Deck 1: Auditing and the Public Accounting

Question 1

The state boards of accountancy work under direct control of the AICPA.

Answer 1

False

Question 2

The GAO has the authority to issue standards pertaining to audits of governmental organizations and other entities that receive federal assistance.

Answer 2

True

Question 3

The concept of independence is a key aspect of assurance services.

Answer 3

True

Question 4

The four components of the profession's multilevel regulatory framework include (1) principle setting, (2) firm regulation, (3) inspection and peer review, and (4) government regulation.

Question 5

Although the SEC recognizes pronouncements from the FASB as constituting GAAP, in some instances the SEC's disclosure requirements exceed GAAP.

Question 6

Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.

Question 7

An examination consists primarily of inquiries of an entity's management and comparative analyses of financial information.

Question 8

The securities acts give the SEC the power to establish GAAP for all domestic companies.

Question 9

The US Senate enacted the Sarbanes-Oxley Act of 2002.

Question 10

An assurance service is one in which the CPA firm issues a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

Question 11

An agreed upon procedures engagement is one in which the auditor performs specific procedures to attest to management's assertions for an outside third party.

Question 12

The public accounting profession's national professional organization is the AICPA.

Question 13

Firm regulation occurs within a CPA firm

Question 14

Statement on Quality Control Standards (SQCS) No. 2 identifies six quality control elements.

Question 15

The IRS is a division of the U.S. Treasury Department.

Question 16

The primary functions of the state societies relate to the licensing of CPAs to practice
within the state.

Question 17

The AICPA established its Practice Monitoring Program in the early 1980's.

Question 18

The booklet titled Governmental Auditing Standards is known as the "green book" after the color of its cover.

Question 19

Over the years the demand for auditing has been reduced by professional managers who misled investors by materially misstating the financial performance of their company's financial statements.

Question 20

The primary focus of the audit is on information presented in set of financial statements.

Question 21

Monitoring is an ongoing process whereby a firm evaluates the effectiveness of the other six elements of quality control.

Question 22

The subject matter of auditing consists of:

A) assertions.
B) established criteria.
C) evidence.
D) written reports.
E) compliance.

Question 23

Of the following entities, which one is not associated with the public accounting profession?

A) state boards of accountancy
B) the FASB
C) state societies
D) practice units
E) the CASB

Question 24

PCAOB stands for the Public Companies Accounting Oversight Board

Question 25

Which one of the following statements is not true of the AICPA?

A) It is public accounting's national professional organization.
B) Membership is mandatory for all CPA firms who practice in more than one state.
C) It operates through a number of divisions.
D) Its publications include the Journal of Accountancy.
E) It provides a broad range of services to members.

Question 26

A CPA performing audits of governmental entities must adhere to standards established by:

A) the AICPA.
B) the GAO.
C) both the GASB and by the GAO.
D) the FASB.
E) both the FASB and by the GAO.

Question 27

The use of negative assurance in a report by a CPA associated with a set of financial statements would be appropriate only in:

A) examinations.
B) reviews.
C) agreed-upon procedures.
D) reviews and agreed-upon procedures.
E) audits.

Question 28

The PCAOB conducts annual inspections of firms that regularly provide audit reports for over 1000 public companies.

Question 29

Which one of the following types of services offered by a CPA is not an attest service?

A) examination
B) review
C) performing agreed-upon procedures
D) audit
E) accounting

Question 30

Compliance audits based on criteria established by management are usually made by:

A) internal auditors.
B) external auditors.
C) upper management.
D) the company employees being evaluated.
E) governmental auditors.

Question 31

State accountancy laws are administered by:

A) state boards.
B) state societies.
C) the AICPA.
D) the SEC.
E) the GAO.

Question 32

An audit that involves obtaining and evaluating evidence about the efficiency and effectiveness of an entity's operating activities in relation to specified objectives is a(n):

A) internal audit.
B) external audit.
C) operational audit.
D) compliance audit.
E) financial statement audit.

Question 33

Personnel management addresses a variety of procedures within a CPA firm for hiring, promoting, and training accounting professionals.

Question 34

The SEC plays a major role in linking self-regulation and government regulation.

Question 35

Which one of the following terms is not part of the definition of auditing?

A) communicating the results
B) interested users
C) systematic process
D) evaluating evidence
E) auditing standards

Question 36

Statement of Quality Control Standards No. 1 mandates that a CPA firm shall have a system of Quality Control

Question 37

The state board of accountancy regularly asks firms to submit their peer review letters as part of obtaining a license for the firm to perform audit and attest services.

Question 38

An audit that involves obtaining and evaluating evidence in order to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations is a(n):

A) internal audit.
B) external audit.
C) operational audit.
D) compliance audit.
E) financial statement audit.

Question 39

Which of the following is not an economic benefit of a financial statement audit?

A) access to capital markets
B) control and operational improvements
C) lower cost of capital
D) decreased inflation rates
E) deterrent to inefficiency and fraud

Question 40

The primary example of an audit service is the:

A) operational audit.
B) financial statement audit.
C) compliance audit.
D) internal audit.
E) external audit.

Question 41

Which one of the following is the service in which the CPA firm issues a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party?

A) consulting service
B) attest service
C) accounting service
D) compilation service
E) examination service

Question 42

Which one of the following consists primarily of inquiries of an entity's management and comparative analyses of financial information?

A) audit
B) compilation
C) agreed-upon procedures
D) review
E) examination

Question 43

Which one of the following services is often performed on public companies' interim financial statements and nonpublic companies' annual financial statements?

A) examination
B) accounting
C) auditing
D) review
E) consulting

Question 44

Which of the following are independent private sector standard-setting bodies?

