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ACCT 460 Chapter 2
Auditing 460
75
Accounting
04/02/2010

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Term
Audit Risk
Definition
the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated
Term
Errors
Definition
unintentional misstatements (or omissions) of amounts or disclosures
Term
Fraud
Definition
intentional misstatements of the financial statements due to either (a) fraudulent financial reporting or (b) misappropriation of assets (defalcation)
Term
Qualified opinion
Definition
The appropriate form of audit report when there is a limitation in the scope of the audit or when the financial statements depart from GAAP significantly enough to require mention in the auditor's report, but not so significantly as to necessitate disclaiming an opinion or expressing an adverse opinion
Term
Adverse opinion
Definition
An opinion issued by auditors that the financial statements they have audited do not present fairly the financial position, results of operation, or cash flows in conformity with GAAP
Term
Disclaimer of opinion
Definition
A form of report in which the auditors state that they do not express an opinion on the financial statements
Term
Adequate Disclosure
Definition
All essential information as required by GAAP (or some other appropriate basis of accounting) that is included in the financial statements
Term
Consistency
Definition
The concept of using the same accounting principles from year to year so that the successive financial statements issued by a business entity will be comparable
Term
Illegal acts
Definition
Violations of laws or governmental regulations
Term
Independence
Definition
A most important auditing standard, which prohibits CPAs from expressing an opinion on financial statements of an enterprise unless they are independent with respect to such enterprise
Term
Internal Control
Definition
A process, effected by the entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: 1) reliability of financial reporting; 2) effectiveness and efficiency of operations; and 3) compliance with applicable laws and regulations
Term
Registered public accounting firm
Definition
A public accounting firm registered with the Public Company Accounting Oversight Board in accordance with the Sarbanes-Oxley Act of 2002. Any CPA firm auditing SEC reporting companies must be registered
Term
Standard report with an unqualified opinion
Definition
The form of audit report issued when the examination was adequate in scope and the auditors believe that the financial statements present fairly the financial position, operating results, and cash flows in conformity with GAAP
Term
b.An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
Definition
Which of the following statements about materiality is not correct?
a.The concept of materiality recognizes that some matters are important for fair presentation of the financial statements in accordance with GAAP while other matters are not important.
b.An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
c.An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.
d.Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
Term
b.explicitly represented in the opening paragraph of the auditor’s standard report
Definition
An auditor’s responsibility to express an opinion on the financial statements is
a.explicitly represented in the opinion paragraph of the auditor’s standard report
b.explicitly represented in the opening paragraph of the auditor’s standard report
c.explicitly represented in the scope paragraph of the auditor’s standard report
d.implicitly represented in the auditor’s standard report
Term
d.not be relied upon to provide assurance that illegal acts will be detected.
Definition
An auditor’s examination performed in accordance with generally accepted auditing standards generally should
a.be expected to provide assurance that illegal acts 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 search actively for illegalities which relate to operating aspects.
d.not be relied upon to provide assurance that illegal acts will be detected.
Term
B – AU 110 .02 states: “The … auditor may make suggestions about the form and content of the F/S or draft them, in whole or in part, based on information from management’s accounting system.”
Definition
Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
a.Making suggestions (that are adopted by the client) about the form and content of an entity’s financial statements impairs an auditor’s independence.
b.An auditor may draft an entity’s financial statements based on information from management’s accounting system.
c.The fair presentation of financial statements in accordance with GAAP is an implicit responsibility of the auditor.
d.An auditor’s responsibilities for audited financial statements are NOT confined to the expression of the auditor’s opinion.
Term
b.an attitude of professional skepticism.
Definition
“The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered.” This is an example of
a.unprofessional behavior.
b.an attitude of professional skepticism.
c.due diligence.
d.a rule in the AICPA’s Code of Professional Conduct.
Term
C.An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.
Definition
Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements?
A.An auditor may not draft an entity's financial statements based on information from management's accounting system.
B.The adoption of sound accounting policies is an implicit part of an auditor's responsibilities.
C.An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.
D.Making suggestions that are adopted about a entity's internal control environment impairs an auditor's independence.
Term
C.Reflect transactions in a manner that presents the financial statements within a range of acceptable limits
Definition
For an entity's financial statements to be presented fairly in conformity with GAAP, the principles selected should:
A.Be applied on a basis consistent with those followed in the prior year
B.Be approved by the Auditing Standards Board or the appropriate industry subcommittee
C.Reflect transactions in a manner that presents the financial statements within a range of acceptable limits
D.Match the principles used by most other entities within the entity's particular industry
Term
A.FASB Technical Bulletins
Definition
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?
