Chapter 02 - The Financial Statement Auditing Environment

Chapter 02 The Financial Statement Auditing Environment
True / False Questions

1. A series of business and related auditing failures led to the passage of the Sarbanes- !le" Act #2002$. True False

2. The primar" audit conte!t %ith %hich an auditor is concerned is the client&s industr" or business. True False

'. The audit committee generall" includes senior e!ecutives of the organi(ation. True False

). A financial statement audit is generall" organi(ed based on the five basic business processes or c"cles. True False

*. ne of the five basic business processes is the %arehousing c"cle. True False

+. The ,AAS- and the AS- collaborated on a replacement for the 10 .AAS standards %hich include principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. True False

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Chapter 02 - The Financial Statement Auditing Environment

/. 0CA - auditing standards must be follo%ed on all financial statement audits performed in the 1.S. True False

2. A financial statement audit must be conducted based on .AA0. True False

3. .enerall"4 the financial statements of 1.S. companies must be prepared based on .AA0. True False

10. 0CA - auditing standards must be follo%ed on all audits of public companies& financial statements. True False

Multiple Choice Questions

11. The Audit Committee consists of A. 5embers of management. -. A subcommittee of the A,C0A %ho establish the SAS. C. 5embers of the -oard of 6irectors. 6. Appointed government overseers.

12. 7hat organi(ation is responsible for setting auditing standards for audits of publicl"traded companies in the 1.S.8 A. A,C0A. -. FAS-. C. .AS-. 6. 0CA -.

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Chapter 02 - The Financial Statement Auditing Environment

1'. The 0ublic Compan" Accounting versight -oard&s role is to A. Conduct the final revie% of auditors& %or9 before the auditor&s opinion is issued. -. versee the auditors of public companies in order to protect the interests of investors. C. Conduct audits of governmental entities. 6. Sanction auditors %ho fail to follo% .AAS.

1). The authoritative bod" designed to promulgate standards concerning an accountant&s association %ith audited financial statements of an entit" that is re:uired to file financial statements %ith the SEC is the A. Financial Accounting Standards -oard. -. .eneral Accounting ffice. C. 0ublic Compan" Accounting versight -oard. 6. Auditing Standards -oard.

1*. The auditor must be independent of the audit client unless A. The lac9 of independence does not influence his or her professional ;udgment. -. -oth parties agree that the independence issue is not a problem. C. The lac9 of independence is insignificant. 6. <one of the above=the auditor cannot lac9 independence.

1+. 7hich of the follo%ing describes the 0CA - generall" accepted auditing standard re:uiring a critical revie% of the %or9 done and the ;udgment e!ercised b" those assisting in an audit at ever" level of supervision8 A. 0roficienc". -. Audit ris9. C. ,nspection. 6. 6ue care.

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Chapter 02 - The Financial Statement Auditing Environment

1/. 7hich of the follo%ing best describes the general character of the three 0CA - generall" accepted auditing standards that are classified as standards of field%or98 A. The competence4 independence4 and professional care of persons performing the audit. -. Criteria for the content of the auditor&s report on financial statements and related footnote disclosures. C. The criteria of audit planning and evidence-gathering. 6. The need to maintain independence in mental attitude in all matters relating to the audit.

12. The first 0CA - general standard re:uires that the e!amination of financial statements is to be performed b" a person or persons having ade:uate technical training and A. ,ndependence %ith respect to the financial statements and supplementar" disclosures. -. E!ercising professional care as ;udged b" peer revie%ers. C. 0roficienc" as an auditor %hich li9el" has been ac:uired from previous e!perience. 6. b;ectivit" as an auditor as verified b" proper supervision.

13. The first 0CA - standard of reporting re:uires that4 >the report shall state %hether the financial statements are presented in accordance %ith generall" accepted accounting principles.> This passage re:uires A. A statement of fact b" the auditor. -. An opinion b" the auditor. C. An implied measure of fairness. 6. An ob;ective measure of compliance.

20. -ecause of the ris9 of material misstatement4 an audit of financial statements in accordance %ith generall" accepted auditing standards should be planned and performed %ith an attitude of A. b;ective c"nicism. -. ,ndependent differentialism. C. 0rofessional s9epticism. 6. ,mpartial conservatism.

2-)

2-* . Auditor in charge of the field%or9. C. ?imited liabilit" corporations. An >in-charge> auditor t"picall" holds the ran9 of A. Associate. 6. -. The accurac" of information included in footnotes accompan"ing the audited financial statements issued b" a compan" %hose shares are traded on a stoc9 e!change is the primar" responsibilit" of A. The stoc9 e!change officials. The largest public accounting firms t"picall" are structured as A. 22. ?imited liabilit" partnerships. -. Associate. Securities and E!change Commission. 5anager. C. 0artner. T"picall"4 an e!ternal auditor first gets supervisor" e!perience at %hat level of authorit"8 A. The Securities and E!change Commission. 6. Subchapter S corporations. 6. C. The primar" responsibilit" for the ade:uac" of disclosures in the financial statements of a publicl" held compan" rests %ith the A. Senior. 2'. 0artner assigned to the audit engagement. 6. Senior. -. -.The Financial Statement Auditing Environment 21. C. -. 5anagement of the compan". The compan"&s management. The independent auditor. 6. 0rofessional corporations. 0artner. C. 2*. 2).Chapter 02 . 5anager.

-. C. '0. @eport on the entit"&s relative success in attaining profit ma!imi(ation. 6. Their offices are not at the entit"&s place of business. 5a9e recommendations for improving performance. -. 5anufacturers& assertions about product :ualit". 22. 6. Emplo"ee fraud. -. Evaluate the feasibilit" of attaining the entit"&s operational ob.The Financial Statement Auditing Environment 2+. 7hich of the follo%ing best describes the concept of ris9 assessment on %hich auditors can provide independent assurance8 A. C. Forensic audits include all of the follo%ing e!cept A. Accurac". The ris9 that financial statements are misstated because of error or fraud. Criminal investigations. C. 6eveloping client acceptance and continuance practices that minimi(e the li9elihood of la%suits against the auditor.ectives. The" are not emplo"ees of the entit" being audited. The" are paid b" parties outside of the audited entit". 2/. 5onetar" stimulus. E!ternal auditors are referred to as >e!ternal> because A. C. Evaluation. 6. 6etermine %hether the financial statements present fairl" the entit"&s operations. The ris9 that financial statements are misstated because of fraud. 6. Compliance. The" report to users outside of the audited entit". 5anagement fraud.ective of an operational audit is for the auditor to A.overnmental auditing often e!tends be"ond e!aminations leading to the e!pression of an opinion on the fairness of financial presentation and includes audits of efficienc"4 effectiveness4 and A. -. 2-+ .Chapter 02 . 6. C. 23. . 7hether management has s"stems in place to evaluate and effectivel" manage the entit"&s business ris9s. A t"pical ob. -.

