auditing chapter 1-6

Chapter 1 The Demand for Audit and Other Assurance Services

Learning Objective 1-1

1) The Sarbanes-Oxley Act applies to which of the following companies? A) All companies.B) Privately held companies. C) Public companies.D) All public companies and privately held companies with assets greater than $500 million. Answer: C

2) Which of the following is considered audit evidence? A)Oral statements made by management

Written Communications

Auditor Observation

Y

N

N

B)Oral statements made by management


Auditor Observation

N

Y

Y

C)Oral statements made by management


Auditor Observation

Y

Y

Y

D)Oral statements made by management


Auditor Observation

N

N

Y

Answer: C

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 outsiders3. Observations by the auditor4. Oral testimony of the auditee (client)

4) The criteria by which an auditor evaluates the information under audit may vary with the information being audited.A) True B)FalseAnswer: A5) The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards.A) True B)FalseAnswer: B

6) The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies. A) TrueB) False Answer: B

7) The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting.A) True B)FalseAnswer: A

8) Only companies that file annual statements with the Securities and Exchange Commission are required to have an annual external audit.A) True B)FalseAnswer: B


1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called:A) finance. B) auditing.C) accounting. D) economics. Answer: C

2) Which department provides quantitative information in order for management and others to make decisions?A) management information systems. B) auditing.C) finance.D) accounting. Answer: D

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

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

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.


1) ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate.A) Client acceptance B) InformationC) Business D) Control Answer: B

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

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. B) Voluminous data.C) Remoteness of information.D) Each of these choices is a common reason for unreliable financial information. Answer: D

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, andcomplex exchange transactions.

Learning Objective 1-41) 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. Answer: D

Learning Objective 1-51) 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. D) B and CE) All of the above. Answer: C

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. B) attestation service.C) assurance service. D) tax service. Answer: B

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.Answer: A

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

5) Which of the following is not a SysTrust Services principle as defined by the AICPA? A) Online privacy.B) Availability.C) Processing integrity. D) Operational integrity. Answer: D

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. D) Tax services.Answer: C

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

Y

Y

Y

Y

Y

B)

Financial Statement Audit

Operational Audit

Compliance Audit



Y

Y

Y

Y

N

C)Financial Statement Audit

Operational Audit

Compliance Audit



Y

Y

Y

N

N

D)Financial Statement Audit

Operational Audit

Compliance Audit



N

N

N

Y

Y

Answer: B

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.Answer: B

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.

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.

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, andother attestation services that may be applied to a broad range of subject matter.

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.

13) CPA firms are never allowed to provide bookkeeping services for clients. A) TrueB) False Answer: B

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

15) Most public companies' audited financial statements are available on the SEC's EDGAR database. A) TrueB) False Answer: A

Learning Objective 1-61) 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

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?A) Operational audit. B) Compliance audit.C) Financial statement audit. D) Production audit. Answer: A

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. B) compliance audit.C) operational audit. D) production audit. Answer: B

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. Answer: C

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

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.

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.

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

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.A) True B) FalseAnswer: A


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:

a. Financial Statement b. Compliancec. Operational

d. Internal e. Externalf. Government g. IRS

Engagement: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. Answer: 1. c, d2. b, d 3. a, e 4. c, d 5. b, f 6. b, g 7. b, e 8. c, f

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.

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.A) True B) FalseAnswer: B


1) The three requirements for becoming a CPA include all but which of the following? A) Uniform CPA examination requirement.B) Educational requirements. C) Character requirements. D) Experience requirement. Answer: C

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.

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

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

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.A) I only B) II only C) I and IID) Neither I or II Answer: B

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

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 PartnershipsLimited Liability Companies Professional CorporationsGeneral Corporations General Partnerships Sole Proprietorship

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.

