TEST BANK FOR AUDITING AND ASSURANCE SERVICES AN INTEGRATED APPROACH 16TH EDITION

Auditing and Assurance Services, 16e (Arens/Elder/Beasley) Chapter 1 The Demand for Audit and Other Assurance Services 1.1 Learning Objective 1-1 1) In the auditing process A) the types and amounts of evidence remain constant from audit to audit. B) the criteria for evaluating information will not vary depending on the information being audited. C) the audit report communicates the auditor's findings to users. D) records are gathered by the auditor to determine whether the audited information is stated in accordance with SEC standards. Answer: C Terms: Audit process Diff: Moderate Objective: LO 1-1 AACSB: Reflective thinking 2) Which of the following is considered audit evidence? A) B) C) D) Answer: C Terms: Audit evidence Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking Oral statements made by management Written Communications Auditor Observation Y N N Oral statements made by management Written Communications Auditor Observation N Y Y Oral statements made by management Written Communications Auditor Observation Y Y Y Oral statements made by management Written Communications Auditor Observation N N Y 3) Which of the following can be used as a criteria for evaluating information being audited? A) International Financial Reporting Standards (IFRS) B) Generally Accepted Accounting Principles (GAAP) C) Internal Revenue Code (IRC) D) all of the above Answer: D Terms: Criteria by which an auditor evaluates information Diff: Moderate Objective: LO 1-1 AACSB: Reflective thinking 4) Evidence is paramount to audit and attestation engagements. List the four basic types of audit evidence. Answer: The four types of audit and attestation evidence include 1. Electronic and documentary data about transactions 2. Written and electronic communications with outsiders 3. Observations by the auditor 4. Oral testimony of the auditee (client) Terms: Basic types of audit evidence Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking 5) The criteria by which an auditor evaluates the information under audit may vary with the information being audited. Answer: TRUE Terms: Criteria by which an auditor evaluates information Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking 6) One criteria used by an external auditor to evaluate published financial statements is known as generally accepted auditing standards. Answer: FALSE Terms: Criteria used by external auditor to evaluate published financial statements Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking 7) Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports. Answer: TRUE Terms: Independence Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking 8) To perform an audit, there must be information in a verifiable form and some criteria by which the auditor can evaluate the information. Answer: TRUE Terms: Independence Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking 9) An auditor must be competent and have an independent mental attitude. Answer: TRUE Terms: Criteria used by external auditor to evaluate published financial statements Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking 1.2 Learning Objective 1-2 1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called A) finance. B) auditing. C) accounting. D) economics. Answer: C Terms: Recording, classifying, and summarizing economic events Diff: Easy Objective: LO 1-2 AACSB: Reflective thinking 2) An accountant A) must possess expertise in the accumulation of audit evidence. B) must decide the number and types of items to test. C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information. D) must be a CPA. Answer: C Terms: Distinguishes auditors from accountants Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking 3) When auditing accounting data, auditors focus on A) determining whether recorded information properly reflects the economic events that occurred during the accounting period. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements. Answer: A Terms: Auditing financial accounting data primary concern Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking 4) The trait that distinguishes auditors from accountants is the A) auditor's ability to interpret accounting principles generally accepted in the United States. B) auditor's education beyond the bachelor's degree. C) auditor's ability to interpret FASB Statements. D) auditor's expertise in the accumulation and interpretation of audit evidence. Answer: D Terms: Distinguishes auditors from accountants Diff: Challenging Objective: LO 1-2 AACSB: Reflective thinking 5) Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant? Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. To provide relevant information, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information. In addition, accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost. The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period. Because U.S. or international accounting standards provide the criteria for evaluating whether financial information is properly recorded, auditors must thoroughly understand those accounting standards. In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants. Determining the proper audit procedures, deciding the number and types of items to test, and evaluating the results are unique to the auditor. Terms: Roles of accountants and auditors Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking 6) Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period. Answer: TRUE Terms: Roles of accountants and auditors Diff: Easy Objective: LO 1-2 AACSB: Reflective thinking 7) Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence. Answer: FALSE Terms: Roles of accountants and auditors Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking 1.3 Learning Objective 1-3 1) ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate. A) Client acceptance B) Information C) Business D) Control Answer: B Terms: Risk that reflects the possibility that information upon which business risk decision was made Diff: Moderate Objective: LO 1-3 AACSB: Reflective thinking 2) The possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as A) materiality risk. B) information risk. C) interest rate risk. D) business risk. Answer: D Terms: Business risk Diff: Moderate Objective: LO 1-3 AACSB: Reflective thinking 3) Auditing can have a significant effect on both information risk and business risk. Answer: FALSE Terms: Business risk and information risk Diff: Moderate Objective: LO 1-3 AACSB: Reflective thinking 1.4 Learning Objective 1-4 1) A correct relationship among the auditor, the client, and the external users is A) management of a public company hires the independent auditor. B) the audit committee of a private company hires the independent auditor. C) the client provides capital to the external users. D) the external users can rely upon the auditor's report to reduce information risk. Answer: D