Chapter 1 [Quality Audit: Why It Matters]

Question 1

In connection with independence, an [_____] is a level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member’s independence is not impaired. When
used in connection with any rule except for the Independence Rule, an [_____] is a level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member’s compliance with the rules is not compromised.

Answer 1

Acceptable level

Question 2

An [_____] should be expressed when the auditor believes that the financial statements taken as a whole are not presented fairly in conformity with GAAP or when the auditor believes that the client’s internal control over financial reporting is not effective.

Answer 2

Adverse opinion

Question 3

A professional organization for CPAs that develops professional standards for the conduct of nonpublic
company audits and other services performed by its members. The organization also serves to self-regulate the profession performing nonpublic audits.

Answer 3

American Institute of Certified Public Accountants (AICPA)

Question 4

Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.

Answer 4

Audit quality

Question 5

An organization affiliated with the AICPA that is
dedicated to enhancing investor confidence and trust in the financial markets.

Answer 5

Center for Audit Quality (CAQ)

Question 6

The process by which a new client is evaluated by the
audit firm and individual engagement partner prior to being accepted into the audit firm’s portfolio of clients.

Answer 6

Client acceptance decision

Question 7

The process by which existing clients for which the
audit firm provided services in the preceding period are evaluated by the audit firm and the individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period.

Answer 7

Client continuance decision

Question 8

Information obtained during the conduct of an audit related to the client’s business or business plans; the auditor is prohibited from communicating confidential information except in very specific instances defined by the Code or with the client’s specific authorization.

Answer 8

Confidential information

Question 9

Number of years after which the individual auditor may resume providing service to the audit client.

Answer 9

Cooling-off period

Question 10

A [_____] includes:
a. An individual on the engagement team
b. An individual in a position to influence the engagement
c. A partner, partner equivalent, or manager who provides more than 10 hours of nonattest services to the audit client within any fiscal year
d. A partner or partner equivalent in the office in which the lead engagement partner or partner equivalent primarily practices in connection with the engagement
e. The firm, including the firm’s employee benefit plans
f. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities des

Answer 10

Covered member

Question 11

A [_____] who is licensed by a state board of accountancy.

Answer 11

CPA

Question 12

An investigation whose purpose is to (1) analyze a problem,
(2) arrive at a conclusion that integrates all available information, and (3) justify that
conclusion convincingly to others.

Answer 12

Critical thinking

Question 13

Qualitative and quantitative techniques and processes that
auditors use to enhance their productivity and effectiveness.

Answer 13

Data-analytics tools

Question 14

Organizational procedures that articulate how users collect,
store, organize, and use data.

Answer 14

Data architecture

Question 15

A repository for data that enables users to categorize and store any type of data

Answer 15

Data bank

Question 16

An organization that manages hardware, software, air conditioning, backup systems, communication, and security equipment for multiple organizations; allows organizations to store data “off-site” to prevent misuse, manipulation, or destruction

Answer 16

Data center

Question 17

The process of ensuring that data is correct, consistent, free of inappropriate anomalies, and therefore usable.

Answer 17

Data cleaning

Question 18

Helps users understand the structure and content of a database, including the name of the data, its description, relationships among various related data, and access rights.

Answer 18

Data dictionary

Question 19

An electronic intrusion in which the perpetrator embeds seemingly valid data that enables malicious computer codes to exploit weaknesses in the computer system.

Answer 19

Data-driven attack

Question 20

An interdisciplinary field about scientific methods, processes, and information systems that aims to help users gain insights from complex and often unstructured data.

Answer 20

Data science

Question 21

A financial interest owned directly by, or under the control
of, an individual or entity or beneficially owned through an investment vehicle, estate, or trust when the beneficiary controls the intermediary or has the authority to supervise
or participate in the intermediary’s investment decisions.

Answer 21

Direct financial interest

Question 22

A standard of care expected to be demonstrated by competent professionals in their field of expertise, set by GAAS but supplemented in specific implementation instances by the standard of care expected by a reasonably prudent auditor.

Answer 22

Due professional care

Question 23

A communication between the audit firm and the audit committee that states the scope of the work to be done on the audit so that there can be no doubt in the mind of the client, external auditor, or court system as to the expectations agreed to by the external auditor and the client.

Answer 23

Engagement letter

Question 24

A situation in which moral duties or obligations conflict; an ethically correct action may conflict with an individual’s immediate self-interest.

