Study Unit 1: questions

Question 1

An engagement to express an opinion on management’s assertion that the square footage of a warehouse offered for sale is 150,000 square feet falls into the category of services beyond those on traditional historical financial statements.

Answer 1

Statements on Standards for Attestation Engagements -cover attest engagements.

Question 2

Peer reviews essentially are:

Answer 2

Peer reviews essentially are evaluations of quality control.They are performed to meet the practice-monitoring requirements applicable to public accounting firms. They are not attest engagements.

Question 3

The following procedure would be most effective in reducing attestation risk?

Answer 3

Examination of evidence.. To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.

Question 4

Which of the following is NOT an attestation standard?

Answer 4

A sufficient understanding of internal control shall be obtained to plan the engagement-no such thing needed.

Question 5

Advising management in the selection of a computer system to meet business needs is what kind of service?

Answer 5

Advisory services are consulting services and therefore not within the scope of the SSAEs.

Question 6

An attest engagement is one in which a CPA is engaged to

Answer 6

an attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party.

Question 7

In performing an attest engagement, a CPA typically

Answer 7

Expresses a conclusion about a written assertion.

Question 8

True or False: An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion.

Answer 8

TRUE. GAAS require the audit report to state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.

Question 9

Two principal conceptual differences exist between the attestation standards and GAAS, what are they?

Answer 9

First, the attestation standards provide a framework for the attest function beyond historical financial statements.

Second, the attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit (an opinion).

Question 10

Notes that are included with financial statements are the responsibility of the

Answer 10

The notes are considered part of the basic financial statements. Because management has the primary responsibility for the financial statements, it also has the primary responsibility for the fairness of information included in notes.

Question 11

The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing:

Answer 11

The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing Form 8-K. Such disclosure inhibits management from changing auditors to gain acceptance of a questionable accounting principle. Also, a potential auditor must inquire of the predecessor auditor before accepting an engagement (AU-C 210). Thus, the inquiry provides an opportunity to confirm the information given in the 8-K report. However, confidential client information may only be communicated with the client’s consent.

Question 12

Who establishes generally accepted auditing standards?

Answer 12

Auditing Standards Board and the Public Company Accounting Oversight Board

Question 13

The Sarbanes-Oxley Act prohibits audit firms from providing consulting, legal, internal auditing, and other specified services to issuer audit clients. Moreover, any other service may be prohibited by the PCAOB. Audit firms may provide other nonaudit services, such as:

Answer 13

conventional tax planning and compliance services, to issuer audit clients. However, the audit committee must preapprove these other nonaudit services to be provided by the auditor.

Question 14

Users of an issuer’s financial statements demand independent audits because

Answer 14

Management may not be objective in reporting. Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.

Question 15

An audit’s primary objective is to:

Answer 15

An audit’s primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.

Question 16

CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that it:

Answer 16

(1) has considered the integrity of the client and the risks involved,
(2) is competent,
(3) has the necessary capabilities and resources, and
(4) is able to comply with applicable requirements

Question 17

Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as

Answer 17

A discipline that attests to financial information presented by management.

Question 18

Professional skepticism is an attitude that includes:

Answer 18

(1) a questioning mind,
(2) alertness to conditions that may indicate material misstatement, and
(3) critical assessment of audit evidence.

Question 19

The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management’s accounting system. However, the auditor’s responsibility for the financial statements (s)he has audited is :

Answer 19

The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management’s accounting system. However, the auditor’s responsibility for the financial statements (s)he has audited is confined to the expression of his or her opinion on them.

Question 20

The presentation of the financial statements in conformity with GAAP is the responsibility of:

Answer 20

management.

Question 21

Generally accepted auditing standards are defined as:

Answer 21

SASs: Statements on Auditing Standards.

Question 22

A financial projection is based on:

Answer 22

A financial projection is based on assumptions by the responsible party reflecting expected conditions and courses of action, given one or more hypothetical assumptions (a condition or action not necessarily expected to occur).

Question 23

Financial forecast consists of prospective financial statements that:

Answer 23

consists of prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.

Question 24

In an agreed-upon procedures engagement:.

Answer 24

the practitioner is engaged to report on the results of performing specific procedures agreed upon with specified parties. The report lists the procedures performed and provides the results of those procedures but provides no form of positive or negative assurance.

Question 25

is an agreed upon procedures restricted?

Answer 25

An agreed-upon procedures report should have a statement restricting its use to the specified parties who agreed upon the procedures to be performed.

Question 26

What are pro forma financial info?