The e!ternal auditor that audits the statements. -. b.general auditing standards in determining A. 5anagement and the shareholders of the organi(ation. C. C.!le" Act8 A. ''. '). '2. 6. 6. 7hether the C0A should underta9e an audit engagement. 5anagement of the organi(ation4 e:uall" %ith the e!ternal auditor that audits the statements. 7ho bears ultimate responsibilit" for the financial statements8 A. 6. . The scope of the C0A&s auditing procedures.ectivit". 6etecting or deterring fraudulent activit". C. 7hich of the follo%ing is < T a re:uirement of the Sarbanes. 7hich is not an attribute of an e!ternal auditor8 A.Chapter 02 . '*. 7hat is the general character of the %or9 conducted in performing a forensic audit for a compan"8 A. A certain number of hours4 %hich is based on the si(e of the compan" being audited4 must be spent on each audit engagement. -. A C0A is most li9el" to refer to one or more of the three 0CA . @e:uirements for the revie% of the entit" and its environment. 6. 2-/ . Client advocac". Concern for the public interest. C. C. 6. -. -. 0roviding assurance that the financial statements are not materiall" misstated. ffering an opinion on the reliabilit" of the specific assertions made b" management. .The Financial Statement Auditing Environment '1. The nature of the C0A&s report :ualification. Firms that audit public companies are sub. Audit firms cannot provide most t"pes of nonaudit services to their public compan" audit clients. -. Audit firms are re:uired to rotate audit partners off audit engagements ever" five "ears for public compan" audits. 5anagement of the organi(ation.ect to inspection b" the 0CA -.dentif"ing the causes of an entit"&s financial difficulties.ndependence.

Aualit" control and peer revie%. 0roviding ver" specific guidance about the specific activities an auditor must perform on each engagement. -. 6.general standards are concerned %ith A. 6ue professional care. 2-2 . Ade:uate training and independence. C. -. -oth b and c. Similar to financial accounting standards in that the" are developed b" the government. '/. Supervision and revie% s9ills. 6.and A1 are issued b" the 0CA -.and A1 are issued b" the AS-. 6. The main difference bet%een SAS and A1 is A.The Financial Statement Auditing Environment '+. The A. SAS define minimum standards of performance for auditors %hile A1 define financial accounting principles that must be follo%ed according to .Chapter 02 . 0roviding assurance that an auditor %ill not issue an incorrect opinion. Education and e!perience in auditing. Ade:uate training and proficienc" of the auditor4 proper planning and supervision4 and due professional care.C0A&s Statements on Auditing Standards can be described as A. C. C. 6efining the minimum standards of performance for an auditor. C. The three 0CA . -. The first 0CA . SAS are issued b" the AS. -usiness and finance courses.general standard recogni(es that regardless of ho% capable an individual ma" be in other fields4 the individual cannot meet the re:uirements of the auditing standards %ithout the proper A. '3. 6. '2. -. The" are the same e!cept that SAS are organi(ed chronologicall" and the A1 are organi(ed b" topical area. SAS are issued b" the 0CA .AA0.

.nternal auditing is a consulting activit". -.nternal auditors should help e!ternal auditors complete the annual financial statement audit. .. 6.The Financial Statement Auditing Environment )0. The efficienc" of operations. )'. The comparabilit" of financial statements bet%een periods is not materiall" affected b" changes in accounting principles that are not disclosed. -. Substantiall" different transactions and events are not accounted for on an identical basis. A. C.ective of the second 0CA .Standard of @eporting is to provide assurance that A. The ob. 6isregard an" evidence generated b" the client during the audit. -. -. E!ercise professional s9epticism during the audit. Cost accounting procedures. Accounting or revie% services. )). 6ue professional care re:uires auditors to A. )2.ectives.ective assurance activit". C. btain independent4 third part" #non-client$ documentation as evidence for all information presented in the financial statements.nternal administrative procedures. 7hich of the follo%ing is not included in the broad categor" of assurance services8 A. 6.A&s definition of internal auditing8 A.Chapter 02 . C. 7hich of the follo%ing is not e!plicitl" a part of the . . There are no variations in the format and presentation of financial statements. Evaluation of the client&s ris9 management frame%or9. 2-3 . Find ever" error contained in the financial statements prepared b" management.nternal auditing should help an organi(ation accomplish its ob. . An internal auditor is li9el" to be more concerned %ith BBBBBBBBBBBBBBBBB than the e!ternal auditor. 6. @eporting on internal control. -.nternal auditing is an ob. )1. C. 6. perational audit.nternal control. The auditor is consulted before material changes are made in the application of accounting principles. . C. . 6.

0rocedures to be used to gather evidence to support financial statements.Chapter 02 . . Acts to be performed b" the auditor. A stud" and revie% of internal controls that includes tests of controls. 6. 5anagement often is compensated based on the compan"&s profitabilit". 2-10 . )2. 7hether principles are consistentl" applied4 %hether all informative disclosures have been made and the degree of responsibilit" the auditor is ta9ing.t has delegated all of its standard-setting authorit" to the A.is incorrect8 A. -. Colding the management team accountable to shareholders and other constituents for the utili(ation of the entit"&s resources.AA0. 7hich of the follo%ing best describes %hat is meant b" generall" accepted auditing standards8 A. )/. C.t sets standards for public compan" audits. 7hich of the follo%ing best describes the role of corporate governance8 A. C. Shareholders vote to decide %ho should be members of the board of directors. The presentation of the financial statements based on .The Financial Statement Auditing Environment )*. The presentation of the financial statements based on .AAS. . )3. . -.t is a public-sector4 nonprofit corporation. C. C. The e!ercise of error-free . 6.standards of reporting are concerned %ith all of the follo%ing e!cept A. -.udgment. 7hich of the follo%ing statements regarding the 0CA . Standards of :ualit" for the auditor&s performance. -. The degree of responsibilit" the auditor is ta9ing. Audit assertions generall" determined on audit engagements. 6ue professional care re:uires A. -. 5anagement decides %hich accounting principles are the most appropriate. . 6. 6.C0A. Auditors to plan and perform their duties %ith the s9ill and care that is commonl" e!pected of accounting professionals. C. )+. 6.t is overseen b" the SEC. The four 0CA . The e!amination of all available corroborating evidence.

. E!press %hether the accounting principles used in preparing the financial statements have been applied consistentl" in the period under e!amination. *1. -. *2. Ensuring consistenc" in financial statements for periods presented. C. 6. The fourth 0CA .mpl" that the auditor is independent in fact as %ell as in appearance %ith respect to the financial statements under e!amination. C.ndicate the character of the auditor&s e!amination and the degree of responsibilit" assumed b" the auditor.standards of field%or9 are concerned %ith A. Choosing evidence %ith due professional care. C.reporting standard re:uires the auditor&s report to contain either an e!pression of opinion regarding the financial statements ta9en as a %hole or an assertion to the effect that an opinion cannot be e!pressed. 6.ective of the fourth standard is to prevent A. -. An auditor from e!pressing different opinions on each of the basic financial statements. An auditor from reporting on one basic financial statement and not the others. 6. The three 0CA . The fourth 0CA . 5anagement from reducing its final responsibilit" for the basic financial statements.Chapter 02 . The ob. 2-11 . . State that the e!amination of financial statements has been conducted in accordance %ith generall" accepted auditing standards. Ade:uate training to understand the client&s internal controls s"stem. 5isinterpretations regarding the degree of responsibilit" the auditor is assuming. -.standard of reporting re:uires an auditor to render a report %henever an auditor&s name is associated %ith financial statements.The Financial Statement Auditing Environment *0. The overall purpose of the fourth standard of reporting is to re:uire that reports A. 0lanning and supervision and understanding the client&s internal control s"stem.

