1.3

Question 1

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures?

Answer 1

The relationship between financial statement assertions and audit procedures should be one-to-one.

Some auditing procedures may relate to more than one assertion. But a combination of auditing procedures may be needed to test a single relevant assertion because audit evidence from different sources or of a different nature may be relevant to the same assertion. For example, when relating controls to assertions, the auditor may determine that multiple controls are needed to address a risk and the related assertion.

Question 2

Quality control policies and procedures should be relevant, adequate, effective, and complied with. This statement is most closely associated with the quality control element of

Answer 2

Monitoring.

Monitoring provides reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued (QC 10).

Question 3

A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by

Answer 3

Having an appropriate system of quality control.

A system of quality control should provide reasonable assurance that the firm’s personnel comply with professional standards and applicable regulatory and legal requirements. However, deficiencies in individual engagements covered by the quality control standards do not, by themselves, signify that the firm’s system of quality control is insufficient to provide it with reasonable assurance of compliance with the relevant standards. GAAS apply to individual audit engagements. Quality control standards apply to the firm’s practice as a whole.

Question 4

In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality control element is this procedure most likely to satisfy?

Answer 4

Relevant ethical requirements.

CPA firms should avoid situations in which third parties might question the firm’s independence. Thus, they should adhere to the independence and other principles established by the AICPA Code of Professional Conduct and the requirements of regulators and other authorities (QC 10).

Question 5

According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review, except

Answer 5

An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team.

The engagement quality reviewer should evaluate (1) the engagement team’s assessment of, and audit responses to, significant risks identified, including fraud risks, and (2) other significant risks identified by the engagement quality reviewer through procedures required by AS 1220, Engagement Quality Review. Thus, the engagement quality reviewer does not independently assess fraud identified by the engagement team.

Question 6

The nature and extent of a CPA firm’s quality control policies and procedures depend on

The CPA firm’s size:
The nature of the CPA firm’s practice:
Cost-Benefit considerations:

Answer 6

Yes
Yes
Yes

The nature and extent of a firm’s quality control policies and procedures depend on a number of factors, such as the firm’s size, the degree of operating autonomy allowed, its human resources policies, the nature of its practice and organization, and appropriate cost-benefit considerations.

Question 7

The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the

Answer 7

Accounting and Review Services Committee.

The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.

Question 8

Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)?

Answer 8

They are generally accepted auditing standards.

Generally accepted auditing standards are defined as SASs. The Code of Professional Conduct requires members who perform professional services to comply with standards promulgated by bodies designated by the AICPA Council. Thus, an AICPA member who performs an audit of a nonissuer must comply with SASs promulgated by the Auditing Standards Board (ASB).

Question 9

According to PCAOB quality control standards applying to audits, the engagement quality reviewer most likely

Answer 9

Must be an associated person of a registered public accounting firm.

The objective of the reviewer is to evaluate the significant judgments made and the related conclusions reached. (S)he must be an associated person of a registered public accounting firm and may be from outside the firm. Moreover, the reviewer must have the competence to serve as a partner on the engagement and have independence, integrity, and objectivity. But an engagement partner on either of the two preceding audits ordinarily may not be the reviewer.

Question 10

Which of the following is an element of a CPA firm’s quality control policies and procedures applicable to the firm’s accounting and auditing practice?

Answer 10

Engagement performance.

Engagement performance relates to policies and procedures implemented by a CPA firm to ensure quality performance of each engagement. Matters addressed include responsibilities for consistency of performance, supervision, and review.

Question 11

Assurance and advisory services differ from consulting services because

Answer 11

Assurance and advisory services usually involve situations in which one party wants to monitor another and focus on improving information.

Assurance and advisory services do not include consulting services. Assurance and consulting services often are similar because they are delivered using a similar body of knowledge and skills. However, assurance and advisory services differ from consulting services because assurance services focus on improving information, whereas consulting services strive to provide advice. Also, assurance and advisory services often involve monitoring of one party by another (often within the same company) rather than the two-party arrangements common in consulting engagements.

Question 12

Personal financial planning services include those that are limited to

Answer 12

Assisting the client to act on personal financial planning decisions.

“Personal financial planning engagements are only those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals.” However, unless they are undertaken by specific agreement with the client, the CPA is not responsible for other services. These services include (1) assisting the client to act on planning decisions, (2) monitoring progress in achieving goals, and (3) updating recommendations and revising planning decisions (PFP 100).

Question 13

Quality control for a CPA firm, as referred to in Statements on Quality Control Standards (SQCS), applies to

Answer 13

Auditing and accounting and review services.

According to QC 10, quality control for a CPA firm applies to all audit, attest, accounting and review, and other services for which professional standards have been established by the ASB and the Accounting and Review Services Committee. The SQCS therefore do not apply to compliance with standards for consulting services and tax services, which are issued by different AICPA technical committees.

Question 14

The engagement partner responsible for coordinating the field work usually schedules a pre-audit conference with the audit team primarily to

Answer 14

Give guidance to the staff regarding both technical and personnel aspects of the audit.

A pre-audit conference is useful to provide guidance to the staff regarding such technical issues as the expected use of client personnel and the expectations of the audit team.

Question 15

An auditor must obtain professional experience primarily to

Answer 15

Exercise professional judgment.

Professional judgment is essential to perform an audit properly. An auditor must interpret relevant ethical requirements and GAAS and make informed decisions during the audit. Such interpretations and decisions require competencies developed through relevant training, knowledge, and experience (AU-C 200).

Question 16

Inspections performed by the PCAOB focus on quality control of registered CPA firms that perform audits of public companies (issuers). As required by the Sarbanes-Oxley Act, inspections determine all of the following except that

Answer 16

Only staff with prior experience work on audits.

Staff members are required to be trained and supervised in accordance with auditing standards. However, there is no requirement that they have prior experience.

Question 17

For which of the SSARS services must a practitioner be independent?

Preparation:
Compilation:
Review:

Answer 17

No
No
Yes

The practitioner must be independent when providing any level of assurance, e.g., in a review or audit. Because preparations and compilations provide no assurance, the practitioner need not be independent to perform those services. However, a report is issued in a compilation. Accordingly, a lack of independence should be noted in the compilation report.

Question 18

For which of the SSARS services will the practitioner issue a report?

Preparation:
Compilation:
Review:

Answer 18

No
Yes
Yes

The practitioner does not issue a report for a preparation service for a nonissuer. This service does not (1) provide assurance or (2) require a determination of whether the practitioner is independent. However, reports are issued for a compilation and a review service. A compilation provides no assurance but requires a determination of independence. A review requires independence.

Question 19

When an accountant performs a review of the financial statements of a nonissuer, (s)he

Answer 19

Seeks to establish a reasonable basis for providing limited assurances about the statements.

To obtain a reasonable basis for the expression of limited assurance, the accountant must apply analytical procedures, make inquiries of management and other entity personnel, and obtain written representations from management. Accordingly, the review report states, “Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.”

Question 20

The objective of assurance services is to

Answer 20

Enhance decision making.

The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.