audit chapter 2

audit chapter 2

TF? An audit report for a nonpublic company includes three sections: planning, internal control, and reporting.
False
TF? An audit report for a issuer refers to PCAOB standards rather than generally accepted auditing standards.
T
TF?
Compliance with generally accepted auditing standards is considered by the AICPA as ideal audit performance rather than an attainable level for most audits.
F
TF?
The pronouncements of the AICPA do not specify the percentage of purchase invoices to be examined or other quantitative measures, but leave to the auditor’s judgment the determination of what constitutes sufficient appropriate audit evidence.
T
TF?
Audits of financial statements by a CPA include obtaining evidence from sources outside the client company as well as from internal sources.
T
TF? Since all audits result in unmodified (unqualified) opinions, it is just an issue of what information the auditors disclose in the financial statement notes.
F
TF?
Professional standards permit a CPA firm to own shares of stock in corporations that they audit if such stock holdings are not material.
F
TF?
The Public Company Accounting Oversight Board performs inspections of CPA firms that audit SEC registrants.
T
TF?
The Public Company Accounting Oversight Board establishes auditing standards for the audits of all companies.
F
definition of the PCAOB from their website:
The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.
TF? Quality control policies and procedures are necessary for large CPA firms, but not for small CPA firms.
F
TF?
A peer review may be expected to analyze, to varying degrees, working papers for each attest engagement performed by the CPA firm.
F
TF?
Fraud is a term that is used to refer to intentional misstatements of financial statements.
T
TF? 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.
T
TF?
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.
T
TF?
GAAP represents a financial reporting framework.
T
TF? When the scope of the audit is restricted by the client, the auditors should issue an adverse opinion.
F
TF? The Attestation Standards are primarily designed to provide guidance on the audit of financial statements.
F
TF? 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.
F
TF?
International auditing standards have been developed by the AICPA.
F
TF?
The international audit report may be signed using the name of the auditor, the firm, or both.
T
Which of the following statements concerning auditor identification of client noncompliance with laws is correct?
-An auditor’s responsibility to detect noncompliance with laws that have an indirect and effect on the
financial statements differs from that for laws that have a direct effect.
-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.
-An auditor considers compliance with laws from the perspective of the reliability of management’s
representations rather than their relation to audit objectives derived from financial statement assertions.
-An auditor has no responsibility to detect client noncompliance with laws that have a direct effect on the
financial statements.
-An auditor’s responsibility to detect noncompliance with laws that have an indirect and effect on the
financial statements differs from that for laws that have a direct effect.
Which of the following is not a type of auditors’ opinion?
Unmodified.
Qualified.
Advisory.
Disclaimer.
Advisory
Which of the following statement is most accurate in describing an auditor’s responsibility to detect errors and fraud?
-The auditor should consider the client’s internal control, and design the audit to provide reasonable
assurance of detecting all errors and fraud.
-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.
-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.
-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.
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.
When the auditors discover that an audit client has committed an illegal act they will ordinarily report it to the:
-Audit committee of the company being audited.
-Securities and Exchange Commission on Form 8-M.
-Justice Department of the U.S. government.
-American Institute of Certified Public Accountants Division of Professional Ethics.
Audit committee of the company being audited.
Which of the following is an element of quality control for a CPA firm?
-Independence and freedom from bias.
-Acceptance and continuance of personnel.
-Engagement performance.
-Supervision.
Engagement performance.
The AICPA Principles Underlying a GAAS audit, include a requirement that:
-Auditors only use CPAs on an engagement.
-Management provides the auditors with unrestricted access to individuals within the entity from whom the
auditor determines it necessary to obtain audit evidence.
-Auditors provide an opinion with limited assurance about whether the financial statements are free from
material misstatement.
-Auditors maintain objective skepticism when performing the audit.
Management provides the auditors with unrestricted access to individuals within the entity from whom the
auditor determines it necessary to obtain audit evidence.
Which of the following is not a reason why auditors provide reasonable assurance, and not absolute assurance?
-The nature of financial reporting.
-The nature of auditor independence standards.
-The nature of audit procedures.
-The need to conduct an audit within a reasonable period of time at a reasonable cost.
-The nature of auditor independence standards.
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:
-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.
-The auditors should change the financial statements to show the valuation they consider proper.
-The difference of opinion should be submitted to arbitration by the FASB.