7) Many small/local accounting firms do not perform audits as their primary services to their clients include accounting and tax.A) True B) FalseAnswer: A

8) All of the Big Four and many of the smaller CPA firms now operate as Limited Liability Partnerships. A) TrueB) False Answer: A

9) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publically traded audit clients.A) True B) FalseAnswer: B10) 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) True B) FalseAnswer: A


1) The organization that is responsible for providing oversight for auditors of public companies is called the ________.A) Auditing Standards Board.B) American Institute of Certified Public Accountants. C) Public Oversight Board.D) Public Company Accounting Oversight Board. Answer: D

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. Answer: D

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. Answer: A

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

Yes

Yes

Yes

B)can enforce disciplinary action against the accounting firm



Yes

Yes

No

C)

can enforce disciplinary action against the accounting firm



Yes

No

No

D)

can enforce disciplinary action against the accounting firm



No

No

No

Answer: B

5) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB's primary functions? Who performed these functions prior to the PCAOB?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.

6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publically traded and private companies.A) True B) FalseAnswer: B

7) All CPA firms registered with the PCAOB are required to undergo a peer review annually. A) TrueB) False Answer: B


1) The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the:A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q. Answer: B

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:A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q. Answer: A

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 companiesB) Compilation and review standards C) Professional conductD) Auditing standards applicable to financial statements of private and public companies Answer: D

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.

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.A) True B) FalseAnswer: B

6) Form 10-K must be filed with the SEC whenever a public company experiences a significant event. A) TrueB) False Answer: B

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.A) True B) FalseAnswer: A


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

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

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.

4) Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors. A) TrueB) False Answer: B

5) Membership in the AICPA is mandatory for all licensed practicing CPAs. A) TrueB) False Answer: B

6) Any public accounting firm can be a member of the AICPA if the firm meets the membership requirements.A) True B) FalseAnswer: A

Learning Objective 2-51) Which of the following are audit standards used in professional practice by audit firms? A)International Standards on Auditing

U.S. Generally Accepted Auditing Standards

PCAOB Auditing Standards

Yes

No

No

B)

International Standards on Auditing



Yes

Yes

No

C)International Standards on Auditing



Yes

Yes

Yes

D)International Standards on Auditing



No

Yes

Yes

Answer: C

2) For privately held companies who of the following is responsible for establishing auditing standards? A) Securities and Exchange CommissionB) Public Company Accounting Oversight Board C) Auditing Standards BoardD) National Association of Accounting Answer: C

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.Answer: B

4) The Audit Standards Board of the AICPA has undertaken the Clarity & Convergence Project to make GAAS easier to read understand and apply; as well as converge GAAS with the International Standards on Auditing (ISAs). Which of the following statements concerning the Clarity & Convergence Project is(are) true?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". A) I and IIB) I and III C) II and IIID) I, II and III Answer: D

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 StandardsB) Statements on Standards for Accounting and Review Services C) Regulations issued by the Securities and Exchange Commission D) The AICPA Code of Professional ConductAnswer: A

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. A) I and IIB) I and III C) II and IIID) I, II and III Answer: A

7) Auditors of public companies should, in the absence of guidance issued by the PCAOB, follow auditing standards issued by the SEC.A) True B) FalseAnswer: B

8) International Standards on Auditing are issued by the International Auditing Practices Committee. A) TrueB) False Answer: A

Learning Objective 2-61) 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

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

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

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.Answer: C

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

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

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

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. Answer: C

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

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

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.. A) I and IIB) I and III C) II and IIID) I, II and III Answer: B

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

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

14) List the ten generally accepted auditing standards and divide them into their proper category. Answer:General StandardsAdequate technical training and proficiency. Independence in mental attitude.Due professional care.

Standards of FieldworkAdequate planning and supervision.Understand the entity and its environment including internal control. Sufficient appropriate audit evidence.

Standards of ReportingWhether 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.

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.