A.FASB Technical Bulletins
B.AICPA Accounting Interpretations
C.FASB Statements of Financial Accounting Concepts
D.AICPA Technical Practice Advice
Term
D.An opinion by the auditor
Definition
The first standard of reporting requires that the report must state whether the financial statements are presented in conformity with GAAP. This should be construed to require:
A.A statement of fact by the auditor
B.An implied measure of fairness
C.An objective measure of compliance
D.An opinion by the auditor
Term
A.AICPA Accounting Trends & Techniques
Definition
A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?
A.AICPA Accounting Trends & Techniques
B.FASB Technical Bulletins
C.AICPA Audit and Accounting Manual
D.FASB Statements of Financial Accounting Concepts
Term
A.Maintain public confidence in the profession
Definition
An auditor strives to achieve independence in appearance in order to:
A.Maintain public confidence in the profession
B.Become independent in fact
C.Maintain an unbiased mental attitude
D.Comply with the generally accepted auditing standards of fieldwork
Term
C.Materiality and audit risk
Definition
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
A.Internal control
B.Corroborating evidence
C.Materiality and audit risk
D.Quality control
Term
B.Measures of the quality of the auditor's performance
Definition
Which of the following best describes what is meant by the term “generally accepted auditing standards”?
A.Procedures to be used to gather evidence to support financial statements
B.Measures of the quality of the auditor's performance
C.Pronouncements issued by the Auditing Standards Board
D.Rules acknowledged by the accounting profession because of their universal application
Term
D."should"
Definition
GAAS require the auditor to document in the workpapers the justification for a departure from a presumptively mandatory requirement. What language indicates a presumptively mandatory requirement?
A."must" or "is required"
B."could"
C."may consider"
D."should"
Term
C.The entity and its environment, including internal control
Definition
The second standard of fieldwork requires the auditor to obtain an understanding of:
A.Internal control
B.The internal audit function
C.The entity and its environment, including internal control
D.The control environment
Term
D."Sufficient appropriate audit evidence"
Definition
The third standard of fieldwork requires the auditor to obtain:
A."Sufficient competent evidential matter"
B."An understanding of the entity's industry"
C."An understanding of the entity's internal control"
D."Sufficient appropriate audit evidence"
Term
C.Standards of fieldwork
Definition
Which of the following categories is included in generally accepted auditing standards?
A.Standards of review
B.Standards of planning
C.Standards of fieldwork
D.Standards of evidence
Term
A.Quality control
Definition
A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards?
A.Quality control
B.Human resources
C.Acceptance and continuance of client relationships and specific engagements
D.Engagement performance
Term
C.Relevant ethical requirements
Definition
Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures per SQCS 7?
A.Complying with laws and regulations
B.Using statistical sampling techniques
C.Relevant ethical requirements
D.Considering audit risk and materiality
Term
B.Tax services
Definition
Under the Sarbanes-Oxley Act of 2002, a registered public accounting firm may perform which of the following services with pre-approval from the audit committee for an audit client that is a publicly-traded company?
A.Internal audit outsourcing services
B.Tax services
C.Bookkeeping services
D.Financial information systems design
Term
B.An audit firm may not perform an audit for a client whose controller was previously employed by the audit firm and participated in the audit of the client within the client's previous fiscal year.
Definition
Which of the following statements is correct concerning the Sarbanes-Oxley Act of 2002 and publicly-traded audit clients?
A.The lead engagement and reviewing audit partners must change every seven years.
B.An audit firm may not perform an audit for a client whose controller was previously employed by the audit firm and participated in the audit of the client within the client's previous fiscal year.
C.The audit firm may not also provide tax services to an audit client.
D.The audit firm may also provide tax services to an audit client without the preapproval of the audit committee.
Term
D.the Securities and Exchange Commission.
Definition
Members of the of the Public Company Accounting Oversight Board are appointed and overseen by
A.the U.S. Congress.
B.the American Institute of Certified Public Accountants.
C.the Auditing Standards Board.
D.the Securities and Exchange Commission.
Term
D.They are interpretations which are intended to clarify the meaning of “generally accepted auditing standards.”
Definition
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, and are intended to limit the degree of auditor judgment.
D.They are interpretations which are intended to clarify the meaning of “generally accepted auditing standards.”
Term
a. audit risk
Definition
The risk that an auditor will conclude that a material error does not exist in the financial statements when, in fact, such error DOES exist is referred to as:
a.audit risk
b.business risk
c.inherent risk
d.sampling risk
Term
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
Definition
Which of the following statements is correct with respect to the auditor’s responsibilities relative to the detection of indirect-effect illegal acts?
a.The auditor has no responsibility for searching for indirect-effect illegal acts.
b.The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.
c.Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect.
d.None of the above is correct.