Terms: Relationships among auditor, client, and external users Diff: Moderate Objective: LO 1-4 AACSB: Reflective thinking 2) The most common way for users to obtain reliable information is to A) have an internal audit. B) have an independent audit. C) verify all information individually. D) verify the information with management. Answer: B Terms: Obtain reliable information Diff: Moderate Objective: LO 1-4 AACSB: Reflective thinking 3) External users of the financial statements A) value the auditor's report because of the auditor's independence from the client. B) look to the auditor's report as an indication of the statements' reliability. C) use the audited information on the assumption that it is reasonably complete, accurate, and unbiased. D) all of the above. Answer: D Terms: Relationships among auditor, client, and external users Diff: Easy Objective: LO 1-4 AACSB: Reflective thinking 4) Explain what is meant by information risk, and list the four causes of this risk. Answer: Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. Four causes of information risk are • remoteness of information, • biases and motives of the provider, • voluminous data, and • complex exchange transactions. Terms: Information risk definition and causes Diff: Easy Objective: LO 1-4 AACSB: Reflective thinking 5) As society becomes more complex, decision makers are more likely to receive reliable information. Answer: FALSE Terms: Reducing information risk Diff: Easy Objective: LO 1-4 AACSB: Reflective thinking 6) Management is required by GAAP to reduce information risk, even if the costs outweigh the benefits. Answer: FALSE Terms: Reducing information risk Diff: Moderate Objective: LO 1-4 AACSB: Reflective thinking 1.5 Learning Objective 1-5 1) In the audit of historical financial statements, management asserts that the financial statements are fairly stated in accordance with what standards? A) regulatory accounting principles B) applicable international accounting standards C) applicable U.S. accounting standards D) B and C Answer: D Terms: Audit of historical financial statements Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking 2) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n) A) accounting and bookkeeping service. B) attestation service. C) assurance service. D) tax service. Answer: B Terms: Assurance services Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking 3) Three common types of attestation services are A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting. B) audits of historical financial information, verifications of historical financial information, and attestations regarding internal controls. C) reviews of historical financial information, verifications of future financial information, and attestations regarding internal controls. D) audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information. Answer: A Terms: Types of attestation services Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking 4) Which of the following services provides the lowest level of assurance on a financial statement? A) review B) audit C) Neither service provides assurance on financial statements. D) Each service provides the same level of assurance on financial statements. Answer: A Terms: Service provides lowest level of assurance on a financial statement Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 5) Which of the following is an accurate statement regarding assurance services? A) Assurance services must be performed by a CPA. B) An attestation service is not a type of assurance service. C) Assurance services improve the quality of information for decision makers. D) Assurance services can only be performed on financial data. Answer: C Terms: Assurance services Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 6) Audits A) are an assurance service, but not an attestation service. B) are designed to provide absolute assurance that the financial statements are free of material misstatement. C) are required for publicly traded companies in the United States. D) do not require the auditor to express their opinion in a written report. Answer: C Terms: Audit assurance Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 7) A high, but not absolute, level of assurance is called A) probable assurance. B) reasonable assurance. C) limited assurance. D) incomplete assurance. Answer: B Terms: Reasonable assurance Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking 8) Which of the following is an accurate statement regarding the various types of other assurance services? A) Assurance services must be about the reliability of another party's assertion about compliance with specified criteria. B) Other assurance services must meet the definition of an attestation service. C) The primary purpose of a management consulting engagement is to improve the quality of information. D) The market for other forms of assurance services is open to non-CPA competitors. Answer: D Terms: Assurance services Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 9) Two types of attestation services provided by CPA firms are audits and reviews. Discuss the similarities and differences between these two types of attestation services. Which type provides the least assurance? Answer: In both the review and audit of the historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards. The CPA provides a lower level of assurance for reviews of financial statements compared to the high level for audits, therefore less evidence is needed. A review is often adequate to meet financial statement users' needs. It can be provided by a CPA firm at a much lower fee than an audit because less evidence is needed. An audit is the most common assurance service provided by CPA firms. Publicly traded companies in the U.S. are required to have audits under the federal securities acts. Many nonpublic companies have a review to limit audit fees. Terms: Attestation services; Audits and reviews of historical financial statements Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 10) What is an audit of internal control over financial reporting? Answer: For an audit of internal control over financial reporting, management asserts that internal controls have been developed and implemented following well established criteria. Section 404 of the Sarbanes-Oxley Act requires public companies to report management's assessment of the effectiveness of internal control. The Act also requires auditors for larger public companies to attest to the effectiveness of internal control over financial reporting. This evaluation, which is integrated with the audit of financial statements, increases user confidence about future financial reporting, because effective internal controls reduce the likelihood of future misstatements in the financial statements. Terms: Engagement to attest on internal control over financial reporting Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking Topic: SOX 11) What