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" Anser! A Terms! Legal rights to perform audits (iff! *oderate Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills 2) The four categories for describing the sie of audit firms include! the #ig $our international firms. national firms. regional and local firms. and small firms" /hich of the folloing is not a characteristic of a small firm0 A) *ost have feer than 2 professionals" #) The perform audits on small and not-for-profit no t-for-profit businesses" C) Ta services are more important to their practice than auditing" () The do not audit publicl traded companies" Anser! ( Terms! $our categories for describing describing sie of audit firms firms (iff! *oderate Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills 3) %arbanes-Ole and the %ecurities 4change Commission restrict auditors from providing man consulting services to their publicl traded audit clients" /hich of the folloing is true for auditors of publicl traded companies0 '" The are restricted from from providing providing consulting services to privatel held companies" ''" There is no restriction on providing providing consulting services services to non-audit clients" A) ' onl #) '' onl C) ' and '' () 5either ' or '' Anser! # Terms! %arbanes-Ole and %ecurities 4change Commission restrictions restrictions (iff! *oderate Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6
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9) /hich of the folloing 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 u nder their supervision" () All partners must be A'CPA members" Anser! C Terms! Limited liabilit partnerships (iff! Challenging Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) List and describe the three factors that influence the organiational structure of all CPA firms" /hat are the most common forms of CPA firm organiation0 Anser! The three factors that influence the organiation of a CPA firm include! 1" 'ndependence from clients" 'ndependence is important as it allos the auditors to remain unbiased in draing conclusions on client financial statements" 2" Auditor Competenc" Competenc allos auditors to conduct audits and perform services effectivel and efficientl" 3" Litigation" The increased litigation ris, faced b au ditors increases audit firm business ris," Certain organiational structures allo a degree of personal protection to individual firm members" Common forms of audit firm organiation include! < Limi Limite ted d Lia Liabi bili lit t Part Partner nersh ship ipss < Limi Limite ted d Liab Liabil ilit it Comp Compan anie iess < Prof Profes essi sion onal al Cor Corpo pora rati tion onss < =ene =enerral Corp Corpor orat atiions ons < =ene =enerral Par Parttner nershi ships < %ol %ole Pro Propr priietor etorsh shiip Terms! $actors that influence that influence influence the organiational structure of CPA firms (iff! *oderate Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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>) List and describe the si organiational structures available to CPA firms" Anser! CPA firms can ta,e ta,e one of si organiational forms! forms! < Proprietorship. This Proprietorship. This form is limited to firms ith onl one oner" < General partnership" partnership" This form is similar to a proprietorship: ecept that it applies to multiple oners" < General corporation" corporation" ?nli,e a general partnership: shareholders in a general corporation are liable onl to the etent of their investment in the corporation" *an states prohibit CPA firms from organiing as a general corporation" < Professional corporation" 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" company" This form combines the most favorable attributes of a general corporation and a general partnership" LLCs are taed li,e a general partnership: but bu t its oners have limited personal liabilit similar to that of a general corporation" < Limited liability partnership" partnership" An LLP is structured and taed li,e a general partnership" @oever: 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 op erate as LLPs" Terms! Organiational structures available to CPA firms (iff! *oderate Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) *an small: local accounting firms do not perform audits as their primar services to their clients include accounting and ta" A) True #) $alse Anser! A Terms! %mall accounting firms firms do not perform perform audits (iff! 4as Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills 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 Anser! A Terms! Limited liabilit partnerships (iff! 4as Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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) %arbanes-Ole and the %ecurities 4change Commission restrict auditors from providing man consulting services to their publicl traded audit clients" A) True #) $alse Anser! A Terms! %arbanes-Ole and %ecurities 4change Commission restrict restrict auditors (iff! 