Financial Stmt Audits

Question 1

In the U.S.A, who issues auditing standards applicable to audits of governmental entities?

Answer 1

U.S. Government Accountability Office (GAO).

Question 2

Define “Generally Accepted Accounting Principles (GAAP).”

Answer 2

The standards by which the quality of the financial statements is judged.

Question 3

What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards?

Answer 3

The Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board.

Question 4

List some benefits of an audit to a private company (also known as a nonissuer).

Answer 4

Q- List some benefits of an audit to a private company (also known as a nonissuer).

1. More favorable cost of capital;
2. Insights into adequacy of internal controls;
3. Benchmark an entity’s performance with other similar entities.

Question 5

In the U.S.A, who issues auditing standards applicable to audits of public companies (also known as issuers)?

Answer 5

Public Company Accounting Oversight Board (PCAOB).

Question 6

Who is primarily responsible for the fairness of an entity’s financial statements?

Answer 6

Management. The financial statements are the representation of management

Question 7

What is the auditor’s primary role?

Answer 7

To provide an impartial (independent) assessment of the reliability of management’s financial statements

Question 8

In the U.S.A, who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?

Answer 8

AICPA’s Auditing Standards Board.

Question 9

Which of the following best describes what is meant by the term “generally accepted auditing standards”?

A. Procedures to be used to gather evidence to support financial statements.

B. The ten specific criteria that measure the quality of the auditor’s performance.

C. The Statements on Auditing Standards issued by the Auditing Standards Board.

D. Rules acknowledged by the accounting profession because of their universal application.

Answer 9

C. The Statements on Auditing Standards issued by the Auditing Standards Board.

Question 10

Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?

A. Making suggestions that are adopted about the form and content of an entity’s financial statements impairs an auditor’s independence.

B. An auditor may draft an entity’s financial statements based on information from management’s accounting system.

C. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor’s responsibilities.

D. An auditor’s responsibilities for audited financial statements are not confined to the expression of the auditor’s opinion

Answer 10

B. An auditor may draft an entity’s financial statements based on information from management’s accounting system.

Reason it is correct:

The auditor may provide suggestions about or draft the financial statements based on information from management’s accounting system, provided that the company is not SEC regulated. SEC regulated companies must draft the financial statements themselves or use an alternate source to draft the financials. The auditors are specifically prohibited from drafting AND auditing the financials for SEC-regulated companies

Question 11

Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.

Answer 11

1. Purpose/premise
2. Responsibilities
3. Performance
4. Reporting

Question 12

Identify the topics associated with the three field work standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 12

1. Planning and supervision
2. Internal control
3. Evidence

Field Work Standards – There are 3 of these (“PIE”). They are related to the evidence-gathering activities that form the foundation for the auditor’s conclusions.

1.

Planning and supervision – “The auditor must adequately plan the work and must properly supervise any assistants.”

2.

Internal control – “The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to fraud or error, and to design the nature, timing, and extent of further audit procedures.”

3.

Evidence – “The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.”

Question 13

Identify the topics associated with the four reporting standards for Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards

Answer 13

1. GAAP
2. Consistency
3. Disclosure
4. Opinion

Reporting Standards – There are 4 of these (“GCDO”). Each of them says something about the language that is required in the auditor’s report.

1.

GAAP – “The auditor must state in the auditor’s report whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP).”

2.

Consistency – “The auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.”

3.

Disclosure – “When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor’s report.”

4.

Opinion – “The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.”

Question 14

Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting

Answer 14

1. Purpose
2. Premise
3. Responsibilities
4. Reasonable assurance
5. Performance requirements to achieve reasonable assurance
6. Inherent limitations
7. Reporting

Question 15

Identify the topics associated with the three general standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.

Answer 15

1. Training
2. Independence
3. Due professional care

General Standards – There are 3 of these (“TID”). They are “personal” in nature as they relate to qualities that the auditor brings to the assignment:

1.

Training – “The auditor must have adequate technical training and proficiency to perform the audit.”

2.

Independence – “The auditor must maintain independence in mental attitude in all matters relating to the audit.”

3.

Due care – “The auditor must exercise due professional care in the performance of the audit and the preparation of the report.”

Question 16

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

Answer 16

B. Critically review the judgment exercised at every level of supervision.

Correct!

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.

Question 17

An independent auditor must have which of the following?

