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Auditing and Assurance Services, 15e (Arens)

Chapter 2 The CPA Profession


Learning Objective 2-1
1) The legal right to perform audits is granted to a CPA firm b regulation of!
A) each state"
#) the $inancial Accounting %tandards #oard &$A%#)"
C) the American 'nstitute of Certified Public Accountants &A'CPA)"
() the Audit %tandards #oard"
Ans)er! A
Terms! Legal rights to perform audits
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
2) The four categories for describing the si-e of audit firms include! the #ig $our international
firms. national firms. regional and local firms. and small firms" /hich of the follo)ing is not a
characteristic of a small firm0
A) *ost have fe)er than 21 professionals"
#) The perform audits on small and not-for-profit businesses"
C) Ta2 services are more important to their practice than auditing"
() The do not audit publicl traded companies"
Ans)er! (
Terms! $our categories for describing si-e of audit firms
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
3) %arbanes-O2le and the %ecurities 42change Commission restrict auditors from providing
man consulting services to their publicl traded audit clients" /hich of the follo)ing is true for
auditors of publicl traded companies0
'" The are restricted from providing consulting services to privatel held companies"
''" There is no restriction on providing consulting services to non-audit clients"
A) ' onl
#) '' onl
C) ' and ''
() 5either ' or ''
Ans)er! #
Terms! %arbanes-O2le and %ecurities 42change Commission restrictions
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Topic! %O6
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9) /hich of the follo)ing statements is true as it relates to limited liabilit partnerships0
A) Onl senior partners are liable for the partnership;s debts"
#) Partners have no liabilit in a limited liabilit partnership arrangement"
C) Partners are personall liable for the acts of those under their supervision"
() All partners must be A'CPA members"
Ans)er! C
Terms! Limited liabilit partnerships
(iff! Challenging
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
1) List and describe the three factors that influence the organi-ational structure of all CPA firms"
/hat are the most common forms of CPA firm organi-ation0
Ans)er! The three factors that influence the organi-ation of a CPA firm include!
1" 'ndependence from clients" 'ndependence is important as it allo)s the auditors to remain
unbiased in dra)ing conclusions on client financial statements"
2" Auditor Competenc" Competenc allo)s auditors to conduct audits and perform services
effectivel and efficientl"
3" Litigation" The increased litigation ris, faced b auditors increases audit firm business ris,"
Certain organi-ational structures allo) a degree of personal protection to individual firm
members"
Common forms of audit firm organi-ation include!
< Limited Liabilit Partnerships
< Limited Liabilit Companies
< Professional Corporations
< =eneral Corporations
< =eneral Partnerships
< %ole Proprietorship
Terms! $actors that influence that influence the organi-ational structure of CPA firms
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
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>) List and describe the si2 organi-ational structures available to CPA firms"
Ans)er! CPA firms can ta,e one of si2 organi-ational forms!
< Proprietorship. This form is limited to firms )ith onl one o)ner"
< General partnership" This form is similar to a proprietorship: e2cept that it applies to
multiple o)ners"
< General corporation" ?nli,e a general partnership: shareholders in a general corporation are
liable onl to the e2tent of their investment in the corporation" *an states prohibit CPA firms
from organi-ing as a general corporation"
< Professional corporation" Professional corporations can have one or more shareholders"
Personal liabilit protection for shareholders in professional corporations varies )idel from
state to state"
< Limited liability company" This form combines the most favorable attributes of a general
corporation and a general partnership" LLCs are ta2ed li,e a general partnership: but its o)ners
have limited personal liabilit similar to that of a general corporation"
< Limited liability partnership" An LLP is structured and ta2ed li,e a general partnership"
@o)ever: the personal liabilit protection of an LLP is less than that of a general corporation or
an LLC: but it is greater than a general partnership" *an accounting firms no) operate as LLPs"
Terms! Organi-ational structures available to CPA firms
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
A) *an small: local accounting firms do not perform audits as their primar services to their
clients include accounting and ta2"
A) True
#) $alse
Ans)er! A
Terms! %mall accounting firms do not perform audits
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
B) All of the #ig $our accounting firms and man of the smaller CPA firms no) operate as
Limited Liabilit Partnerships"
A) True
#) $alse
Ans)er! A
Terms! Limited liabilit partnerships
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
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C) %arbanes-O2le and the %ecurities 42change Commission restrict auditors from providing
man consulting services to their publicl traded audit clients"
A) True
#) $alse
Ans)er! A
Terms! %arbanes-O2le and %ecurities 42change Commission restrict auditors
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Topic! %O6
18) Limited liabilit companies are structured and ta2ed li,e a general partnership: but their
o)ners have limited personal liabilit similar to that of a general corporation"
A) True
#) $alse
Ans)er! A
Terms! Limited liabilit companies
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Learning Objective 2-2
1) The organi-ation that is responsible for providing oversight for auditors of public companies
is called the DDDDDDDD"
A) Auditing %tandards #oard
#) American 'nstitute of Certified Public Accountants
C) Public Oversight #oard
() Public Compan Accounting Oversight #oard
Ans)er! (
Terms! Organi-ation responsible for providing oversight for auditors of public companies
(iff! 4as
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
Topic! %O6
2) *embers of the Public Compan Accounting Oversight #oard are appointed and overseen b!
