Test bank auditing and assurance principles ch02 defining professional responsibility quality standards and ethics

Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards?. Statements of the Financial Accounting Standards Board.. Generally Accepted A

Defining Professional Responsibility:

Quality Standards and Ethics

MULTIPLE CHOICE:

to the alleged audit failures of the 1980s and 1990s?

for fraud detection

ANSWER: C

the following except

a Having the technical qualifications to perform an

engagement

b Possessing the ability to supervise and evaluate the

quality of staff work

c Warranting the infallibility of the work performed

d Consulting others if additional technical information

is needed ANSWER: C

3 Which of the following is mandatory if the auditor is to

comply with generally accepted auditing standards?

training

b Use of analytical review on audit engagements

c Use of statistical sampling whenever feasible on an

audit engagement

receivable balances

ANSWER: A

of an auditor, the auditor should refer to

a Statements of the Financial Accounting Standards Board

b Generally Accepted Auditing Standards

c Interpretations of the Statements on Auditing Standards

ANSWER: B

their clients Standards governing the quality of these services are covered in the attestation standards generally, and performance requirements are more explicitly defined in sets of statements relating to each type of service Which

of the following is not such a set?

Services

ANSWER: B

(Confidential Client Information) of the Code of

Professional Conduct?

auditor-prepared workpapers as evidence of possible illegal acts perpetrated by the client

concocted by top management to intentionally inflate

earnings

acquiring Client A The CPA bases this warning on knowledge of Client A's financial condition and a belief that the management of Client A lacks integrity This knowledge was obtained by the CPA as a result of auditing Client A during the past several years

of certain illegal acts perpetrated by the client

ANSWER: C

7 Which of the following statements best describes why the

CPA profession has deemed it essential to promulgate

ethical standards and to establish means for ensuring their observance?

a A requirement for a profession is the establishment

of ethical standards that stress primarily a

responsibility to clients and colleagues

b A requirement of most state laws calls for the profession to establish a code of ethics

c An essential means of self-protection for the

profession is the establishment of flexible ethical standards by the profession

d A distinguishing mark of a profession is its

acceptance of responsibility to the public ANSWER: D

generally accepted auditing standards?

a Audit objectives generally determined on audit

engagements

b Acts to be performed by the auditor

c Measures of the quality of the auditor's performance

d Procedures to be used to gather evidence to support

financial statements ANSWER: C

9 Which of the following best describes what is meant by

generally accepted auditing standards?

a Pronouncements issued by the Auditing Standards Board

b Procedures to be used to gather evidence to support

financial statements

c Rules acknowledged by the accounting profession because

of their universal compliance

d Measures of the quality of the auditor's performance ANSWER: D

with a departure from an accounting principle promulgated by that body designated by AICPA Council to formulate such principles?

Principles Board inasmuch as the APB is no longer the body so designated by Council

principle in question would make the financial statements materially misleading

practice

financial statements to be inconsistent with prior years

ANSWER: B

11 Pursuant to the AICPA rules of conduct, the auditor's

responsibility to the profession is defined by

a The AICPA Code of Professional Conduct

b Federal laws governing licensed professionals who are

involved in interstate commerce

c Statements on Auditing Standards

d The Bylaws of the AICPA ANSWER: A

possess the industry expertise of the business entity, should

a Engage financial experts familiar with the nature of the business entity

nature of the entity's business

c Refer a substantial portion of the audit to another CPA who will act as the principal auditor

d First inform management that an unqualified opinion cannot be issued

ANSWER: B

an auditor's responsibility to detect errors and fraud?

statements

existence of illegal acts

material misstatements

ANSWER: D

weighing the relevant factors before reaching a decision

b Ensure that the financial statements are free from

error

profession

ANSWER: A

auditor

a Examine all available corroborating evidence

b Critically review the judgment exercised at every level of supervision

c Reduce control risk below the maximum

d Attain the proper balance of professional experience

and formal education ANSWER: B

specializes in the audit of commercial banks

level of understanding of the transactions and

accounting practices unique to commercial banking.

transcends unique industry characteristics

ANSWER: C

17 The first general standard requires that a person or

persons have adequate technical training and proficiency as

an auditor This standard is met by

a An understanding of the field of business and finance

b Education and experience in the field of auditing

c Continuing professional education

d A thorough knowledge of the Statements on Auditing

Standards ANSWER: B

18 The first general standard recognizes that regardless of

how capable an individual may be in other fields, the

individual cannot meet the requirements of the auditing

standards without the proper

b Quality control and peer review

ANSWER: C

19 In determining estimates of fees, an auditor may take into

account each of the following, except the

a Value of the service to the client

b Degree of responsibility assumed by undertaking the engagement

c Skills required to perform the service

d Attainment of specific findings ANSWER: D

20 A CPA, while performing an audit, strives to achieve

independence in appearance in order to

b Comply with the generally accepted standards of field work

ANSWER: D

21 Which of the following best describes why publicly traded corporations follow the practice of having the outside

auditor appointed by the board of directors or elected by the stockholders?

a To comply with the regulations of the Financial Accounting Standards Board

b To emphasize auditor independence from the management

of the corporation

c To encourage a policy of rotation of the independent auditors

d To provide the corporate owners with an opportunity to voice their opinion concerning the quality of the auditing firm selected by the directors ANSWER: B

22 Which of the following is not required by the generally

accepted auditing standard that states that due

professional care is to be exercised in the performance of the examination?