16) Statements on Auditing Standards are considered authoritative literature. A) TrueB) False Answer: A

17) Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board.A) True B) FalseAnswer: B

18) Statements on Auditing Standards (SASs) are considered to be interpretations of the ten generally accepted auditing standards.A) True B) FalseAnswer: A

Learning Objective 2-71) 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

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

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

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. Answer: D

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

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

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.

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.

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 Procedure1. 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.

Standards Category a. GAAP Standardsb. Quality Control Standards

Answer: 1. a2. b 3. b 4. a 5. b 6. a 7. b 8. a

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.Definition1. 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 information.10. Requires annual inspections of accounting firms auditing > 100 issuers.11. Practice monitoring by a CPA firm for another CPA firm.12. Fulfilling duties diligently and carefully. 13. Requires a registration statement.

Audit Term a. AICPA b. PCAOBc. Securities Exchange Commision d. Form 10-ke. IAASB f. Form S-1g. Due professional careh. Limited Liability Partnership i. Professional Corporationj. Limited Liability Company k. Peer reviewl. 1933 Securities Act m. 1934 Securities Act n. Form 8-ko. State Regulationp. Code of Professional Conduct q. Quality Control Standardsr. GAAS Standards

Answer: 1. i2. o 3. n 4. a 5. b 6. j 7. f 8. q 9. c 10. b 11. k 12. g 13. l

11) Quality controls are established for the entire CPA firm whereas GAAS are applicable to the individual engagement.A) True B) FalseAnswer: A

Chapter 3 Audit Reports

Learning Objective 3-11) 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

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.Answer: A

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

No

Yes

Yes

B)

Company Controller

Shareholders

Board of Directors

No

No

Yes

C)

Company Controller

Shareholders

Board of Directors

Yes

Yes

No

D)Company Controller

Shareholders

Board of Directors

Yes

No

No

Answer: A

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

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.Answer: D

6) The standard audit report refers to GAAS and GAAP in which paragraphs? A)GAAS

GAAP

Scope only

Opinion only

B)

GAAS

GAAP

Intro only

Scope and Opinion

C)

GAAS

GAAP

Intro and Scope

Opinion only

D)GAAS

GAAP

Intro only

All paragraphs

Answer: A

7) Which of the following is not explicitly stated in the standard unqualified audit report? A) The financial statements are the responsibility of management.B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit provides a reasonable basis for their opinion.D) An audit includes assessing the accounting estimates used. Answer: B

8) If an auditor performs an audit of a public company, the scope paragraph should make reference to which standards?A) GAAP. B) GAAS.C) Standards issued by the PCAOB (U.S.). D) International Audit Standards. Answer: C

9) The introductory paragraph of the standard audit report states that the financial statements are: A) the responsibility of the auditor.B) the responsibility of management.C) the joint responsibility of management and the auditor. D) none of the above.Answer: BTerms: Introductory paragraph of standard audit report Diff: ModerateObjective: LO 3-1AACSB: Reflective thinking skills

10) The introductory paragraph of the standard audit report performs which functions? I.State the CPA has performed an audit.II. Lists the financials being audited.III. States the financials are the responsibility of the auditor. A) I and IIB) I and III C) II and IIID) I, II and III Answer: C

11) Which of the following statements are true?I.The introductory paragraph states that management is responsible for the preparation and content of the financial statements.II. The scope paragraph states that the auditor evaluates the appropriateness of those accounting principles, estimates, and financial statement disclosures.A) I only B) II only C) I and IID) Neither I nor II Answer: C

12) The introductory paragraph of the standard audit report states that the auditor is: A) responsible for the financial statements and the opinion on them.B) responsible for the financial statements.C) responsible for the opinion on the financial statements.D) jointly responsible for the financial statements with management. Answer: C

13) If the balance sheet of a company is dated December 31, 2011, the audit report is dated February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has searched for subsequent events that occurred up to:A) December 31, 2011. B) January 1, 2012.C) February 8, 2012. D) February 15, 2012. Answer: C

