ACCT 431 CHAPTER 2 Auditing and Assurance Services

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