A) the ?"%" Congress"
#) the American 'nstitute of Certified Public Accountants"
C) the Auditing %tandards #oard"
() the %ecurities and 42change Commission"
Ans)er! (
Terms! *embers of Public Compan Accounting Oversight #oard
(iff! 4as
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
Topic! %O6
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3) The Public Compan Accounting Oversight #oard!
A) performs inspections of the Eualit controls of audit firms that audit public companies"
#) establishes auditing standards that must be follo)ed b CPAs on all audits"
C) oversees auditors of private companies"
() performs an of the above functions"
Ans)er! A
Terms! Public Compan Accounting Oversight #oard
(iff! *oderate
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
Topic! %O6
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9) Assume the Public Compan Accounting Oversight #oard &PCAO#) identifies a violation
during its inspection of a registered accounting firm" The PCAO#!
A)
can enforce
disciplinar action
against the accounting
firm
report the matter to
the %ecurities and
42change
Commission
suspend the license to
practice of the CPA
guilt of the violation
Fes Fes Fes
#)
can enforce
disciplinar action
against the accounting
firm
report the matter to
the %ecurities and
42change
Commission
suspend the license to
practice of the CPA
guilt of the violation
Fes Fes 5o
C)
can enforce
disciplinar action
against the accounting
firm
report the matter to
the %ecurities and
42change
Commission
suspend the license to
practice of the CPA
guilt of the violation
Fes 5o 5o
()
can enforce
disciplinar action
against the accounting
firm
report the matter to
the %ecurities and
42change
Commission
suspend the license to
practice of the CPA
guilt of the violation
5o 5o 5o
Ans)er! #
Terms! Public Compan Accounting Oversight #oard inspection violations
(iff! *oderate
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
Topic! %O6
1) The %arbanes-O2le Act established the Public Compan Accounting Oversight #oard
&PCAO#)" /hat are the PCAO#;s primar functions0
Ans)er! The PCAO# has responsibilit for providing oversight to auditors of public companies:
establishing auditing and Eualit control standards for public compan audits and performing
inspections of the Eualit controls at audit firms performing those audits"
Terms! %arbanes-O2le Act. Public Compan Accounting Oversight #oard primar functions
(iff! *oderate
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
Topic! %O6
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>) The Public Compan Accounting Oversight #oard &PCAO#) provides oversight to auditors of
publicl traded and private companies"
A) True
#) $alse
Ans)er! #
Terms! Public Compan Accounting Oversight #oard
(iff! 4as
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
A) All CPA firms registered )ith the PCAO# are reEuired to undergo a peer revie) annuall"
A) True
#) $alse
Ans)er! #
Terms! PCAO# reEuirement for peer revie)
(iff! *oderate
Objective! LO 2-2
AAC%#! +eflective thin,ing s,ills
Topic! %O6
Learning Objective 2-3
1) The form that must be completed and filed )ith the %ecurities and 42change Commission
)henever a compan e2periences a significant event that is of interest to public investors is the!