14) Which of the following is true concerning financial statements issued by a U.S. entity to the Securities and Exchange Commission?A) Financial statements can be prepared using International Financial Reporting Standards.B) The United States now allows an auditor to perform an audit of financial statements of a U.S. entity in accordance with both GAAS and International Audit Standards.C) The United States only allows an auditor to perform an audit of financial statement of an entity in accordance with GAAS if they are using International Financial Reporting Standards.D) An audit that uses both the GAAS and International Audit standards must modify the scope paragraph to include both sets of standards.Answer: C

15) Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to:A) determine that they are not in violation of FASB statements.B) examine the substance of transactions and balances for possible misinformation. C) review the statements using the accounting principles promulgated by the SEC. D) assure investors that net income reported this year will be exceeded in the future. Answer: B

16) In which of the following situations would the auditor most likely issue an unqualified report? A) The client valued ending inventory by using the replacement cost method.B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method. C) The client valued ending inventory at selling price rather than historical cost.D) The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements.Answer: DTerms: Issuance of unqualified report Diff: ChallengingObjective: LO 3-1AACSB: Reflective thinking skills

17) Brown Co.'s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not reasonably estimable. The auditor's report should be a(n):A) unqualified opinion. B) disclaimer.C) qualified opinion. D) adverse opinion. Answer: A

18) An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2012 was completed on March 1, 2013, and the report was issued to Javlin Corporation, a private company, on March 13, 2013. List any deficiencies in this report. Do not rewrite the report.

We have examined the accompanying financial statements of Dalton Corporation as of December 31, 2012. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with generally accepted accounting principles. Those principles require that we plan and perform the audit to provide reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, except for the effects of not capitalizing certain lease obligations that should be capitalized in order to conform with generally accepted accounting principles, the financial statements referred to above present accurately the financial position of Jacob Corporation as of December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

Garrett and Brown, CPAs

March, 2013Answer: The audit report contains the following deficiencies: The report title is missing.The report is not addressed to anyone and should be addressed to shareholders or the board of directors.The introductory paragraph should refer to an "audit," not an "examination."The introductory paragraph should list the financial statements that were audited. The introductory paragraph refers to the wrong company.The scope paragraph should state the audit was conducted in accordance with auditing standards generally accepted in the United States of America, not generally accepted accounting principles."Those principles " should read "Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements." The scope paragraph should contain the following phrase: "An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation."Following the scope paragraph, there should be an explanatory paragraph that discusses the GAAP violation related to the failure to capitalize certain lease obligations.In the opinion paragraph, the auditor should state that the financial statements present fairly, not present accuratelyIn the opinion paragraph, the phrase "in all material respects" should be included.In the opinion paragraph, the phrase "and the results of its operations and its cash flows for the year then ended" should be included.The audit report should be dated March 1, 2013.

19) Describe the standard unqualified report to be issued for an audit of a private company. Begin by specifying the seven parts of the report, and then discuss the contents of each part.Answer: The parts of the standard unqualified report are as follows:Report title. The title must include the word "independent." Examples of appropriate titles are "independent auditor's report," or "report of independent accountant."Report address. The report is usually addressed to the company's stockholders or board of directors. It should not be addressed to company management.Introductory paragraph. There are three important components of the introductory paragraph. First, it states that an audit was performed. Second, it lists the financial statements that were audited and their dates. Third, it states that management is responsible for the financial statements, and that the auditor is responsible for expressing an opinion on those statements based on an audit.Scope paragraph. The scope paragraph is a factual statement about what was done during the audit. It first states that auditing standards generally accepted in the United States of America were followed by the auditor. It then states that an audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. It concludes by stating that the auditor evaluated the appropriateness of the accounting principles used, and estimates made, by management, and of the financial statement disclosures and presentations given.Opinion paragraph. This paragraph states the auditor's opinion concerning whether the financial statements present fairly the client's financial position and results of its operations and cash flows in conformity with generally accepted accounting principles.Name of CPA firm. Typically, the name of the CPA firm, and not the name of an individual auditor, is used.Audit report date. The audit report is normally dated as of the last day of fieldwork.

