ACCT 5200 Exam 1 | Answered with complete solutions

ACCT 5200 Exam 1 | Answered with complete solutions What is auditing? focuses on determining whether recorded information properly reflects the economic events that occurred during the accounting period What is the difference between auditing and accounting? Auditing verifies that accounting information is accurate Auditors must understand accounting principles and rules and know how to ____________ and ___________ audit evidence to evaluate financial information accumulate, interpret Information risk when the information used to make a business decision is inaccurate It is beneficial for all companies to reduce information risk (t/f) False (costs could outweigh benefits for smaller companies) What are the three ways to reduce information risk? (1) user verifies information (2) user shares information risk with management (3) audited financial statements are provided Assurance service an independent professional service that improves the quality of information for decision makers An assurance service uses ______________________ to assess information against pre-established criteria The True Source Honey example from class is an example of what type of service? an assurance service Attestation service a form of assurance that comes with an official report A report produced by an attestation service can be either written or verbal (t/f) True What is the key difference between an assurance and attestation service? An attestation service is a type of assurance service that requires the production of a report An official sustainability report provided by a public firm for a company would be considered what type of service? an attestation service A review of financial statements is the same thing as an audit of financial statements (t/f) False (lower level of assurance) What is the definition of an audit? a specific type of attestation service that usually involves historical financial statements What are the three types of audits? (1) operational (2) compliance (3) financial statement audit Operational audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods Compliance audit conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority Financial statement audit conducted to determine whether the financial statements are stated in accordance with specified criteria What are the four types of auditors? CPA Firms, Government Accountability Office Auditors, Internal Revenue Agents, Internal Auditors How was auditing regulated up until the early 2000's? It was very self-regulated. Accounting firms marketed lucrative non-audit consulting services to clients, to whom they also audited, which created lacks of independence and resulted in incentives that didn't align with the purpose of an audit Audit and assurance services can only be provided by CPAs (t/f) False What was the purpose of the Rosie's East End Restaurant in-class example? Materiality matters! Auditors promise reasonable assurance What is the difference between inherent risk and control risk? Inherent risk involves the natural vulnerability of an assertion whereas control risk involves whether the client's controls can catch or prevent errors Who are the three parties involved in the assurance relationship? Management, assurance provider, users What does management do in the assurance relationship? provides information What does the user do in the assurance relationship? rely on information to make an informed decision What does assurance provider do in the assurance relationship? evaluates information against a set of pre-established criteria What makes the assurance relationship particularly hard? Management pays the assurance provider! Users must be able to trust that they are acting in their best interest! What did the Sarbanes-Oxley Act of 2002 do? (1) created the PCAOB (2) set SEC restrictions that focused on independence and non-audit services (3) required mandatory partner rotation and integrated audits (4) established audit firm inspections Why did SOX require mandatory partner rotations? They wanted partners to stay subjective and didn't want long-standing relationships getting in the way! What does the PCAOB do? Created auditing standards for U.S. public companies and oversees the auditing of public accounting firms What did the Dodd-Frank Wall Street Reform and Consumer Protection Act do? created regulation for audits of financial service companies What are the three accounting governing bodies? IAASB, AICPA/ASB, PCAOB IAASB International Auditing and Assurance Standards Board AICPA/ASB American Institute of Certified Public Accountants/Auditing Standards Board PCAOB Public Company Accounting Oversight Board The ________ is applicable to private company audits while the __________ is applicable to all US public company audits and other SEC registrants AICPA, PCAOB In regards to auditing standards, what does the AICPA do? give statements on auditing standards for non-issuers and non-public companies In regards to auditing standards, what does the PCAOB do? gives public company auditing standards for issuers and public companies What three broad sections are in the PCAOB auditing standards? general auditing standards, audit procedures, auditor reporting What is included in the general auditing standards section of the PCAOB? standards on broad auditing principles that set expectations for overall audit What is included in the audit procedures section of the PCAOB? standards for planning and performing audit procedures and for obtaining auditing evidence (go into detail on every part of an audit) What is included in the auditor reporting section of the PCAOB? standards for auditor reports that tell you what to communicate to the public What is the main goal of quality control standards? to ensure that a firm, and its personnel, comply with the professional standards All three accounting government bodies have quality control standards (t/f) True Quality