a Observance of the standards of field work and

reporting

b Critical review of the audit work performed at every

level of supervision

profession

d Responsibility for losses because of errors of

judgment

ANSWER: D

23 The third general standard states that due care is to be

exercised in the performance of the examination This standard means that a CPA who undertakes an engagement assumes a duty to perform each audit

a As a professional possessing the degree of skill

commonly possessed by others in the field

b In conformity with generally accepted accounting

principles

c With reasonable diligence and without fault or error

d To the satisfaction of governmental agencies and

investors who rely upon the audit ANSWER: A

COMPLETION:

as internal auditing, to the national accounting firms may cause financial statement users to question _ _

ANSWER: AUDITOR INDEPENDENCE (OR INDEPENDENCE OF THE

AUDITOR)

has provided a framework for defining the acceptable quality

of independent audits and other services rendered by CPAs ANSWER: CODE OF PROFESSIONAL CONDUCT

26 Proper study and evaluation of internal accounting control

is needed because virtually all independent audits are

ANSWER: TEST BASED

27 The generally accepted auditing standards, as promulgated by

the American Institute of Certified Public Accountants, define the of independent auditing

ANSWER: QUALITY

of the auditor

ANSWER: CHARACTER, COMPETENCE

29 The field work standards are concerned with the

process

ANSWER: AUDIT

ANSWER: ATTEST

MATCHING:

rule violated by the action No rule is used more than once Briefly explain why the action is a violation of the rule cited

1 Juanita Garcia, CPA, refused to be associated with

a client’s financial statements after the client

declined to correct a material misstatement Garcia

later contacted James Jordan, CPA, retained by the

client to replace Garcia, and informed Jordan of the

misstatement

2 Brianna Lopez, CPA, agreed to review loan

applications for First Charter Bank, an audit client.

The bank granted or denied the loans on the basis of

Lopez’ recommendations

3 In defense of a lawsuit alleging negligence, Melissa

Franklin, CPA, explained that she was not an expert in commodities trading and therefore did not detect the

accounting fraud perpetrated by her client, a

commodities broker

4 Rudy Boesch, CPA, accepted an audit engagement

for a fixed fee of $27,000 plus 1% of audited net

assets

5 In reviewing the corporate tax return for Eager

Turnstiles, Inc., Abba Shah, CPA, discovered that Eager’s controller had incorrectly reported a $500,000 purchase of painting equipment as repairs expense

When Shah informed the controller of the tax code

violation, she refused to correct the return Shah

signed the return as preparer

6 Ben Williams, CPA, issued an unqualified opinion on

a set of financial statements, even though he felt

uncomfortable about an accounting practice applied by the client Although the practice in question was in accordance with GAAP, it increased net income

significantly above a level that Williams considered

reasonable

7 Jones Transfer Company wishes to defer charging

certain research and development expenditures to

current income on the basis that the expenditures

are virtually certain to benefit future operations

For this reason, Jack Risher, CPA and Jones’ auditor, agrees with the proposed accounting treatment

SOLUTION:

Garcia been contacted by Jordan, with her former

client’s permission, she could have informed Jordan of the disagreement

associated with an audit client in any capacity equivalent to that of a member of management

Making loan recommendations casts Lopez in that capacity

those engagements that the member or the member’s firm can complete with professional competence Before accepting this engagement, therefore, Franklin should have received training in commodities trading and related accounting practices

engagement on a contingent fee basis In this case, the higher the audited net income, the higher will be the audited net assets, and the higher will be the audit fee Such arrangements impair auditor objectivity

the standards governing the practice of public accounting as set by those AICPA bodies

responsible for promulgating them One of these sets of standards is the Statements on

Responsibilities in Tax Practice, which prohibits members from being associated with tax returns known to contain material errors

misrepresent facts or subordinate his or her judgment to others In this case, Williams, in agreeing to the questionable practice,

subordinated his judgment to that of management, thereby failing to adequately represent the interests of the stockholders

accounting principle promulgated by the body designated by Council to establish such

principles unless the departure is necessary in order not to make the financial statements

materially misleading In the present case,

inasmuch as the R & D expenditures are not

directly reimbursable, they must be charged to expense in the current period; and, therefore, Risher is wrong in agreeing to the departure

from GAAP

Problem/Essay

audit client, Snappy Enterprises, Inc Snappy had previously been audited by another CPA Before accepting the engagement,

Block discussed several matters with Snappy’s controller and (with Snappy’s permission) the other CPA As a result of these discussions, the following information was obtained

Incorporated in 1992, Snappy’s primary business is buying, developing, selling, and leasing commercial real estate

Apartment complexes, shopping malls, and industrial parks make up the major portion of the company’s business Starting out in Albuquerque, New Mexico and the surrounding area, Snappy

gradually expanded its operations to include most of southwestern United States, including the Phoenix Scottsdale Mesa area of Arizona

After two years of losses, the company reported its first earnings in 1994 From 1995 to 2000, revenues and earnings

increased dramatically Earnings for 2001 and 2002, however declined from earlier levels For the current year, 2003,

unaudited net income has rebounded to the 2000 level

Block has learned from discussions with Snappy’s controller that, as of 12/31/03, the end of the current year, the company was in the process of completing a major mall project The

company currently owns several apartment complexes and leases its completed shopping malls to numerous retail establishments After having been developed, industrial properties are sold

either to municipalities or to companies locating in the

complexes

In discussing past audits with the CPA formerly engaged by Snappy, Block learned that several disagreements had arisen over the years, many of which had not been resolved to the

satisfaction of the former auditors The disagreements related

to accounting matters as well as to the substance of certain transactions with lessees

Required:

factors should Block consider?

should he concentrate his audit resources?

SOLUTION:

auditor and their potential impact on the financial statements

management integrity