Term
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
Definition
Which of the following statements is correct with respect to the auditor’s responsibilities relative to the detection of indirect-effect illegal acts?
a.The auditor has no responsibility for searching for indirect-effect illegal acts.
b.The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.
c.Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect.
d.None of the above is correct.
Term
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
Definition
Which of the following statements is correct with respect to the auditor’s responsibilities relative to the detection of indirect-effect illegal acts?
a.The auditor has no responsibility for searching for indirect-effect illegal acts.
b.The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.
c.Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect.
d.None of the above is correct.
Term
C.Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
Definition
An audit should be designed to achieve reasonable assurance of detecting material misstatements due to:
A. Errors.
B. Errors and fraud.
C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
D. Errors, fraud and illegal acts.
Term
C.Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
Definition
An audit should be designed to achieve reasonable assurance of detecting material misstatements due to:
A. Errors.
B. Errors and fraud.
C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
D. Errors, fraud and illegal acts.
Term
C. Appears in the opinion paragraph of the auditors' report.
Definition
In an audit opinion on financial statements, the expression "accounting principles generally accepted in the United States of America":
A. Appears in both the scope paragraph and the opinion paragraph of the auditors' report.
B. Appears in the introductory paragraph of the auditors' report.
C. Appears in the opinion paragraph of the auditors' report.
D. Does not appear in the auditors' report.
Term
A. Criteria for competence, independence, and professional care of individuals performing the audit.
Definition
What is the general character of the three generally accepted auditing standards classified as general standards?
A. Criteria for competence, independence, and professional care of individuals performing the audit.
B. Criteria for the content of the financial statements and related footnote disclosures.
C. Criteria for the content of the auditors' report on financial statements and related footnote disclosures.
D. The requirements for the planning of the audit and supervision of assistants, if any.
Term
B. Whether the results of their client's operating decisions are fairly presented in the financial statements.
Definition
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.
Term
B. GAAS in the scope paragraph and GAAP in the opinion paragraph.
Definition
The standard auditors' report for the audit of a nonpublic company generally includes an introductory paragraph, a scope paragraph, and an opinion paragraph. In the report the auditors refer to both accounting principles generally accepted in the U.S. and auditing standards generally accepted in the U.S. In which of the paragraphs are these terms used?
A. GAAP in the scope paragraph and GAAS in the opinion paragraph.
B. GAAS in the scope paragraph and GAAP in the opinion paragraph.
C. GAAS in all paragraphs and GAAP in the scope paragraph.
D. GAAP in all paragraphs and GAAS in the opinion paragraph.
Term
A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
Definition
An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unqualified 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.
Term
D. Responsibility for losses because of errors of judgment.
Definition
Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the audit?
A. Observance of the standards of field work and reporting.
B. Critical review of the audit work performed at every level of supervision.
C. Degree of skill commonly possessed by others in the profession.
D. Responsibility for losses because of errors of judgment.
Term
C. They are authoritative statements, enforced through the Code of Professional Conduct.
Definition
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
Term
F.An opinion by the auditor
Definition
The first standard of reporting requires that the report must state whether the financial statements are presented in conformity with GAAP. This should be construed to require:
E.A statement of fact by the auditor
F.An opinion by the auditor
G.An implied measure of fairness
H.An objective measure of compliance
Term
C. To minimize the likelihood of association with clients whose managements lack integrity.
Definition
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.
Term
B. Includes a report on subject matter, or on an assertion about subject matter.
Definition
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.
Term
A. Appendices to Statements on Auditing Standards.
Definition
Which of the following is considered an interpretive publication in the GAAS Hierarchy?
A. Appendices to Statements on Auditing Standards.
B. Statements on Auditing Standards.
C. Interpretations of FASB Standards.
D. Auditing articles explaining Statements on Auditing Standards in the Journal of Accountancy.
Term
A. Have substantial authoritative support.
Definition
To qualify as "generally accepted," an accounting principle must:
A. Have substantial authoritative support.
B. Be covered in one or more of the SASs issued by the AICPA.
C. Be set forth in a Financial Reporting Release issued by the SEC.
D. Have received the approval of the FASB.
Term
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
Definition
Which of the following best describes a portion of the auditors' responsibility regarding illegal acts by clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the company.
D. The auditors' responsibility for the detection of all illegal acts is the same as their responsibility regarding material misstatements due to errors and fraud.
Term
C. Knowledge required to fulfill assigned responsibilities and to progress within the firm.
Definition
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
Term
D. Relevant ethical requirements.
Definition
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.