are the four categories of attestation services? Answer: The four categories of attestation services include • Audit of historical financial statements • Audit of internal control over financial reporting • Review of historical financial statements • Other attestation services that may be applied to a broad range of subject matter. Terms: Categories of attestation services Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 12) CPA firms perform numerous services that generally fall outside the scope of assurance services. Give three examples of such services. Answer: Three specific examples of services performed by CPAs that generally fall outside the scope of assurance services are • accounting and bookkeeping services • tax services • management and consulting services. Terms: Nonassurance services provided by CPAs Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking 13) CPA firms are never allowed to provide bookkeeping services for clients. Answer: FALSE Terms: CPA services provided to clients Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 14) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting. Answer: TRUE Terms: Section 404 of the Sarbanes-Oxley Act Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking Topic: SOX 15) Most public companies' audited financial statements are available on the SEC's EDGAR database. Answer: TRUE Terms: Public companies' audited financial statements: SEC's EDGAR database Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking 16) The primary purpose of a management consulting engagement is to generate a recommendation to management. Answer: TRUE Terms: Nonassurance services provided by CPAs; management consulting Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking 1.6 Learning Objective 1-6 1) One objective of an operational audit is to A) determine whether the financial statements fairly present the entity's operations. B) determine if the auditee is in compliance with GAAP. C) make recommendations for improving performance. D) report on the entity's relative success in attaining profit maximization. Answer: C Terms: Objective of operational audit Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 2) An examination of part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit? A) operational audit B) compliance audit C) financial statement audit D) production audit Answer: A Terms: Examination of part of an organization's procedures and method to evaluate efficiency and effectiveness Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 3) An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n) A) audit of financial statements. B) compliance audit. C) operational audit. D) production audit. Answer: B Terms: Audit to determine whether entity followed specific procedures or rules Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 4) Which one of the following is more difficult to evaluate objectively? A) presentation of financial statements in accordance with generally accepted accounting principles B) compliance with government regulations C) efficiency and effectiveness of operations D) All three of the above are equally difficult. Answer: C Terms: Most difficult to evaluate objectively Diff: Challenging Objective: LO 1-6 AACSB: Reflective thinking 5) Which of the following audits can be regarded as generally being a compliance audit? A) IRS agents' examinations of taxpayer returns B) GAO auditor's evaluation of the computer operations of governmental units C) an internal auditor's review of a company's payroll authorization procedures D) a CPA firm's audit of a public company Answer: A Terms: Compliance audit Diff: Challenging Objective: LO 1-6 AACSB: Reflective thinking 6) Which of the following are required to have a written report regarding the assertion of another party? A) B) C) D) Answer: B Terms: Required to have a written report Diff: Challenging Objective: LO 1-6 AACSB: Reflective thinking 7) In a financial statement audit, the auditor A) gathers evidence to determine whether the statements contain material errors or other misstatements. B) must have a thorough understanding of the entity and its environment. C) determines whether the financial statements are stated in accordance with specified criteria. D) all of the above. Answer: D Terms: Audit of historical financial statements Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement Y Y Y Y Y Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement Y Y Y Y N Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement Y Y Y N N Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement N N N Y Y 8) Discuss the similarities and differences between financial statement audits, operational audits, and compliance audits. Give an example of each type. Answer: Financial statement audits, operational audits, and compliance audits are similar in that each type of audit involves accumulating and evaluating evidence about information to ascertain and report on the degree of correspondence between the information and established criteria and/or procedures, rules, or regulations. The differences between each type of audit are the information being examined and the criteria used to evaluate the information. A financial statement audit is conducted to determine whether financial statements are stated in accordance with specified criteria, normally the U.S. or international standards. Auditors not only focus on accounting transactions, but also focus on an integrated approach in which both the risk of misstatements and the operating controls are considered. The auditor must have a thorough understanding of the entity and its environment. An operational audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods. At completion of an operational audit, management normally expects recommendations for improving operations. In operational auditing, the reviews are not limited to accounting. It is more difficult to objectively evaluate whether the efficiency and effectiveness of operations meets established criteria than it is for compliance and financial statement audits. Also, establishing criteria for evaluating the information in an operational audit is extremely subjective. Thus, operational auditing is more like management consulting than what is usually considered auditing. A compliance audit is conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority. Results of compliance audits are typically reported to management, like in the operational audits, rather than to outside users as is done with financial statement audits. An example of a financial statement audit would be the annual audit of IBM Corporation, in which the external auditors examine IBM's financial statements to determine the degree of correspondence between those financial statements and generally accepted accounting principles. An example of an operational audit would be an internal auditor's evaluation of whether the company's computerized payroll-processing system is