20) Presented below is an independent auditor's report for a private company prepared by the firm of Harrington and Perry, LLP.

Auditor's Report

To the president and management of EPM, Inc.

We have examined the accompanying balance sheets and statements of income, retained earnings, and cash flows of EPM, Inc., as of December 31, 2012 and 2011. We performed our examination in accordance with auditing standards generally accepted in the United States of America and examined, on a test basis, evidence supporting the accounting principles used and estimates made by management.

In our opinion, the financial statements referred to above accurately present the financial position of EPM, Inc., in conformity with generally accepted accounting principles.

Harrington and Perry, LLP December 31, 2012

Other information:

EPM, Inc., is a for-profit corporation and publishes comparative financial statements for distribution to shareholders, potential investors, and the general public. The client has a calendar year-end. For the most recent audit, the auditor completed all significant fieldwork on March 5, 2013 and issued the audit report on March 16, 2013. During 2012, EPM changed its method of depreciating long-term assets and properly reflected the effect of the change in the current year's financial statements, restated the prior year's financial statements, and properly discussed the change in a footnote (Note 4) to those statements. The auditors are satisfied that the change was preferable.

Required:

Consider all the facts given and rewrite the complete auditor's report, including report title, address, body of report, name of firm, and audit report date.

Answer: Independent Auditor's Report

To the shareholders of EPM, Inc.

We have audited the accompanying balance sheets of EPM, Inc., as of December 31, 2012 and 2011, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EPM, Inc., as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

As discussed in Note 4 to the financial statements, EPM, Inc., changed its method of computing depreciation.

Harrington and Perry, LLP March 5, 2013

21) The financial statements most commonly audited by external auditors are the balance sheet, the income statement, and the statement of changes in retained earnings.A) True B) FalseAnswer: B

22) AICPA professional standards provide uniform wording for the auditor's report to enable users of the financial statements understand the audit report.A) True B) FalseAnswer: A

23) Users of the financial statements rely on the auditor's report because it provides absolute assurancethe report provides. A) TrueB) False Answer: B

24) The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on financial statements.A) True B) FalseAnswer: B

25) The audit report date is the date the auditor completed audit procedures in the field. A) TrueB) False Answer: A

26) Audit reports issued for financial statements of a public company should refer to generally accepted auditing standards in the scope paragraph.A) True B) FalseAnswer: B

27) Audit reports issued for financial statements of a private company should refer to generally accepted auditing standards in the scope paragraph.A) True B) FalseAnswer: A

28) The audit report is normally addressed to the company's president or chief executive officer.A) True B) FalseAnswer: B

29) The phrase "generally accepted accounting principles" can be found in the opinion paragraph of a standard unqualified report.A) True B) FalseAnswer: A

30) The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date.A) True B) FalseAnswer: A

31) The phrase "auditing standards generally accepted in the United States of America" can be found in the opinion paragraph of a standard, unqualified audit report for a public company.A) True B) FalseAnswer: B

32) The phrase "The audit is designed to obtain reasonable assurance about whether the statements are free of material misstatements" is included in the introductory paragraph of an audit report.A) True B) FalseAnswer: B

Learning Objective 3-31) Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms?I.A combined report on financial statements and internal control over financial reporting. II. Separate reports on financial statements and internal control over financial reporting. A) I onlyB) II onlyC) Either I or II. D) Neither I nor II. Answer: C

2) PCAOB Auditing Standard No. 2 requires the audit of internal control over financial reporting to be integrated with:A) the audit of the financial statements.B) the quarterly review of financial information. C) the review of annual financial statements.D) None of the above. Answer: A