A) $orm %-1"
#) $orm B-G"
C) $orm 18-G"
() $orm 18-H"
Ans)er! #
Terms! %ec form B-,: reporting significant events
(iff! *oderate
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
2) The form that must be filed )ith the %ecurities and 42change Commission )henever a
compan plans to issue ne) securities to the public is the!
A) $orm %-1"
#) $orm B-G"
C) $orm 18-G"
() $orm 18-H"
Ans)er! A
Terms! $orm must be completed and filed )ith %ecurities and 42change Commission )hen
compan plans to issue ne) securities
(iff! *oderate
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
A
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3) The A'CPA has authorit to establish standards and rules in all but )hich of the follo)ing
areas0
A) Auditing standards applicable to financial statements of private companies
#) Compilation and revie) standards
C) Professional conduct
() Auditing standards applicable to financial statements of private and public companies
Ans)er! (
Terms! A'CPA has authorit to establish standards and rules
(iff! Challenging
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
9) (iscuss the purpose of the %ecurities and 42change Commission and its influence on setting
generall accepted accounting principles"
Ans)er! The %4C: an agenc of the federal government : assists in providing investors )ith
reliable information upon )hich to ma,e investment decisions" The %4C has considerable
influence in setting generall accepted accounting principles and disclosure reEuirements for
financial statements as a result of its authorit for specifing reporting reEuirements considered
necessar for fair disclosure to investors" The %4C has po)er to establish rules for an CPA
associated )ith audited financial statements submitted to the commission" The %4C;s attitude is
generall considered in an major change proposed b the $A%#: the independent organi-ation
that establishes ?"%" =AAP"
Terms! %ecurities and 42change Commission influence on setting generall accepted accounting
principles
(iff! *oderate
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
1) The difference bet)een the %ecurities Act of 1C33 and the %ecurities Act of 1C39 is that onl
the 1C39 act reEuires audited financial statements"
A) True
#) $alse
Ans)er! #
Terms! %ecurities Acts of 1C33 and 1C39
(iff! 4as
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
>) $orm 18-G must be filed )ith the %4C )henever a public compan e2periences a significant
event"
A) True
#) $alse
Ans)er! #
Terms! $orm 18-G. %4C
(iff! *oderate
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
B
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A) The overall purpose of the %ecurities and 42change Commission is to assist in providing
investors )ith reliable information upon )hich to ma,e investment decisions"
A) True
#) $alse
Ans)er! A
Terms! %ecurities and 42change Commission
(iff! *oderate
Objective! LO 2-3
AAC%#! +eflective thin,ing s,ills
Learning Objective 2-9
1) %tatements on %tandards for Accounting and +evie) %ervices are issued b the!
A) Accounting and +evie) %ervices Committee"
#) Professional 4thics 42ecutive Committee"
C) %ecurities and 42change Commission"
() $inancial Accounting %tandards #oard"
Ans)er! A
Terms! %tatements on %tandards for Accounting and +evie) %ervices &%%A+%)
(iff! *oderate
Objective! LO 2-9
AAC%#! +eflective thin,ing s,ills
2) /hat are the major functions of the A'CPA0
Ans)er! *ajor functions of the A'CPA include!