Answer 24

Ethical dilemma

Question 25

The United Kingdom’s independent regulator responsible for promoting investment in securities through good corporate governance and financial reporting.

Answer 25

Financial Reporting Council

Question 26

A systematic process of objectively obtaining evidence
regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the
results to interested users.

Answer 26

Financial statement audit

Question 27

[_____] refers to professional external auditing standards that are followed by auditors when conducting a financial
statement audit. Throughout the book, when we refer to professional external auditing standards, we use the term [_____] . [_____] are set by several bodies, including the AICPA, the IAASB, and the PCAOB.

Answer 27

Generally accepted auditing standards (GAAS)

Question 28

A financial interest in which the beneficiary neither
controls the intermediary nor has the authority to supervise or participate in the intermediary’s investment decisions.

Answer 28

Indirect financial interest

Question 29

Type of audit provided when an external auditor is engaged to perform an audit of the effectiveness of internal control over financial reporting (the audit of internal control over financial reporting) that is integrated with an audit of the financial statements.

Answer 29

Integrated audit

Question 30

A part of the International Federation of Accountants that is responsible for issuing auditing and assurance standards. Its goal is to harmonize auditing standards on a global basis.

Answer 30

International Auditing and Assurance Standards Board (IAASB)

Question 31

An independent, standard-setting body that serves the public interest by setting robust, internationally appropriate ethics standards, including auditor independence requirements, for professional accountants worldwide.

Answer 31

International Ethics Standards Board for Accountants (IESBA)

Question 32

The global organization for the accountancy profession dedicated to serving the public interest by strengthening
the profession and contributing to the development of strong international economies.

Answer 32

International Federation of Accountants (IFAC)

Question 33

The threat that the accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant; this threat is named in the IESBA Code of Ethics
but is not named in the AICPA’s Code of Professional Conduct.

Answer 33

Intimidation threat

Question 34

A firm or other entity that belongs to a network. This includes any entity (including another firm) that the network firm, by itself or through one or more of its owners, controls, is controlled by, or is under common control with.

Answer 34

Network firm

Question 35

An impartial, unbiased attitude

Answer 35

Objectivity

Question 36

Broad principles that articulate auditors’ responsibilities and their requirements to act in the public interest, to act with integrity and objectivity, to be independent, to exercise due care, and to perform an appropriate scope of services.

Answer 36

Principles of professional conduct

Question 37

The application of relevant professional knowledge and experience to the facts and circumstances in order to reach a conclusion or make a decision.

Answer 37

Professional judgment

Question 38

An attitude that includes a questioning mind and critical
assessment of audit evidence.

Answer 38

Professional skepticism

Question 39

A quasi-public board, appointed by the SEC, to provide oversight of the firms that audit public companies
registered with the SEC. It has the authority to set auditing standards for the audits of public companies.

Answer 39

Public Company Accounting Oversight Board (PCAOB)

Question 40

An ethical theory that identifies a hierarchy of rights that should be considered in solving ethical dilemmas.

Answer 40

Rights theory

Question 41

A data-analytics test in which the auditor extracts values
without decimal places following the whole number in order to exploit the fact that round numbers are more common in fraudulent journal entries.

Answer 41

Round-number tests

Question 42

Actions or other measures that may eliminate a threat or reduce a threat to an acceptable level.

Answer 42

Safeguards

Question 43

The governmental body with the oversight responsibility to ensure the proper and efficient operation of capital markets
in the United States.

Answer 43

Securities and Exchange Commission (SEC)

Question 44

Relationships or circumstances that could compromise compliance with the rules

Answer 44

Threats

Question 45

The standard audit report that describes the auditor’s work and communicates the auditor’s opinion that the financial statements are fairly presented in accordance with GAAP

Answer 45

Unqualified audit report

Question 46

An ethical theory that systematically considers all the potential stakeholders who may be affected by an ethical decision and measures the effects of the decision on each party; it seeks to facilitate decisions resulting in the greatest amount of good for the greatest number of people.

Answer 46

Utilitarian theory

Question 47

When the auditor has no reservations about management’s financial statements or internal controls, the auditor will issue an unqualified audit opinion.

T or F?

Answer 47

TRUE

Question 48

The sole responsibility of management with regard to financial reporting involves preparing and presenting financial statements in accordance with the applicable financial reporting framework.

T or F?