**. These principles are grouped into four categories.The Financial Statement Auditing Environment Short Answer Questions *'. E!plain the five process categories and ho% the" appl" to "our business. 7hat are the four categories8 *).have collaborated on the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. The second categor" is that of >personal responsibilit" of the auditor. Dou are the o%ner of a small grocer" store4 Corner 5ar9etplace. The principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards are grouped into four categories. 2-12 .> .AAS. The .Chapter 02 .and the AS.enerall" e!plain %hat is intended b" this principle.

6escribe the organi(ations involved in standard setting for auditors in the 1nited States and %hat their respective roles are in setting current auditing standards for companies in the 1nited States. 7hat are the three 0CA .The Financial Statement Auditing Environment *+.AAS$ and %h" is each important8 2-1' . */. 6efine corporate governance4 the board of directors4 and the audit committee and e!plain ho% the" relate to each other. *2.general auditing standards found %ithin the 10 .AAS #< T the three main categories of .Chapter 02 .

The Financial Statement Auditing Environment *3. T%o months after the report is issued4 Eane discovers on the ne%s that the CE of Auagmire4 Eohnn" -est4 had been stealing small amounts of inventor". +1. Further4 he feels that no% Auagmire&s financial statements are not fairl" stated because of Eane. 5ar9 thin9s Eane did not properl" perform the audit4 as she did not discover this fraud. 7hat options does 5i9e have8 6escribe three auditing career options4 including a description of the organi(ation 5i9e %ould %or9 for. Eane performed the audit %ith due professional care and in accordance %ith generall" accepted auditing standards.oodperson performed an audit on the Auagmire Corporation and issued an un:ualified opinion. Ce %ould li9e to pursue a career in auditing. Eane soon receives a call from Auagmire&s CF 4 5ar9 -eastl".ust graduated from State 1niversit" %ith a bachelor&s degree in accounting. 5i9e has . 2-1) . Eane . 7ith respect to an entit"&s financial statements4 describe both the responsibilit" of management and of the auditor. The amount4 ho%ever4 is immaterial compared to the overall inventor" of the corporation. Co% should Eane respond to this claim8 +0. 5ar9 %ants Eane to refund her audit fees.Chapter 02 .

2-1* . .Chapter 02 . 7hat auditing standards are used to conduct an audit for a privatel"-held corporation8 7hat auditing standards are used to conduct an audit for a publicl"-traded corporation8 7hat organi(ation is responsible for setting each of these sets of standards8 +'.The Financial Statement Auditing Environment +2.dentif" and define three of these t"pes of audits. There are several t"pes of audit services that are provided b" auditors.

!le" Act #2002$.o.rofession o#er t*e . TR E AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$' (n)erstan) t*e significant c*anges t*at *a#e ta+en .lace in t*e au)iting . TR E AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$/ Recogni0e t*at au)iting is s*a.ic: .*e Conte3t of Financial Statement Au)iting '.ic: A Deca)e of C*allenge an) C*ange for Financial Statement Au)itors 2.ic: A Mo)el of Business 2-1+ .e) by t*e client1s business2 in)ustry2 an) economic en#ironment.The Financial Statement Auditing Environment Chapter 02 The Financial Statement Auditing Environment Ans%er Fe" True / False Questions 1.Chapter 02 . The primar" audit conte!t %ith %hich an auditor is concerned is the client&s industr" or business.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity. A series of business and related auditing failures led to the passage of the Sarbanes.o.o.ast )eca)e. The audit committee generall" includes senior e!ecutives of the organi(ation. FA!SE AACSB: Communication AICPA BB: In)ustry AICPA FN: Re.

orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.o. TR E AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$5 Be familiar 6it* a fi#e&com.The Financial Statement Auditing Environment ). TR E AACSB: Communication AICPA BB: Legal AICPA FN: Re.ic: A Mo)el of Business Process: Fi#e Com.o.AAS. The .te) au)iting stan)ar)s-7 . A financial statement audit is generall" organi(ed based on the five basic business processes or c"cles.onent mo)el of business . FA!SE AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$5 Be familiar 6it* a fi#e&com.onents *.ic: Au)iting Stan)ar)s 2-1/ .rinci.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.o.Chapter 02 .collaborated on a replacement for the 10 .onents +.rocesses.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. ne of the five basic business processes is the %arehousing c"cle.ic: A Mo)el of Business Process: Fi#e Com.onent mo)el of business .rocesses.and the AS.AAS standards %hich include principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards.te) au)iting stan)ar)s7 an) t*e 7.

o. A financial statement audit must be conducted based on .ublic accounting .orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. companies must be prepared based on .rinci. FA!SE AACSB: Communication AICPA BB: Legal AICPA FN: Re.te) au)iting stan)ar)s-7 .orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e . TR E AACSB: Communication AICPA BB: Legal AICPA FN: Re.o.rofession1s en#ironment.te) au)iting stan)ar)s-7 .S.AA0.te) au)iting stan)ar)s7 an) t*e 7.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.AA0.The Financial Statement Auditing Environment /.orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.ic: !rgani0ations t*at Affect t*e Public Accounting Profession 2.ic: Au)iting Stan)ar)s 3. 0CA .auditing standards must be follo%ed on all financial statement audits performed in the 1.enerall"4 the financial statements of 1.ic: Au)iting Stan)ar)s 2-12 . .te) au)iting stan)ar)s7 an) t*e 7.Chapter 02 .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.rinci. FA!SE AACSB: Communication AICPA BB: Legal AICPA FN: Re.o.S.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.

*in+ing AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity. C" 5embers of the -oard of 6irectors.ublic accounting .Chapter 02 .ic: A Mo)el of Business 12. 0CA .orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e .S.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e . FAS-.rofession1s en#ironment.C0A.8 A. .ublic accounting . -.o. 7hat organi(ation is responsible for setting auditing standards for audits of publicl"traded companies in the 1. TR E AACSB: Communication AICPA BB: Legal AICPA FN: Re. C. AACSB: Communication AICPA BB: Legal AICPA FN: Re.rofession1s en#ironment. 6.C0A %ho establish the SAS. Appointed government overseers. #" 0CA -.o.The Financial Statement Auditing Environment 10.ic: !rgani0ations t*at Affect t*e Public Accounting Profession 2-13 . -.auditing standards must be follo%ed on all audits of public companies& financial statements. A subcommittee of the A. AACSB: Analytic AICPA BB: Critical . A.ic: !rgani0ations t*at Affect t*e Public Accounting Profession Multiple Choice Questions 11. The Audit Committee consists of A.AS-.o. 5embers of management.

