becoming a CPA include all but which of the following?

A) Uniform CPA examination requirement

2) List and discuss the three primary requirements to become a CPA

Answer: The three primary requirements for becoming a CPA are:

• Educational requirement An undergraduate degree or a graduate degree with a major in accounting is

required Most states now require 150 semester hours for licensure and some states require 150 semester hours before taking the CPA exam

• Uniform CPA examination requirement This is a four-part, computer-based examination with

components on auditing and attestation, financial accounting and reporting, regulation, and business environment and concepts

• Experience requirement The experience requirement varies from state to state with some states

requiring no experience, while other states require up to two years of audit experience

Terms: Primary requirements to become CPA

Diff: Easy

Objective: LO 1-8

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Chapter 2 The CPA Profession

1) The legal right to perform audits is granted to a CPA firm by regulation of:

A) each state

B) the Financial Accounting Standards Board (FASB)

C) the American Institute of Certified Public Accountants (AICPA)

D) the Audit Standards Board

Answer: A

Terms: Legal rights to perform audits

Diff: Moderate

Objective: LO 2-1

2) The four categories for describing the size of audit firms include: the Big Four international firms; national firms; regional and local firms; and small firms Which of the following is not a characteristic of a small firm?

A) Most have fewer than 25 professionals

B) They perform audits on small and not-for-profit businesses

C) Tax services are more important to their practice than auditing

D) They do not audit publically traded companies

Answer: D

Terms: Four categories for describing size of audit firms

Diff: Moderate

Objective: LO 2-1

3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publically traded audit clients Which of the following is true for auditors of publically traded companies?

I They are restricted from providing consulting services to privately held companies

II There is no restriction on providing consulting services to non-audit clients

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4) Which of the following statements is true as it relates to limited liability partnerships?

A) Only senior partners are liable for the partnership's debts

B) Partners have no liability in a limited liability partnership arrangement

C) Partners are personally liable for the acts of those under their supervision

D) All partners must be AICPA members

Answer: C

Terms: Limited liability partnerships

Diff: Challenging

Objective: LO 2-1

5) List and describe the three factors that influence the organizational structure of all CPA firms What are the most common forms of CPA firm organization?

Answer: The three factors that influence the organization of a CPA firm include:

1 Independence from clients Independence is important as it allows the auditors to remain unbiased in drawing conclusions on client financial statements

2 Auditor Competency Competency allows auditors to conduct audits and perform services effectively and efficiently

3 Litigation The increased litigation risk faced by auditors increases audit firm business risk Certain organizational structures allow a degree of personal protection to individual firm members

Common forms of audit firm organization include:

• Limited Liability Partnerships

• Limited Liability Companies

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6) List and describe the six organizational structures available to CPA firms

Answer: CPA firms can take one of six organizational forms:

• Proprietorship This form is limited to firms with only one owner

• General partnership This form is similar to a proprietorship, except that it applies to multiple owners

• General corporation Unlike a general partnership, shareholders in a general corporation are liable only

to the extent of their investment in the corporation

• Professional corporation Professional corporations can have one or more shareholders Personal

liability protection for shareholders in professional corporations varies widely from state to state

• Limited liability company This form combines the most favorable attributes of a general corporation

and a general partnership LLCs are taxed like a general partnership, but its owners have limited personal liability like shareholders of a general corporation

• Limited liability partnership An LLP is structured and taxed like a general partnership However, the

personal liability protection of an LLP is less than that of a general corporation or an LLC, but it is greater than a general partnership Many accounting firms now operate as LLPs

Terms: Organizational structures available to CPA firms

Diff: Moderate

Objective: LO 2-1

7) Many small/local accounting firms do not perform audits as their primary services to their clients include accounting and tax

8) All of the Big Four and many of the smaller CPA firms now operate as Limited Liability Partnerships A) True

9) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publically traded audit clients

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10) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation

A) Auditing Standards Board

B) American Institute of Certified Public Accountants

C) Public Oversight Board

D) Public Company Accounting Oversight Board

2) Members of the Public Company Accounting Oversight Board are appointed and overseen by:

A) the U.S Congress

B) the American Institute of Certified Public Accountants

C) the Auditing Standards Board

D) the Securities and Exchange Commission

3) The Public Company Accounting Oversight Board:

A) perform inspections of the quality controls at audit firms that audit public companies

B) establish auditing standards that must be followed by CPAs on all audits

C) oversee auditors of private companies

D) perform any of the above functions

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4) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm The PCAOB:

