Deck 2: Professional Standards

Question 1

Financial statements are prepared following a(an)

A) Applicable financial reporting framework.
B) Appropriate subject matter.
C) Generally accepted auditing standards.
D) Set of quality control standards.

Answer 1

A

Question 2

If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement.

Answer 2

False

Question 3

Partners in CPA firms usually have the responsibility for signing the audit report.

Answer 3

True

Question 4

The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards.

Question 5

A peer review is generally performed by employees of the AICPA.

Question 6

The auditors' report on a corporation's financial statements usually is addressed to the president of the company.

Question 7

An audit provides reasonable assurance of detecting which of the following types of material illegal acts? $$\begin{array} { | l | c | c | } \hline & \text { Direct Effect } & \text { Without a Direct Effect } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 8

A set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing in the financial statements is referred to as a(n)

A) Financial reporting framework.
B) Public Company Accounting Oversight Board Criteria.
C) Quality control presentation standard.
D) Special purpose audit standard.

Question 9

Which of the following is not a type of auditors' opinion?

A) Adverse.
B) Ordinary.
C) Qualified.
D) Unmodified.

Question 10

A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element?

A) Engagement performance.
B) Human resources.
C) Leadership responsibilities for quality with the firm.
D) Monitoring.

Question 11

Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards?

A) The audit provides reasonable assurance the client will remain in business for at least one year.
B) The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement.
C) Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation.
D) An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.

Question 12

To express an opinion on financial statements, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.

Question 13

The pronouncements of the International Auditing and Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company.

Question 14

An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws.

Question 15

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatements, and a critical assessment of audit evidence is referred to as:

A) Reasonable assurance.
B) Professional skepticism.
C) Audit neutralism.
D) Auditing mindset.

Question 16

An audit is more likely to detect tax evasion than violations of antitrust laws.

Question 17

Which of the following is one of the elements of AICPA quality control?

A) Assurance of proper levels of association.
B) Due professional care.
C) Engagement performance.
D) Supervision.

Question 18

Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Frauoulent } \\\text { Financial } \\\text { Reporting }\end{array} & \begin{array} { c } \text { Misappropriation } \\\text { of Assets }\end{array} \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 19

The AICPA Statements on Attestation Standards do not supersede the AICPA Statements on Auditing Standards.

Question 20

An attestation engagement:

A) Has as its primary source of standards the assurance standards.
B) Includes a report on subject matter, or on an assertion about subject matter.
C) Includes search and verification procedures for all major accounts.
D) Is ordinarily an examination, review or compilation engagement.

Question 21

The body that issues international pronouncements providing auditing procedural and reporting guidance is the:

A) International Federation of Auditors.
B) Multinational Reporting Commission.
C) International Auditing and Assurance Standards Board.
D) AICPA Auditing Standards Board.

Question 22

An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s): $$\begin{array} { | l | l | l | } \hline & \text { Must } & \text { Should } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 23

Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients?

A) The auditors have a responsibility to discover all material noncompliance.
B) If audit procedures reveal noncompliance, the auditors should take appropriate actions.
C) If the auditors suspect noncompliance, they should conduct a legal audit of the company.
D) The auditors' responsibility for the detection of all noncompliance is the same as their responsibility regarding material misstatements due to errors and fraud.

Question 24

A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of:

A) Acceptance and continuance of client relationships and specific engagements.
B) Engagement performance.
C) Human resources.
D) Relevant ethical requirements.

Question 25

Which of the following is not an underlying premise of an audit?

A) Management must provide the auditor with all information relevant to the preparation and fair presentation of the financial statements.
B) Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework.
C) Where appropriate, the auditor may obtain information from those charged with governance.
D) The auditors should be provided unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.

Question 26

The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

A) Management fails to take appropriate corrective action.
B) Illegal act has material financial statement implications.
C) Illegal act has received widespread publicity.
D) Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.

Question 27

When a Statement on Auditing Standards uses the word "should" relating to a requirement, it means that the auditor:

A) Must fulfill the responsibilities under all circumstances.
B) Must comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards.
C) Should consider whether to follow the advice based on the exercise of professional judgment in the circumstances.
D) May choose to change responsibilities relating to various professional standards that remain under consideration.