< 4stablishing standards and rules that practicing CPAs must follo)" These standards consist
of auditing standards for auditors of private companies: compilation and revie) standards: other
attestation standards: and the Code of Professional Conduct"
< +esearch and publication on man different subjects related to accounting: auditing:
attestation and assurance services: management consulting services: and ta2es" A'CPA
publications include the Journal of Accountancy: industr audit guides: periodic updates of the
Codification of Statements on Auditing Standards: and the Code of Professional Conduct"
< Promoting the accounting profession through organi-ing national advertising campaigns"
< (eveloping specialist certifications to help mar,et and ensure the Eualit of services in
speciali-ed practice areas"
< /riting and grading the uniform CPA e2amination"
< Providing continuing education seminars for its members"
Terms! *ajor functions of A'CPA
(iff! *oderate
Objective! LO 2-9
AAC%#! +eflective thin,ing s,ills
C
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3) *embership in the A'CPA is restricted to CPAs )ho are currentl practicing as independent
auditors"
A) True
#) $alse
Ans)er! #
Terms! *embership in A'CPA
(iff! 4as
Objective! LO 2-9
AAC%#! +eflective thin,ing s,ills
9) *embership in the A'CPA is mandator for all licensed practicing CPAs"
A) True
#) $alse
Ans)er! #
Terms! *embership in A'CPA
(iff! 4as
Objective! LO 2-9
AAC%#! +eflective thin,ing s,ills
1) An public accounting firm can be a member of the A'CPA if the firm meets the membership
reEuirements"
A) True
#) $alse
Ans)er! A
Terms! *embership in A'CPA
(iff! 4as
Objective! LO 2-9
AAC%#! +eflective thin,ing s,ills
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Learning Objective 2-1
1) /hich of the follo)ing are audit standards used in professional practice b audit firms0
A)
'nternational
%tandards
on Auditing
?"%" =enerall
Accepted Auditing
%tandards
PCAO# Auditing
%tandards
Fes 5o 5o
#)
'nternational
%tandards
on Auditing
?"%" =enerall
Accepted Auditing
%tandards
PCAO# Auditing
%tandards
Fes Fes 5o
C)
'nternational
%tandards
on Auditing
?"%" =enerall
Accepted Auditing
%tandards
PCAO# Auditing
%tandards
Fes Fes Fes
()
'nternational
%tandards
on Auditing
?"%" =enerall
Accepted Auditing
%tandards
PCAO# Auditing
%tandards
5o Fes Fes
Ans)er! C
Terms! %tandards used in professional practice
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
2) $or privatel held companies )ho is responsible for establishing auditing standards0
A) %ecurities and 42change Commission
#) Public Compan Accounting Oversight #oard
C) Auditing %tandards #oard
() 5ational Association of Accounting
Ans)er! C
Terms! 4stablishing auditing standards for privatel held companies
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
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3) %tandards issued b the Public Compan Accounting Oversight #oard must be follo)ed b
CPAs )ho audit!
A) both private and public companies"
#) public companies onl"
C) private companies: public companies: and nonprofit entities"
() private companies onl"
Ans)er! #
Terms! Public Compan Accounting Oversight #oard %tandards
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Topic! %O6
9) The 'nternational %tandards on Auditing &'%As)!
A) are issued b the A'CPA"
#) override a countr;s regulations governing the audit of a compan"
C) has man of the same standards as the Auditing %tandards #oard &A%#)"
() must be follo)ed b companies )hose stoc, is traded in the ?"%"
Ans)er! C
Terms! 'nternational %tandards on Auditing. 'nternational Auditing and Assurance %tandards
#oard
(iff! *oderate
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
1) 'f an auditor of a public compan cannot find guidance issued b the PCAO# on a particular
audit matter: the auditor should generall see, guidance from )hich of the follo)ing sources0
A) %tatements on Auditing %tandards
#) %tatements on %tandards for Accounting and +evie) %ervices
C) +egulations issued b the %ecurities and 42change Commission
() The A'CPA Code of Professional Conduct
Ans)er! A
Terms! =uidance issued b PCAO#
(iff! Challenging
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Topic! %O6
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>) /hich of the follo)ing is a true statement regarding auditing standards0
A) Prior to the passage of %arbanes-O2le: the $A%# established auditing principles for ?"%"
public companies"
#) PCAO# auditing standards are applicable to entities outside the ?"%"
C) There are no similarities bet)een PCAO# standards and 'nternational %tandards on Auditing"
() The Auditing %tandards #oard has revised most of its standards to converge )ith the
international standards"
Ans)er! (
Terms! Auditing standards of ?nited %tates and 'nternational %tandards of Auditing
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
A) The PCAO# considers 'nternational %tandards on Auditing &'%As) )hen developing its
standards"
A) True
#) $alse
Ans)er! A
Terms! Public Compan Accounting Oversight #oard %tandards
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Topic! %O6
B) 'nternational %tandards on Auditing are issued b the 'nternational Auditing and Assurance
%tandards #oard"
A) True
#) $alse
Ans)er! A
Terms! 'nternational %tandards on Auditing. 'nternational Auditing and Assurance %tandards
#oard
(iff! 4as
Objective! LO 2-1
AAC%#! +eflective thin,ing s,ills
Learning Objective 2->
1) @istoricall auditing standards have been organi-ed into three categories: including!