control standards and auditing standards are the same thing (t/f) false (closely related but distinct) What is the difference between quality control standards and audit standards? Audit standards guide how to perform an individual audit, while quality control standards ensure the firm maintains overall policies and procedures to deliver consistent, high-quality audits ________________ standards make sure public firms are auditing themselves Quality control What is an audit report? the auditor’s final evaluation of the evidence, stating whether the financial statements as a whole are fairly presented in accordance with GAAP If financial statements are fairly stated they are considered to have a(n) _______________ opinion Unqualified If financial statements are unfairly stated they are considered to have a(n) _______________ opinion qualified (auditor is needing to add a qualification) What is professional skepticism? an attitude that includes a questioning mind and a critical assessment of audit evidence Why is professional skepticism so important for an auditor? it ensures auditors maintain independence, critically evaluate evidence, and detect errors or fraud to protect public trust What are the 6 characteristics of professional skepticism? (1) a questioning mind (2) a suspension of judgment (3) a search for knowledge (4) interpersonal understanding (5) self-esteem (6) autonomy There is a ________ aspect of an audit. It is important to understand the motivation and integrity of the individuals who provide evidence Human An auditor must have __________ and __________ within themselves! self-esteem, autonomy What is the AICPA Code of Professional Conduct? it is a set of principles, rules, and interpretations that guide CPAs in ethical responsibilities, emphasizing integrity, objectivity, independence, and due care The AICPA Code of Professional Conduct is composed of which three things? principals, rules, interpretations Can you explain the difference between the principals, rules, and interpretations in the AICPA Code of Professional Conduct? Principles are the broad ideals that express the profession's values; rules are the specific, enforceable requirements members must follow; interpretations are case law/examples of how to apply the rules in real life What are the six principles in the AICPA Code of Professional Conduct? (1) carry out responsibilities (2) serve public interest (3) have high integrity (4) remain objective and independent (5) show due care (6) determine proper scope and nature of service What is the most prominent rule in the AICPA Code of Professional Conduct? the independence rule!!! What are the two types of independence requirements that must be met to adhere to the independence rule? (1) independence in mind (2) independence in appearance Independence in mind actual, rule-based prohibitions Independence in appearance independence is considered violated if, in light of all relevant facts and circumstances, a reasonable and informed third party (a "reasonable investor") would conclude that the auditor could not act without bias What is the attest engagement team? individuals (from audit, tax, consulting, and clerical) involved in the audit Individuals performing concurring and 2nd partner reviews are not included in the attest engagement team (t/f) false (rules apply to them!) Who does the term immediate family include? everyone in your household (spouse and dependents) What do close relatives mean? your immediate family plus parents, siblings, and non-dependent children (household and one degree outside of it) Who is considered a covered member? an individual on the engagement team, an individual in position to influence the engagement team, partner/manager who provides > 10 hours of non-attest services, partner in the office of the lead engagement partner, the firm (including the firm's employee benefit plans), an entity that can be controlled by any covered members What does the term key position mean? refers to an individual who can directly shape the financial statements What are the three key parts of the independence rule? Independence in: financial interests, employment relationships, non-audit services When does a direct financial interest exist? when the auditor owns equity or debt instruments of a client directly For direct financial interests, covered persons and their immediate families are prohibited from ______________________ while all Audit firm Professionals, their immediate family and close relatives, are prohibited from ___________________ any direct investment in clients, direct investment of >5% of equity of audit clients When does an indirect financial interest exist? when a person owns shares of a client through another entity or has a mutual interest with a client For an indirect financial interest, covered persons and their immediate family members are prohibited from __________________ material indirect investment How is material indirect investment determined? considered in terms of an individual's personal wealth and income (generally a 5% rule exists) What two factors determines material indirect investment? individual's personal wealth and income Covered persons and close family members prohibited from _______________ in client audit key positions Former partner or professional employee prohibited from becoming a ____________ within a year (required by SOX) key position Former audit client employees are prohibited from ever becoming a ___________________ and being involved in the audit partner in audit firm What 10 non-audit services cannot be provided to a public audit client? bookkeeping, appraisal/valuation, actuarial services, management functions, human resources, broker-dealer services, legal services, financial info system design and implementation, internal audit services, certain tax services What are two other important facets of independence? proxy disclosure and quality control What is proxy disclosure?