Question 28

To present fairly in conformity with generally accepted accounting principles, the financial statements must:

A) Be consistently applied.
B) Inform users of all matters that could materially affect a decision.
C) Reflect transactions and events within a range of reasonable limits.
D) Be considered preferable to the users of those financial statements.

Question 29

An audit should be designed to obtain reasonable assurance of detecting material misstatements due to:

A) Errors.
B) Errors and fraud.
C) Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts and others.
D) Errors, fraud and noncompliance with all laws.

Question 30

Which of the following is not included as a part of the description of the auditor's responsibility in a nonpublic company unmodified report?

A) The audit was performed in accordance with generally accepted accounting principles.
B) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
C) The procedures selected depend on the auditor's judgment.
D) An audit includes evaluating the appropriateness of accounting policies used.

Question 31

By definition, proper professional skepticism on an audit requires: $$\begin{array} { | c | c | c | } \hline & \begin{array} { c } \text { Questioning } \\\text { mind }\end{array} & \begin{array} { c } \text { Subjective assessment of audit } \\\text { evidence }\end{array} \\\hline \text { A. } & \text { No } & \text { No } \\\hline \text { B. } & \text { No } & \text { Yes } \\\hline \text { C. } & \text { Yes } & \text { No } \\\hline \text { D. } & \text { Yes } & \text { Yes } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 32

Which of the following is explicitly included as a part of the description of management's responsibility in an unmodified audit report?

A) Management is responsible for making a judgment on which misstatements are material vs. immaterial.
B) Management is responsible for providing auditors with all relevant evidence.
C) Management is responsible for the maintenance of internal control.
D) Management is responsible for listing all illegal acts with a direct effect on financial statement amounts and disclosures.

Question 33

Which of the following is accurate, as indicated in the principles underlying an audit?

A) Management is expected to provide the auditors with all needed evidence prior to the beginning of audit work.
B) An auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement.
C) Auditors are responsible for having appropriate competence to perform the audit without the assistance of outside specialists.
D) Management is responsible for preparing accurate financial statement amounts, while auditors are responsible for auditing those amounts and for preparing note disclosures related to those amounts.

Question 34

The Auditing Standards Board's guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in:

A) The 10 Generally Accepted Auditing Standards.
B) The Code of Professional Conduct.
C) Accounting Series Releases.
D) Principles Underlying an Audit Conducted in Accordance with GAAS.

Question 35

Primary responsibility for the financial statements lies with: $$\begin{array} { | c | c | c | } \hline & \text { Auditors } & \text { Management } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 36

A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of:

A) Acceptance and continuance of client relationships and specific engagements.
B) Engagement performance.
C) Human resources.
D) Relevant ethical requirements.

Question 37

When the auditors express an opinion on financial statements, their responsibilities extend to:

A) The underlying wisdom of their client's management decisions.
B) Whether the results of their client's operating decisions are fairly presented in the financial statements.
C) Active participation in the implementation of the advice given to their client.
D) An ongoing responsibility for their client's solvency.

Question 38

An audit performed in accordance with generally accepted auditing standards should:

A) Be expected to provide absolute assurance that noncompliance with all laws will be detected where internal control is effective.
B) Be relied upon to disclose violations of truth in lending laws.
C) Encompass a plan to actively search for all illegalities which relate to operating aspects.
D) Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.

Question 39

Which of the following is not included in the auditors' standard unmodified audit report?

A) The procedures selected by the auditor depend on the auditor's judgment.
B) An audit includes evaluating the appropriateness of accounting policies used.
C) An audit includes evaluating the overall presentation of the financial statements.
D) Accounting principles have been consistently applied.

Question 40

The auditors' report for a nonpublic company should indicate:

A) That the audit was made in accordance with auditing standards generally accepted in the United States of America.
B) Any weakness in internal control observed by the auditors.
C) That accounting principles have been consistently applied.
D) That no illegal acts have been identified.

Question 41

An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unmodified auditors' report. From this, the investor may conclude that:

A) Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
B) The auditors are satisfied that Sundby is operationally efficient.
C) The auditors have ascertained that Sundby's financial statements have been prepared accurately.
D) Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate.

Question 42

Generally accepted auditing standards established by the AICPA through April of 2003:

A) Have been accepted as interim standards by the Public Company Accounting Oversight Board.
B) Provide accounting guidance for nonpublic companies.
C) Have all been superseded by Public Company Accounting Oversight Board standards.
D) Are now developed by the Securities and Exchange Commission.