3) A combined report on financial statements and internal control over financial reporting includes all but which of the following types of paragraphs?A) Inherent limitations paragraph B) Description paragraphC) Opinion paragraphD) Each of the above paragraphs is included. Answer: B

4) There are five conditions that must be met before an auditor can issue a standard unqualified report for the audit of a private company. Please discuss each of these five conditions.Answer: The five conditions that justify issuing a standard unqualified report are:All statementsbalance sheet, income statement, statement of retained earnings, and statement of cash flowsare included in the financial statements.The three general standards of GAAS have been followed in all respects on the engagement.Sufficient appropriate audit evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the three fieldwork standards have been followed.The financial statements are presented in accordance with U.S. GAAP. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements.There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

5) Section 404(b) of the Sarbanes Oxley Act requires that the auditor of an issuer attest to management's report on the efficiency of internal controls over financial reporting.A) True B) FalseAnswer: B

6) Auditors of public company financial statements must issue separate reports on internal control over financial reporting.A) True B) FalseAnswer: B

Learning Objective 3-41) Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include:A) the use of other auditors. B) material uncertainties.C) substantial doubt about the audited company (or the entity) continuing as a going concern. D) lack of consistent application of GAAP.Answer: A

2) A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is:A) included in the scope paragraph. B) included in the opinion paragraph.C) included in a separate paragraph in the report. D) included in the introductory paragraph. Answer: C

3) All of the following are conditions requiring a departure from a standard unqualified audit report except:A) management refused to allow the auditor to confirm significant accounts receivable for which there were no alternative procedures performed.B) Mmnagement decided not to allow the auditor to confirm significant accounts receivable, but the auditor obtained sufficient appropriate evidence by examining subsequent cash receipts.C) part of the audit was performed by other auditors whose report was furnished to the principle auditor. D) management has determined that fixed assets should be reported in the balance sheet at their replacement values rather than historical costs. The auditors do not concur.Answer: B

4) Which of the following is not a cause for a modification of the format for a standard unqualified auditor's report?A) Substantial doubt about an entity's ability to continue as a going concern. B) Reports involving other auditors.C) A departure from promulgated accounting principles. D) Not consistently applying accounting principles. Answer: C

5) Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report?A) Error corrections not involving principles B) Changes in accounting estimatesC) Variations in the format and presentation of financial information D) All of the above.Answer: D

6) Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?A) A potential lawasuit against the entity for a patent infringement. B) Loss of major customers.C) Significant recurring operating losses. D) Working capital deficiencies. Answer: A

7) When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed:A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report.D) one year from the date of the audit report. Answer: B

8) When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be:I.an unqualified opinion with an explanatory paragraph. II. a disclaimer of opinion.A) I only B) II only C) I or IID) Neither I nor II Answer: C

9) When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in:A) the scope paragraph.B) an explanatory paragraph that appears before the opinion paragraph. C) the opinion paragraph.D) an explanatory paragraph after the opinion paragraph. Answer: B

10) William Gregory, CPA, is the principal auditor for a multi-national corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory:A) must not refer to the examination of the other auditor. B) must refer to the examination of the other auditor.C) may refer to the examination of the other auditor.D) must refer to the examination of the other auditors along with the percentage off consolidated assets and revenue that they audited.Answer: C

11) A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include:A) no reference to consistency.B) a reference to a prior period adjustment in the opinion paragraph.C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net income.D) an explanatory paragraph explaining the change. Answer: D

12) Which of the following modifications of the auditor's report does not include an explanatory paragraph?A) A qualified report due to a GAAP departure. B) The report includes an emphasis of a matter. C) There is a very material scope limitation.D) A principle auditor accepts the work of an other auditor. Answer: D

13) No reference is made in the auditor's report to other auditors who perform a portion of the audit when:I.The other auditor audited an immaterial portion of the audit.II. The other auditor is well known or closely supervised by the principle auditor. III. The principle auditor has thoroughly reviewed the work of the other auditor. A) I and IIB) I and III C) II and IIID) I, II and III Answer: D