The auditor must be independent of the audit client unless A. C.te) au)iting stan)ar)s-7 .te) au)iting stan)ar)s7 an) t*e 7. The authoritative bod" designed to promulgate standards concerning an accountant&s association %ith audited financial statements of an entit" that is re:uired to file financial statements %ith the SEC is the A.. C.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e .rofession1s en#ironment. -.ublic accounting . The lac9 of independence is insignificant.The Financial Statement Auditing Environment 1'.ic: !rgani0ations t*at Affect t*e Public Accounting Profession 1). 6. #" <one of the above=the auditor cannot lac9 independence. Auditing Standards -oard. Sanction auditors %ho fail to follo% .ic: !rgani0ations t*at Affect t*e Public Accounting Profession 1*. -oth parties agree that the independence issue is not a problem. Financial Accounting Standards -oard.ly Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: A. Conduct audits of governmental entities.ic: Au)iting Stan)ar)s 2-20 .ublic accounting .les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.rinci. .o.Chapter 02 .eneral Accounting ffice.rofession1s en#ironment. The 0ublic Compan" Accounting versight -oard&s role is to A. AACSB: Communication AICPA BB: Legal AICPA FN: Re. The lac9 of independence does not influence his or her professional . -. C" 0ublic Compan" Accounting versight -oard.o.AAS. $" versee the auditors of public companies in order to protect the interests of investors.o.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce. 6. Conduct the final revie% of auditors& %or9 before the auditor&s opinion is issued. AACSB: Communication AICPA BB: Legal AICPA FN: Re.udgment.

rinci.te) au)iting stan)ar)s7 an) t*e 7.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. Audit ris9.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce. 7hich of the follo%ing best describes the general character of the three 0CA . AACSB: Analytic AICPA BB: Resource Management AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.te) au)iting stan)ar)s-7 Learning !b"ecti#e: $%&19 (n)erstan) t*at au)iting is a . AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.generall" accepted auditing standard re:uiring a critical revie% of the %or9 done and the . 6.udgment e!ercised b" those assisting in an audit at ever" level of supervision8 A.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce. 7hich of the follo%ing describes the 0CA . 0roficienc". The need to maintain independence in mental attitude in all matters relating to the audit. The competence4 independence4 and professional care of persons performing the audit. C" The criteria of audit planning and evidence-gathering.ic: Au)iting Stan)ar)s .en)ence: an) t*e Co)e of Professional Con)uct 2-21 .rinci.ic: Au)iting Stan)ar)s 1/.rofession t*at . .The Financial Statement Auditing Environment 1+.laces a . -.te) au)iting stan)ar)s7 an) t*e 7.Chapter 02 .te) au)iting stan)ar)s-7 .les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.ic: t*ics: In)e. Criteria for the content of the auditor&s report on financial statements and related footnote disclosures.o.generall" accepted auditing standards that are classified as standards of field%or98 A. #" 6ue care.nspection.o. C.remium on et*ical be*a#ior an) t*at is go#erne) by a Co)e of Professional Con)uct.o. -.

an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.en)ence: an) t*e Co)e of Professional Con)uct 13.ectivit" as an auditor as verified b" proper supervision.o. b.The Financial Statement Auditing Environment 12.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. An implied measure of fairness.ndependence %ith respect to the financial statements and supplementar" disclosures. E!ercising professional care as .> This passage re:uires A.ic: Au)iting Stan)ar)s . An ob.orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.general standard re:uires that the e!amination of financial statements is to be performed b" a person or persons having ade:uate technical training and A. The first 0CA . C.udged b" peer revie%ers.te) au)iting stan)ar)s-7 Learning !b"ecti#e: $%&19 (n)erstan) t*at au)iting is a .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.te) au)iting stan)ar)s7 an) t*e 7.rofession t*at .rinci. .ective measure of compliance.Chapter 02 .te) au)iting stan)ar)s7 an) t*e 7. The first 0CA .o. AACSB: Communication AICPA BB: Legal AICPA FN: Re.rinci. -.o.standard of reporting re:uires that4 >the report shall state %hether the financial statements are presented in accordance %ith generall" accepted accounting principles. AACSB: Analytic AICPA BB: Resource Management AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.ic: t*ics: In)e. A statement of fact b" the auditor.te) au)iting stan)ar)s-7 . 6. C" 0roficienc" as an auditor %hich li9el" has been ac:uired from previous e!perience.laces a . $" An opinion b" the auditor.ic: Au)iting Stan)ar)s 2-22 .remium on et*ical be*a#ior an) t*at is go#erne) by a Co)e of Professional Con)uct. 6.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.

o.onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res.ic: Society1s 3.ndependent differentialism. <no6 t*at management is . C" 0rofessional s9epticism.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$.ic: Society1s 3.onsibility for )etecting errors2 material frau)2 an) illegal acts. The Securities and E!change Commission.onsibility 2-2' .ectations an) t*e Au)itor1s Res. 6. b.The Financial Statement Auditing Environment 20. The independent auditor.ective c"nicism.o.en)ence: an) t*e Co)e of Professional Con)uct .remium on et*ical be*a#ior an) t*at is go#erne) by a Co)e of Professional Con)uct. The accurac" of information included in footnotes accompan"ing the audited financial statements issued b" a compan" %hose shares are traded on a stoc9 e!change is the primar" responsibilit" of A.onsibility 21. The stoc9 e!change officials. -ecause of the ris9 of material misstatement4 an audit of financial statements in accordance %ith generall" accepted auditing standards should be planned and performed %ith an attitude of A.rimarily res. AACSB: Analytic AICPA BB: Legal AICPA FN: Ris+ Analysis Blooms: A.onsibility for )etecting errors2 material frau)2 an) illegal actsLearning !b"ecti#e: $%&19 (n)erstan) t*at au)iting is a . C" The compan"&s management.mpartial conservatism.rimarily res. .onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res.Chapter 02 .ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$.o.laces a .ic: t*ics: In)e.. -.ectations an) t*e Au)itor1s Res. <no6 t*at management is . 6. -. . AACSB: Communication AICPA BB: Legal AICPA FN: Re.rofession t*at .

Auditor in charge of the field%or9. $" 5anagement of the compan".ic: Public Accounting Firms 2).rimarily res.osition of . Securities and E!change Commission. 0artner assigned to the audit engagement. $" Senior.ectations an) t*e Au)itor1s Res. Subchapter S corporations. <no6 t*at management is .ublic accounting firms. 0rofessional corporations. 6. 5anager. AACSB: Communication AICPA BB: Legal AICPA FN: Re. C. The largest public accounting firms t"picall" are structured as A. 6. The primar" responsibilit" for the ade:uac" of disclosures in the financial statements of a publicl" held compan" rests %ith the A. Associate.osition of .ublic accounting firms. AACSB: Communication AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$9 (n)erstan) t*e organi0ation an) com.ic: Society1s 3.The Financial Statement Auditing Environment 22. AACSB: Communication AICPA BB: Legal AICPA FN: Researc* Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$9 (n)erstan) t*e organi0ation an) com.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$.ic: Public Accounting Firms 2-2) . -.o.onsibility 2'.onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res. C.o. 6.o. T"picall"4 an e!ternal auditor first gets supervisor" e!perience at %hat level of authorit"8 A.onsibility for )etecting errors2 material frau)2 an) illegal acts. ?imited liabilit" corporations. 0artner. C" ?imited liabilit" partnerships.Chapter 02 .