A. A pre-existing and well-informed point of view with respect to the audit.

B. Technical training that is adequate to meet the requirements of a professional.

C. A background in many different disciplines.

D. Experience in taxation that is sufficient to comply with generally accepted auditing standards.

Answer 17

B. Technical training that is adequate to meet the requirements of a professional.

Correct!

GAAS requires auditors to have adequate technical training and proficiency in auditing.

Question 18

According to GAAS, which of the following terms identifies a requirement for audit evidence?

A.

Appropriate.

B.

Adequate.

C.

Reasonable.

D.

Disconfirming.

Answer 18

A.

Appropriate

Correct!

GAAS requires the auditor to obtain “sufficient appropriate audit evidence…”

Question 19

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

Answer 19

C. Standards of field work.

Correct!

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.

Question 20

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.

Answer 20

C. Critically review the judgment exercised by those assisting in the audit.

Correct!

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

Question 21

The GAAS requirement states that due care is to be exercised in the performance of an audit is ordinarily interpreted to require

A. Thorough review of the existing safeguards over access to assets and records.

B. Limited review of the indications of employee fraud and illegal acts.

C. Objective review of the adequacy of the technical training and proficiency of firm personnel.

D. Critical review of the judgment exercised at every level of supervision

Answer 21

D. Critical review of the judgment exercised at every level of supervision.

Correct!

While due care imposes the general responsibility of following the applicable GAAS standards, the professional standards specifically address the need for critical review. Exercising due care is defined as requiring “critical review” of the work performed and the audit judgments made at every level of supervision

Question 22

What type of professional requirement is indicated by the word should in AICPA professional standards?

Answer 22

Presumptively mandatory requirement

Question 23

What is meant by the term interpretive publications?

Answer 23

These consist of the appendices to the SASs, auditing interpretations of the SASs, the AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.

Question 24

What type of professional requirement is indicated by the word must in AICPA professional standards?

Answer 24

Unconditional requirement.

Question 25

In AICPA professional standards, the term professional requirements refers to:

Answer 25

Unconditional requirements

Yes

Presumptively mandatory requirements

Yes

There are 2 categories of professional standards: (1) unconditional requirements; and (2) presumptively mandatory requirements.

Question 26

What is meant by the term engagement quality control review?

Answer 26

A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)

Question 27

Who is responsible for the administration of a quality control system?

Answer 27

May be vested in one person but everyone shares responsibility.

Question 28

Services for which a CPA firm is required to have a sytem of quality control.

Answer 28

Audits, attestation, compilation and review services. (Not applicable to tax or consulting services.)

Question 29

List the six elements of a quality control system.

Answer 29

1. Leadership responsibilities for quality within the firm
2. Relevant ethical requirements (especially independence)
3. Acceptance and continuance of client relationships
4. Human resources
5. Engagement performance
6. Monitoring

Question 30

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

Answer 30

D. Quality control

Correct!

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.

Question 31

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to

A. Enable the CPA firm to attest to the reliability of the client.

B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.

C. Minimize the likelihood of association with clients whose management lacks integrity.

D. Anticipate before performing any field work whether an unqualified opinion can be expressed.

Answer 31

C. Minimize the likelihood of association with clients whose management lacks integrity

Correct!

Quality control policies and procedures governing new client acceptance are established to minimize the likelihood of association with a client whose management lacks integrity. A firm should be selective in determining its professional relationships.

Question 32

Would the following factors ordinarily be considered in planning an audit engagement’s personnel requirements?

Opportunities for on-the-job training Yes or No

Continuity and periodic rotation of personnel Yes or No

Answer 32

Opportunities for on-the-job training Yes

Continuity and periodic rotation of personnel Yes

Correct!

Factors to be considered in planning an audit engagement’s personnel requirements include engagement size and complexity, personnel availability, special expertise required, timing of the work, continuity and periodic rotation of personnel, and opportunities for on-the-job training.

Question 33

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.

Answer 33

B. Having an appropriate system of quality control.

Correct!

A firm is required to establish an appropriate system of quality control to provide reasonable assurance of conforming with professional standards

Question 34

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

A. Establishing an understanding with each client concerning individual responsibilities in a signed engagement letter.

B. Assessing the risk that errors and fraud may cause the financial statements to contain material misstatements.

C. Developing specific audit objectives to support management’s assertions that are embodied in the financial statements.

D. Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

Answer 34

D. Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure

Correct!

The purpose of a firm’s system of quality control is to provide the firm with reasonable assurance that the firm (and its personnel) comply with professional standards and applicable regulatory and legal requirements and issue reports that are appropriate in the circumstances

Question 35

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.