A)

can enforce disciplinary

action against the

accounting firm

report the matter to the Securities and Exchange Commission

suspend the license to practice of the CPA guilty of the violation

B)

action against the

accounting firm

C)

action against the

accounting firm

D)

action against the

accounting firm

Answer: The PCAOB has responsibility for providing oversight to auditors of public companies,

establishing auditing and quality control standards for public company audits and performing

inspections of the quality controls at audit firms performing those audits These functions were formerly the responsibility of the American Institute of Certified Public Accountants

Terms: Sarbanes-Oxley Act; Public Company Accounting Oversight Board primary functions

Diff: Moderate

Objective: LO 2-2

Topic: SOX

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6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of

publically traded and private companies

7) All CPA firms registered with the PCAOB are required to undergo a peer review annually

2) The form that must be filed with the Securities and Exchange Commission whenever a company plans

to issue new securities to the public is the:

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3) The AICPA has authority to establish standards and rules in all but which of the following areas? A) Auditing standards applicable to financial statements of private companies

B) Compilation and review standards

4) Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles

Answer: The overall purpose of the SEC is to assist in providing investors with reliable information upon which to make investment decisions As a result of its authority for specifying financial reporting

requirements, the SEC has considerable influence in setting generally accepted accounting principles Although the SEC has taken the position that accounting principles should be set by the profession (FASB), the SEC's opinion is generally considered in any major change in GAAP proposed by the FASB

Terms: Securities and Exchange Commission influence on setting generally accepted accounting principles

Diff: Moderate

Objective: LO 2-3

5) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements

6) Form 10-K must be filed with the SEC whenever a public company experiences a significant event A) True

7) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions

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1) Statements on Standards for Accounting and Review Services are issued by the:

A) Accounting and Review Services Committee

B) Professional Ethics Executive Committee

C) Securities and Exchange Commission

D) Financial Accounting Standards Board

Answer: A

Terms: Statements on Standards for Accounting and Review Services (SSARS)

Diff: Moderate

Objective: LO 2-4

2) Which of the following is not an essential component of quality control?

A) Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies B) Policies and procedures to ensure that the work performed by firm personnel meet applicable

professional standards

C) Policies to ensure that personnel maintain their independence in fact and in appearance

D) Policies that ensure that monitoring activities are effectively applied

Answer: A

Terms: Component of quality control

Diff: Moderate

Objective: LO 2-4

3) What are the major functions of the AICPA?

Answer: Major functions of the AICPA include:

• Establishing standards and rules that practicing CPAs must follow These standards consist of auditing standards for auditors of private companies, compilation and review standards, other attestation

standards, and the Code of Professional Conduct

• Research and publication on many different subjects related to accounting, auditing, attestation and

assurance services, management consulting services, and taxes AICPA publications include the Journal of

Accountancy, industry audit guides, periodic updates of the Codification of Statements on Auditing

Standards, and the Code of Professional Conduct

• Promoting the accounting profession through organizing national advertising campaigns

• Developing specialist certifications to help market and ensure the quality of services in specialized practice areas

• Writing and grading the uniform CPA examination

• Providing continuing education seminars for its members

Terms: Major functions of AICPA

Diff: Moderate

Objective: LO 2-4

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4) Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors A) True

5) Membership in the AICPA is mandatory for all licensed practicing CPAs

6) Any public accounting firm can be a member of the AICPA if the firm meets the membership

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PCAOB Auditing Standards

2) For privately held companies who of the following is responsible for establishing auditing standards? A) Securities and Exchange Commission

B) Public Company Accounting Oversight Board

C) Auditing Standards Board

D) National Association of Accounting

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3) Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit:

A) both private and public companies

B) public companies only

C) private companies, public companies, and nonprofit entities

D) private companies only

I The "General" standards of GAAS will be termed "Responsibilities"

II The "Fieldwork" standards will be termed "Performance"

III The "Reporting" standards will be termed "Communications"

5) If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter, the auditor should generally seek guidance from which of the following sources?

A) Statements on Auditing Standards

B) Statements on Standards for Accounting and Review Services

C) Regulations issued by the Securities and Exchange Commission

D) The AICPA Code of Professional Conduct

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6) The Auditing Standards Board of the AICPA has undertaken a Clarity and Convergence Project whose aim is to make GAAS easier to read, apply and converge with International Audit Standards As a result the GAAS will become "Auditing Principles" The principles will be consistent with the three categories of GAAS Accordingly, which of the following is true?

I The General Standards will be termed Responsibilities Principles

II The Fieldwork Standards will be termed Performance Principles

III The Reporting Standards will be termed Communication Principles

7) Auditors of public companies should, in the absence of guidance issued by the PCAOB, follow

auditing standards issued by the SEC

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1) Which one of the following is not one of the three General Standards?