The ris9 that financial statements are misstated because of error or fraud. Associate. 6eveloping client acceptance and continuance practices that minimi(e the li9elihood of la%suits against the auditor.ro#i)ers.ublic accounting firms. Criminal investigations.o.o.es of Au)itors an) Ser#ices 2/. The ris9 that financial statements are misstated because of fraud. $" Senior. AACSB: Analytic AICPA BB: Critical . 0artner.ic: Public Accounting Firms 2+.*in+ing AICPA FN: Ris+ Analysis Blooms: A. 5anagement fraud.o.ic: . 6. -. 6. Emplo"ee fraud. C. 7hich of the follo%ing best describes the concept of ris9 assessment on %hich auditors can provide independent assurance8 A. C.ic: .es of Au)itors an) Ser#ices 2-2* . 5anager. C" 7hether management has s"stems in place to evaluate and effectivel" manage the entit"&s business ris9s..osition of .Chapter 02 .ly Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance . An >in-charge> auditor t"picall" holds the ran9 of A.y. Forensic audits include all of the follo%ing e!cept A.ec*nology Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance .ro#i)ers. AACSB: Communication AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$9 (n)erstan) t*e organi0ation an) com.The Financial Statement Auditing Environment 2*.y. 6. $" 5anufacturers& assertions about product :ualit". AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging .

ic: . -. E!ternal auditors are referred to as >e!ternal> because A. Their offices are not at the entit"&s place of business.y.ic: .Chapter 02 .ectives.ro#i)ers.o. . AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging . AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty.es of Au)itors an) Ser#ices 2-2+ .ec*nology Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance . C. Evaluate the feasibilit" of attaining the entit"&s operational ob. 5onetar" stimulus. C" 5a9e recommendations for improving performance.The Financial Statement Auditing Environment 22.ro#i)ers. @eport on the entit"&s relative success in attaining profit ma!imi(ation. 6etermine %hether the financial statements present fairl" the entit"&s operations.y.ective of an operational audit is for the auditor to A. -. 6.ic: .o.o.y.es of au)itors. The" are paid b" parties outside of the audited entit". -. The" report to users outside of the audited entit". A t"pical ob. Evaluation. AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging . C" The" are not emplo"ees of the entit" being audited.es of Au)itors an) Ser#ices '0.ec*nology Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance .overnmental auditing often e!tends be"ond e!aminations leading to the e!pression of an opinion on the fairness of financial presentation and includes audits of efficienc"4 effectiveness4 and A.es of Au)itors an) Ser#ices 23. 6. #" Compliance. Accurac".

Chapter 02 .ec*nology Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance .es of Au)itors an) Ser#ices 2-2/ . . C. 6.y. C.ic: . $" Client advocac".es of Au)itors an) Ser#ices '2. . Concern for the public interest.ectivit". AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging . 0roviding assurance that the financial statements are not materiall" misstated.es of au)itors.o.The Financial Statement Auditing Environment '1.ro#i)ers.y. ffering an opinion on the reliabilit" of the specific assertions made b" management. 7hat is the general character of the %or9 conducted in performing a forensic audit for a compan"8 A.ndependence. 7hich is not an attribute of an e!ternal auditor8 A.ic: .o. b. $" 6etecting or deterring fraudulent activit". 6. AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty.dentif"ing the causes of an entit"&s financial difficulties.

-. AACSB: Communication AICPA BB: Legal AICPA FN: Re.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. C.Chapter 02 . AACSB: Communication AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: A.rofession1s en#ironment.o.ast )eca)eLearning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e .ic: Au)iting Stan)ar)s .ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$/ Recogni0e t*at au)iting is s*a.rofession o#er t*e .ic: !rgani0ations t*at Affect t*e Public Accounting Profession ').ect to inspection b" the 0CA -. -.ic: . 7hich of the follo%ing is < T a re:uirement of the Sarbanes.general auditing standards in determining A. @e:uirements for the revie% of the entit" and its environment.ic: A Deca)e of C*allenge an) C*ange for Financial Statement Au)itors .orting Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$' (n)erstan) t*e significant c*anges t*at *a#e ta+en . The nature of the C0A&s report :ualification. The scope of the C0A&s auditing procedures.o.te) au)iting stan)ar)s-7 . #" 7hether the C0A should underta9e an audit engagement.te) au)iting stan)ar)s7 an) t*e 7.ublic accounting .lace in t*e au)iting . #" A certain number of hours4 %hich is based on the si(e of the compan" being audited4 must be spent on each audit engagement.o.e) by t*e client1s business2 in)ustry2 an) economic en#ironmentLearning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. A C0A is most li9el" to refer to one or more of the three 0CA . Audit firms cannot provide most t"pes of nonaudit services to their public compan" audit clients.rinci. Audit firms are re:uired to rotate audit partners off audit engagements ever" five "ears for public compan" audits.The Financial Statement Auditing Environment ''. C.!le" Act8 A.*e Conte3t of Financial Statement Au)iting 2-22 .. Firms that audit public companies are sub.o.

onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res. The e!ternal auditor that audits the statements. -. C. AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$. C.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.ic: Au)iting Stan)ar)s 2-23 .onsibility '+. <no6 t*at management is .o.o.The Financial Statement Auditing Environment '*.rinci. AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. 5anagement and the shareholders of the organi(ation.rimarily res.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. 7ho bears ultimate responsibilit" for the financial statements8 A.te) au)iting stan)ar)s-7 . -. 6ue professional care.te) au)iting stan)ar)s7 an) t*e 7.ectations an) t*e Au)itor1s Res.onsibility for )etecting errors2 material frau)2 an) illegal acts. 5anagement of the organi(ation4 e:uall" %ith the e!ternal auditor that audits the statements.general standards are concerned %ith A. #" 5anagement of the organi(ation. Ade:uate training and independence.ic: Society1s 3. Ade:uate training and proficienc" of the auditor4 proper planning and supervision4 and due professional care. The three 0CA . #" -oth b and c.Chapter 02 .

The Financial Statement Auditing Environment '/. -usiness and finance courses. AACSB: Communication AICPA BB: Resource Management AICPA FN: Decision Ma+ing Blooms: Analy0e Difficulty: % Me)ium Learning !b"ecti#e: $%&1% (n)erstan) t*e nature of t*e Statements on Au)iting Stan)ar)s. The first 0CA .AA0. -. SAS define minimum standards of performance for auditors %hile A1 define financial accounting principles that must be follo%ed according to .te) au)iting stan)ar)s-7 .and A1 are issued b" the 0CA -.Chapter 02 . Aualit" control and peer revie%. 6.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce. The main difference bet%een SAS and A1 is A" The" are the same e!cept that SAS are organi(ed chronologicall" and the A1 are organi(ed b" topical area.ic: Au)iting Stan)ar)s '2. SAS are issued b" the 0CA . 6. AACSB: Di#ersity AICPA BB: Mar+eting AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. C.and A1 are issued b" the AS-. Supervision and revie% s9ills. C" Education and e!perience in auditing.o.te) au)iting stan)ar)s7 an) t*e 7.rinci.general standard recogni(es that regardless of ho% capable an individual ma" be in other fields4 the individual cannot meet the re:uirements of the auditing standards %ithout the proper A. -.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.o. SAS are issued b" the AS.ic: Au)iting Stan)ar)s an) t*e A( Co)ification 2-'0 .