Question 43

Which of the following best describes what is meant by generally accepted auditing standards?

A) Acts to be performed by the auditors.
B) Measures of the quality of the auditors' performance.
C) Procedures to be used to gather evidence to support financial statements.
D) Audit objectives generally determined on audit engagements.

Question 44

As compared with the US public company audit report, the international audit report:

A) Is shorter in length.
B) Includes enhanced explanation of the audit process.
C) Includes the name of the partner and managers on the audit, while the US report includes only the CPA firm name.
D) Is dated as of year-end, whereas the US report is dated as of the last date of significant field work.

Question 45

If noncompliance with a law is discovered during the audit of a publicly held company, the auditors should first:

A) Notify the regulatory authorities.
B) Determine who was responsible for the noncompliance.
C) Intensify the examination to identify noncompliance with any laws.
D) Report the act to high level personnel within the client's organization and to the audit committee.

Question 46

The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies? $$\begin{array} { | l | c | c | } \hline & \text { Attestation Standards } & \text { Independence Standards } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 47

An engagement review form of peer review is least likely to include a peer reviewer's detailed analysis of:

A) Compilation reports.
B) Documentation of procedures followed on a review.
C) Overall system of quality control.
D) Review reports.

Question 48

Which of the following is the name used to describe financial reporting frameworks other than GAAP which include: cash basis, tax basis, regulatory basis, or contractual basis.

A) Applicable.
B) PCAOB.
C) Special reports.
D) Special purpose.

Question 49

A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is:

A) To enable the auditor to attest to the integrity or reliability of a client.
B) To comply with the quality control standards established by regulatory bodies.
C) To minimize the likelihood of association with clients whose managements lack integrity.
D) To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.

Question 50

Which of the following is least likely to be directly examined in an inspection performed by the PCAOB?

A) Audit engagements.
B) Review engagements.
C) Compilation engagements.
D) CPA firm quality control system.

Question 51

The auditors' report may be addressed to the company whose financial statements are being examined or to that company's:

A) Chief operating officer.
B) President.
C) Board of Directors.
D) Chief financial officer.

Question 52

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the:

A) Partner assigned to the audit engagement.
B) Management of the company.
C) Auditor in charge of the fieldwork.
D) Securities and Exchange Commission.

Question 53

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with:

A) Technical training that assures proficiency as an auditor.
B) Professional education that is required in order to perform with due professional care.
C) Knowledge required to fulfill assigned responsibilities and to progress within the firm.
D) Knowledge required in order to perform a peer review.

Question 54

Indicate whether you agree or disagree with the following statements concerning a financial statement audit conducted in accordance with generally accepted auditing standards.

Question 55

A peer review in which the peer reviewers study and appraise a CPA firm's system of quality control to perform accounting and auditing work is referred to as a(n):

A) Engagement review.
B) Inspection review.
C) Supervision review.
D) System review.

Question 56

In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy?

A) Acceptance and continuance of clients and engagements.
B) Engagement performance.
C) Personnel management.
D) Relevant ethical requirements.

Question 57

Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

A) They are guides intended to set forth auditing procedures which are applicable to a variety of situations.
B) They are procedural outlines which are intended to narrow the areas of inconsistency and divergence of auditor opinion.
C) They are authoritative statements, enforced through the Code of Professional Conduct.
D) They are interpretations which may be useful guidance to auditors.

Question 58

Of the following, which are current types of peer reviews? $$\begin{array} { | l | c | c | } \hline & \text { SystemReriews } & \text { Engagement Reviews } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 59

Authoritative GAAP Sources include: $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { FASB } \\\text { Remediation Statements }\end{array} & \begin{array} { c } \text { FASB } \\\text { Codification }\end{array} \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 60

Which of the following is not an element of quality control?

A) Documentation.
B) Engagement performance.
C) Monitoring.
D) Relevant ethical requirements.

Question 61

Auditors must consider the possibility of fraud by employees or management on every audit engagement. They must also consider the possibility that the client has not complied with laws.
(a) Distinguish between employee and management fraud.
(b) Describe the auditors' responsibility for the detection of fraud in an audit.
(c) Describe the auditors' responsibility regarding noncompliance with laws by a client.

Question 62

The standard unmodified auditors' report for audits of nonpublic companies consists of three paragraphs. Identify the three paragraphs and describe the purpose of each.