A) %tandards of field )or,"
#) Purpose of an audit"
C) +esponsibilities of the auditor"
() Proper planning and supervision"
Ans)er! A
Terms! =AA%: general standards
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
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2) The IPrinciples ?nderling an Audit in Accordance )ith =enerall Accepted Auditing
PrinciplesI provides a frame)or, to help auditors!
A) understand the ten =AA% standards"
#) obtain complete assurance that the financial statements are free from an error"
C) report on the financial statements"
() prevent fraud"
Ans)er! C
Terms! =AA%. 5e) principles underling =AA%
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
3) /hich of the follo)ing is not one of the responsibilities of an auditor under the principles
underling an audit0
A) Possess appropriate competence and capabilities
#) Compl )ith ethical reEuirements
C) Plan )or, and supervise assistants
() *aintain professional s,epticism and e2ercise professional judgment
Ans)er! C
Terms! 5e) principles underling an audit
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
9) To obtain reasonable assurance about )hether the financial statements as a )hole are free
from material misstatement: the auditor must fulfill several performance responsibilities:
including!
A) verifing that all audit )or, is performed b a CPA )ith a minimum of three ears
e2perience"
#) obtaining sufficient: appropriate audit evidence"
C) e2ercising professional judgment"
() providing an opinion on the financial statements"
Ans)er! #
Terms! =AA%- 5e) principles underling =AA%. Purpose of an audit
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
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1) The %tatements on Auditing %tandards issued b the Auditing %tandards #oard!
A) are regarded as authoritative literature"
#) are the eEuivalent of la)s for audit practitioners"
C) must be follo)ed in all situations"
() are optional guidelines )hich an auditor ma choose to follo) or not follo) )hen conducting
an audit"
Ans)er! A
Terms! =eneral accepted auditing standards. Performance
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
>) An auditor need not abide b a particular auditing standard if the auditor believes that!
A) the issue in Euestion is immaterial in amount"
#) more e2pertise is needed to fulfill the reEuirement"
C) the reEuirement of the standard has not been addressed b the PCAO#"
() an of the above three are correct"
Ans)er! A
Terms! Auditor need not abide b a particular auditing standard
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
A) /hen assessing the ris, of material misstatements in the financial statements:
A) inadeEuate internal control procedures )ill mitigate client business ris,"
#) =AA% specifies in detail ho) much and )hat tpes of evidence the auditor needs to obtain"
C) compan management is responsible for determining materialit levels"
() the auditor must have an understanding of the client;s business and industr"
Ans)er! (
Terms! =eneral accepted auditing standards. Performance
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
B) 'n order to properl plan and perform an audit: an important fact for both the auditor and the
client to understand is that!
A) the internal control policies and procedures are developed b the auditors"
#) the purpose of an audit is to prevent fraud"
C) management is responsible for the preparation of the financial statements"
() management can restrict the auditor;s access to important information relevant to the financial
statements"
Ans)er! C
Terms! =AA%- 5e) principles underling =AA%. Purpose of an audit
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
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C) /hich of the follo)ing statements best describes the primar purpose of %tatements on
Auditing %tandards0
A) The are guides intended to set forth auditing procedures that are applicable to a variet of
situations"
#) The are procedural outlines that are intended to narro) the areas of inconsistenc and
divergence of auditor opinion"
C) The are authoritative statements: enforced through the Code of Professional Conduct: and
are intended to limit the degree of auditor judgment"
() The are interpretations that are intended to clarif the meaning of Igenerall accepted
auditing standards"I
Ans)er! (
Terms! Purpose of %tatements on Auditing %tandards
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
18) @ansen Corporation;s stoc, is listed on a national stoc, e2change and registered )ith the
%ecurities and 42change Commission" @ansen;s management hires a CPA to perform an
independent audit of @ansen;s financial statements" The primar objective of this audit is to
provide assurance to the!