14) Readers of financial statements often interpret that the number of paragraphs in the independent auditor's report is a "signal" of the entity's financial fairness. Which of the following is not true regarding the number of paragraphs in an independent auditor's report?A) More than three paragraphs indicates either a qualification or report modification.B) An additional paragraph is added before the opinion for a qualified, adverse or disclaimer of opinion. C) An additional paragraph is added after the opinion when there is required information the auditor must report when the opinion is unqualified.D) No explanatory paragraph is required for an unqualified shared report involving other auditors, however, explanatory language is added in the introductory paragraph.Answer: D

15) Which of the following circumstances would not require more than one report modification in from the standard unqualified independent auditor's report?A) There is a GAAP departure and accounting principles were not consistently applied with that of the preceding year.B) There is a scope limitation and the auditor's are not independent.C) There is a scope limitation and there is substantial doubt about the entity's ability to continue as a going concern.D) There is substantial doubt about the entity's ability to continue as a going concern and the causes of these uncertainties are not adequately disclosed in a footnote.Answer: B

16) Which of the following is not an unqualified opinion with modified wording? A) Emphasis of a matter.B) Reports involving other auditors.C) Auditor disagrees with client's departure from GAAP. D) Lack of consistent application of GAAP.Answer: C

17) Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit?A) Issue a joint report signed by both CPA firms.B) Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion.C) Make reference to the other auditor in the report by using modified wording (a shared opinion or report).D) A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.Answer: A

18) Which of the following requires recognition in the auditor's opinion as to consistency?A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest.B) A change in the estimate of provisions for warranty costs.C) The change from the cost method to the equity method of accounting for investments in common stock.D) A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.Answer: C

19) Indicate which changes would require an explanatory paragraph in the audit report. A)Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable

Change from LIFO to FIFO

Yes

Yes

B)

Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable


No

No

C)Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable


Yes

No

D)Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable


No

Yes

Answer: A

20) Indicate which changes would require an explanatory paragraph in the audit report. A)Change in the estimated life of an asset

Variation in the format of the financial statements

Yes

Yes

B)Change in the estimated life of an asset


No

No

C)Change in the estimated life of an asset


Yes

No

D)

Change in the estimated life of an asset


No

Yes

Answer: B

21) Indicate which changes would require an explanatory paragraph in the audit report. A)The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern

Change from FIFO to LIFO

Yes

Yes

B)The CPA concludes there is substantial doubt about the entitys ability to continue as a going concern


No

No

C)The CPA concludes there is substantial doubt about the entitys ability to continue as a going concern


Yes

No

D)The CPA concludes there is substantial doubt about the entitys ability to continue as a going concern


No

Yes

Answer: A

22) Indicate which changes would require an explanatory paragraph in the audit report. A)A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion.

The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion.

Yes

Yes

B)A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion.


No

No

C)A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion.


Yes

No

D)A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion.


No

Yes

Answer: C

23) In certain circumstances, an auditor will issue modified unqualified report. Discuss each of the five circumstances when an auditor would issue an unqualified report with an explanatory paragraph or modified wording.Answer: An unqualified report with an explanatory paragraph or modified wording is appropriate in the following circumstances:Lack of consistent application of GAAP. When the client has not followed generally accepted accounting principles consistently in the current period in relation to the preceding period, an unqualified opinion with an explanatory paragraph following the opinion paragraph is appropriate.Substantial doubt about continuing as a going concern. When an auditor concludes there is substantial doubt about the client's ability to continue as a going concern, an unqualified opinion with an explanatory paragraph following the opinion paragraph is appropriate. The auditor also has the option of issuing a disclaimer of opinion.A departure from GAAP with which the auditor concurs. If adherence to GAAP would result in misleading financial statements, an unqualified opinion with an explanatory paragraph is appropriate. Emphasis of a matter. If the auditor wants to emphasize specific matters in the audit report, an explanatory paragraph discussing those matters may be added to an unqualified report.Reports involving other auditors. When an auditor relies upon a different CPA firm to perform part of the audit, the auditor can indicate that responsibility for the audit is shared with another CPA firm by modifying the wording of an unqualified report.