Answer 35

A. The fair presentation of the financial statements in conformity with GAAP.

Correct!

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

Question 36

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to

A. Monitor the risk factors concerning misstatements arising from the misappropriation of assets.

B. Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.

C. Minimize the likelihood of associating with clients whose management lacks integrity.

D. Document objective criteria for the CPA firm’s responses to peer review comments.

Answer 36

C. Minimize the likelihood of associating with clients whose management lacks integrity.

Correct!

The AICPA’s Quality Control Standards identify 3 focal points in considering acceptance and continuance issues: (1) the integrity and reputation of management and other relevant persons associated with the entity; (2) whether the CPA has the competence and resources to perform the engagement; and (3) whether the CPA can comply with applicable legal and ethical requirements. Hence, a primary purpose of addressing the acceptance/continuance issues is to avoid association with clients whose management lacks integrity and clients who are otherwise regarded as too risky

Question 37

The nature and extent of a CPA firm’s quality control policies and procedures depend on

The CPA firm’s size - Yes or No

The nature of the CPA firm’s practice - Yes or No

Cost-benefit considerations - Yes or No

Answer 37

The CPA firm’s size The nature of the CPA firm’s practice Cost-benefit considerations

Yes Yes Yes

Correct!

The nature and extent of a firm’s quality control policies and procedures depend on factors such as size, degree of operating autonomy allowed, nature of the practice, organization, and the cost-benefit relationships.

Question 38

Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?

A.

Establish procedures that comply with the standards of the Sarbanes-Oxley Act.

B.

Use attributes sampling techniques in testing internal controls.

C.

Consider inherent risk and control risk before determining detection risk.

D.

Establish policies to ensure that the audit work meets applicable professional standards

Answer 38

D.

Establish policies to ensure that the audit work meets applicable professional standards.

Correct!

The AICPA’s quality control standards are applicable to the CPA firm’s portfolio of audit (and other financial statement related) services, which is consistent with this answer.

Question 39

One of a CPA’s firm’s basic objectives is to provide professional services that conform with professional standards.

Reasonable assurance of achieving this basic objective is provided through

A. A system of quality control.

B. A system of peer review.

C. Continuing professional education.

D. Compliance with generally accepted reporting standards.

Answer 39

A. A system of quality control.

Correct!

A firm establishes a system of internal control in order to provide reasonable assurance that the professional services provided will conform to professional standards.

Question 40

List the two types of substantive audit procedures.

Answer 40

1. Analytical Procedures
2. Tests of details.

Question 41

What are some considerations that must be given by the auditor during the planning phase of the audit

Answer 41

1. Determine whether to accept or continue the audit engagement
2. Assess the risk of material misstatement
3. Evaluate requirements for staffing and supervision
4. Prepare the required written audit program (also called the “audit plan”).

Question 42

List the two types of test of details

Answer 42

1. Tests of ending balances
2. Tests of transactions

Question 43

List the four basic steps in the audit process.

Answer 43

1. Planning
2. Internal Control Consideration
3. Substantive Audit Procedures
4. Reporting.

Question 44

What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?

Answer 44

1. Obtain the required understanding of the design of internal control for planning purposes.
2. Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls.

Question 45

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.

Answer 45

D. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

Correct!

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.

Question 46

Principles Underlying an Audit Conducted in Accordance with GAAS state that sufficient appropriate audit evidence is to be obtained through designing and implementing appropriate responses, i.e., by performing audit procedures, to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidential matter required by this standard may be obtained, in part, through

A. Flowcharting the internal control structure.

B. Proper planning of the audit engagement.

C. Analytical procedures.

D. Audit documentation.

Answer 46

C. Analytical procedures

Correct!

Substantive evidential matter required by the Principles may include evidence obtained through the performance of substantive analytical procedures (as well as that obtained through inspection, observation, inquiries, and confirmation). Analytical procedures performed as substantive tests can be used to provide substantive evidential matter.

Question 47

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

A. Auditor’s system of quality control has been maintained at a high level.

B. Results are consistent with the conclusions to be presented in the auditor’s report.

C. Audit procedures performed are approved in the professional standards.

D. Audit has been performed by persons having adequate technical training and proficiency as auditors.

Answer 47

B. Results are consistent with the conclusions to be presented in the auditor’s report

Correct!

The audit work performed by each assistant should be reviewed for adequacy and to ensure that it supports the conclusions reached