4as Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 18) Limited liabilit companies are structured and taed li,e a general partnership: but their oners have limited personal liabilit similar to that of a general corporation" A) True #) $alse Anser! A Terms! Limited liabilit companies (iff! *oderate Objective! LO 2-1 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Learning Objective 2-2 1) The organiation that is responsible for providing ove rsight 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 Anser! ( Terms! Organiation responsible for providing providing oversight for auditors of public companies (iff! 4as Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 2) *embers of the Public Compan Accounting Acco unting 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 4change Commission" Anser! ( Terms! *embers of Public Public Compan Accounting Oversight #oard (iff! 4as Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 9
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 folloed b CPAs on all audits" C) oversees auditors of private companies" () performs an of the above functions" Anser! A Terms! Public Compan Accounting Oversight #oard (iff! *oderate Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6
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 report the matter to disciplinar action the %ecurities and suspend the license to against the accounting 4change practice of the CPA firm Commission guilt of the violation Fes Fes Fes #) can enforce report the matter to disciplinar action the %ecurities and suspend the license to against the accounting 4change practice of the CPA firm Commission guilt of the violation Fes Fes 5o C) can enforce report the matter to disciplinar action the %ecurities and suspend the license to against the accounting 4change practice of the CPA firm Commission guilt of the violation Fes 5o 5o () can enforce report the matter to disciplinar action the %ecurities and suspend the license to against the accounting 4change practice of the CPA firm Commission guilt of the violation 5o 5o 5o Anser! # Terms! Public Compan Accounting Oversight Oversight #oard inspection violations (iff! *oderate Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 ) The %arbanes-Ole Act established the Public Compan Accounting Oversight #oard &PCAO#)" /hat are the PCAO#;s primar functions0 Anser! The PCAO# has responsibilit responsibilit for providing oversight to auditors of public companies: 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-Ole Act. Public Compan Accounting Oversight #oard primar functions functions (iff! *oderate Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 >
>) The Public Compan Accounting Accou nting Oversight #oard &PCAO#) provides oversight to auditors of publicl traded and private companies" A) True #) $alse Anser! # Terms! Public Compan Accounting Oversight #oard (iff! 4as Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) All CPA firms registered ith the PCAO# are reEuired to undergo a peer revie annuall" A) True #) $alse Anser! # Terms! PCAO# reEuirement for peer revie (iff! *oderate Objective! LO 2-2 AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 Learning Objective 2-3 1) The form that must be completed and an d filed ith the %ecurities and 4change Commission henever a compan eperiences e periences 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" Anser! # Terms! %ec form B-,: reporting significant events (iff! *oderate Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills s,ills 2) The form that must be filed ith the %ecurities % ecurities and 4change 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" Anser! A Terms! $orm must be completed and filed filed ith %ecurities and 4change Commission Commission hen compan plans to issue ne securities (iff! *oderate Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills s,ills
3) The A'CPA has authorit to establish standards and rules in all but hich of the folloing 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 Anser! ( Terms! A'CPA has authorit authorit to establish establish standards and rules rules (iff! Challenging Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills s,ills 9) (iscuss the purpose of the %ecurities and 4cha nge Commission and its influence on setting generall accepted accounting principles" Anser! The %4C: an agenc of the federal government government : assists in 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 poer 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 organiation that establishes ?"%" =AAP" Terms! %ecurities and 4change Commission Commission influence on setting generall accepted accounting principles (iff! *oderate Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) The difference beteen the %ecurities %ecu rities Act of 133 and the %ecurities Act of 139 is that onl the 139 act reEuires audited financial statements" A) True #) $alse Anser! # Terms! %ecurities Acts of 133 and 139 (iff! 4as Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills s,ills >) $orm 18-G must be filed ith the %4C henever a public compan eperiences a significant event" A) True #) $alse Anser! # Terms! $orm 18-G. %4C (iff! *oderate Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills s,ills B
