Chapter 6 (slide 1 to 8) End for Exam 1

Question 1

Roles of the PCAOB

Answer 1

Issuing Standards: Auditing; ethics and independence rules; Quality control standards; Attestation standards

Question 2

Registration and Reporting deals with three aspects with PCAOB

Answer 2

1. Application:0-49 issuers, $500; 50-100 issuers, $3,000; 101-1,000 issuers , $29,000; 1001 and up issuers, $390,000
2. Annual fees: Firms with more than 500 issuer audit clients and 10,000 personnel, $100,000; Other firms with more than 200 issuer audit clients and more than 1,000 personnel, $25,000; All other firms, $500
3. Annual reporting: Reports such information as audit reports issued and disciplinary history of new personnel and other special reports within 30 days after the reported event

Question 3

PCAOB does what with firms?

Answer 3

Inspections: Firms with more than 100 issuers inspected annually, firms with between 1-100 issuers inspected once every three years,

Question 4

How does PCAOB enforce their rules?

Answer 4

Enforcement: Firm registration revoked, firm required to improve quality control standards, Auditors barred or suspended, Auditors required to attend continuing education courses, Auditors restricted from acting in certain capacities

Question 5

PCAOB and International

Answer 5

International: Under the Sarbanes-Oxley Act, PCAOB oversight extends to non-U.S. firms that audit or play a substantial role in the audit of U.S. issuers, brokers and dealers. In exercising our oversight authority outside of the U.S., we benefit greatly from cross-border cooperation. To facilitate cross-border cooperation, we often enter into formal cooperative arrangements with foreign audit regulators.

Question 6

The preface to the clarified AICPA auditing standards and is the primary focus on issuing an opinion on the financial statements:

Answer 6

The purpose of an audit is to provide financial statements users with an opinion by the auditor on whether the financial statements are presented fairly. In all material respects, in accordance with the applicable financial accoutning framework. an auditor’s opinion enhances the degree of confidence that intended users can place in the financial statements.

Question 7

Management’s responsibilities (list 4)

Answer 7

1. Adopting sound accounting policies
2. Preparing financial statements that contain fair representations
3. Establishing and maintaining adequate internal controls
4. Certifying the quarterly and annual financial statements (public audits)

Question 8

Auditor’s responsibilities when it comes to errors (2)

Answer 8

Auditors must obtain reasonable assurance regarding whether the financial statements are free of material error:

1. Errors (unintentional) versus fraud (intentional)–Auditing standards make no distinction between the auditor’s responsibilities for detecting errors versus fraud.
2. Employee fraud (misappropriation of assets that affects stockholders and creditors) versus management fraud (fraudulent financial reporting that affects users)

Question 9

Auditor’s responsibilities when it comes to internal control

Answer 9

Auditors must test internal controls and report on the effectiveness of internal control over financial reporting

Question 10

Auditor’s responsibilities when it comes to mindset

Answer 10

Auditors should maintain an attitude that includes a questioning mind and a critical assessment of audit evidence (neither honesty or dishonesty is assumed)

Question 11

The Auditor is responsible for discovering what?

Answer 11

discovering illegal acts that have a material and direct effect on the financial statements.

Question 12

Two primary components of Professional Skepticism:

Answer 12

1. A questioning mindset

2. A critical assessment of audit evidence.

Question 13

Elements of Professional Skepticism (list 6):

Answer 13

1. Questioning mindset—“trust but verify”—a disposition to inquiry with some sense of doubt.
2. Suspension of judgment—withholding judgment until appropriate evidence is obtained.
3. Search for knowledge—a desire to investigate beyond the obvious, with a desire to corroborate.
4. Interpersonal understanding—recognition that people’s motivations and perceptions can lead them to provide biased or misleading information.
5. Autonomy—the self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others.
6. Self-esteem—the self-confidence to resist persuasion and to challenge assumptions or conclusions.

Question 14

Types of Judgment Tendencies (list 4)

Answer 14

1. Confirmation
2. Overconfidence
3. Anchoring
4. Availability

Question 15

Judgment Tendencies Confirmation:

Answer 15

The tendency to put more weight on information that is consistent with initial beliefs or preferences

Question 16

Judgment Tendencies Overconfidence:

Answer 16

The tendency to overestimate one’s own abilities to perform tasks or to make accurate assessments of risks or other judgments and decisions

Question 17

Judgment Tendencies Anchoring:

Answer 17

The tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value

Question 18

Judgment Tendencies Availability:

Answer 18

The tendency to consider information that is easily retrievable or easily accessible as being more likely or more relevant

Question 19

Judgment Tendencies Confirmation Counter (2):

Answer 19

1. Make the opposing case and consider alternative explanations
2. Consider potentially disconfirming or conflicting information

Question 20

Judgment Tendencies Overconfidence Counter (2):

Answer 20

1. Challenge opinions and experts

2. Challenge underlying assumptions

Question 21

Judgment Tendencies Anchoring Counter (2):

Answer 21

1. Solicit input from others

2. Consider management bias, including the potential for fraud or material misstatements

Question 22

Judgment Tendencies Availability Counter (3):

Answer 22

1. Consider why something comes to mind
2. Obtain and consider objective data
3. Consult with others and make the opposing case