Financial Statement Audits Flashcards
To exercise due professional care an auditor should
A. Attain the proper balance of professional experience and formal education.
B. Design the audit to detect all instances of illegal acts.
C. Critically review the judgment exercised by those assisting in the audit.
D. Examine all available corroborating evidence supporting management’s assertions.
C - The auditor is required by GAAS to exercise due care in the performance of the audit and the preparation of the report. Due care encompasses the employment of reasonable care and diligence as well as critical review at every level of supervision of the work done and the judgment exercised by those assisting in the audit
The exercise of due professional care requires that an auditor
A. Examine all available corroborating evidence.
B. Critically review the judgment exercised at every level of supervision.
C. Reduce control risk below the maximum.
D. Attain the proper balance of professional experience and formal education
B - The exercise of due professional care requires that a critical review of the work completed and the judgments made be performed at every level of supervision.
According to GAAS, which of the following terms identifies a requirement for audit evidence? A. Appropriate. B. Adequate. C. Reasonable. D. Disconfirming.
APPROPRIATE
Which of the following categories was included in the AICPA's ten historical generally accepted auditing standards? A. Standards of review. B. Standards of planning. C. Standards of field work. D. Standards of evidence
C - The AICPA’s prior generally accepted auditing standards (GAAS) included three categories: General Standards, Standards of Field Work, and the Standards of Reporting. The field work standards addressed how the audit was to be conducted and included planning, supervision, evidence, and understanding of the entity and its environment.
After field work audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up working paper review. This second review usually focuses on
A. The fair presentation of the financial statements in conformity with GAAP.
B. Irregularities involving the client’s management and its employees.
C. The materiality of the adjusting entries proposed by the audit staff.
D. The communication of internal control weaknesses to the client’s audit committee
A - The review by a second partner is part of a firm’s quality control system. It is performed to ensure the fair presentation of the financial statements in conformity with GAAP. While this particular step was not specifically discussed in the Study Text, it is a common part of firm quality control systems and thus important to know (as evidenced by its past inclusion in the exam). If your knowledge of this area is a little hazy, consider looking it up in an auditing textbook for more detailed coverage
A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by
A. Adhering to generally accepted auditing standards.
B. Having an appropriate system of quality control.
C. Joining professional societies that enforce ethical conduct.
D. Maintaining an attitude of independence in its engagements
B
A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility.
This is evidence of the firm’s adherence to which of the following prescribed standards
A. Professional ethics.
B. Supervision and review.
C. Accounting and review services.
D. Quality control
D - Professional standards on quality control require that a firm establish policies and procedures to ensure that personnel selected for advancement have the qualifications necessary for the work they will be required to perform
Which of the following statements would least likely appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.
B. During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations.
C. Our engagement is subject to the risk that material errors or irregularities, including fraud and defalcations, if they exist, will not be detected.
D. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement
D - The engagement letter documents the understanding between the auditor and the client regarding the nature and timing of the services to be performed, expected fees and the basis for billing, the responsibilities of the auditor, the client’s responsibilities in preparing for the audit, and the need for other services to be performed. It would not include a statement committing the auditor to discuss the auditing procedures considered necessary. Selection and performance of auditing procedures are a matter of auditor judgment and not subject to disclosure to the client.
The auditor makes explicit reference to "auditing standards generally accepted in the United States of America" in which paragraph of the standard unmodified audit report? A. Opening. B. Auditor's Responsibility. C. Opinion. D. Both B and C.
B - The second sentence of the Auditor’s Responsibility section states as follows: “We conducted our audits in accordance with auditing standards generally accepted in the United States of America.”
How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements? (explicitly or implicitly)
- Examination of evidence
- Consistent application of accounting principles
- Explicitly
- Implicitly
The standard auditor’s report on comparative financial statements states explicitly that evidence is obtained (and therefore examined) and implies that accounting principles have been consistently applied. Such application is assumed unless the report indicates otherwise.