) The overall purpose of the %ecurities % ecurities and 4change Commission is to assist in providing investors ith reliable information upon hich to ma,e investment decisions" A) True #) $alse Anser! A Terms! %ecurities and 4change Commission Commission (iff! *oderate Objective! LO 2-3 AAC%#! +eflective thin,ing thin,ing s,ills 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 4ecutive Committee" C) %ecurities and 4change Commission" () $inancial Accounting %tandards #oard" Anser! A Terms! %tatements on %tandards for Accounting and +evie %ervices &%%A+%) (iff! *oderate Objective! LO 2-9 AAC%#! +eflective thin,ing thin,ing s,ills s,ills 2) /hat are the major functions of the A'CPA0 Anser! *ajor functions of the A'CPA A'CPA include! < 4stablishi 4stablishing ng standards standards and rules rules that that practic practicing ing CPAs CPAs must must follo" follo" These standards standards consis consistt of auditing standards for auditors of private companies: compilation and revie standards: other attestation standards: and the Code of Professional Conduct " < +esearch +esearch and publication publication on man man different different subjects subjects related related to accounting: accounting: auditi auditing: ng: attestation and assurance services: management consulting services: and taes" A'CPA publications include the Journal the Journal of Accountancy: Accountancy: industr audit guides: periodic updates of the Codification of Statements on Auditing Standards: Standards: and the Code of Professional Conduct " < Promoting Promoting the the accountin accounting g professio profession n through through organi organiing ing nationa nationall advertis advertising ing campaig campaigns" ns" < (eveloping (eveloping special specialist ist certif certificati ications ons to help mar,et mar,et and and ensure ensure the the Eualit Eualit of services services in specialied practice areas" < /riti /riting ng and and grad grading ing the unifor uniform m CPA CPA eamina eaminatio tion" n" < Provid Providing ing cont continu inuing ing educ educati ation on semi seminar narss for its member members" s" Terms! *ajor functions functions of A'CPA (iff! *oderate Objective! LO 2-9 AAC%#! +eflective thin,ing thin,ing s,ills s,ills
3) *embership in the A'CPA is restricted to CPAs ho are cu rrentl practicing as independent auditors" A) True #) $alse Anser! # Terms! *embership in A'CPA (iff! 4as Objective! LO 2-9 AAC%#! +eflective thin,ing thin,ing s,ills s,ills 9) *embership in the A'CPA is mandator for all licensed p racticing CPAs" A) True #) $alse Anser! # Terms! *embership in A'CPA (iff! 4as Objective! LO 2-9 AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) An public accounting firm can be a member of the A'CPA if the firm meets the membership reEuirements" A) True #) $alse Anser! A Terms! *embership in A'CPA (iff! 4as Objective! LO 2-9 AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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Learning Objective 2- 1) /hich of the folloing are audit standards used in professional practice b audit firms0 A) 'nternational ?"%" =enerall PCAO# Auditing %tandards Accepted Auditing %tandards on Auditing %tandards Fes 5o 5o #) 'nternational %tandards on Auditing Fes
?"%" =enerall Accepted Auditing %tandards Fes
PCAO# Auditing %tandards
'nternational %tandards on Auditing Fes
?"%" =enerall Accepted Auditing %tandards Fes
PCAO# Auditing %tandards
'nternational %tandards on Auditing 5o
?"%" =enerall Accepted Auditing %tandards Fes
PCAO# Auditing %tandards
5o
C)
Fes
()
Fes
Anser! C Terms! %tandards used in professional practice (iff! 4as Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills 2) $or privatel held companies ho is responsible for establishing auditing standards0 A) %ecurities and 4change Commission #) Public Compan Accounting Oversight #oard C) Auditing %tandards #oard () 5ational Association of Accounting Anser! C Terms! 4stablishing auditing standards standards for privatel privatel held companies (iff! 4as Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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3) %tandards issued b the Public Compan Accounting Oversight #oard must be folloed b CPAs ho audit! A) both private and public companies" #) public companies onl" C) private companies: public companies: and nonprofit entities" () private companies onl" Anser! # Terms! Public Compan Accounting Accounting Oversight #oard %tandards (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills 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 folloed b companies hose stoc, is traded in the ?"%" Anser! C Terms! 'nternational %tandards on Auditing. 'nternational Auditing and Assurance Assurance %tandards #oard (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) '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 folloing sources0 A) %tatements on Auditing %tandards #) %tatements on %tandards for Accounting and +evie %ervices C) +egulations issued b the %ecurities and 4change Commission () The A'CPA Code of Professional Conduct Anser! A Terms! =uidance issued b PCAO# (iff! Challenging Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6