operating efficiently and effectively. An example of a compliance audit would be an IRS auditor's examination of an entity's federal tax return to determine the degree of compliance with the Internal Revenue Code. Terms: Financial statement audits, operational audits and compliance audits Diff: Challenging Objective: LO 1-6 AACSB: Analytic thinking 9) To perform an audit, it is necessary for the information to be in a verifiable form and there must be some criteria by which the auditor can evaluate the information. Detail the information and criteria that would be used when (A) an independent CPA firm audits a company's historical financial statements. (B) an Internal Revenue Service auditor audits that same company's tax return. (C) an internal auditor performs an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively. Answer: (A) The information used by a CPA firm in a financial statement audit is the financial information in the company's financial statements. The most commonly used criteria are applicable U.S. or international accounting standards. (B) The information used by an IRS auditor is the financial information in the company's federal tax return. The criteria used are the internal revenue code and interpretations. (C) The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month. The criteria would consist of company standards for departmental efficiency and effectiveness. Terms: Information and criteria used by CPA firm, Internal Revenue Service auditor, and internal auditor Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 10) The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles. Answer: FALSE Terms: Compliance audit Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 11) Results of compliance audits are typically reported to the company's management rather than to a broad spectrum of outside users. Answer: TRUE Terms: Compliance audit Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 12) An integrated approach to auditing considers both the risk of misstatements and operating controls intended to prevent misstatements. Answer: TRUE Terms: Audit of historical financial statements; integrated approach Diff: Moderate Objective: LO 1-6 AACSB: Reflective thinking 1.7 Learning Objective 1-7 1) Internal auditors A) must be independent of the entity that employs them. B) generally report to the accounting department. C) are employed by all types of organizations. D) must be CPAs. Answer: C Terms: Internal audit Diff: Moderate Objective: LO 1-7 AACSB: Reflective thinking 2) Which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to Congress? A) internal auditor B) revenue agent C) independent auditor D) GAO auditor Answer: D Terms: Types of auditors Diff: Easy Objective: LO 1-7 AACSB: Reflective thinking 3) Match the engagement described to the (A) type of audit and (B) auditor that would most likely perform the engagement. Each engagement will have an answer from List-A and List-B. An answer can be used once, more than once, or not at all. Engagement: 1. Evaluate a company's payroll processing for economy. 2. Evaluate/determine if bank covenants are being met. 3. Evaluate financial statements that are to be submitted to a bank. 4. Evaluate the promptness of materials inspection in a manufacturer's receiving department. 5. Determine if Medicare reimbursements are in accordance with the Healthcare Financing Administration (HCFA). 6. Determine if the tax return of a multinational corporation is in accordance with the tax code. 7. Determine if a public school is properly applying their reimbursement for the payment-in-kind program. 8. Determine the effectiveness of a Department of Defense project. Answer: 1. c, d 2. b, d 3. a, e 4. c, d 5. b, f 6. b, g 7. b, e 8. c, f Terms: Financial statement audit; Compliance audit; Operational audit; Types of auditors Diff: Challenging Objective: LO 1-7 AACSB: Analytic thinking List A - Type of Audit: List B - Type of Auditor: a. Financial Statement b. Compliance c. Operational d. Internal e. External f. Government g. IRS 4) Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors. Answer: The roles of all four types of auditors are similar in that they involve the accumulation and evaluation of evidence about information to ascertain and report on the degree of correspondence between the information and established criteria. The differences in their roles center around the information audited and the criteria used to evaluate that information. Independent auditors primarily audit companies' financial statements. GAO auditors' primary responsibility is to perform the audit function for Congress. IRS auditors are responsible for the enforcement of federal tax laws. Internal auditors primarily perform operational and compliance audits for their employing company. Terms: Roles of independent auditors, GAO auditors, internal revenue agents and internal auditors Diff: Moderate Objective: LO 1-7 AACSB: Reflective thinking 5) The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts. Answer: FALSE Terms: Primary role of United States General Accounting Office Diff: Moderate Objective: LO 1-7 AACSB: Reflective thinking 1.8 Learning Objective 1-8 1) The three requirements for becoming a CPA include all but which of the following? A) uniform CPA examination requirement B) education requirements C) character requirements D) experience requirement Answer: C Terms: Requirements for becoming a CPA Diff: Moderate Objective: LO 1-8 AACSB: Reflective thinking 2) The use of the Certified Public Accountant title is regulated by A) the federal government. B) state law through the licensing departments of each state. C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees. D) the Securities and Exchange Commission. Answer: B Terms: Certified Public Accountant title Diff: Moderate Objective: LO 1-8 AACSB: Reflective thinking 3) List and discuss the three primary requirements to become a CPA. Answer: The three primary requirements for becoming a CPA are: • Educational requirement. Normally, an undergraduate degree or a graduate degree with a major in accounting, including a minimum number of accounting credits is required. Most states now require 150 semester hours for licensure. Some states require fewer credits before taking the examination, but require 150 semester credits before receiving the CPA certificate. • Uniform CPA examination requirement. This is a four-part, computer-based examination with components on auditing and attestation, financial accounting and reporting, regulation, and business environment and concepts. Some states also require a separate ethics requirement. • Experience requirement. The experience requirement varies from state to state with some states requiring no experience, while other states require up to two years of audit experience. Terms: Primary requirements to become CPA Diff: Easy Objective: LO 1-8 AACSB: Reflective thinking Auditing and Assurance Services, 16e (Arens/Elder/Beasley) Chapter 