A) investors in @ansen Corporation;s stoc,"
#) stoc, e2change"
C) %ecurities and 42change Commission"
() management of @ansen Corporation"
Ans)er! A
Terms! Primar objective of audit to provide assurance
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
11) /hich of the follo)ing statements about =enerall Accepted Audit %tandards are true0
'" The serve as broad guidelines to auditors for conducting an audit engagement"
''" The are sufficientl specific to provide an meaningful guide to practitioners"
'''" The represent a frame)or, upon )hich the A'CPA can provide interpretations""
A) ' and ''
#) ' and '''
C) '' and '''
() ': '' and '''
Ans)er! #
Terms! =enerall Accepted Audit %tandards
(iff! Challenging
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
1>
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12) =enerall Accepted Auditing %tandards &=AA%) and %tatements on Auditing %tandards
&%A%) should be loo,ed upon b practitioners as!
A) ideals to )or, to)ards: but )hich are not achievable"
#) ma2imum standards that denote e2cellent )or,"
C) minimum standards of performance that must be achieved on each audit engagement"
() benchmar,s to be used on all audits: revie)s: and compilations"
Ans)er! C
Terms! =enerall Accepted Auditing %tandards &=AA%) and %tatements on Auditing %tandards
&%A%)
(iff! Challenging
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
13) %tatements on Auditing %tandards issued b the A'CPA;s Auditing %tandards #oard are!
A) part of the generall accepted auditing standards under the A'CPA Code of Professional
Conduct"
#) interpretations of generall accepted auditing standards and departures from such statements
must be justified"
C) interpretations of generall accepted auditing standards and such standards must be follo)ed
in ever engagement"
() generall accepted auditing procedures that are not covered b the A'CPA Code of
Professional Conduct"
Ans)er! #
Terms! %tatements on Auditing %tandards
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
19) List the four principles underling an audit"
Ans)er!
< Purpose of an audit
< +esponsibilities
< Performance
< +eporting
Terms! =AA%. 5e) principles underling =AA%
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
1A
Copright 7 2819 Pearson 4ducation: 'nc"
11) (istinguish bet)een generall accepted auditing standards &=AA%) and generall accepted
accounting principles &=AAP)" /hat professional organi-ation establishes =AA%0 /hat
professional organi-ation establishes =AAP0
Ans)er! =enerall 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 Eualities that the auditor should possess" The standards of field
)or, concern evidence accumulation and other activities during the actual conduct of the audit"
The reporting standards reEuire the auditor to prepare a report on the financial statements ta,en
as a )hole: stating )hether the statements are prepared in accordance )ith =enerall Accepted
Accounting Principles &=AAP)" The are considered to be the minimum standards of
performance for auditors to follo) and are established b the Auditing %tandards #oard of the
American 'nstitute of Certified Public Accountants for private companies and b the Public
Compan Accounting Oversight #oard for public companies" =enerall accepted accounting
principles are the guidelines )hich an entit;s management normall follo)s )hen preparing
historical financial statements" =AAP is established b the $inancial Accounting %tandards
#oard"
Terms! =enerall Accepted Auditing %tandards
(iff! 4as
Objective! LO 2-1 and LO 2->
AAC%#! +eflective thin,ing s,ills
1>) Professional s,epticism must be maintained onl if the auditor suspects fraud"
A) True
#) $alse
Ans)er! #
Terms! =enerall Accepted Auditing %tandards. +esponsibilities
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
1A) %tatements on Auditing %tandards &%A%s) are issued b the Public Compan Accounting
Oversight #oard"
A) True
#) $alse
Ans)er! #
Terms! %tatements on Auditing %tandards &%A%). Public Compan Accounting Oversight #oard
(iff! 4as
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
1B
Copright 7 2819 Pearson 4ducation: 'nc"
1B) The %A% number identifies the order in )hich it )as issued in relation to all other %A%s"
A) True
#) $alse
Ans)er! A
Terms! %tatements on Auditing %tandards &%A%). =enerall accepted auditing standards
(iff! *oderate
Objective! LO 2->
AAC%#! +eflective thin,ing s,ills
Learning Objective 2-A
1) /hich of the follo)ing is not true for audit firms )ho audit publicl traded companies0
A) The must undergo a PCAO# inspection on an annual basis if the audit more than 188
issuers"
#) The must have an A'CPA peer revie) on all audit clients"
C) The must have an A'CPA peer revie) on all non-publicl traded clients"
() The audit firm can choose )hich CPA firm the )ish to conduct their A'CPA peer revie)"
Ans)er! #
Terms! Audit firms )ho audit publicl traded companies
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
2) The methods used b a CPA firm to ensure that the firm meets is professional responsibilities
to clients and others is!