Term
True
Definition
T/F A standard unqualified auditor's report explicitly states that the audit report conducted and the financial statements are "in conformity with accounting standards generally accepted in the United States of America"
Term
True
Definition
T/F Accumulated Depreciation does not have a significant affect on the auditor's decision when determining materiality
Term
Qualified opinion
Definition
An auditor report that states that the financial statements are fairly represented "except for" a specific matter
Term
Non-standard qualified opinion
Definition
A _____ report is used to emphasize a matter in a report
Term
1) Public: Integrated audit of internal controls and the financial statements
2) Public: References PCAOB standards rather than GAAS
3) Public: Includes a fourth paragraph referencing the auditor's report on internal controls
Definition
Mention two differences between Public Company Audit Reports and Non-Public Company Audit Reports
Term
1) Independence, Integrity, and Objectivity
2) Personnel Management
3) Acceptance and continuation of Clients and Engagements
4) Engagement Performance
5) Monitoring
Definition
Quality control consists of 5 elements. What are they?
Term
d. The applicable state board of accountancy
Definition
Which of the following organizations can revoke the right of an individual to practice as a CPA?
a. The Public Company Accounting Oversight Board
b. The American Institute of Certified Public Accountants
c. The Securities and Exchange Commission
d. The applicable state board of accountancy
Term
a. Accounting standards applicable to nonpublic companies
Definition
The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA?
a. Accounting standards applicable to nonpublic companies
b. Auditing standards applicable to audits of nonpublic companies
c. Quality control standards applicable to audits of public companies
d. Standards for reviews of the interim financial information issued by public companies
Term
a. Statements on Auditing Standards
Definition
Which of the following are not interpretive publications under the AICPA’s hierarchy of generally accepted auditing standards?
a. Statements on Auditing Standards
b. Appendices to Statements on Auditing Standards
c. Auditing guidance in AICPA Audit and Accounting Guides
d. AICPA auditing Statements of Position
Term
b. The criteria for audit planning and evidence gathering
Definition
The three AICPA generally accepted standards classified as standards of fieldwork may be summarized as:
a. The need to maintain an independence in mental attitude throughout the audit
b. The criteria for audit planning and evidence gathering
c. The criteria for the content of the auditors' report on financial statements
d. The competence, independence, and professional care to be exerted while performing the audit
Term
b. A system of quality control
Definition
A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:
a. Compliance with generally accepted reporting standards
b. A system of quality control
c. A system of peer review
d. Continuing professional education
Term
c. That internal control of the client was satisfactory
Definition
Which of the following is not explicitly included in an unqualified standard audit report for a nonpublic company?
a. The CPA's opinion that the financial statements comply with generally accepted accounting principles
b. That generally accepted auditing standards were followed during the audit
c. That internal control of the client was satisfactory
d. An identification of the financial statements audited
Term
a. The auditors maintain an independent mental attitude
Definition
The general group of the AICPA generally accepted auditing standards requires that:
a. The auditors maintain an independent mental attitude
b. The audit be conducted in conformity with generally accepted accounting principles
c. Assistants, if any, be properly supervised
d. The auditors obtain an understanding of internal control
Term
c. Relevant ethical requirements
Definition
Which AICPA quality control standard would most likely be satisfied when a CPA firm maintains records indicating which partners or employees of the firm were previously employed by the CPA firm’s clients?
a. Professional relationship
b. Engagement performance
c. Relevant ethical requirements
d. Monitoring
Term
a. Fraudulent Financial Reporting and Misappropriation of Assets
Definition
And audit provides reasonable assurance of detecting material:
a. Fraudulent Financial Reporting and Misappropriation of Assets
b. Fraudulent Financial Reporting but not Misappropriation of Assets
c. Misappropriation of Assets but not Fraudulent Financial Reporting
d. Neither Fraudulent Financial Reporting nor Misappropriation of Assets
Term
a. The report states that the audit was performed in accordance with AICPA standards
Definition
Which of the following is not included in an integrated audit report on the financial statements of a public company?
a. The report states that the audit was performed in accordance with AICPA standards
b. The report indicates that the financial statements are the responsibility of management
c. The report indicates that the auditors have also audited the effectiveness of the company's internal control
d. The report is signed in the name of the CPA firm
Term
c. Audit firms that are registered with the PCAOB
Definition
Audit firms that are subject to inspections by the PCAOB staff include:
a. All audit firms
b. Audit firms that are registered with the SEC
c. Audit firms that are registered with the PCAOB
d. Audit firms that are registered with the state board of accountancy
Term
d. The international audit report includes an opinion on internal control
Definition
Which of the following is not a difference noted when comparing the AICPA audit report to the international audit report?
a. The international audit report has an expanded discussion of management's responsibility for the financial statements and internal controls
b. The international audit report may be signed using the personal name of the audit partner, the audit firm, or both
c. The international audit report contains an enhanced description of the nature of an audit
d. The international audit report includes an opinion on internal control