Answer 48

FALSE

Question 49

Which of the following are the responsibilities of the external auditor in auditing financial statements?

a. Maintaining internal controls and preparing financial reports.
b. Providing internal assurance on internal control and financial reports
c. Providing internal oversight of the reporting process.
d. Providing independent assurance on the financial statements.

Answer 49

D

Question 50

Which of the following factors does not create a demand for external audit services?

a. Potential bias by management in providing
information.
b. Requirements of the state boards of accountancy.
c. Complexity of the accounting processing systems.
d. Remoteness between a user and the organization.

Answer 50

B

Question 51

Audit quality is achieved when the audit is performed in accordance with GAAS and when it provides reasonable assurance that the financial statements have been presented in accordance with GAAP and are not materially misstated due to errors or fraud.

T or F?

Answer 51

TRUE

Question 52

One of the key drivers of audit quality is the gross margin achieved by the audit firm and the ability of the engagement partner to maintain those margins over the duration of the audit engagement.

T or F?

Answer 52

FALSE

Question 53

Audit quality involves which of the following?

a. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.
b. Performing an audit in accordance with GAAP to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAS and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.
c. Performing an audit in accordance with GAAS to provide absolute assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.
d. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements contain no misstatements due to errors or fraud.

Answer 53

A

Question 54

Which of the following factors is not a driver of audit quality as discussed by the FRC?

a. Audit firm culture.
b. Skills and personal qualities of client management.
c. Reliability and usefulness of audit reporting.
d. Factors outside the control of auditors.

Answer 54

B

Question 55

The AICPA’s principles of professional conduct articulate auditors’ responsibilities and their requirements to act in the public interest, to act with integrity and objectivity, to be objective and independent, to exercise due care, and to perform an appropriate scope of services.

T or F?

Answer 55

TRUE

Question 56

Per the AICPA’s Code, independence would be impaired if his or her immediate family member were employed by the audit client in any capacity or personnel level.

T or F?

Answer 56

FALSE

Question 57

Which of the following is not a threat to auditor
independence?

a. Self-review threat.
b. Advocacy threat.
c. Adverse interest threat.
d. Regulatory interest threat.

Answer 57

D

Question 58

Which of the following statements is false?

a. An auditor in public practice shall be independent in the performance of professional services.
b. In performing audit services, the auditor shall maintain objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate his or her judgment to others.
c. In performing audit services, the auditor may accept only contingent fees for publicly traded audit clients.
d. An auditor in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive.

Answer 58

C

Question 59

Utilitarian theory holds that what is ethical is the action that achieves the greatest good for the most important people.

T or F?

Answer 59

FALSE

Question 60

In rights theory, the highest order rights are those granted by the government, such as civil rights, legal rights, rights to own property, and license privileges.

T or F?

Answer 60

FALSE

Question 61

Which of the following statements related to rights theory is false?

a. The highest order rights include the rights to life, autonomy, and human dignity.
b. Second-order rights include rights granted by the government, such as civil rights and legal rights.
c. Third-order rights include social rights, such as the right to higher education, to good health care, and to earning a living.
d. Fourth-order rights include one’s essential interests or personal tastes.

Answer 61

D

Question 62

**

Existing clients for which the audit firm provided services in the preceding period are evaluated by the audit firm and by the individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period. The process by which this evaluation occurs is called the client continuance decision.

T or F?

Answer 62

TRUE

Question 62

Utilitarianism does not require which of the following actions when a person considers how to resolve an ethical dilemma?

a. Identification of the potential problem and courses of action.
b. Identification of the potential direct or indirect
impact of actions on each affected party who has an interest in the outcome.
c. Identification of the motivation of the person facing the ethical dilemma.
d. Assessment of the desirability of each action for each affected party.

Answer 62

C

Question 63

Audit firms may discontinue serving a client because the client does not fit the profile or growth strategy of the audit firm.

T or F?

Answer 63

TRUE

Question 64

With regard to client acceptance/continuance decisions, which of the following is false?

a. Client acceptance/continuance decisions are one part of the audit firm’s overall portfolio management activities.
b. The primary driver of the client acceptance/continuance decision is the level of audit fees that the audit firm can charge the client.
c. One can view an individual audit client as analogous to an individual stock in an investment portfolio.
d. Audit firms are not required to provide audit services for all organizations requesting an audit.

Answer 64

B

Question 65

Which of the following factors is not an example of a risk relevant to the client continuance decision?

a. Client entity characteristics.
b. Independence risk factors.
c. Third-party/due diligence risk factors.
d. Advocacy threat.

Answer 65

D