A) continuing professional education"
#) compliance )ith generall accepted reporting standards"
C) Eualit control"
() peer revie)"
Ans)er! C
Terms! Hualit control policies and procedures
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
3) /ithin the conte2t of Eualit control: the primar purpose of continuing professional
education and training activities is to enable a CPA firm to provide its personnel )ith!
A) technical training that assures proficienc as a valuation e2pert"
#) professional education that is reEuired in order to perform )ith due professional care"
C) ,no)ledge reEuired to fulfill assigned responsibilities"
() ,no)ledge reEuired to perform a peer revie)"
Ans)er! C
Terms! Hualit control. Continuing professional education and training activities
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
1C
Copright 7 2819 Pearson 4ducation: 'nc"
9) The purpose of establishing Eualit control policies and procedures to accept or continue a
client relationship is to!
A) provide reasonable assurance that personnel are adeEuatel trained to fulfill their
responsibilities"
#) monitor the ris, factors concerning misstatements that arise from the misappropriation of
assets"
C) document objective criteria for the CPA firm;s peer revie)"
() minimi-e the li,elihood of associating )ith a client )hose management ma lac, integrit"
Ans)er! (
Terms! Purpose of Eualit control policies and procedures to accept or continue client
relationship
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
1) /hich of the follo)ing is an element of the CPA;s Eualit control sstem that should be
considered in establishing its Eualit control policies and procedures0
A) Considering audit ris, and materialit
#) ?sing statistical sampling techniEues
C) Assigning personnel to engagements
() Compling )ith la)s and regulations
Ans)er! C
Terms! Hualit control policies and procedures
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
>) /hich of the follo)ing is not an essential component of Eualit control0
A) Policies and procedures to ensure that firm personnel are activel engaged in mar,eting
strategies
#) Policies and procedures to ensure that the )or, performed b firm personnel meet applicable
professional standards
C) Policies to ensure that personnel maintain their independence in fact and in appearance
() Policies that ensure that monitoring activities are effectivel applied
Ans)er! A
Terms! Component of Eualit control
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
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A) /hich one of the follo)ing is not true regarding the American 'nstitute of Certified Public
Accountants peer revie) reEuirement0
A) A CPA firm must develop and adhere to Eualit control standards"
#) Peer revie)s are mandator"
C) A CPA firm )ill lose A'CPA eligibilit if a peer revie) is not performed"
() $irms reEuired to be registered )ith and inspected b the PCAO# are e2empt"
Ans)er! (
Terms! A'CPA peer revie)
(iff! Challenging
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
B) (iscuss the relationship bet)een Eualit control and generall accepted auditing standards"
Ans)er! $or a CPA firm: Eualit control encompasses the methods used to ma,e sure that the
firm meets its professional responsibilities to clients" Hualit control is closel related to: but
distinct from: =AA%" The standards recogni-e that a Eualit control sstem can provide onl
reasonable assurance: not a guarantee that auditing standards are follo)ed" A CPA firm must
ma,e sure that =AA% are follo)ed on ever audit" Hualit controls are the procedures used b
the entire CPA firm that help it meet reEuirements demanded b =AA% on ever engagement in
a consistent manner"
Terms! +elationship bet)een Eualit control and generall accepted auditing standards
(iff! 4as
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
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C) List and describe the si2 elements of Eualit control" /ho establishes the standards for Eualit
control0
Ans)er!