A) Proper planning and supervision

B) Independence of mental attitude

C) Adequate training and proficiency

D) Due professional care

Answer: A

Terms: General standards

Diff: Easy

Objective: LO 2-6

2) Which one of the following is not a Field Work Standard?

A) Adequate planning and supervision

B) Due professional care

C) Understand the entity and its environment including internal control

D) Sufficient appropriate audit evidence

Answer: B

Terms: Field Work Standards

Diff: Easy

Objective: LO 2-6

3) The generally accepted auditing standard that requires "Adequate technical training and proficiency" is normally interpreted as requiring the auditor to have:

A) formal education in auditing and accounting

B) worked for an entity similar to the entity being audited

C) independence in mental attitude

D) a graduate degree in a business field

Answer: A

Terms: General accepted auditing standards; Adequate technical training and proficiency

Diff: Easy

Objective: LO 2-6

4) Which of the following statements most accurately captures the intent of the standards of field work? A) Field work standards are primarily concerned with personal attributes necessary during the conduct

of the audit

B) Field work standards provide extensive guidance regarding the conduct of an audit

C) Field work standards are primarily directed at the auditor's planning, understanding of internal control, and evidence accumulation

D) Field work standards are primarily concerned with the conduct of substantive testing as opposed to testing of internal controls

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5) The Statements on Auditing Standards issued by the Auditing Standards Board:

A) interpret generally accepted auditing standards

B) are the equivalent of laws for audit practitioners

C) must be followed in all situations

D) are optional guidelines which an auditor may choose to follow or not follow when conducting an audit

Answer: A

Terms: Statements on Auditing Standards

Diff: Moderate

Objective: LO 2-6

6) An auditor need not abide by a particular auditing standard if the auditor believes that:

A) the issue in question is immaterial in amount

B) more expertise is needed to fulfill the requirement

C) the requirement of the standard has not been addressed by the PCAOB

D) any of the above three are correct

Answer: A

Terms: Auditor need not abide by a particular auditing standard

Diff: Moderate

Objective: LO 2-6

7) Under GAAS, which of the following reflects a concept from the general group?

A) The confirmation of accounts receivable

B) Completing an internal control questionnaire

C) The initial planning of the audit with the audit partner, manager, senior, staff and client personnel D) The assignment of audit personnel to an engagement where they have no financial interest

Answer: D

Terms: GAAS, general standards

Diff: Moderate

Objective: LO 2-6

8) The third general standard states that due care is to be exercised in the performance of an audit This standard is generally interpreted to require:

A) objective review of the adequacy of the technical training of firm personnel

B) thorough review of the existing internal control structure

C) critical review of work done at every level of supervision

D) periodic review of a CPA firm's quality control procedures

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

A) They are guides intended to set forth auditing procedures that are applicable to a variety of situations B) They are procedural outlines that are intended to narrow the areas of inconsistency and divergence of auditor opinion

C) They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment

D) They are interpretations that are intended to clarify the meaning of "generally accepted auditing standards."

Answer: D

Terms: Purpose of Statements on Auditing Standards

Diff: Moderate

Objective: LO 2-6

10) Hansen Corporation's stock is listed on a national stock exchange and registered with the Securities and Exchange Commission Hansen's management hires a CPA to perform an independent audit of Hansen's financial statements The primary objective of this audit is to provide assurance to the:

A) investors in Hansen Corporation's stock

B) stock exchange

C) Securities and Exchange Commission

D) management of Hansen Corporation

Answer: A

Terms: Primary objective of audit to provide assurance

Diff: Moderate

Objective: LO 2-6

11) Which of the following statements about Generally Accepted Audit Standards are true?

I They serve as broad guidelines to auditors for conducting an audit engagement

II They are sufficiently specific to provide any meaningful guide to practitioners

III They represent a framework upon which the AICPA can provide interpretations

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12) Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) should

be looked upon by practitioners as:

A) ideals to work towards, but which are not achievable

B) maximum standards that denote excellent work

C) minimum standards of performance that must be achieved on each audit engagement

D) benchmarks to be used on all audits, reviews, and compilations

Answer: C

Terms: Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS)

Diff: Challenging

Objective: LO 2-6

13) Statements on Auditing Standards issued by the AICPA's Auditing Standards Board are:

A) part of the generally accepted auditing standards under the AICPA Code of Professional Conduct

B) interpretations of generally accepted auditing standards and departures from such statements must be justified