A) SEC and IRS
B) AICPA and IIA
C) NASBA and AAA
D) FASB and GASB
E) GAO and FAA

Question 45

Internal auditors are primarily involved with:

A) compliance audits.
B) operational audits.
C) compliance audits and operational audits.
D) financial statement audits.
E) governmental audits.

Question 46

The need for independent audits of financial statements can be attributed to all of the following conditions except:

A) remoteness.
B) complexity.
C) consequence.
D) validity.
E) conflict of interest.

Question 47

The three types of audits are listed below. Indicate the category to which each statement belongs by placing the following letters in the spaces provided:FSA:Financial Statement Audit,
CA:Compliance Audit, or
OA:Operational Audit.
1.The results of such an audit are distributed to a wide spectrum of users such as
creditors, stockholders, regulatory agencies, and the general public.
2.This type of audit is often called a performance audit.
3.This audit may be based on criteria established by creditors.
4.The scope of such an audit may encompass all the activities of a department.
5.This audit relates to fair presentation of statements in accordance with GAAP.

Question 48

An auditor would be most likely to issue a "summary of findings" in connection with which one of the following types of services?

A) a financial statement audit
B) consulting services
C) an operational audit
D) a review
E) accounting services

Question 49

The audit report on internal control is a variation of which type of audit?

A) operational audit
B) financial statement audit
C) compliance audit
D) internal audit
E) external audit

Question 50

Which of the following is not one of the four common levels of assurance?

A) reasonable assurance
B) negative assurance
C) agreed-upon procedures
D) compilation without assurance
E) relative assurance

Question 51

The statement that the reviewer "is not aware of any material modifications that should be made to the statements in order for them to be in conformity with GAAP" is known as:

A) reasonable assurance.
B) negligent performance.
C) negative assurance.
D) necessary ignorance.
E) positive assurance.

Question 52

The three types of auditors are listed below. Indicate the category to which each statement belongs by placing the following letters in the spaces provided:IND:Independent Auditors,
INT:Internal Auditors, or
GOV:Government Auditors.
1.They perform audits as employees of various local , state, and federal agencies.
2.They perform audits as employees of the companies they audit.
3.They render professional auditing services to their clients.
4.They are mainly involved with compliance and operational audits.
5.They perform independent financial statement audits.

Question 53

There are four conditions that give rise to the need for independent audits of financial statements. One of these conditions is complexity. In this context, complexity relates to all of the following except complexity:

A) of the accounting process.
B) in evaluating the quality of financial statements.
C) of financial statement preparation.
D) of the subject matter, or GAAP.
E) of the decision process.

Question 54

Which one of the following was not listed as an inherent limitation of a financial statement audit?

A) accounting estimates
B) reasonable length of time
C) alternative accounting principles
D) reasonable cost
E) level of complexity

Question 55

Which one of the following is not among the conditions that give rise to a demand by external users for independent audits of financial statements?

A) remoteness of users
B) complexity of subject matter
C) the securities acts, administered by the SEC
D) potential conflict of interest between users and preparers of the statements
E) consequence for making decisions

Question 56

There are four conditions that give rise to the need for independent audits of financial statements. One of these conditions is consequence. In this context, consequence means that the:

A) users of the statements may not fully understand the consequences of their actions.
B) auditor must anticipate all possible consequences of the report issued.
C) impact of using different accounting methods may not be fully understood by the users of the statements.
D) financial statements are used for important decisions.
E) financial statements were prepared in accordance with GAAS.

Question 57

When providing audit services, the CPA is expected to be:

A) independent of the client.
B) an advocate for the client.
C) an advocate for the general public.
D) indifferent to the effect of the financial statements and the audit report.
E) able to make managerial decisions for the client.

Question 58

Statement on Quality Control Standards No. 2 identifies certain quality control elements that should be considered when performing which types of services?

A) auditing, accounting, and review services
B) auditing, tax, and review services
C) accounting, tax, and review services
D) auditing, accounting, and tax services
E) auditing, tax, and consulting services

Question 59

Compilation is an example of which one of the following types of services?

A) auditing
B) review
C) consulting
D) examination
E) accounting

Question 60

The GAO reports directly to the:

A) general public via the news media.
B) SEC.
C) president of the country.
D) IRS.
E) U. S. Congress.

Question 61

A financial statement audit made in accordance with GAAS is subject to a number of inherent limitations. Briefly discuss (a) the two important economic limits and (b) the two important limitations associated with the established accounting framework.

Question 62

Indicate for each of the following primary activities the component of the multilevel regulatory framework to which it relates.
1.Establish quality review programs and conduct quality reviews.
2.Establish and enforce rules of professional conduct.
3.Granting licenses to auditors.
4.Supervise and review work done on each audit.

Question 63

For each of the following types of financial statement audits, indicate who the interested users may be.
1. Financial Statement
2. Compliance
3. Audit report on internal control
4. Operational

Question 64

List and explain the four conditions that are attributed to the need for independent audits.

Question 65

Indicate for each of the following items the element of quality control to which it relates.
1.Policies should be established for making the decision whether to accept or retain a client in order to minimize the risk of associating with a client whose management lacks integrity.
2.Policies should be established to assure that personnel are independent of clients when performing attest services.
3.Policies and procedures must be established to provide an ongoing consideration and evaluation of the effectiveness of professional development activities.
4.Policies should be established to reasonably assure that work is assigned to personnel who have the technical training and proficiency required for the assignment.
5.Policies and procedures should be established for planning, performing, supervising, reviewing, documenting and communicating the results of each engagement.

Question 66

Identify the entities that are associated with the public accounting profession that are (1) private sector organizations and those that are (2) public sector organizations.