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ACC 450 (Audit) Exam 1 > Ch 1- role of a public accountant > Flashcards

Ch 1- role of a public accountant Flashcards

learning the basics

1
Q

purpose of an audit?
(PCAOB definition)

A

Provide/obtain “reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

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2
Q

T/F: reasonable assurance is objective.

A

False; reasonable assurance is subjective (meaning the audit can’t provide 100% assurance)

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3
Q

who is responsible for misstated financial statements?

A

Management (not auditors)

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4
Q

the auditor’s final opinion on the financial statements is conveyed to the public in an…

A

audit report

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5
Q

T/F: The audit is only focused on the big, decision changing misstatements.

A

true (small misstatements don’t matter to auditors because they don’t heavily impact the financial statements)

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6
Q

what is the fastest growing practice in public accounting?

A

Consulting/advisory

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7
Q

A type of assurance that has to do with improving the quality of information in the financial statements

A

Assurance services

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8
Q

Due diligence engagements (prior to a merger) and IT system security reviews are examples of ___________ services.

A

Assurance services

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9
Q

A subset of Assurance Services that provide assurance over the assertions of a 3rd party

A

Attest services

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10
Q

6 fundamental financial statement assertions:

A

PREVCC acronym:
1. Presentation/ classification
2. Rights & obligations
3. Existence or occurrence
4. Valuation or allocation
5. Completeness
6. Cut-off (AICPA only)

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11
Q

Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period.

A

Existence/occurrence
(making sure stuff wasn’t made up)

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12
Q

Which fundamental assertion focuses on overstating assets?

A

Existence/occurrence

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13
Q

All transactions and accounts that should be presented in the financial statements are so included.

A

Completeness (making sure stuff isn’t left out)

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14
Q

Which fundamental assertion focuses on understating liabilities?

A

Completeness

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15
Q

Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.

A

Valuation/allocation (making sure stuff is listed at the correct $ amounts)

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16
Q

The company holds or controls rights to the assets, and liabilities are obligations of the company at a given date.

A

Rights & obligations (things can exist but the client does not have a right to list them in the financial statements)

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17
Q

Consignment sale is an example of which fundamental assertion?

A

Rights & obligations (legal ownership/title doesn’t change)

18
Q

The components of the financial statements are properly classified, described, and disclosed.

A

Presentation/classification
(saying something is something else)

19
Q

Saying an upcoming merger/business purchase is complete when it is not, or calling an Available for Sale security as a Held to Maturity security, is an example of which fundamental assertion?

A

Presentation/classification

20
Q

Transactions and events have been recorded in the correct accounting period.

21
Q

What are the 3 attest services that auditors provide to clients?

A
  1. Financial statement audit (fundamental assertions)
  2. Reviews
  3. Agreed-upon procedures
22
Q

____________ provide a lower level of assurance (moderate/limited), have a moderate risk of material misstatements, and consist of a limited set of tests done (inquiries and analytical procedures)

23
Q

____________ provide a summary of findings, have a varied risk of material misstatements, and the auditor does only/exactly what tests the client prescribes and merely reports the results.

A

Agreed-upon procedures

24
Q

T/F: In the US, annual financial statements get reviews.

A

False; QUARTERLY f/s get reviews

25
Q

An engagement where the CPA actually creates the financial statements.

A

Compilation

26
Q

T/F: A Compilation is not an Assurance or Attest service

A

True; CPAs are banned from providing Assurance/Attestation over their own work/creations (keeps objectivity and independence)

27
Q

Any threat/risk that would disrupt/harm the business.

A

Business risk

28
Q

The risk that the information used to evaluate Business Risk is incorrect (ex: studying the wrong chapters for an exam)

A

Information risk

29
Q

T/F: Audits directly influence business risks.

A

False; audits only directly influence information risks

30
Q

The appointer is the _________ & the appointee is the _________

A

Principle ; Agent

31
Q

The owners of large corporations (or shareholders) are the _________, while the management team of the corporation (or CEO, CFO) are the _________.

A

Shareholders are principles; CEO/CFOs are agents

32
Q

The costs imposed on the Principle because the Agent is acting in their own self-interest are called…
(CEOs doing what they want, rather than what shareholders want)

A

Agency costs

33
Q

The Principle’s main monitoring control over Agents is the…

A

Financial statements

34
Q

T/F: Audits allow for better monitoring of Agents by Principles and reduce agency costs

A

True; audits provide better quality information that is more reliable for Principles

35
Q

4 industry tiers for CPA firms:

A
  1. Big 4 (Deloitte, EY, PwC, KPMG)
  2. National firms - mid-tier and operate internationally
  3. Regional firms - concentrated in a particular geographic area, not international
  4. Local firms - limited to small area and don’t typically do public company audits
36
Q

An audit team consists of…

A

A partner, manager, senior associate, and staff associate (highest to lowest)

37
Q

T/F: The External Auditor is believed to be more independent than the Internal Auditor.

A

True; internal auditors work at the company and can’t be truly independent

38
Q

T/F: The Internal Auditor is believed to be less competent than the External Auditor.

A

False; internal auditors are more competent than external auditors because they work at the company everyday and have a deeper knowledge of the company

39
Q

T/F: Internal and External Auditors offer different trade-offs between independence and competence which are needed for quality audits.

A

True; need both independence and competence for audits

40
Q

What are the responsibilities of the AICPA?

A
  1. Create the content of the CPA Exam.
  2. Write and enforce CPA Ethics standards.
  3. Write standards for audits of private companies.
  4. Conduct Peer Reviews of auditors of private companies.
41
Q

What are the main responsibilities of the PCAOB

A
  1. Write standards for audits of publicly traded companies.
  2. Conduct (gov) Inspections of public company audits.
    ** created by SOX, reports to SEC
    ** 5 board members with majority being non-accountants
    ** “Quasi-Governmental” organization

ACC 450 (Audit) Exam 1 (6 decks)

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