C) interpretations of generally accepted auditing standards and such standards must be followed in every engagement

D) generally accepted auditing procedures that are not covered by the AICPA Code of Professional Conduct

Answer: B

Terms: Statements on Auditing Standards

Diff: Challenging

Objective: LO 2-6

14) List the ten generally accepted auditing standards and divide them into their proper category

Answer:

General Standards

• Adequate technical training and proficiency

• Independence in mental attitude

• Due professional care

Standards of Fieldwork

• Adequate planning and supervision

• Understand the entity and its environment including internal control

• Sufficient appropriate audit evidence

Standards of Reporting

• Whether statements were prepared in accordance with GAAP

• Circumstances when GAAP was not consistently followed

• Adequacy of informative disclosures

• Expression of opinion on financial statements as a whole

Terms: Generally Accepted Auditing Standards

Diff: Moderate

Objective: LO 2-6

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15) Distinguish between generally accepted auditing standards (GAAS) and generally accepted

accounting principles (GAAP) What professional organization establishes GAAS? What professional organization establishes GAAP?

Answer: Generally accepted auditing standards are general guidelines to help auditors meet their professional responsibilities in the audit of historical financial statements The general standards stress the important personal qualities that the auditor should possess The standards of field work concern evidence accumulation and other activities during the actual conduct of the audit The reporting

standards require the auditor to prepare a report on the financial statements taken as a whole, stating whether the statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) They are considered to be the minimum standards of performance for auditors to follow and are established by the Auditing Standards Board of the American Institute of Certified Public Accountants for private companies and by the Public Company Accounting Oversight Board for public companies Generally accepted accounting principles are the guidelines which an entity's management normally follows when preparing historical financial statements GAAP is established by the Financial Accounting Standards Board

Terms: Generally Accepted Auditing Standards

Diff: Easy

Objective: LO 2-5 and LO 2-6

16) Statements on Auditing Standards are considered authoritative literature

17) Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board

18) Statements on Auditing Standards (SASs) are considered to be interpretations of the ten generally accepted auditing standards

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1) Which of the following is not true for audit firms who audit publically traded companies?

A) They must undergo a PCAOB inspection on an annual basis if they audit more than 100 issuers B) They must have an AICPA peer review on all audit clients

C) They must have an AICPA peer review on all non-publically traded clients

D) The audit firm can choose which CPA firm they wish to conduct their AICPA peer review

Answer: B

Terms: Audit firms who audit publically traded companies

Diff: Moderate

Objective: LO 2-7

2) A basic objective of a CPA firm is to provide professional services to conform to professional

standards Reasonable assurance of achieving this basic objective is provided through:

A) continuing professional education

B) compliance with generally accepted reporting standards

C) a system of quality control

D) a system of peer review

Answer: C

Terms: Professional standards

Diff: Moderate

Objective: LO 2-7

3) Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with:

A) technical training that assures proficiency as a valuation expert

B) professional education that is required in order to perform with due professional care

C) knowledge required to fulfill assigned responsibilities

D) knowledge required to perform a peer review

Answer: C

Terms: Quality control; Continuing professional education and training activities

Diff: Moderate

Objective: LO 2-7

4) The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to:

A) provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities B) monitor the risk factors concerning misstatements that arise from the misappropriation of assets C) document objective criteria for the CPA firm's peer review

D) minimize the likelihood of associating with client's whose management may lack integrity

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5) Which of the following is an element of the CPA's quality control system that should be considered in establishing it's quality control policies and procedures?

A) Considering audit risk and materiality

B) Using statistical sampling techniques

C) Assigning personnel to engagements

D) Complying with laws and regulations

Answer: C

Terms: Quality control policies and procedures

Diff: Moderate

Objective: LO 2-7

6) Which one of the following is not true regarding the American Institute of Certified Public Accountants peer review requirement?

A) A CPA firm must develop and adhere to quality control standards

B) Peer reviews are mandatory

C) A CPA firm will lose AICPA eligibility if a peer review is not performed

D) Firms required to be registered with and inspected by the PCAOB are exempt

Answer: D

Terms: AICPA peer review

Diff: Challenging

Objective: LO 2-7

7) Discuss the relationship between quality control and generally accepted auditing standards

Answer: For a CPA firm, quality control encompasses the methods used to make sure that the firm meets its professional responsibilities to clients Quality control is closely related to, but distinct from, GAAS The standards recognize that a quality control system can provide only reasonable assurance, not a guarantee that auditing standards are followed A CPA firm must make sure that GAAS are followed on every audit Quality controls are the procedures used by the entire CPA firm that help it meet

requirements demanded by GAAS on every engagement in a consistent manner

Terms: Relationship between quality control and generally accepted auditing standards

