Auditing Chapter 1 Review

8/11/2019 Auditing Chapter 1 Review

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Chapter 01 - The Role of the Public Accountant in the American Economy

Chapter 01 The Role of the Public Accountant in the American Economy

True / False Questions

1. Independent audits of today place more emphasis on sampling than did the audits of the1 th century.TRUE

Difficulty: Medium

!. The American Institute of Certified Public Accountants issues CPA certificates and permitsCPAs to practice.FALSE

Difficulty: Medium

". A company is either audited by the #A$ or internal auditors% but not both.FALSE

Difficulty: Easy

&. The 'EC does not pass on the merits of the securities that are registered (ith the agency.TRUE

Difficulty: Medium

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). The American Institute of Certified Public Accountants has the primary authority toestablish accounting standards.FALSE

Difficulty: Easy

*. An annual peer re+ie( is a re,uirement of the AICPA.FALSE

Difficulty: Medium

. any small companies elect to ha+e their financial statements re+ie(ed by a CPA firm%rather than incur the cost of an audit.TRUE

Difficulty: Easy

/. 'taff assistants in CPA firms generally are responsible for planning and coordinating auditengagements.FALSE

Difficulty: Easy

. The 'arbanes-$ ley Act re,uires that auditors of publicly traded companies in the nited'tates perform an integrated audit that includes pro+iding assurance on both the financialstatements and on compliance (ith la(s and regulations.FALSE

Difficulty: Medium

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10. Auditing is fre,uently only a small part of the practice of local CPA firms.TRUE

Difficulty: Medium

Multiple Choice Questions

11. A summary of findings rather than assurance is most li2ely to be included in a3n45A. Agreed-upon procedures report.6. Compilation report.C. E amination report.7. Re+ie( report.

Difficulty: Medium

1!. The 'tatements on Auditing 'tandards ha+e been issued by the5A. Auditing 'tandards 6oard.6. 8inancial Accounting 'tandards 6oard.C. 'ecurities and E change Commission.7. 8ederal 6ureau of In+estigation.

Difficulty: Easy

1". The ris2 associated (ith a company9s sur+i+al and profitability is referred to as5A. 6usiness Ris2.6. Information Ris2.C. 7etection Ris2.7. Control Ris2.

Difficulty: Easy

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1&. :istorically% (hich of the follo(ing has the AICPA been most concerned (ith pro+iding;A. Professional standards for CPAs.6. Professional guidance for regulating financial mar2ets.C. 'tandards guiding the conduct of internal auditors.

7. 'taff support to Congress.

Difficulty: Medium

1). The organi


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1/. The #o+ernment Accountability $ffice 3#A$45A. Is primarily concerned (ith rapid processing of all accounts payable incurred by thefederal go+ernment.B. Conducts operational audits and reports the results to Congress.

C. Is a multinational organi


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!!. The attest function5A. Is an essential part of e+ery engagement by the CPA% (hether performing auditing% ta(or2% or other ser+ices.B. Includes the preparation of a report of the CPA9s findings.

C. Re,uires a consideration of internal control.7. Re,uires a complete re+ie( of all transactions during the period under e amination.

Difficulty: Medium

!". Attestation ris2 is limited to a lo( le+el in (hich of the follo(ing engagement3s4;A. 6oth e aminations and re+ie(s.B. E aminations% but not re+ie(s.C. Re+ie(s% but not e aminations.

7. @either e aminations nor re+ie(s.

Difficulty: Easy

!&. >hen compared to an audit performed prior to 1 00% an audit today5A. Is more li2ely to include tests of compliance (ith la(s and regulations.6. Is less li2ely to include consideration of the effecti+eness of internal control.C. :as ban2 loan officers as the primary financial statement user group.7. Includes a more detailed e amination of all indi+idual transactions.

Difficulty: Medium

!). >hich of the follo(ing are issued by the 'ecurities and E change Commission;A. Accounting Research 'tudies.6. Accounting Trends and Techni,ues.C. Industry Audit #uides.D. 8inancial Reporting Releases.

Difficulty: Medium

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!*. >hich of the follo(ing is not correct relating to the 'arbanes-$ ley Act;A. It toughens penalties for corporate fraud.6. It restricts the types of consulting CPAs may perform for audit clients.C. It created the Public Company Accounting $+ersight 6oard 3PCA$64 as a replacement for

the 8inancial Accounting 'tandards 6oard.7. It eliminates a significant portion of the accounting profession9s system of self-regulation.

Difficulty: Medium

! . An operational audit differs in many (ays from an audit of financial statements. >hich ofthe follo(ing is the best e ample of one of these differences;A. The usual audit of financial statements co+ers the four basic statements% (hereas theoperational audit is usually limited to either the balance sheet or the income statement.

B. The boundaries of an operational audit are often dra(n from an organi


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! . >hich statement is correct (ith respect to continuing professional education 3CPE4re,uirements of members of the AICPA;A. $nly members employed by the AICPA are re,uired to ta2e such courses.6. $nly members in public practice are re,uired to ta2e such courses.

C. embers% regardless of (hether they are in public practice% are re,uired to meet suchre,uirements.7. There is no re,uirement for members to participate in CPE.

Difficulty: Medium

"0. The 87IC Impro+ement Act re,uires that management of large financial institutionsengage auditors to attest to assertions by management about the effecti+eness of theinstitution9s internal controls o+er

A. Compliance (ith la(s and regulations.B. 8inancial reporting.C. Effecti+eness of operations.7. Efficiency of operations.