2 The CPA Profession 2.1 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 Auditing Standards Board. Answer: A Terms: Legal rights to perform audits Diff: Moderate Objective: LO 2-1 AACSB: Reflective thinking 2) Which of the following is not a characteristic of a small firm? A) Most small firms have fewer than 25 professionals. B) Small firms perform audits on small and not-for-profit businesses. C) Tax services are more important than auditing services to the small firm. D) Small firms are prohibited by the SEC from auditing publicly traded companies. Answer: D Terms: Characteristics of a small firm Diff: Moderate Objective: LO 2-1 AACSB: Reflective thinking 3) Sarbanes-Oxley and the Securities and 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 nor II Answer: B Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions Diff: Moderate Objective: LO 2-1 AACSB: Reflective thinking Topic: SOX 4) Which of the following does not describe a size category for a CPA firm? A) Big Four national firms B) Big Four international firms C) local firms D) national and regional firms Answer: A Terms: Three categories for describing size of audit firms Diff: Easy Objective: LO 2-1 AACSB: Reflective thinking 5) ________ is one of the Big Four international CPA firms. A) Deloitte B) KPMG C) Ernst & Young D) All of the above are classified as Big Four international CPA firms. Answer: D Terms: Three categories for describing size of audit firms Diff: Moderate Objective: LO 2-1 AACSB: Reflective thinking 6) In which type of service does the CPA assemble the financial statements but provide no assurance to third parties? A) audit B) compilation C) review D) bookkeeping Answer: B Terms: Compilation Diff: Moderate Objective: LO 2-1 AACSB: Reflective thinking 7) In addition to attestation and assurance services, CPA firms provide other services to their clients. List three of these services. Answer: Other services performed by a CPA firm include: • accounting and bookkeeping services • tax services • management consulting and risk advisory services. Terms: Activities of CPA firms Diff: Moderate Objective: LO 2-1 AACSB: Reflective thinking 8) Many small, local accounting firms perform audits as their primary service to their clients. Answer: FALSE Terms: Small accounting firms do not perform audits Diff: Easy Objective: LO 2-1 AACSB: Reflective thinking 9) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. Answer: TRUE Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions Diff: Easy Objective: LO 2-1 AACSB: Reflective thinking Topic: SOX 2.2 Learning Objective 2-2 1) Which of the following statements is true as it relates to limited liability partnerships? A) Only senior partners are liable for the partnerships 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 2-2 AACSB: Reflective thinking 2) Which staff level in a CPA firm performs most of the detailed audit work? A) partner B) staff assistant C) senior auditor D) senior manager Answer: B Terms: Staff levels in CPA firm Diff: Easy Objective: LO 2-2 AACSB: Reflective thinking 3) 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. The need for independence from clients. Independence permits auditors to remain unbiased in drawing conclusions about the financial statements. 2. The importance of a structure to encourage competence. Competency permits auditors to conduct audits and perform other services effectively and efficiently. 3. The increased litigation risk faced by auditors. Audit firms continue to experience increases in litigation-related costs. Some organizational structures afford a degree of protection to individual firm members. Common forms of audit firm organization include: • Proprietorship • General Partnership • General Corporation • Professional Corporation • Limited Liability Company • Limited Liability Partnership Terms: Factors that influence the organizational structure of CPA firms Diff: Moderate Objective: LO 2-2 AACSB: Reflective thinking 4) 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. 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. A professional corporation provides professional services and is owned by 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 typically structured and 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 owned by one or more partners. It 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 2-2 AACSB: Reflective thinking 5) All of the Big Four accounting firms and many of the smaller CPA firms now operate as limited liability partnerships. Answer: TRUE Terms: Limited liability partnerships Diff: Easy Objective: LO 2-2 AACSB: Reflective thinking 6) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation. Answer: TRUE Terms: Limited liability companies Diff: Moderate Objective: LO 2-2 AACSB: Reflective thinking 7) In a CPA firm, the audit partner coordinates the performance of audit procedures. Answer: FALSE Terms: Staff levels in CPA firm Diff: Easy Objective: LO 2-2 AACSB: Reflective thinking 2.3 Learning Objective 2-3 1) The organization that is responsible for providing oversight for auditors of public companies is called the A) Auditing Standards Board. B) American Institute of Certified Public Accountants. C) Public Oversight Board. D) Public Company Accounting Oversight Board. Answer: D Terms: Organization responsible for providing oversight for auditors of public companies Diff: Easy Objective: LO 2-3 AACSB: Reflective thinking Topic: SOX 2) Members of the Public Company Accounting Oversight Board are appointed and overseen by the A) U.S. Congress. B) American Institute of Certified Public Accountants. C) Auditing Standards Board. D) Securities and Exchange Commission. Answer: D Terms: Members of Public Company Accounting Oversight Board Diff: Easy Objective: LO 2-3 AACSB: Reflective thinking Topic: SOX 3) The Public Company Accounting Oversight Board A) performs inspections of the quality controls of firms that audit public companies. B) establishes auditing standards that must be followed by CPAs on all audits. C) oversees auditors of private companies. D) performs all of the above functions. Answer: A Terms: Public Company Accounting Oversight Board Diff: Moderate Objective: LO 2-3 AACSB: Reflective thinking Topic: SOX 4) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm. The PCAOB A) B) C) D) Answer: B Terms: Public Company Accounting Oversight Board inspection violations Diff: Moderate Objective: LO 2-3 AACSB: Reflective thinking Topic: SOX can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation Yes Yes Yes can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation Yes Yes No can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation Yes No No can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation No No No 5) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB's primary functions? Answer: The PCAOB provides oversight for auditors of public companies; establishes auditing, attestation, and