Chapter 2 Class

Question 1

responsibilities of the PCAOB:

Answer 1

1. oversight of the audits of public entities
2. registering public accounting firms
3. establishing standards for audit engagements
4. inspecting the quality of audits conducted by public accounting firms

Question 2

who develops standards for the audits of non-issuers?

Answer 2

the AICPA

Question 3

the pronouncements of the PCAOB and AICPA are referred to as:

Answer 3

GAAS

Question 4

objectives of an audit examination:

Answer 4

1. obtain reasonable assurance about whether the financial statements are free from material misstatements
2. issue a report on the financial statements

Question 5

audit procedures

Answer 5

the actions that auditors take to obtain evidence in a specific audit engagement

Question 6

audit standards

Answer 6

quality guides to the audit that apply to all audits

Question 7

three fundamental principles of GAAS:

Answer 7

1. responsibilities of the audit team
2. performance of the audit
3. reporting the results of

Question 8

Fundamental Principle: responsibilities (3 aspects)

Answer 8

1. having appropriate competence
2. complying with ethics
3. maintaining professional skepticism and exercising professional judgements

Question 9

_________ and _________ are necessary for an auditor to be capable

Answer 9

experience and education

Question 10

“independence in fact”

Answer 10

auditors must be unbiased and impartial

Question 11

“independence in appearance”

Answer 11

the auditor must appear to be unbiased (can’t have personal interests in the client)

Question 12

the two types of relationships that compromise independence:

Answer 12

financial relationships and managerial relationships

Question 13

due care

Answer 13

a level of performance that would be exercised by reasonable auditors in similar circumstances

Question 14

professional skepticism

Answer 14

a state of mind that is characterized by appropriate questioning and a critical assessment of audit evidence

Question 15

3 threats to professional skepticism:

Answer 15

1. financial pressure
2. time pressure
3. personal relationships with client

Question 16

professional judgement

Answer 16

the application of relevant training, knowledge, and experience in making informed decisions

Question 17

auditors must document their professional judgement in a way that:

Answer 17

other auditors can understand their judgements made and conclusions reached

Question 18

Fundamental Principle: performance

Answer 18

sets forth the quality criteria when conducting an audit

Question 19

5 stages of an audit

Answer 19

1. obtain (or retain) engagement
2. engagement planning
3. risk assessment
4. audit evidence
5. reporting

Question 20

which principle states that the auditor must obtain reasonable assurance about whether the financial statements are free from material misstatement?

Answer 20

performance principle

Question 21

auditors are not _________ regarding the fairness of financial statements

Answer 21

guarantors

Question 22

in regards to planning and supervision, audit standards address:

Answer 22

1. preparing a written audit plan and supervising the work
2. obtaining knowledge of the client’s business
3. dealing with differences of opinion among firm’s personnel

Question 23

materiality

Answer 23

an amount or event that has a substantial likelihood to influence financial statement user’s decisions

Question 24

auditors should focus on:

Answer 24

matters that are important to financial statement users

Question 25

risk assessment

Answer 25

involves identifying important concerns the auditor faces in the audit

Question 26

internal control

Answer 26

the policies and procedures implemented by an entity to prevent or detect material accounting frauds or errors and provide for their correction on a timely basis

Question 27

risk of material misstatement (RMM)

Answer 27

a combination of inherent risk and control risk
- the likelihood that an error will exist in the financial statements prior to the auditor’s work

Question 28

inherent risk

Answer 28

the probability that a material misstatement will occur

Question 29

control risk

Answer 29

the probability that a material misstatement will not be prevented or detected on a timely basis by the company’s internal controls

Question 30

effective internal control =

Answer 30

lower level of control risk, less evidence or less effective substantiative procedures

Question 31

ineffective internal control =

Answer 31

higher level of control risk, more evidence or more effective substantiative procedures

Question 32

substantiative procedure

Answer 32

procedure used to obtain evidence with respect to the fairness of the account balance (i.e. to “substantiate” the account balance)

Question 33

what is required for auditing public companies but not for non-issuers?

Answer 33

testing and reporting on the effectiveness of internal controls on financial reporting

Question 34

audit evidence

Answer 34

the audit team is required to collect and evaluate sufficient appropriate evidence to provide a reasonable basis for their opinion

Question 35

evidence

Answer 35

the information that auditors use in arriving at the conclusions on which to base the audit opinion
- includes underlying data and all available corroborating information

Question 36

appropriateness relates to _______, while sufficiency relates to _________

Answer 36

quality, quantity

Question 37

for evidence to be appropriate, it must be:

Answer 37

reliable and relevant

Question 38

relevant

Answer 38

the nature of information provided by the audit evidence

Question 39

reliable

Answer 39

the level of trust an auditor can have in the evidence

Question 40

detection risk

Answer 40

the risk that the audit procedures will fail to detect a material misstatement

Question 41

higher quality of evidence means a ________ detection risk

Answer 41

lower

Question 42

Fundamental Principle: reporting

Answer 42

the final stage of an audit

Question 43

which principle states that the auditor expresses in the form of a written report, an opinion in accordance with the auditor’s findings or states that an opinion cannot be expressed?

Answer 43

reporting principle

Question 44

unmodified (unqualified) opinion

Answer 44

all financial statements present fairly, in all material respects, the results of operations, financial position, and cash flows

Question 45

adverse opinion

Answer 45

the financial statements are not presented in conformity with GAAP

Question 46

qualified opinion

Answer 46

the financial statements are presented in conformity with GAAP except for a relatively isolated departure

Question 47

disclaimer

Answer 47

the auditor chooses not to express an opinion, usually due to a lack of independence or severe scope limitation

Question 48

six elements of quality control established by SOA:

Answer 48

1. leadership responsibilities
2. relevant ethical requirements
3. acceptance and continuance of relationships
4. HR
5. engagement performance
6. monitoring

Question 49

goal of monitoring

Answer 49

to provide reasonable assurance that quality control policies and procedures are operating effectively

Question 50

when does the PCAOB inspect firms auditing more than 100 issuers?

Answer 50

annually

Question 51

when does the PCAOB inspect firms auditing less than 100 issuers?

Answer 51

at least every 3 years

Question 52

who reviews non-public audits?

Answer 52

the AICPA

Question 53

when does the AICPA National Peer Review Committee review non-public audits?

Answer 53

every 3 years