Difficulty: Medium

"1. Passage of the 'arbanes-$ ley Act led to the establishment of the5A. Auditing 'tandards 6oard.

6. Accounting Enforcement Releases 6oard.C. Public Company Accounting $+ersight 6oard.7. 'ecurities and E change Commission.

Difficulty: Medium

"!. >hich of the follo(ing professionals has primary responsibility for the performance of anaudit;A. The managing partner of the firm.6. The senior assigned to the engagement.C. The manager assigned to the engagement.D. The partner in charge of the engagement.

Difficulty: Medium

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"". >hich of the follo(ing types of ser+ices is generally pro+ided only by CPA firms;A. Ta audits.B. 8inancial statement audits.C. Compliance audits.

7. $perational audits.

Difficulty: Medium

"&. The right to practice as a CPA is gi+en by (hich of the follo(ing organi


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" . >hich of the follo(ing best describes the reason (hy independent auditors report onfinancial statements;A. A management fraud may e ist and it is more li2ely to be detected by independentauditors.

B. 7ifferent interests may e ist bet(een the company preparing the statements and the persons using the statements.C. A misstatement of account balances may e ist and is generally corrected as the result of theindependent auditors9 (or2.7. Poorly designed internal control may be in e istence.

Difficulty: MediumSource: AICPA

"/. #o+ernmental auditing often e tends beyond e aminations leading to the e pression ofopinion on the fairness of financial presentation and includes audits of efficiency% economy%effecti+eness% and also5A. Accuracy.6. E+aluation.C. Compliance.7. Internal control.

Difficulty: Hard Source: AICPA

" . $perational auditing is primarily oriented to(ard5A. 8uture impro+ements to accomplish the goals of management.6. The accuracy of data reflected in management9s financial records.C. The +erification that a company9s financial statements are fairly presented.7. Past protection pro+ided by e isting internal control.

Difficulty: Hard Source: AICPA

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&0. A typical ob ecti+e of an operational audit is for the auditor to5A. 7etermine (hether the financial statements fairly present the entity9s operations.6. E+aluate the feasibility of attaining the entity9s operational ob ecti+es.C. a2e recommendations for impro+ing performance.

7. Report on the entity9s relati+e success in attaining profit ma imi


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Essay Questions

&!. The 'arbanes-$ ley Act of !00! made significant reforms for public companies and theirauditors.a. 7escribe the e+ents that led up to the passage of the Act.

b. 7escribe the ma or changes made by the Act.

a. The e+ents leading up to the passage of the 'arbanes-$ ley Act include5 A large number of misstatements of financial statements% many of (hich resulted fromfraudulent financial reporting. @otably including >orldCom and Enron. The con+iction of the 6ig ) accounting firm of Arthur Andersen on charges of destroyinge+idence.

b. The ma or reforms made the Act include5 Tougher penalties for fraud.

Restrictions on the types of consulting ser+ices that may be pro+ided by auditors to their public audit clients. The creation of the Public Company Accounting $+ersight 6oard to create auditingstandards and o+ersee accounting firms that audit public companies. Re,uirements for management to ma2e a assertion about the effecti+eness of internalcontrol. Re,uirements for auditors of public companies to audit and report on internal control.

Difficulty: Hard

&". any people confuse the responsibilities of the independent auditors and the client9smanagement (ith respect to audited financial statements.a. 7escribe management9s responsibility regarding audited financial statements.

b. 7escribe the independent auditors9 responsibility regarding audited financial statements.c. E+aluate the follo(ing statement5 BIf the auditors disagree (ith management regarding anaccounting principle used in the financial statements the auditors should e press their +ie(s inthe notes to the financial statements.B

a. anagement has primary responsibility for the fairness of the financial statements. b. The auditors are responsible for performing an independent audit of the financialstatements and issuing a report on them in accordance (ith generally accepted auditingstandards.c. The statement if false. The notes to the financial statements should contain onlyrepresentations of management. The auditors should e press their reser+ations in their report.

Difficulty: Medium

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&&. An in+estor is considering in+esting in one of t(o companies. The companies ha+e +erysimilar reported financial position and results of operations. :o(e+er% only one of thecompanies has its financial statements audited.a. 7escribe (hat creates the demand for an audit in this situation. Include a discussion of ho(

audited financial statements facilitate this in+estment transaction% and the effect of the auditon business ris2 and information ris2. b. Identify the potential conse,uences to the company of not ha+ing its financial statementsaudited.

a. Audits add credibility to the financial statements of the company. The indi+idual can in+estin the company 2no(ing that there is a lo( probability that the financial statements departmaterially from generally accepted accounting principles. Audited financial statementsfacilitate this transaction by reducing ris2 related to the in+estment. 'pecifically% audits reduceinformation ris2--the ris2 that information used to ma2e the in+estment decision is misstated--related to the financial statements. Audited financial statements do not directly affect business

ris2% (hich is the ris2 that the company (ill not be able to meet its financial obligations. b. The potential conse,uences of not ha+ing an audit are5

If the in+estor is particularly ris2 a+erse% he or she may not in+est in the company at all. If the in+estor decides to in+est in the company% he or she (ill not be (illing to pay as higha price because the in+estor (ill (ant to be compensated for the additional ris2 that isin+ol+ed in relying upon unaudited financial statements.

Difficulty: Medium

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Auditing Chapter 1 Review

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