6.ic: Au)iting Stan)ar)s an) t*e A( Co)ification )0.onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res.C0A&s Statements on Auditing Standards can be described as A.o.ectations an) t*e Au)itor1s Res. 6.Chapter 02 .The Financial Statement Auditing Environment '3. 6isregard an" evidence generated b" the client during the audit. btain independent4 third part" #non-client$ documentation as evidence for all information presented in the financial statements. -. Similar to financial accounting standards in that the" are developed b" the government. The A. Find ever" error contained in the financial statements prepared b" management. <no6 t*at management is . $" E!ercise professional s9epticism during the audit. AACSB: Communication AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&$.o. C" 6efining the minimum standards of performance for an auditor. AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1% (n)erstan) t*e nature of t*e Statements on Au)iting Stan)ar)s.onsibility 2-'1 .onsibility for )etecting errors2 material frau)2 an) illegal acts. 6ue professional care re:uires auditors to A.rimarily res. 0roviding assurance that an auditor %ill not issue an incorrect opinion. C. 0roviding ver" specific guidance about the specific activities an auditor must perform on each engagement.ic: Society1s 3.

Cost accounting procedures. Substantiall" different transactions and events are not accounted for on an identical basis. C. AACSB: Analytic AICPA BB: In)ustry AICPA FN: Ris+ Analysis Blooms: A.nternal administrative procedures.y.o.te) au)iting stan)ar)s-7 . . The ob.. An internal auditor is li9el" to be more concerned %ith BBBBBBBBBBBBBBBBB than the e!ternal auditor. 6.nternal control. There are no variations in the format and presentation of financial statements.ro#i)ers.ective of the second 0CA .o. -. .ic: Au)iting Stan)ar)s )2. #" The comparabilit" of financial statements bet%een periods is not materiall" affected b" changes in accounting principles that are not disclosed.Chapter 02 .ic: . AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.es of Au)itors an) Ser#ices 2-'2 .The Financial Statement Auditing Environment )1. -.te) au)iting stan)ar)s7 an) t*e 7.rinci.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. The auditor is consulted before material changes are made in the application of accounting principles.es of au)itorsLearning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance . C" The efficienc" of operations. A.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty.Standard of @eporting is to provide assurance that A.

C" Accounting or revie% services.o. #" .t sets standards for public compan" audits.ic: . AACSB: Communication AICPA BB: In)ustry AICPA FN: Re..t has delegated all of its standard-setting authorit" to the A.ublic accounting . . -.t is overseen b" the SEC.ectives.C0A.orting Blooms: A. AACSB: Communication AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e .o. @eporting on internal control.o. -. 7hich of the follo%ing statements regarding the 0CA .ic: .nternal auditing should help an organi(ation accomplish its ob. . . .nternal auditors should help e!ternal auditors complete the annual financial statement audit.es of Au)itors an) Ser#ices )). C.y.t is a public-sector4 nonprofit corporation.ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance .Chapter 02 .nternal auditing is a consulting activit". . #" . . 6. Evaluation of the client&s ris9 management frame%or9. AACSB: Communication AICPA BB: In)ustry AICPA FN: Researc* Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty.A&s definition of internal auditing8 A. 7hich of the follo%ing is not e!plicitl" a part of the .nternal auditing is an ob. perational audit.. C.rofession1s en#ironment.es of Au)itors an) Ser#ices )*.is incorrect8 A.ic: !rgani0ations t*at Affect t*e Public Accounting Profession 2-'' . 7hich of the follo%ing is not included in the broad categor" of assurance services8 A.y.ective assurance activit".ro#i)ers.The Financial Statement Auditing Environment )'. -.es of au)itors.

C. The e!ercise of error-free .o.te) au)iting stan)ar)s-7 .les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. -. 5anagement decides %hich accounting principles are the most appropriate.*in+ing AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$/ Recogni0e t*at au)iting is s*a. Shareholders vote to decide %ho should be members of the board of directors.The Financial Statement Auditing Environment )+.ic: Au)iting Stan)ar)s .o.ic: A Mo)el of Business 2-') . 6ue professional care re:uires A" Auditors to plan and perform their duties %ith the s9ill and care that is commonl" e!pected of accounting professionals.Chapter 02 . A stud" and revie% of internal controls that includes tests of controls. AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity.*e Conte3t of Financial Statement Au)iting )/.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.rinci.udgment. AACSB: t*ics AICPA BB: Critical .te) au)iting stan)ar)s7 an) t*e 7. 7hich of the follo%ing best describes the role of corporate governance8 A. -. C" Colding the management team accountable to shareholders and other constituents for the utili(ation of the entit"&s resources. 5anagement often is compensated based on the compan"&s profitabilit". 6. The e!amination of all available corroborating evidence.e) by t*e client1s business2 in)ustry2 an) economic en#ironmentLearning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.ic: .o. 6.

AA0. C.te) au)iting stan)ar)s-7 .les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. -. The presentation of the financial statements based on .ic: Au)iting Stan)ar)s )3. The four 0CA . C" Standards of :ualit" for the auditor&s performance.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.rinci.rinci.standards of reporting are concerned %ith all of the follo%ing e!cept A" The presentation of the financial statements based on .o.o.ic: Au)iting Stan)ar)s 2-'* . AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.Chapter 02 .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.AAS. The degree of responsibilit" the auditor is ta9ing. Audit assertions generall" determined on audit engagements. AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.te) au)iting stan)ar)s7 an) t*e 7. 0rocedures to be used to gather evidence to support financial statements.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.te) au)iting stan)ar)s-7 . 7hether principles are consistentl" applied4 %hether all informative disclosures have been made and the degree of responsibilit" the auditor is ta9ing. Acts to be performed b" the auditor. 6.The Financial Statement Auditing Environment )2.te) au)iting stan)ar)s7 an) t*e 7. 7hich of the follo%ing best describes %hat is meant b" generall" accepted auditing standards8 A. -. 6.

standard of reporting re:uires an auditor to render a report %henever an auditor&s name is associated %ith financial statements. 6.te) au)iting stan)ar)s7 an) t*e 7. AACSB: Communication AICPA BB: Legal AICPA FN: Re.te) au)iting stan)ar)s-7 .ndicate the character of the auditor&s e!amination and the degree of responsibilit" assumed b" the auditor. Ensuring consistenc" in financial statements for periods presented.Chapter 02 .mpl" that the auditor is independent in fact as %ell as in appearance %ith respect to the financial statements under e!amination.o. The three 0CA . .les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.te) au)iting stan)ar)s-7 . State that the e!amination of financial statements has been conducted in accordance %ith generall" accepted auditing standards.ic: Au)iting Stan)ar)s *1. 6.orting Blooms: Remember Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. E!press %hether the accounting principles used in preparing the financial statements have been applied consistentl" in the period under e!amination. Ade:uate training to understand the client&s internal controls s"stem.rinci.orting Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce. $" . The overall purpose of the fourth standard of reporting is to re:uire that reports A. The fourth 0CA .ic: Au)iting Stan)ar)s 2-'+ .te) au)iting stan)ar)s7 an) t*e 7.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce. C.The Financial Statement Auditing Environment *0. C. AACSB: Communication AICPA BB: Legal AICPA FN: Re.standards of field%or9 are concerned %ith A" 0lanning and supervision and understanding the client&s internal control s"stem.o. Choosing evidence %ith due professional care.rinci.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. -.