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>) /hich of the folloing is a true statement regarding auditing standards0 A) Prior to the passage of %arbanes-Ole: the $A%# established auditing principles for ?"%" public companies" #) PCAO# auditing standards are applicable to entities outside the ?"%" C) There are no similarities beteen PCAO# standards and 'nternational %tandards on Auditing" () The Auditing %tandards #oard has revised most of its standards to converge ith the international standards" Anser! ( Terms! Auditing standards of ?nited ?nited %tates and 'nternational %tandards of Auditing (iff! 4as Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) The PCAO# considers 'nternational %tandards on Auditing &'%As) hen d eveloping its standards" A) True #) $alse Anser! A Terms! Public Compan Accounting Accounting Oversight #oard %tandards (iff! 4as Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills Topic! %O6 B) 'nternational %tandards on Auditing are issued b the 'nternational Auditing and Assurance %tandards #oard" A) True #) $alse Anser! A Terms! 'nternational %tandards on Auditing. 'nternational Auditing and Assurance Assurance %tandards #oard (iff! 4as Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills Learning Objective 2-> 1) @istoricall auditing standards have been organied into three categories: including! A) %tandards of field or," #) Purpose of an audit" C) +esponsibilities of the auditor" () Proper planning and supervision" Anser! A Terms! =AA%: general standards standards (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 13
2) The IPrinciples ?nderling an Audit in Acco rdance ith =enerall Accepted Auditing PrinciplesI provides a frameor, 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" Anser! C Terms! =AA%. 5e principles underling underling =AA% (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 3) /hich of the folloing is not one of the responsibilities of an auditor aud itor 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 eercise professional judgment Anser! C Terms! 5e principles underling an audit (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 9) To obtain reasonable assurance about abou t 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 eperience" #) obtaining sufficient: appropriate audit evidence" C) eercising professional judgment" () providing an opinion on the financial statements" Anser! # Terms! =AA%- 5e principles principles underling =AA%. Purpose of an audit (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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) The %tatements on Auditing %tandards issued b the Auditing %tandards #oard! A) are regarded as authoritative literature" #) are the eEuivalent of las for audit practitioners" C) must be folloed in all situations" () are optional guidelines hich an auditor au ditor ma choose to follo or not follo hen conducting an audit" Anser! A Terms! =eneral accepted auditing auditing standards. Performance (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills 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 epertise is needed to fulfill the reEuirement" C) the reEuirement of the standard has not n ot been addressed b the PCAO#" () an of the above three are correct" Anser! A Terms! Auditor need not abide b a particular particular auditing standard (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) /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" Anser! ( Terms! =eneral accepted auditing auditing standards. Performance (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills 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" Anser! C Terms! =AA%- 5e principles principles underling =AA%. Purpose of an audit (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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) /hich of the folloing 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 a nd 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 Anser! ( Terms! Purpose of %tatements on Auditing %tandards (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 18) @ansen Corporation;s stoc, is listed on a national stoc, echange and registered ith the %ecurities and 4change Commission" @ansen;s management h ires a CPA to perform an independent audit of @ansen;s financial statements" The primar ob jective of this audit is to provide assurance to the! A) investors in @ansen Corporation;s stoc," #) stoc, echange" C) %ecurities and 4change Commission" () management of @ansen Corporation" Anser! A Terms! Primar objective of audit to provide assurance (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 11) /hich of the folloing statements about =enerall Accepted Audit %tandards are true0 '" The serve serve as broad guidelines guidelines to to auditors auditors for for conducti conducting ng an audit audit engageme engagement" nt" ''" The are sufficient sufficientl l specific specific to provide an meaningful meaningful guide to practiti practitioners" oners" '''" The represent a frameor, upon hich the the A'CPA can provide interpretations"" interpretations"" A) ' and '' #) ' and ''' C) '' and ''' () ': '' and ''' Anser! # Terms! =enerall Accepted Audit %tandards %tandards (iff! Challenging Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills
1>
12) =enerall Accepted Auditing %tandards &=AA%) and %tatements on Auditing %tandards &%A%) should be loo,ed upon b practitioners as! A) ideals to or, toards: but hich are not achievable" #) maimum standards that denote ecellent or," C) minimum standards of performance that must be achieved on each audit engagement" engag ement" () benchmar,s to be used on all audits: revies: and compilations" Anser! C Terms! =enerall Accepted Auditing %tandards &=AA%) and %tatements on Auditing %tandards %tandards &%A%) (iff! Challenging Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills 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 folloed in ever engagement" () generall accepted auditing procedures that are not covered b the A'CPA Code of Professional Conduct " Anser! # Terms! %tatements on Auditing %tandards (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 19) List the four principles underling an audit" Anser! < Pur Purpos pose of an audit < +esponsi nsibilities < Performance < +eporting Terms! =AA%. 5e principles underling underling =AA% (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills
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1) (istinguish beteen generall accepted auditing standards &=AA%) and generall accepted accounting principles &=AAP)" /hat professional organiation establishes =AA%0 /hat professional organiation establishes =AAP0 Anser! =enerall accepted auditing standards are general guidelines to help auditors meet their professional responsibilities 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 p repared in accordance ith =enerall Accepted Accep ted 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 follos hen preparing historical financial statements" =AAP is established b the $inancial Accounting %tandards #oard" Terms! =enerall Accepted Auditing %tandards (iff! 4as Objective! LO 2- and LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 1>) Professional s,epticism must be maintained onl if the auditor suspects fraud" A) True #) $alse Anser! # Terms! =enerall Accepted Auditing Auditing %tandards. +esponsibilities (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills 1) %tatements on Auditing %tandards &%A%s) are issued b the Public Compan Accounting Oversight #oard" A) True #) $alse Anser! # Terms! %tatements on Auditing %tandards &%A%). &%A%). Public Compan Accounting Oversight #oard (iff! 4as Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills
1B
1B) The %A% number identifies the order in hich it as issued in relation to all other %A%s" A) True #) $alse Anser! A Terms! %tatements on Auditing Auditing %tandards &%A%). =enerall accepted auditing standards standards (iff! *oderate Objective! LO 2-> AAC%#! +eflective thin,ing thin,ing s,ills s,ills Learning Objective 2- 1) /hich of the folloing 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" Anser! # Terms! Audit firms ho audit publicl traded companies (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills 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" Anser! C Terms! Hualit control policies and procedures (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills 3) /ithin the contet 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 epert" #) professional education that is reEuired in order to perform ith du e professional care" C) ,noledge reEuired to fulfill assigned responsibilities" () ,noledge reEuired to perform a peer revie" Anser! C Terms! Hualit control. Continuing professional professional education and training activities activities (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
1
9) The purpose of establishing Eualit control policies and procedures to accept or continue con tinue 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" () minimie the li,elihood of associating ith a client hose managemen t ma lac, integrit" Anser! ( Terms! Purpose of Eualit control policies policies and procedures to accept or continue continue client relationship (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills ) /hich of the folloing is an element of o f 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 las and regulations Anser! C Terms! Hualit control policies and procedures (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills >) /hich of the folloing 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 Anser! A Terms! Component of Eualit control (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