-The auditors should withdraw from the engagement.
-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.
An auditors’ unmodified (unqualified) standard report:
-Explicitly states that disclosure is adequate in the financial statements.
-Implies that disclosure is adequate in the financial statements.
-Explicitly states that all material facts have been disclosed in conformity with generally accepted
accounting principles.
-Takes no position, explicit or implicit, with respect to the adequacy of disclosures.
-Implies that disclosure is adequate in the financial statements.
Which is correct concerning an audit requirement that is “unconditional”?
-The word “should” precedes it.
-The auditor must comply with the requirement unless the auditor demonstrates and documents that
alternative actions were sufficient.
-The auditor must fulfill the requirement in all cases where that requirement is relevant.
-Not performing the requirement will ordinarily result in permanent revocation of the auditor’s CPA license.
-The auditor must fulfill the requirement in all cases where that requirement is relevant.
The GASB promulgates standards for:
-The federal government.
-State and local governments.
-All governmental organizations.
-General-purpose entities.
-State and local governments.
An adverse opinion is most likely to be included in an audit report when:
-A standard unmodified opinion is necessary.
-A public company is involved.
-A client refuses to allow an auditor to perform a particular procedure.
-The financial statements depart from GAAP.
-The financial statements depart from GAAP.
Established by the Sarbanes-Oxley Act of 2002.
-PCAOB
-Quality control policies
-IAASB
-Inspections
-IFAC
-PCAOB
The subject of a peer review.
-PCAOB
-Quality control policies
-IAASB
-Inspections
-IFAC
-Quality control policies
Issues international standards on auditing.
-PCAOB
-Quality control policies
-IAASB
-Inspections
-IFAC
-IAASB
Requirement for all CPA firms with issuer clients.
-PCAOB
-Quality control policies
-IAASB
-Inspections
-IFAC
inspections
A worldwide organization of national accounting bodies.
-PCAOB
-Quality control policies
-IAASB
-Inspections
-IFAC
IFAC
Which of the following organizations can revoke the right of an individual to practice as a CPA?
The Public Company Accounting Oversight Board.
The American Institute of Certified Public Accountants.
The Securities and Exchange Commission.
The applicable state board of accountancy.
The applicable state board of accountancy. Because the license to practice as a CPA is granted by the state, the applicable state, through its state board of accountancy, has the right to revoke the right of an individual to practice as a CPA. Students are sometimes confused by the fact that while the CPA examination is administered nationally, it is the individual states that award CPA certificates.
The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA?
Accounting standards applicable to nonpublic companies.
Auditing standards applicable to audits of nonpublic companies.
Quality control standards applicable to audits of public companies.
Standards for reviews of the interim financial information issued by public companies.
Auditing standards applicable to audits of nonpublic companies. The AICPA has authority to establish auditing standard for nonpublic companies. The Financial Accounting Standards board has authority for accounting standards of both public and nonpublic companies. The Public Company Accounting Oversight Board has authority to establish standards for audits and reviews of public companies, and quality controls for firms that audit public companies.
Which of the following does the FASB consider a source of nonauthoritative guidance for use when there is no authoritative guidance available?
The FASB Codification.
FASB Concepts Statements.
SEC Rules.
SEC Interpretive Releases.
FASB Concepts Statements.
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
Yes Yes
Yes No
No Yes
No No
Reasonable Absolute
Yes No
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:
-Compliance with generally accepted reporting standards.
-A system of quality control.
-A system of peer review.
-Continuing professional education.
-A system of quality control
Which of the following is not explicitly included in a standard report for a nonpublic company?
The CPA’s opinion that the financial statements comply with generally accepted accounting principles.
That generally accepted auditing standards were followed during the audit.
That internal control of the client was satisfactory.
An identification of the financial statements audited.
That internal control of the client was satisfactory.
The general group of the 10 PCAOB Auditing Standards requires that:
The auditors maintain an independent mental attitude.
The audit be conducted in conformity with generally accepted accounting principles.
Assistants, if any, be properly supervised.
The auditors obtain an understanding of internal control.
The auditors maintain an independent mental attitude.
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?
Professional relationship.
Engagement performance.
Relevant ethical requirements.
Monitoring.
Relevant ethical requirements. Such a quality control policy is designed to assure that personnel assigned to an engagement are independent to perform the work, an ethical requirement.