Diff: Easy

Objective: LO 2-7

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8) List and describe the six elements of quality control Who establishes the standards for quality control? Answer:

• Leadership responsibilities for quality within the firm - Firm should promote that quality is essential in

performing engagements and should establish policies and procedures that support that culture

• Relevant ethical requirements - Personnel on engagement should maintain independence in fact and in

appearance, perform all professional responsibilities with integrity and maintain objectivity in

performing their professional responsibilities

• Human Resources - Policies and procedures should be established to provide the firm with reasonable

assurance that all new personnel are qualified to perform their work, work is assigned to personnel who have adequate training, and personnel should participate in continuing professional education

• Acceptance and continuation of clients and engagements - Policies and procedures should be established

for deciding whether to accept or continue a client relationship These policies should minimize the risk

of associating with a client whose management lacks integrity

• Engagement performance - Policies and procedures should exist to ensure that engagement personnel

perform work that meets applicable professional standards and the firm's standards of quality

• Monitoring - Policies and procedures should exist to ensure that the other four quality control

elements are being effectively applied

Quality control standards are established by the Auditing Standards Board for auditors of private companies and by the Public Company Accounting Oversight Board for auditors of public companies

Terms: Elements of quality controls

Diff: Moderate

Objective: LO 2-7

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9) Listed below are policies or procedures that the Crystal Cove audit firm has in place For each

identified policy or procedure state if it is a Generally Accepted Audit Standard (GAAS) or a Quality Control Standard

Audit firm Policy or Procedure

1 Independence in mental attitude

2 A client evaluation form

3 All personnel participate in continuing

professional education

4 Conducting the audit with professional

skepticism

5 Answering an independence questionnaire

6 Understand the client industry

7 Audit staff workpapers are reviewed by audit

seniors, then managers

8 Audit staff are supervised

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10) The following are definitions of terms that are listed on the right Match the definition with its associated term Each term can be used once, more than once or not at all

Definition

1 An organizational structure where professional

services are provided by one or more shareholders

2 The grantor of the right to practice public accounting

3 A report filed to indicate a significant event

4 Sets professional standards and rules for auditors

5 Oversees accounting firms who audit public

companies

6 An organizational structure where the owners are

taxed like a partnership and have limited personal

liability

7 A report that is filed when a company wishes to issue

new securities

8 The methods used to ensure the firm meets its

professional responsibilities to clients and others

9 Assists in providing investors with reliable

12 Fulfilling duties diligently and carefully

13 Requires a registration statement

g Due professional care

h Limited Liability Partnership

p Code of Professional Conduct

q Quality Control Standards

Diff: Moderate

Objective: LO 2-1, LO 2-2, LO 2-3, LO 2-6, and LO 2-7

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11) Quality controls are established for the entire CPA firm whereas GAAS are applicable to the

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Chapter 3 Audit Reports

1) An audit of historical financial statements most commonly includes the:

A) balance sheet, statement of retained earnings, and the statement of cash flows

B) income statement, the statement of cash flows, and the statement of net working capital

C) statement of cash flows, balance sheet, and the statement of retained earnings

D) balance sheet, income statement, and the statement of cash flows

Answer: D

Terms: Audit of historical financial statements

Diff: Moderate

Objective: LO 3-1

2) Auditing standards require that the audit report must be titled and that the title must:

A) include the word "independent."

B) indicate if the auditor is a CPA

C) indicate if the auditor is a proprietorship, partnership, or incorporated

D) indicate the type of audit opinion issued

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3) To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be: A)

Company Controller Shareholders Board of Directors

4) The scope paragraph of the standard unqualified audit report states that the audit is designed to: A) discover all errors and/or irregularities

B) discover material errors and/or irregularities

C) conform to generally accepted accounting principles

D) obtain reasonable assurance whether the statements are free of material misstatement

Answer: D

Terms: Scope paragraph of standard unqualified audit report states

Diff: Easy

Objective: LO 3-1

5) The audit report date on a standard unqualified report indicates:

A) the last day of the fiscal period

B) the date on which the financial statements were filed with the Securities and Exchange Commission C) the last date on which users may institute a lawsuit against either client or auditor

D) the last day of the auditor's responsibility for the review of significant events that occurred subsequent

to the date of the financial statements

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Test bank for Audit and assurance services by Alvin Alrens

Audit Planning and Analytical Procedures

Section 404 Audits of Internal Control and Control Risk