24) A modified unqualified auditor report arises when the auditor believes the financials are fairly stated but also believes additional information should be provided.A) True B) FalseAnswer: A

25) Changes of an accounting estimate requires the auditor to issue a modified unqualified audit report with a consistency paragraph is inserted after the opinion paragraph.A) True B) FalseAnswer: B

26) The only modified unqualified opinion that does not include an explanatory paragraph is when other auditors are involved. In this case only the introductory paragraph is modified.A) True B) FalseAnswer: B

27) Items that materially affect the comparability of the financial statements generally require disclosure in the footnotes.A) True B) FalseAnswer: A

28) Changes in an estimate, such as a change in the estimated useful life of an asset for depreciation purposes, affect consistency but not comparability, and therefore require an explanatory paragraph in the audit report.A) True B) FalseAnswer: B

29) Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but not consistency, and therefore do not require an explanatory paragraph in the audit report.A) True B) FalseAnswer: B

30) When an auditor relies upon a different CPA firm to perform part of the audit and chooses to issue a shared opinion, the wording of the report should be modified in all three paragraphs.A) True B) FalseAnswer: A

31) When other auditors are involved in the audit and they qualify their portion of the audit, the principle auditor must decide if the amount in question is material to the financial statements as a whole.A) True B) FalseAnswer: A

Learning Objective 3-51) As a result of management's refusal to permit the auditor to physically examine inventory. The auditor must depart from the unqualified audit report because:A) the financial statements have not been prepared in accordance with GAAP.B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control.C) the financial statements have not been audited in accordance with GAAS. D) the scope of the audit has been restricted.Answer: D

2) An adverse opinion is issued when the auditor believes:A) some parts of the financial statements are materially misstated or misleading.d the financial statements would be found to be materially misstated if an investigation were performed. B) the financial statements would be found to be materially misstated if an investigation were performed. C) the auditor is not independent.D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.Answer: D

3) An auditor can express a qualified opinion due to a: A)Departure from GAAP

Lack of Consistency

Lack of Sufficient Evidence

Yes

No

No

B)Departure from GAAP

Lack of Consistency


No

Yes

No

C)Departure from GAAP

Lack of Consistency


Yes

No

Yes

D)

Departure from GAAP

Lack of Consistency


Yes

Yes

Yes

Answer: C

4) An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued?A)Disclaimer

Qualified

Adverse

Yes

No

No

B)Disclaimer

Qualified

Adverse

No

Yes

No

C)Disclaimer

Qualified

Adverse

Yes

No

Yes

D)

Disclaimer

Qualified

Adverse

No

Yes

Yes

Answer: D

5) A qualified opinion can be issued for which of the following? I.When a limitation on the scope of the audit has occurred. II. When the auditor lacks independence.III. When generally accepted accounting principles have not been used. A) I and IIB) I and III C) II and IIID) I, II and III Answer: B

6) In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion?A) The auditor lacks independence. B) A client-imposed scope limitation.C) A circumstance imposed scope limitation. D) Lack of full disclosure within the footnotes. Answer: D

7) When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue:A) an adverse opinion.B) a disclaimer of opinion.C) either a qualified opinion or an adverse opinion.D) either a qualified opinion or an unqualified opinion with modified wording. Answer: B

8) If the auditor lacks independence, a disclaimer of opinion must be issued: A) if the client requests it.B)

auditing chapter 1-6

Documents

c accounting

financial information

b auditing

d accounting

c public companies

c auditors ability

annual statements

companys financial statements