An audit provides reasonable assurance of detecting material misstatement due to Fraudulent Financial
Reporting and/or Misappropriation of Assets?
both.
An audit provides reasonable assurance of detecting misstatements due to fraud, which includes two types of intentional misstatements of financial statements—misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.
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.
The report indicates that the financial statements are the responsibility of management.
The report indicates that the auditors have also audited the effectiveness of the company’s internal control.
The report is signed in the name of the CPA firm.
The report states that the audit was performed in accordance with AICPA standards. An integrated audit report on the financial statements of a public company states that the audit was performed in accordance with Public Company Accounting Oversight Board standards, not AICPA standards.
Audit firms that are subject to inspections by the PCAOB staff include:
All audit firms.
Audit firms that are registered with the SEC.
Audit firms that are registered with the PCAOB.
Audit firms that are registered with a state board of accountancy.
Audit firms that are registered with the PCAOB. The PCAOB staff performs inspections of audit firms that are registered with the PCAOB. In order to perform an audit of a public client an audit firm must be registered.
Which of the following is not a difference noted when comparing the AICPA audit report to the international audit report?
The international audit report may use the phrase “true and fair view.”
The international audit report may be signed using the personal name of the audit partner, the audit firm, or both.
The international audit report requires inclusion of the city of the CPA firm office that performed the audit.
The international audit report includes an opinion on internal control.
The international audit report includes an opinion on internal control. Neither the AICPA audit report nor the international audit report include an opinion on internal control. The other options provide actual differences between the two reports.
agree or disagree? The report should begin with “CPA’s Report” at the top.
D The top must have a title that includes the term “independent.”
agree or disagree? The report is ordinarily addressed “to whom it may concern.”
D The report is ordinarily addressed to the audit committee of the board of directors.
agree or disagree? The report indicates that management is responsible for the preparation of the financial statements.
A
agree or disagree? The report indicates that the auditors’ responsibility is to obtain particular assurance about whether the financial statements are free of material misstatements.
D Reasonable assurance is obtained.
agree or disagree? The report ordinarily concludes on whether the financial statements are in conformity with generally accepted auditing standards.
D It concludes on whether the financial statements are in conformity with generally accepted accounting principles.
agree or disagree? The report indicates that the audit procedures selected depend on the auditors’ judgment.
A
agree or disagree? The report indicates that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion.
A
agree or disagree? The report indicates that the auditors consider and provide an opinion on internal control.
D Internal control is considered, but no opinion is provided on it.
Type of auditor’s report: The auditors are unable to determine the overall fairness of the financial statements.
-Disclaimer
-Standard unmodified
-qualified
-adverse
-Disclaimer
Type of auditor’s report: This is the report most clients prefer.
-Disclaimer
-Standard unmodified
-qualified
-adverse
-Standard unmodified
Type of auditor’s report: A limitation on the scope of the audit is significant, but not so as to overshadow an overall opinion.
-Disclaimer
-Standard unmodified
-qualified
-adverse
qualified
Type of auditor’s report: The financial statements are not fairly presented.
-Disclaimer
-Standard unmodified
-qualified
-adverse
adverse
Type of auditor’s report: A material departure from GAAP exists, but not so material as to overshadow an overall opinion.
-Disclaimer
-Standard unmodified
-qualified
-adverse
qualified
TF? The purpose of an audit is to provide financial statement users with an opinion by the auditors on whether the financial statements are presented fairly, in all material and immaterial respects, in accordance with the applicable financial reporting framework.
F. not “immaterial”
TF? The auditors are responsible for having appropriate competence and capabilities to perform the audit.
T
TF? The auditors are unable to obtain absolute assurance that the financial statements are free from material misstatement.
T
TF? The opinion states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
T
TF? Inherent limitations of an audit include the need to conduct an audit to achieve a balance between the benefit to management and the benefit to the auditors.
F. The balance is a proper balance between benefit and cost.
A report providing a summary of findings is
an agreed-upon procedures report
a report providing reasonable assurance is
an audit report
what is an unintentional misstatement?
an error
what gives the the financial reporting framework?
GAAP
what is a misappropriation of assets?
fraud
A review of a cPA firm conducted by PCAOB
inspection
Human resources and monitoring are
Quality control elements
A CPA firm that may conduct audits of public or non-public companies
Registered public accounting firm
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