Chapter 2 Flashcards
AICPA standards are for _____ (public/nonpublic) companies
nonpublic
What are the three standards of Field Work?
- Adequate planning and supervision
- Sufficient understanding of Internal Control to determine the NET of tests
- Sufficient evident matter to afford a reasonable basis for an opinion
SASs are based on ____ (GAAP/10 Principles)
10 Principles
What are the three categories of the ten principles of GAAS?
General Standards
Field Work
Reporting Standards
What are the three General Standards for GAAS.
- Adequate technical training and proficiency
- Independence
- Due Professional care exercised
Who issues GAAP?
FASB, through their Codification and Accounting Standards and Updates
Describe the Auditor Responsibility for the Detection of Errors and Fraud
- Obtain info to assess inherent risks and fraud
- assess risk of errors and fraud that may cause material misstatement
- plan and perform audit to obtain reasonable assurance that misstatements will be detected
- Exercise due care in planning/performing audit procedures, evaluating results, and using enough professional skepticism
What are the four standards of reporting?
- In accordance w/GAAP
- Identify where not observing GAAP
- Reasonably adequate disclosures in the statement
- Expression of Opinion. If not able to express, reasons why
What is the definition of Reasonable Assurance?
Adequately low Audit Risk
Describe the Standard Unqualified Opinion
o Auditor was able to gather sufficient evidence that financial statements follow GAAP without additional commentary for any issue.
o These companies conform to GAAP without qualifications (big mistakes, exclusions, etc) so GOOD result.
What three things does the intro paragraph of the audit report do?
- States the CPA firm has done an audit
• 2. It lists the financial statements that were audited
• 3. It defines responsibilities between management and the auditor
Describe an Unqualified Opinion with Emphasis of Matter?
Good, but going concern issues, A lack of consistency in application of accounting principles (add an explanatory paragraph)
What is a goal of Quality Control?
to establish adequate quality control policies and procedures to provide reasonable assurance that it follows professional standards on every engagement.
What kind of opinion is one that departure from GAAP so significant that financial statements as a whole are misleading (change opinion and add explanatory paragraph)?
Adverse
Describe a disclaimer of opinion
• Scope limitation so significant that auditor is unable to arrive at an opinion due to inability to examine evidence, or a lack of auditor independence
Procedures performed by an independent CPA firm to ensure compliance is known as
Peer Review
What kind of opinion is one that has a material departure from GAAP or scope limitation but financials can be taken fairly as a whole (add an “except for” to the opinion and an explanatory paragraph)?
Qualified Opinion
Does the AICPA require specific quality control procedures?
No, depends on size of firm, number of offices, and nature of firm’s practices. Quality control of 200-office firm differs largely from a single-office firm
A firm that audits 100 or less must be inspected
every three years or less. If audited more than 100, annual inspections
A ______ (system/engagement) review studies appraisal of a CPA firm’s quality control to perform accounting and auditing work
System review. An engagement review is one in which reviewers select a sample of firm’s accounting work to evaluate whether they are appropriate or not.
Describe some elements of Quality Control
- Leadership responsiblilites for quality within term (“Tone at the Top”)
- Relevant Ethical Requirements
- Acceptance and Continuance of Clients and Engagements
- Human Resources
- Engagement Performance
- Monitoring
• In addition to peer reviews, CPA firms with SEC registrants as clients are required to have an inspection performed by the PCAOB staff. Inspections are performed annually for CPA firms with numerous public clients and less frequently for those with fewer public clients. True or False?
True
o The Sarbanes-Oxley Act provides that an inspection shall include at least the following three general components:
An inspection and review of selected audit and review engagements.
An evaluation of the sufficiency of the quality control system of the firm and the manner of the documentation and communication of the system.
Tests of the audit, supervisory, and quality control procedures considered necessary.
______ (PCAOB/AICPA) staff focuses on risk assessment?
PCAOB. AICPA is more SYSTEM and QUALITY CONTROL.
• International audit reports - May be signed using the personal name of the auditor or the audit firm or both. True or False?
True
SEC accepts IFRS for foreign companies that issue securities in United States markets. True or False?