7hat are the four categories8 The four categories of principles areG 1. An auditor from e!pressing different opinions on each of the basic financial statements. AACSB: Communication AICPA BB: Legal AICPA FN: Re. These principles are grouped into four categories. 0urpose and premise of an audit4 2.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.ective of the fourth standard is to prevent A. Auditor actions in performing the audit and ). 5anagement from reducing its final responsibilit" for the basic financial statements.ic: Au)iting Stan)ar)s 2-'/ .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.te) au)iting stan)ar)s7 an) t*e 7.o.ic: Au)iting Stan)ar)s Short Answer Questions *'.o. C. An auditor from reporting on one basic financial statement and not the others.The Financial Statement Auditing Environment *2. The fourth 0CA . AACSB: Communication AICPA BB: Legal AICPA FN: Re.reporting standard re:uires the auditor&s report to contain either an e!pression of opinion regarding the financial statements ta9en as a %hole or an assertion to the effect that an opinion cannot be e!pressed.rinci.orting Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.te) au)iting stan)ar)s-7 .rinci.te) au)iting stan)ar)s-7 . The . 0ersonal responsibilities of the auditor4 '. #" 5isinterpretations regarding the degree of responsibilit" the auditor is assuming.orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. -.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. @eporting.te) au)iting stan)ar)s7 an) t*e 7.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.and the AS.Chapter 02 .have collaborated on the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. The ob.AAS.

> .orting Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.o.te) au)iting stan)ar)s-7 .enerall" e!plain %hat is intended b" this principle.ic: Au)iting Stan)ar)s 2-'2 .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.udgment4 throughout the planning and performance of the audit.The Financial Statement Auditing Environment *).rinci. The principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards are grouped into four categories. AACSB: Communication AICPA BB: Legal AICPA FN: Re.te) au)iting stan)ar)s7 an) t*e 7. The second categor" is that of >personal responsibilit" of the auditor. Auditors are responsible for having appropriate competence and capabilities to perform the auditH compl"ing %ith relevant ethical re:uirementsH and maintaining professional s9epticism and e!ercising professional .Chapter 02 .

T"picall"4 a small grocer" store %ould not have accounts receivables from customers4 as customers %ould pa" immediatel".o. .ly Difficulty: 9 =ar) Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entityLearning !b"ecti#e: $%&$5 Be familiar 6it* a fi#e&com.ic: A Mo)el of Business Process: Fi#e Com. The store %ould need to allocate proper costs to inventor" and %ould need to account for produce4 etc. Co%ever4 the revenue c"cle includes cash receipts and credit card transactions. that is e!pired. . Corner 5ar9etplace should have established policies for hiring4 training4 evaluating4 counseling4 promoting4 compensating4 and terminating emplo"ees.t ma" also have solicited other means of financing4 such as additional o%ner funds.onents 2-'3 . FinancingG The financing process involves loans or shareholder capital financing for assets such as land4 buildings4 and e:uipment.nventor" 5anagementG A grocer" store %ould have significant inventor" to manage4 %hich it accomplishes as part of the inventor" management process.The Financial Statement Auditing Environment **. 0urchasingG -usinesses ac:uire goods and services to support the sale of their o%n goods or services through the purchasing process. . E!plain the five process categories and ho% the" appl" to "our business..t might also need to purchase displa" cases4 free(ers4 etc.onent mo)el of business . @evenueG Corner 5ar9etplace %ould generate revenue through sales of food to customers and %ould collect the proceeds of those sales. Corner 5ar9etplace %ould purchase food inventor" to sell to customers. AACSB: Analytic AICPA BB: In)ustry AICPA FN: Measurement Blooms: A. Cuman @esource 5anagementG -usiness organi(ations hire personnel to perform various functions in accordance %ith the enterprise&s mission and strateg". Corner 5ar9etplace ma" have a ban9 loan or lease for its store.o.Chapter 02 .ic: A Mo)el of Business .rocesses. to store and displa" the inventor". Dou are the o%ner of a small grocer" store4 Corner 5ar9etplace.

ic: A Mo)el of Business 2-)0 . The board of directors is the bod" primaril" responsible for management oversight in corporations. Corporate governance is all the people4 processes4 and activities in place to help ensure proper ste%ardship over an entit"&s assets. The audit committee enhances corporate governance b" holding management accountable for its activities through audits of its %or9.o. The board of directors pla"s a part in ensuring proper corporate governance b" holding management responsible for the usage of the entit"&s assets.*in+ing AICPA FN: Measurement Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity. The audit committee is made up of members of the board of directors.Chapter 02 . 6efine corporate governance4 the board of directors4 and the audit committee and e!plain ho% the" relate to each other. AACSB: Analytic AICPA BB: Critical . The audit committee oversees internal and e!ternal audit %or9 done for an entit".The Financial Statement Auditing Environment *+.

ublic accounting . 6escribe the organi(ations involved in standard setting for auditors in the 1nited States and %hat their respective roles are in setting current auditing standards for companies in the 1nited States. C0As must still abide b" the A.ic: Au)iting Stan)ar)s .o.C0A&s Accounting Standards -oard #AS-$.lace in t*e au)iting . 5ost auditing standards %ere developed b" the A. Co%ever4 the Sarbanes.C0A&s Code of 0rofessional Conduct at all times.rofession o#er t*e . At that time4 the profession %as self-regulated.AAS %ith a more comprehensive and coherent description of the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards.te) au)iting stan)ar)s-7 .has replaced the 10 .ic: A Deca)e of C*allenge an) C*ange for Financial Statement Au)itors .rinci.%hen performing audits of private companies and other entities that are not public companies.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.The Financial Statement Auditing Environment */.ic: !rgani0ations t*at Affect t*e Public Accounting Profession 2-)1 .te) au)iting stan)ar)s7 an) t*e 7. The" must also follo% auditing standards set b" the AS.Chapter 02 .les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.adopted the AS-&s auditing standards on an interim basis. The AS.o.ast )eca)eLearning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e .rofession1s en#ironmentLearning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.o.!le" Act of 2002 transferred the authorit" to set auditing standards for public compan" audits to the 0ublic Compan" Accounting versight -oard #0CA -$4 %hich is overseen b" the Securities and E!change Commission #SEC$. Co%ever4 the 0CA . AACSB: t*ics AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&$' (n)erstan) t*e significant c*anges t*at *a#e ta+en .

ectivit".AAS #< T the three main categories of .o.. .an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.rinci. Auditors must be independent in fact and in appearance to protect the profession&s image of ob. This ongoing training is necessar" so auditors can sta" up to date %ith current developments in the industr".te) au)iting stan)ar)s7 an) t*e 7. AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: A.t is important that an"one %ho practices as a C0A is able to offer a certain level of service. This is gained through formal education4 continuing education programs4 and e!perience.te) au)iting stan)ar)s-7 .AAS$ and %h" is each important8 The first standard states that an auditor must have ade:uate training and proficienc" as an auditor. 7hat are the three 0CA .general auditing standards found %ithin the 10 .ic: Au)iting Stan)ar)s 2-)2 .ly Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S. The second standard re:uires that the auditor maintain an attitude of independence on an engagement.Chapter 02 . The third standard focuses on due professional care4 %hich means that the auditor plans and performs his or her duties %ith a degree of s9ill commonl" possessed b" others in the profession.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce.The Financial Statement Auditing Environment *2.