28
) /hich one of the folloing is not true regarding the American 'nstitute of Certified Public Accountants peer revie reEuirement0 A) A CPA firm must develop and adhere adhe re to Eualit control standards" #) Peer revies 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 eempt" Anser! ( Terms! A'CPA peer revie (iff! Challenging Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills B) (iscuss the relationship beteen Eualit control and gen erall accepted auditing standards" Anser! $or a CPA firm: firm: Eualit control encompasses the methods 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 recognie that a E ualit control sstem can provide onl reasonable assurance: not a guarantee that auditing standards are folloed" A CPA firm must ma,e sure that =AA% are folloed 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 engage ment in a consistent manner" Terms! +elationship beteen Eualit control and generall accepted auditing standards (iff! 4as Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
21
) List and describe the si elements of Eualit co ntrol" /ho establishes the standards for Eualit control0 Anser! < Leadership responsibilities for quality quality within the firm - $irm - $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 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 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 engagements - Policies and procedures should be established for deciding hether to accept or continue a client relationship" These policies should minimie the ris, of associating ith a client hose management lac,s integrit" < #ngagement performance performance - Policies and procedures should eist to ensure that engagement personnel perform or, that meets applicable professional standards standards and the firm;s standards of Eualit" < $onitoring - Policies and procedures should eist to en sure 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 P ublic Compan Accounting Oversight #oard for auditors of pu blic companies" Terms! 4lements of Eualit controls (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
22
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" %tandards Categor 2" A client evaluation form" a" =AA% 3" All personnel participate in continuing b" Hualit Control professional education" 9" Conducting the audit ith professional s,epticism" " Ansering an independence Euestionnaire" >" (etermine and appl materialit levels" " Audit staff or,papers are revieed b audit seniors: then managers" B" Plan or, and supervise assistants" Anser! 1" a 2" b 3" b 9" a " b >" a " b B" a Terms! =enerall Accepted Audit %tandards &=AA%) and Hualit Control %tandards (iff! *oderate Objective! LO 2-> and LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
23
11) The folloing 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 on ce or not at all" (efinition 1" An organiational structure here professional services are provided b one or more shareholders" 2" The grantor of the right to practice public accounting" Audit Term 3" A report filed to indicate a significant event" a" A'CPA 9" %ets professional standards and rules for auditors" b" PCAO# " Oversees accounting firms ho audit public c" %ecurities 4change companies" Commission >" An organiational structure here the oners are d" $orm 18-, taed li,e a partnership and have limited personal e" 'AA%# liabilit" f" $orm %-1 " A report that is filed hen a compan ishes to g" (ue professional care issue ne securities" h" Limited Liabilit Partnership B" The methods used to ensure the firm meets its i" Professional Corporation professional responsibilities responsibilities to clients and others" j" Limited Liabilit Compan " Assists in providing investors ith reliable ," Peer revie information" l" 133 %ecurities Act 18" +eEuires annual inspections of accounting firms m" 139 %ecurities Act auditing J 188 issuers" n" $orm B-, 11" Practice monitoring b a CPA firm for another o" %tate +egulation CPA firm" p" Code of Professional Conduct 12" $ulfilling duties diligentl and carefull" E" Hualit Control %tandards 13" +eEuires a registration statement" r" =AA% %tandards Anser! 1" i 2" o 3" n 9" a " b >" j " f B" E " c 18" b 11" , 12" g 13" l Terms! A'CPA. PCAO#. %ecurities %ecurities 4change Commission. $orm %-1. $orm B-G. (ue professional care. Professional Corporation. Corporation. Limited Liabilit Compan. Peer revie. 133 %ecurities Act. %tate +egulation. Hualit Control %tandards (iff! *oderate Objective! LO 2-1: LO 2-2: LO 2-3: LO 2->: and LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills 29
12) Hualit controls are established for the entire CPA firm hereas =AA% are applicable to the individual engagement" A) True #) $alse Anser! A Terms! Hualit controls controls and =AA% (iff! *oderate Objective! LO 2- AAC%#! +eflective thin,ing thin,ing s,ills s,ills
2