Ch 2 - professional standards

Question 1

Main goal for auditing standards is to…

Answer 1

Enforce a minimum level of audit quality

Question 2

Consumers of low-quality audits “don’t understand” what they are buying and “should have” bought higher quality audits instead

Answer 2

Audit paternalism

Question 3

Audit firms can compete either on _____ or _____.

Answer 3

price or quality

Question 4

T/F: Regulators goal is to prevent a “race to the bottom”.

Answer 4

True; they don’t want audit firms lowering their quality standards just to charge get more clients by charging lower prices

Question 5

Where the customer/client is unable to (or has a very difficult time) evaluate the quality of the product provided.
(ex: car repairs)

Answer 5

Credence good (customers don’t have the specialized knowledge needed to understand)

Question 6

Auditing Standards for audits of private entities are typically referred to as…

Answer 6

GAAS (generally accepted auditing standards)

Question 7

AICPA stands for…

Answer 7

American Institute of Certified Public Accountants

Question 8

Where does the AICPA’s authority come from?

Answer 8

State governments (who delegate responsibilities to them)

Question 9

CPAs send teams to other CPA firms to do annual quality control reviews; main way for AICPA to enforce standards

Answer 9

(AICPA) Peer Reviews

Question 10

PCAOB stands for

Answer 10

Public Company Accounting Oversight Board

Question 11

T/F: AICPA standards are stricter than PCAOB standards.

Answer 11

False; have some overlapping standards but PCAOB is stricter

Question 12

T/F: If you are a PCAOB registered CPA firm, you get both an AICPA peer-review and a PCAOB Inspection.

Answer 12

True

Question 13

PCAOB Inspections: 2 parts and explanations

Answer 13

1) Engagement Level Inspection: selected specifically based on high risk to confirm compliance with PCAOB audit standards, deficiencies reported to the public (which client is a secret), deficiencies are common
2) Quality Control Inspection: Inspects firm-level systems of quality control, firms can correct deficiencies, not reported to the public, deficiencies are rare

Question 14

T/F: Firms with 50 or more public clients are inspected by the PCAOB every year.

Answer 14

False, 100 or more clients

Question 15

SOX started a massive shift from…

Answer 15

from self-governance to federal/state-governance that cannot be overstated.

Question 16

T/F: According to SOX, you cannot be the client’s auditor and consultant.

Answer 16

True; can’t provide (most) other services as an auditor (for independence reasons)

Question 17

You can provide audit and tax services to a client, but you must…

Answer 17

get explicit permission from the client’s Audit Committee.

Question 18

A _________ audit requires publicly traded firms to get an audit of the financial statements AND the company’s Internal Controls over Financial Reporting; one report contains the opinions for both audits.

Answer 18

Integrated Audit

Question 19

T/F: Audit Partners and the audit firm MUST rotate off the client after 5 years.

Answer 19

False; ONLY the audit partner has to rotate off, the firm does not

Question 20

T/F: Partners cannot accept or seek employment from their client for a full year after they leave the client

Answer 20

True

Question 21

T/F: Public firms post-SOX aren’t required to have an Independent Audit Committee, but are recommended to.

Answer 21

False; they ARE required

Question 22

A subset of the Board of Directors responsible for monitoring, hiring/firing and compensating the External Auditor.

Answer 22

Audit Committee

Question 23

Those not employed by the company (e.g., the CEO or CFO).

Answer 23

Independent directors

Question 24

SOX pros and cons?

Answer 24

Pros: improved quality of audits, lowered frequency of accounting problems
Cons: costly

Question 25

6 pieces of Audit Report content:

Answer 25

1. What the auditor did (statements and years audited)
2. The auditor’s responsibilities (audit definition)
3. Management’s responsibilities
4. Standards used (PCAOB or AICPA)
5. Financial statement opinion
6. Something about Internal Controls (for public company audits)

Question 26

PCAOB term, means that everything is fine, the financials are free of material misstatement without exception

Answer 26

Unqualified opinion

Question 27

T/F: For publicly traded clients, an unqualified opinion is the only opinion that the SEC will accept.

Answer 27

True

Question 28

T/F: Emphasis of Matter paragraphs change the core of the Unqualified Opinion

Answer 28

False, they do NOT change the unqualified opinion & everything is reported correctly

Question 29

PCAOB & AICPA term; The auditor believes there is at least one Material Misstatement, but it/they can be limited to a particular area of the financials; the financials are free of material misstatement with exception to…

Answer 29

Qualified opinion; “financials are mostly okay, except…”

Question 30

T/F: Material Misstatements can be Pervasive because of their size, or the number of misstatements present.

Answer 30

True (size and #)

Question 31

PCAOB and AICPA term; The auditor finds one or more Material Misstatements that are Pervasive

Answer 31

Adverse opinion
(the misstatements are so big or there are so many you shouldn’t trust the entirety of the financials)

Question 32

PCAOB & AICPA term; The audit is explicitly NOT giving an opinion because the auditor wasn’t able to gather all the evidence they wanted/needed to form an opinion

Answer 32

Disclaimer of Opinion
(doesn’t mean bad)