ACCT 431 CHAPTER 2
Auditing and Assurance Services, 15e
(Arens) The CPA Profession
Learning Objective 2-1
1) The legal right to perform audits is granted to a CPA firm by regulation of:
A) each state.
B) the Financial Accounting Standards Board (FASB).
C) the American Institute of Certified Public Accountants (AICPA).
D) the Audit Standards
Board. Answer: A
Terms: Legal rights to perform audits
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
2) The four categories for describing the size of audit firms include: the Big Four international
firms; national firms; regional and local firms; and small firms. Which of the following is not a
characteristic of a small firm?
A) Most have fewer than 25 professionals.
B) They perform audits on small and not-for-profit businesses.
C) Tax services are more important to their practice than auditing.
D) They do not audit publicly traded
companies. Answer: D
Terms: Four categories for describing size of audit firms
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing
many consulting services to their publicly traded audit clients. Which of the following is true
for auditors of publicly traded companies?
I. They are restricted from providing consulting services to privately held companies.
II. There is no restriction on providing consulting services to non-audit clients.
A) I only
B) II only
C) I and II
D) Neither I or II
Answer: B
Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
Topic: SOX
1
,4) Which of the following statements is true as it relates to limited liability partnerships?
A) Only senior partners are liable for the partnership's debts.
B) Partners have no liability in a limited liability partnership arrangement.
C) Partners are personally liable for the acts of those under their supervision.
D) All partners must be AICPA
members. Answer: C
Terms: Limited liability partnerships
Diff: Challenging
Objective: LO 2-1
AACSB: Reflective thinking skills
5) List and describe the three factors that influence the organizational structure of all CPA
firms. What are the most common forms of CPA firm organization?
Answer: The three factors that influence the organization of a CPA firm include:
1. Independence from clients. Independence is important as it allows the auditors to
remain unbiased in drawing conclusions on client financial statements.
2. Auditor Competency. Competency allows auditors to conduct audits and perform
services effectively and efficiently.
3. Litigation. The increased litigation risk faced by auditors increases audit firm business
risk. Certain organizational structures allow a degree of personal protection to individual firm
members.
Common forms of audit firm organization include:
• Limited Liability Partnerships
• Limited Liability Companies
• Professional Corporations
• General Corporations
• General Partnerships
• Sole Proprietorship
Terms: Factors that influence that influence the organizational structure of CPA firms
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
2
, 6) List and describe the six organizational structures available to CPA
firms. Answer: CPA firms can take one of six organizational forms:
•Proprietorship. This form is limited to firms with only one owner.
•General partnership. This form is similar to a proprietorship, except that it applies
to multiple owners.
•General corporation. Unlike a general partnership, shareholders in a general corporation are
liable only to the extent of their investment in the corporation. Many states prohibit CPA firms
from organizing as a general corporation.
•Professional corporation. Professional corporations can have one or more shareholders.
Personal liability protection for shareholders in professional corporations varies widely
from state to state.
•Limited liability company. This form combines the most favorable attributes of a general
corporation and a general partnership. LLCs are taxed like a general partnership, but its owners
have limited personal liability similar to that of a general corporation.
•Limited liability partnership. An LLP is structured and taxed like a general partnership.
However, the personal liability protection of an LLP is less than that of a general corporation or
an LLC, but it is greater than a general partnership. Many accounting firms now operate as
LLPs. Terms: Organizational structures available to CPA firms
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
7) Many small, local accounting firms do not perform audits as their primary services to
their clients include accounting and tax.
A) True
B) False
Answer: A
Terms: Small accounting firms do not perform audits
Diff: Easy
Objective: LO 2-1
AACSB: Reflective thinking skills
8) All of the Big Four accounting firms and many of the smaller CPA firms now operate
as Limited Liability Partnerships.
A) True
B) False
Answer: A
Terms: Limited liability partnerships
Diff: Easy
Objective: LO 2-1
AACSB: Reflective thinking skills
3
Auditing and Assurance Services, 15e
(Arens) The CPA Profession
Learning Objective 2-1
1) The legal right to perform audits is granted to a CPA firm by regulation of:
A) each state.