True
SAHIB - SEE YOUR CHART CH. 2 NOTES
aight
An audit report indicates that the audit evidence we have obtained is sufficient to provide a basis for the opinion. True or False
True
Give the order of the components of the standard auditor’s report in the correct order.
Title - Introduction - Managements Responsibility for the Financial Statements - Auditor’s Responsibility - Opinion
The audit report is the end product of an audit. True or False?
True
The PCAOB has adopted the AICPA standards as its interim quality control standards. True or False
True
Quality control procedures exist to provide reasonable assurance that the firm follows professional standards on _______ (some/every) engagement(s).
every
QC standards help to ensure that CPA firms meet their responsibilities to their clients and the public. True or False
True
The Public Company Accounting Oversight Board performs inspections of CPA firms that audit SEC registrants. True or False?
True
An audit report for a issuer refers to PCAOB standards rather than generally accepted auditing standards. True or False?
True
Compliance with generally accepted auditing standards is considered by the AICPA as ideal audit performance rather than an attainable level for most audits.
False
An audit report for a nonpublic company includes three sections: planning, internal control, and reporting. True or False?
False. The sections, in order, are Title - Introduction - Managements Responsibility for the Financial Statements - Auditor’s Responsibility - Opinion.
Professional standards permit a CPA firm to own shares of stock in corporations that they audit if such stock holdings are not material. True or False?
False
The auditors have a responsibility to design their audit to obtain reasonable assurance of detecting material misstatements in the financial statements due to fraud or errors. True or False?
True
An audit can be relied on to provide reasonable assurance of detecting noncompliance with laws that have a material and direct effect on financial statement amounts and related disclosures. True or False?
True
The Attestation Standards are primarily designed to provide guidance on the audit of financial statements. True or False?
False
A peer review may be expected to analyze, to varying degrees, working papers for each attest engagement performed by the CPA firm. True or False
False
When the scope of the audit is restricted by the client, the auditors should issue an adverse opinion. true or False?
False
When the auditors discover that an audit client has committed an illegal act they will ordinarily report it to the ______ (audit committee/government)
Audit Committee
GAAP represents a financial reporting framework. True or False?
True
An auditors’ unmodified (unqualified) standard report:
Takes no position, explicit or implicit, with respect to the adequacy of disclosures. Explicitly states that all material facts have been disclosed in conformity with generally accepted accounting principles. Explicitly states that disclosure is adequate in the financial statements. Implies that disclosure is adequate in the financial statements.
Implies that disclosure is adequate in the financial statements.
Which is correct concerning an audit requirement that is “unconditional”?
The auditor must comply with the requirement unless the auditor demonstrates and documents that alternative actions were sufficient. The auditor must fulfill the requirement in all cases where that requirement is relevant. The word "should" precedes it. Not performing the requirement will ordinarily result in permanent revocation of the auditor's CPA license.
The auditor must fulfill the requirement in all cases where that requirement is relevant.
Which of the following is an element of quality control for a CPA firm?
Supervision
Acceptance and Continuance of Personnel
Independence and freedom from Bias
Engagement performance
Engagement performance
Is it required for Management to provide the auditors with unrestricted access to individuals within the entity from whom the
auditor determines it necessary to obtain audit evidence?
Yes
Does the auditor or management have the final decision in the event of an unresolvable difference of opinion between client company and CPA firm.
The final decision rests with the client’s management and the auditors can express their disapproval in the
audit report if they deem it appropriate to do so.
GASB promulgates standards for ___ (state and local/federal)
state and local
Quality control policies are often checked by peer review. True or false?
True
An adverse opinion is most likely to be included in an audit report when financial statements ____ (follow/depart from)
Depart from
Inspections are required for all CPA firms with issuer clients. True or False?
True
If noncompliance with laws has a direct effect on financial statements, treat as the same as for errors and fraud?
Yes
A disclaimer opinion is another way of saying that there wasn’t enough to study to give an opinion. True or false?
True
rules to follow when actually executing the audit work out in the field is which category of the 10 GAAS?
Standards of Field Work
General standards – basic requirements and responsibilities to do an audit
Supervising on Totem Pole accumulation in planning stage. True or false?
True
Are reporting standards How to disclose and issue reports to the public?
Yes