< Leadership responsibilities for quality within the firm - $irm should promote a culture that
Eualit is essential in performing engagements and should establish policies and procedures that
support that culture"
< ele!ant ethical requirements - Personnel on engagements should maintain independence in
fact and in appearance: perform all professional responsibilities )ith integrit and maintain
objectivit in performing their professional responsibilities"
< "uman esources - Policies and procedures should be established to provide the firm )ith
reasonable assurance that all ne) personnel are Eualified to perform their )or,: )or, is assigned
to personnel )ho have adeEuate training: and personnel should participate in continuing
professional education"
< Acceptance and continuation of clients and engagements - Policies and procedures should be
established for deciding )hether to accept or continue a client relationship" These policies should
minimi-e the ris, of associating )ith a client )hose management lac,s integrit"
< #ngagement performance - Policies and procedures should e2ist to ensure that engagement
personnel perform )or, that meets applicable professional standards and the firm;s standards of
Eualit"
< $onitoring - Policies and procedures should e2ist to ensure that the other Eualit control
elements are being effectivel applied"
Hualit control standards are established b the Auditing %tandards #oard for auditors of private
companies and b the Public Compan Accounting Oversight #oard for auditors of public
companies"
Terms! 4lements of Eualit controls
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
22
Copright 7 2819 Pearson 4ducation: 'nc"
18) Listed belo) are policies or procedures that the Crstal Cove audit firm has in place" $or
each identified polic or procedure state if it is a =enerall Accepted Audit %tandard &=AA%) or
a Hualit Control %tandard"
Audit firm Polic or Procedure
1" (etermination on )hether to accept or
reject a ne) client"
2" A client evaluation form"
3" All personnel participate in continuing
professional education"
9" Conducting the audit )ith professional
s,epticism"
1" Ans)ering an independence
Euestionnaire"
>" (etermine and appl materialit levels"
A" Audit staff )or,papers are revie)ed b
audit seniors: then managers"
B" Plan )or, and supervise assistants"
%tandards Categor
a" =AA%
b" Hualit Control
Ans)er!
1" a
2" b
3" b
9" a
1" b
>" a
A" b
B" a
Terms! =enerall Accepted Audit %tandards &=AA%) and Hualit Control %tandards
(iff! *oderate
Objective! LO 2-> and LO 2-A
AAC%#! +eflective thin,ing s,ills
23
Copright 7 2819 Pearson 4ducation: 'nc"
11) The follo)ing are definitions of terms that are listed on the right" *atch the definition )ith
its associated term" 4ach term can be used once: more than once or not at all"
(efinition
1" An organi-ational structure )here professional
services are provided b one or more shareholders"
2" The grantor of the right to practice public
accounting"
3" A report filed to indicate a significant event"
9" %ets professional standards and rules for auditors"
1" Oversees accounting firms )ho audit public
companies"
>" An organi-ational structure )here the o)ners are
ta2ed li,e a partnership and have limited personal
liabilit"
A" A report that is filed )hen a compan )ishes to
issue ne) securities"
B" The methods used to ensure the firm meets its
professional responsibilities to clients and others"
C" Assists in providing investors )ith reliable
information"
18" +eEuires annual inspections of accounting firms
auditing J 188 issuers"
11" Practice monitoring b a CPA firm for another
CPA firm"
12" $ulfilling duties diligentl and carefull"
13" +eEuires a registration statement"
Audit Term
a" A'CPA
b" PCAO#
c" %ecurities 42change
Commission
d" $orm 18-,
e" 'AA%#
f" $orm %-1
g" (ue professional care
h" Limited Liabilit Partnership
i" Professional Corporation
j" Limited Liabilit Compan
," Peer revie)
l" 1C33 %ecurities Act
m" 1C39 %ecurities Act
n" $orm B-,
o" %tate +egulation
p" Code of Professional Conduct
E" Hualit Control %tandards
r" =AA% %tandards
Ans)er!
1" i
2" o
3" n
9" a
1" b
>" j
A" f
B" E
C" c
18" b
11" ,
12" g
13" l
Terms! A'CPA. PCAO#. %ecurities 42change Commission. $orm %-1. $orm B-G. (ue
professional care. Professional Corporation. Limited Liabilit Compan. Peer revie). 1C33
%ecurities Act. %tate +egulation. Hualit Control %tandards
(iff! *oderate
Objective! LO 2-1: LO 2-2: LO 2-3: LO 2->: and LO 2-A
AAC%#! +eflective thin,ing s,ills
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Copright 7 2819 Pearson 4ducation: 'nc"
12) Hualit controls are established for the entire CPA firm )hereas =AA% are applicable to the
individual engagement"
A) True
#) $alse
Ans)er! A
Terms! Hualit controls and =AA%
(iff! *oderate
Objective! LO 2-A
AAC%#! +eflective thin,ing s,ills
21
Copright 7 2819 Pearson 4ducation: 'nc"