AACSB: Communication AICPA BB: Legal AICPA FN: Ris+ Analysis Blooms: A. Eane performed the audit %ith due professional care and in accordance %ith generall" accepted auditing standards. Eane .o. Co% should Eane respond to this claim8 Eane should tell 5ar9 that her responsibilit" %as to plan and perform the audit to obtain reasonable assurance about %hether the financial statements are free of material misstatement4 %hether caused b" error or fraud.ectations an) t*e Au)itor1s Res.onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res.n fact4 because of the Sarbanes. ..ic: Society1s 3. She had no responsibilit" to plan and perform the audit to obtain reasonable assurance that misstatements4 %hether caused b" errors or fraud4 that are not material to the financial statements %ill be detected.ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$.rimarily res. 5ar9 %ants Eane to refund her audit fees. Auagmire&s management4 not Eane4 has responsibilit" for the financial statements.onsibility 2-)' . Further4 he feels that no% Auagmire&s financial statements are not fairl" stated because of Eane.onsibility for )etecting errors2 material frau)2 an) illegal acts.!le" Act of 20024 5ar9 had to ta9e e!plicit responsibilit" for the financial statements b" >certif"ing> that he4 as CF 4 is responsible for establishing and maintaining internal control and that the financial statements fairl" present the entit"&s financial conditions and operations. This statement is probabl" still true4 since the amount stolen %as immaterial.The Financial Statement Auditing Environment *3. The amount4 ho%ever4 is immaterial compared to the overall inventor" of the corporation. T%o months after the report is issued4 Eane discovers on the ne%s that the CE of Auagmire4 Eohnn" -est4 had been stealing small amounts of inventor". Eane soon receives a call from Auagmire&s CF 4 5ar9 -eastl".oodperson performed an audit on the Auagmire Corporation and issued an un:ualified opinion. <no6 t*at management is .Chapter 02 . 5ar9 thin9s Eane did not properl" perform the audit4 as she did not discover this fraud.

nternal auditors ma" conduct financial4 internal control4 compliance4 operational4 and forensic audits %ithin their organi(ation. This is essentiall" a form of internal auditing and 5i9e could be emplo"ed b" federal #such as the . 5i9e %ould need to pass the 1niform C0A E!amination monitored b" the American .o.nstitute of .overnment Accountabilit" ffice or the .onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res. AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty. . Cis state ma" have other re:uirements4 such as 1*0 credit hours and e!perience.ic: Society1s 3.onsibility 2-)) . Ce %ould be directl" emplo"ed b" the entit" on %hich he is performing audits.nternal @evenue Service$4 state4 or local agencies. The financial statements are the responsibilit" of management.ic: .y. Ce %ould %or9 for a C0A firm providing independent audits to nonpublic or public companies.es of au)itors.es of Au)itors an) Ser#ices +1.nternal Auditors.o.onsibility for )etecting errors2 material frau)2 an) illegal acts. Answer could include an% three o& the &ollowing' E!ternalG 5i9e could become an e!ternal auditor.nternalG 5i9e could also be an internal auditor.Chapter 02 . ForensicG 5i9e could also be a forensic auditor.*in+ing AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$.nternal auditors are supported b" the . The" are trained in detecting4 investigating4 and deterring fraud and %hitecollar crime and are supported b" the Association of Certified Fraud E!aminers and the Association of Certified Fraud E!amines. . The auditor&s responsibilit" is to e!press an opinion on the financial statements based on the audit.The Financial Statement Auditing Environment +0. 7hat options does 5i9e have8 6escribe three auditing career options4 including a description of the organi(ation 5i9e %ould %or9 for. Ce %ould li9e to pursue a career in auditing.rimarily res.nstitute of Certified 0ublic Accountants. 7ith respect to an entit"&s financial statements4 describe both the responsibilit" of management and of the auditor. . . Forensic auditors are emplo"ed b" corporations4 government agencies4 public accounting firms4 and consulting and investigative services firms.ectations an) t*e Au)itor1s Res. 5i9e has . AACSB: Communication AICPA BB: Critical .ust graduated from State 1niversit" %ith a bachelor&s degree in accounting. <no6 t*at management is .overnmentalG Another option for 5i9e is governmental auditing.

ic: Au)iting Stan)ar)s 2-)* .te) au)iting stan)ar)s7 an) t*e 7.an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce.te) au)iting stan)ar)s-7 .orting Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S.after that point.The Financial Statement Auditing Environment +2.les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce. These standards include all those issued b" the AS.through 200'4 %hich %ere codified b" the 0CA -4 and an" ne% standards issued b" the 0CA .o. This includes the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards and the AS-&s Statements on Auditing Standards #SAS$.C0A&s Auditing Standards -oard #AS-$ are used to conduct an audit for a privatel"-held corporation or other entities that are not public companies.Chapter 02 . AACSB: Communication AICPA BB: Legal AICPA FN: Re. Auditing standards developed b" the 0ublic Compan" Accounting versight -oard #0CA -$ must be used to conduct an audit for a publicl"-traded corporation.rinci. 7hat auditing standards are used to conduct an audit for a privatel"-held corporation8 7hat auditing standards are used to conduct an audit for a publicl"-traded corporation8 7hat organi(ation is responsible for setting each of these sets of standards8 Auditing standards developed b" the A.

The auditor assesses the entit"&s performance4 identifies areas for improvement4 and develops recommendations. . preventing4 or detecting and correcting4 misstatements in the financial statements$.ro#i)ers. There are several t"pes of audit services that are provided b" auditors.nternal Control AuditG Auditors test the internal controls of a compan" to determine %hether the control s"stem is functioning effectivel" #i.dentif" and define three of these t"pes of audits. Forensic AuditG Auditors conduct forensic audits to detect or deter fraudulent activities.Chapter 02 . AACSB: Communication AICPA BB: In)ustry AICPA FN: Re. perational AuditG Auditors revie% part or all of an organi(ation&s activities to evaluate %hether resources are being used effectivel" and efficientl". .y.es of Au)itors an) Ser#ices 2-)+ . Compliance AuditG Auditors test the e!tent to %hich rules4 policies4 la%s4 covenants4 or government regulations are follo%ed b" the entit".e.o.The Financial Statement Auditing Environment +'. Answer should include an% three o& the &ollowing' Financial Statement AuditG Auditors test the transactions4 balances4 and disclosures in a set of financial statements to determine if the" are materiall" correct.orting Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance .ic: .

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