quality control standards for public company audits; and performs inspections of audit engagements as well as the quality controls at audit firms performing those audits. Terms: Sarbanes-Oxley Act; Public Company Accounting Oversight Board primary functions Diff: Moderate Objective: LO 2-3 AACSB: Reflective thinking Topic: SOX 6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publicly traded and private companies. Answer: FALSE Terms: Public Company Accounting Oversight Board Diff: Easy Objective: LO 2-3 AACSB: Reflective thinking 7) The PCAOB requires annual inspections of accounting firms that audit more than ten public companies. Answer: FALSE Terms: Payroll expense accounts; tests of details of balances Diff: Moderate Objective: LO 2-3 AACSB: Reflective thinking Topic: SOX 2.4 Learning Objective 2-4 1) The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q. Answer: B Terms: Sec form 8-k, reporting significant events Diff: Moderate Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 2) The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q. Answer: A Terms: Form must be completed and filed with Securities and Exchange Commission when company plans to issue new securities Diff: Moderate Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 3) Which of the following is a correct statement regarding the SEC? A) The Securities Act of 1934 requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval. B) All public companies must file monthly statements with the SEC. C) The Form 10-K must be filed within 30 days after the close of the fiscal year. D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission. Answer: D Terms: Securities and Exchange Commission Diff: Challenging Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 4) With respect to the SEC, A) the attitude of the SEC is generally considered in any major change proposed by the FASB. B) the SEC is the sole agency responsible for setting generally accepted accounting principles. C) the SEC requirements of greatest interest to CPAs are set forth in the their enforcement regulations. D) the SEC has the power to establish rules for all CPAs. Answer: A Terms: Securities and Exchange Commission influence on setting generally accepted accounting principles Diff: Moderate Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 5) Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles. Answer: The SEC, an agency of the federal government, assists in providing investors with reliable information upon which to make investment decisions. The SEC has considerable influence in setting generally accepted accounting principles (GAAP) and disclosure requirements for financial statements as a result of its authority for specifying reporting requirements considered necessary for fair disclosure to investors. The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission. The attitude of the SEC is generally considered in any major change proposed by the Financial Accounting Standards Board (FASB), the independent organization that establishes U.S. GAAP. Terms: Securities and Exchange Commission influence on setting generally accepted accounting principles Diff: Moderate Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 6) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements. Answer: FALSE Terms: Securities Acts of 1933 and 1934 Diff: Easy Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 7) Form 10-K must be filed with the SEC whenever a public company experiences a significant event. Answer: FALSE Terms: Form 10-K; SEC Diff: Moderate Objective: LO 2-4 AACSB: Reflective thinking Topic: Public 8) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions. Answer: TRUE Terms: Securities and Exchange Commission Diff: Moderate Objective: LO 2-4 AACSB: Reflective thinking 2.5 Learning Objective 2-5 1) Statements on Standards for Accounting and Review Services (SSARS) are issued by the A) Accounting and Review Services Committee. B) Professional Ethics Executive Committee. C) Securities and Exchange Commission. D) Financial Accounting Standards Board. Answer: A Terms: Statements on Standards for Accounting and Review Services (SSARS) Diff: Moderate Objective: LO 2-5 AACSB: Reflective thinking 2) The American Institute of Certified Public Accountants (AICPA) A) is responsible for issuing licenses to new CPAs. B) restricts its membership to CPAs who are independent auditors. C) sets auditing standards for both public and private companies. D) sets rules of conduct that CPAs are required to meet. Answer: D Terms: AICPA has authority to establish standards and rules Diff: Moderate Objective: LO 2-5 AACSB: Reflective thinking 3) What are the major functions of the AICPA? Answer: Major functions of the AICPA include: • Setting standards and rules that all members and other practicing CPAs must follow. These standards consist of auditing standards for auditors of private companies, compilation and review standards, other attestation standards, and the Code of Professional Conduct. • Research and publication on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes. AICPA publications include the Journal of Accountancy, industry audit guides for several industries, periodic updates of the Codification of Statements on Auditing Standards, and the Code of Professional Conduct. • Promoting the accounting profession through organizing national advertising campaigns • Promoting new assurance services • Developing specialist certifications to help market and ensure the quality of services in specialized practice areas • Writing and grading the uniform CPA examination • Providing continuing education seminars for its members Terms: Major functions of AICPA Diff: Challenging Objective: LO 2-5 AACSB: Reflective thinking 4) Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors. Answer: FALSE Terms: Membership in AICPA Diff: Easy Objective: LO 2-5 AACSB: Reflective thinking 5) Membership in the AICPA is mandatory for all licensed practicing CPAs. Answer: FALSE Terms: Membership in AICPA Diff: Easy Objective: LO 2-5 AACSB: Reflective thinking 6) A CPA must meet continuing education requirements to maintain their license to practice. Answer: TRUE Terms: Membership in AICPA Diff: Easy Objective: LO 2-5 AACSB: Reflective thinking 2.6 Learning Objective 2-6 1) Which of the following are audit standards used in professional practice by audit firms? A) B) C) D) Answer: C Terms: Standards used in professional practice Diff: Easy Objective: LO 2-6 AACSB: Reflective thinking 2) Who is responsible for establishing auditing standards for privately held companies? A) Securities and Exchange Commission B) Public Company Accounting Oversight Board C) Auditing Standards Board D) National Association of Accounting Answer: C Terms: Establishing auditing standards for privately held companies Diff: Easy Objective: LO 2-6 AACSB: Reflective thinking International Standards on Auditing AICPA Auditing Standards PCAOB Auditing Standards