B) the Financial Accounting Standards Board (FASB).
C) the American Institute of Certified Public Accountants (AICPA).
D) the Audit Standards
Board. Answer: A
Terms: Legal rights to perform audits
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
2) The four categories for describing the size of audit firms include: the Big Four international
firms; national firms; regional and local firms; and small firms. Which of the following is not a
characteristic of a small firm?
A) Most have fewer than 25 professionals.
B) They perform audits on small and not-for-profit businesses.
C) Tax services are more important to their practice than auditing.
D) They do not audit publicly traded
companies. Answer: D
Terms: Four categories for describing size of audit firms
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing
many consulting services to their publicly traded audit clients. Which of the following is true
for auditors of publicly traded companies?
I. They are restricted from providing consulting services to privately held companies.
II. There is no restriction on providing consulting services to non-audit clients.
A) I only
B) II only
C) I and II
D) Neither I or II
Answer: B
Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
Topic: SOX
1
,4) Which of the following statements is true as it relates to limited liability partnerships?
A) Only senior partners are liable for the partnership's debts.
B) Partners have no liability in a limited liability partnership arrangement.
C) Partners are personally liable for the acts of those under their supervision.
D) All partners must be AICPA
members. Answer: C
Terms: Limited liability partnerships
Diff: Challenging
Objective: LO 2-1
AACSB: Reflective thinking skills
5) List and describe the three factors that influence the organizational structure of all CPA
firms. What are the most common forms of CPA firm organization?
Answer: The three factors that influence the organization of a CPA firm include:
1. Independence from clients. Independence is important as it allows the auditors to
remain unbiased in drawing conclusions on client financial statements.
2. Auditor Competency. Competency allows auditors to conduct audits and perform
services effectively and efficiently.
3. Litigation. The increased litigation risk faced by auditors increases audit firm business
risk. Certain organizational structures allow a degree of personal protection to individual firm
members.
Common forms of audit firm organization include:
• Limited Liability Partnerships
• Limited Liability Companies
• Professional Corporations
• General Corporations
• General Partnerships
• Sole Proprietorship
Terms: Factors that influence that influence the organizational structure of CPA firms
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
2
, 6) List and describe the six organizational structures available to CPA
firms. Answer: CPA firms can take one of six organizational forms:
•Proprietorship. This form is limited to firms with only one owner.
•General partnership. This form is similar to a proprietorship, except that it applies
to multiple owners.
•General corporation. Unlike a general partnership, shareholders in a general corporation are
liable only to the extent of their investment in the corporation. Many states prohibit CPA firms
from organizing as a general corporation.
•Professional corporation. Professional corporations can have one or more shareholders.
Personal liability protection for shareholders in professional corporations varies widely
from state to state.
•Limited liability company. This form combines the most favorable attributes of a general
corporation and a general partnership. LLCs are taxed like a general partnership, but its owners
have limited personal liability similar to that of a general corporation.
•Limited liability partnership. An LLP is structured and taxed like a general partnership.
However, the personal liability protection of an LLP is less than that of a general corporation or
an LLC, but it is greater than a general partnership. Many accounting firms now operate as
LLPs. Terms: Organizational structures available to CPA firms
Diff: Moderate
Objective: LO 2-1
AACSB: Reflective thinking skills
7) Many small, local accounting firms do not perform audits as their primary services to
their clients include accounting and tax.
A) True
B) False
Answer: A
Terms: Small accounting firms do not perform audits
Diff: Easy
Objective: LO 2-1
AACSB: Reflective thinking skills
8) All of the Big Four accounting firms and many of the smaller CPA firms now operate
as Limited Liability Partnerships.
A) True
B) False
Answer: A
Terms: Limited liability partnerships
Diff: Easy
Objective: LO 2-1
AACSB: Reflective thinking skills
3