Yes No No International Standards on Auditing AICPA Auditing Standards PCAOB Auditing Standards Yes Yes No International Standards on Auditing AICPA Auditing Standards PCAOB Auditing Standards Yes Yes Yes International Standards on Auditing AICPA Auditing Standards PCAOB Auditing Standards No Yes Yes 3) Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit A) both private and public companies. B) public companies only. C) private companies, public companies, and nonprofit entities. D) private companies only. Answer: B Terms: Public Company Accounting Oversight Board Standards Diff: Moderate Objective: LO 2-6 AACSB: Reflective thinking Topic: SOX 4) The International Standards on Auditing (ISA) A) are issued by the AICPA. B) override a country's regulations governing the audit of a company. C) has many of the same standards as the Auditing Standards Board (ASB). D) must be followed by companies whose stock is traded in the U.S. Answer: C Terms: International Standards on Auditing; International Auditing and Assurance Standards Board Diff: Moderate Objective: LO 2-6 AACSB: Reflective thinking 5) ________ are referred to as U.S. generally accepted auditing standards (GAAS). A) AICPA auditing standards B) SEC auditing standards C) PCAOB auditing standards D) Sarbanes-Oxley standards Answer: A Terms: Auditing standards of the United States Diff: Moderate Objective: LO 2-6 AACSB: Reflective thinking 6) Which of the following is a true statement regarding auditing standards? A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies. B) PCAOB auditing standards are applicable to entities outside the U.S. C) There are no similarities between PCAOB standards and International Standards on Auditing. D) The Auditing Standards Board has revised most of its standards to converge with the international standards. Answer: D Terms: Auditing standards of the United States and International Standards of Auditing Diff: Easy Objective: LO 2-6 AACSB: Reflective thinking 7) Which of the following is true with regards to the various auditing standards? A) Statements on Auditing Standards (SASs) are issued by the PCAOB. B) The ASB Clarity Project was intended to make the U.S. auditing standards easier to read, understand, and apply. C) The ASB redrafted existing AICPA auditing standards to align them with respective ISAs. D) Both B and C are correct. Answer: D Terms: Auditing standards of the United States and International Standards of Auditing Diff: Challenging Objective: LO 2-6 AACSB: Reflective thinking 8) The PCAOB considers International Standards on Auditing (ISA) when developing its standards. Answer: TRUE Terms: Public Company Accounting Oversight Board Standards Diff: Easy Objective: LO 2-6 AACSB: Reflective thinking Topic: SOX 9) International Standards on Auditing are issued by the International Auditing and Assurance Standards Board (IAASB). Answer: TRUE Terms: International Standards on Auditing; International Auditing and Assurance Standards Board Diff: Easy Objective: LO 2-6 AACSB: Reflective thinking 10) The ASB has revised its audit standards to converge with international standards. Answer: TRUE Terms: Auditing standards of the United States and International Standards of Auditing Diff: Easy Objective: LO 2-6 AACSB: Reflective thinking 2.7 Learning Objective 2-7 1) Historically, auditing standards have been organized into three categories, including A) standards of field work. B) purpose of an audit. C) responsibilities of the auditor. D) proper planning and supervision. Answer: A Terms: GAAS, general standards Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 2) The "Principles Underlying an Audit in Accordance with Generally Accepted Auditing Principles" provides a framework to help auditors A) understand the ten GAAS standards. B) obtain complete assurance that the financial statements are free from any error. C) report on the financial statements. D) prevent fraud. Answer: C Terms: GAAS; New principles underlying GAAS Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 3) Which of the following is not one of the responsibilities of an auditor under the principles underlying an audit? A) possess appropriate competence and capabilities B) comply with ethical requirements C) plan work and supervise assistants D) maintain professional skepticism and exercise professional judgment Answer: C Terms: New principles underlying an audit Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 4) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor must fulfill several performance responsibilities, including A) verifying that all audit work is performed by a CPA with a minimum of three years' experience. B) obtaining sufficient, appropriate audit evidence. C) exercising professional judgment. D) providing an opinion on the financial statements. Answer: B Terms: GAAS- New principles underlying GAAS; Purpose of an audit Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 5) The Statements on Auditing Standards issued by the Auditing Standards Board A) are regarded as authoritative literature. B) mandate the amount of evidence that must be obtained. C) must be followed in all situations. D) are optional guidelines which an auditor may choose to follow or not follow when conducting an audit. Answer: A Terms: Generally Accepted Auditing Standards Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 6) An auditor need not abide by a particular auditing standard if the auditor believes that A) the issue in question is immaterial in amount. B) more expertise is needed to fulfill the requirement. C) the requirement of the standard has not been addressed by the PCAOB. D) fraud is involved. Answer: A Terms: Auditor need not abide by a particular auditing standard Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 7) When assessing the risk of material misstatements in the financial statements, A) inadequate internal control procedures will mitigate client business risk. B) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain. C) company management is responsible for determining materiality levels. D) the auditor must have an understanding of the client's business and industry. Answer: D Terms: Generally Accepted Auditing Standards Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 8) In order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that A) the internal control policies and procedures are developed by the auditors. B) the purpose of an audit is to prevent fraud. C) management is responsible for the preparation of the financial statements. D) management can restrict the auditor's access to important information relevant to the financial statements. Answer: C Terms: GAAS- New principles underlying GAAS; Purpose of an audit Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 9) The principles underlying an audit A) contain the procedures that must be followed during an audit. B) carry the same authority as AICPA auditing standards. C) only apply to the audits of public companies D) provide structure for the clarified Codification. Answer: D Terms: Principles underlying an audit Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 10) The AICPA principles underlying an audit are organized around four principles. Which of the following is not one of those principles? A) fairness B) responsibilities C) reporting D) performance Answer: A Terms: Principles underlying an audit Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 11) Which of the following statements about Generally Accepted Audit Standards are true? I. They serve as broad guidelines to auditors for conducting an audit engagement. II. They are sufficiently specific to provide any meaningful guide to practitioners. III. They represent a framework upon which the AICPA can provide interpretations. A) I and II B) I and III C) II and III D) I, II and III Answer: B Terms: Generally Accepted Auditing Standards Diff: Challenging Objective: LO 2-7 AACSB: Reflective thinking 12) The AICPA principles and the auditing standards should be viewed by practitioners as A) ideals to work towards, but which are not achievable. B) maximum standards that denote excellent work. C) minimum standards of performance that must be achieved on each audit engagement. D) benchmarks to be used on all audits, reviews, and compilations. Answer: C Terms: Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) Diff: Challenging Objective: LO 2-7 AACSB: Reflective thinking 13) Which of the following is an accurate statement regarding principles and auditing standards? A) The principles underlying an audit give specific guidance to an auditor when a problem arises in an audit. B) The principles underlying an audit state that the only objective of an audit is to provide financial statement users with an opinion. C) All auditing standards issued by the PCAOB are given two classification numbers. D) The SAS number identifies the order in which it was issued in relation to other SASs. Answer: D Terms: Principles underlying an audit versus auditing standards Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 14) ________ is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence. A) Reasonableness B) Diligence C) Professional skepticism D) Competence Answer: C Terms: Professional skepticism Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 15) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor fulfills several performance responsibilities, including A) complying with the AICPA Code of Professional Conduct. B) issuing a written report on the financial statements. C) determining and applying materiality levels. D) having the appropriate competence to perform the audit. Answer: C Terms: Principles underlying an audit Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 16) List the four principles underlying an audit. Answer: • Purpose of an audit • Responsibilities • Performance • Reporting Terms: GAAS; New principles underlying GAAS Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 17) Principles related to the auditor's responsibilities in the audit stress three important personal qualities that the auditor should possess. List and discuss these three qualities. Answer: 1. Appropriate competence and capabilities. The auditor is required to have formal education in auditing and accounting, adequate practical experience for the work being performed, and continuing professional education. 2. Comply with relevant ethical requirements. The AICPA Code of Professional Conduct outlines the ethical requirements for CPAs who practice in accounting firms or work in organizations as part of management. The Code and auditing standards stress the need for independence in audit engagements. 3. Maintain professional skepticism and exercise professional judgment. Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence. In making judgments about the presence of a material misstatement, auditors are responsible for applying relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Terms: Principles underlying an audit Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 18) Performance is one of the principles underlying an audit. List three performance responsibilities. Answer: Performance responsibilities include: • obtain reasonable assurance about whether financial statements are free of material misstatement • plan work and supervise assistants • determine and apply materiality level(s) • identify and assess risks of material misstatements based on understanding of the entity and its environment, including internal controls • obtain sufficient appropriate audit evidence Terms: Principles underlying an audit Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 19) Professional skepticism must be maintained only if the auditor suspects fraud. Answer: FALSE Terms: Generally Accepted Auditing Standards; Responsibilities Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 20) Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board. Answer: FALSE Terms: Statements on Auditing Standards (SAS); Public Company Accounting Oversight Board Diff: Easy Objective: LO 2-7 AACSB: Reflective thinking 21) The AU-C number identifies the order in which it was issued in relation to all other codified auditing standards. Answer: FALSE Terms: Classification of auditing standards Diff: Moderate Objective: LO 2-7 AACSB: Reflective thinking 2.8 Learning Objective 2-8 1) Quality control for a CPA firm A) includes the organizational structure of the firm and the procedures it establishes. B) is tailored to each specific audit engagement. C) is a guarantee that auditing standards are followed. D) is required only for firms auditing SEC companies. Answer: A Terms: Quality control policies and procedures Diff: Moderate Objective: LO 2-8 AACSB: Reflective thinking 2) The methods used by a CPA firm to ensure that the firm meets is professional responsibilities to clients and others is A) continuing professional education. B) compliance with generally accepted reporting standards. C) quality control. D) peer review. Answer: C Terms: Quality control policies and procedures Diff: Moderate Objective: LO 2-8 AACSB: Reflective thinking 3) Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with A) technical training that assures proficiency as a valuation expert. B) professional education that is required in order to perform with due professional care. C) knowledge required to fulfill assigned responsibilities. D) knowledge required to perform a peer review. Answer: C Terms: Quality control; Continuing professional education and training activities Diff: Moderate Objective: LO 2-8 AACSB: Reflective thinking 4) The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to A) provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. B) monitor the risk factors concerning misstatements that arise from the misappropriation of assets. C) document objective criteria for the CPA firm's peer review. D) minimize the likelihood of assoc