Answer 26

Pro forma information shows what the significant effects on historical financial information would have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples of these transactions include a business combination, disposal of a segment, a change in the form or status of an entity, and a change in capitalization.

Question 27

The party responsible for assumptions identified in the preparation of prospective financial statements is usually

Answer 27

Management is usually the responsible party, that is, the person(s) responsible for the assumptions underlying PFSs. However, the responsible party may be a party outside the entity, such as a possible acquirer.

Question 28

What services, if any, may an accountant who is not independent provide?

Answer 28

Compilations, but not reviews. If an accountant is not independent, it needs to be stated in the report.

Question 29

The AICPA bylaws designate the Accounting and Review Services Committee as:

Answer 29

The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.

Question 30

SysTrust is designed

Answer 30

to increase the comfort of management, customers, creditors, bankers, and business partners with the systems that support a business or a particular activity. The CPA tests and expresses an opinion on management’s assertions or directly on the system concerning any or all of the following: 
online privacy, 
availability, 
security, 
processing integrity, 
and confidentiality.

Question 31

What is the difference between assurance services and consulting services?

Answer 31

Assurance services differ subtly from consulting services because assurance services focus on improving information, whereas consulting services strive to provide advice. Also, assurance services often involve monitoring of one party by another (often within the same company) rather than the two-party arrangements common in consulting engagements.

Question 32

The objective of assurance services is to?

Answer 32

The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.

Question 33

One fundamental purpose of this assurance service is to assist the elderly and their families by

Answer 33

Reporting whether specified objectives are being met by caregivers

Question 34

WebTrust requires from client management a

Answer 34

WebTrust was developed from the attestation standards and requires a written assertion by management. The written assertion relates to one or more of the principles of security, privacy, availability, processing integrity, and confidentiality. Consumers may access the examination report and CPA WebTrust principles and criteria through the entity’s web page.

Question 35

SysTrust reports are always based on what?

Answer 35

SysTrust reports are always based on a period of time, not a particular moment in time.

Question 36

If prior experience required to provide CPA ElderCare (PrimePlus) services?

Answer 36

Prior experience is not required because ElderCare (PrimePlus) services are relatively new to the CPA market. Personal skills and knowledge of issues are fundamental to providing this service to the elderly.

Question 37

What services may be performed as a consulting service?

Answer 37

(1) analysis of an accounting system as an advisory service, (2) review of a client’s prepared business plan as a consultation, and
(3) preparation of information for obtaining financing as a transaction service. Other possible services are implementation services, staff and other support services, and product services.

Question 38

Engagement letters for ElderCare (PrimePlus) services should be:

Answer 38

Engagement letters for ElderCare (PrimePlus) services should be tailored to the situation and contain many details including the form and frequency of financial reporting.

Question 39

Quality control policies and procedures should be relevant, adequate, effective, and complied with. This statement is most closely associated with the quality control element of

Answer 39

Monitoring is concerned with providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued (QC 10).

Question 40

The lead audit partner must rotate off the audit every:

Answer 40

every 5 years.

Question 41

Quality control for a CPA firm, as referred to in Statements on Quality Control Standards (SQCS), applies to

Answer 41

applies to all audit, attest, accounting and review, and other services for which professional standards have been established by the ASB and the Accounting and Review Services Committee. The SQCS therefore do not apply to compliance with standards for consulting services and tax services, which are issued by different AICPA technical committees.

Question 42

The engagement performance element of quality control includes policies and procedures that cover planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement. Objectives of supervision include establishing procedures for:

Answer 42

(1) planning engagements,
(2) maintaining the firm’s standards of quality, and
(3) reviewing documentation of the work performed and reports issued.

Question 43

Peer review is a necessary part of the practice-monitoring requirement for AICPA membership. A peer review of a firm enrolled in the AICPA Peer Review program may be performed by a review team organized by:

Answer 43

(1) a firm engaged by the reviewed firm or

(2) a state CPA society. Also, an association of firms may be authorized to aid its members by organizing review teams.

Question 44

The quality control element of human resources requires:

Answer 44

The quality control element of human resources requires establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work.

Question 45

CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that:

Answer 45

(1) has considered the integrity of the client and the risks involved,
(2) is competent,
(3) has the necessary capabilities and resources, and
(4) is able to comply with applicable requirements (QC 10).

Question 46

According to PCAOB quality control standards applying to an audit, the engagement quality reviewer evaluates

Answer 46

The documentation. The EQR process in an audit evaluates the significant judgments made. This involves discussions with the engagement partner and other team members and reviewing whether the documentation supports the conclusions reached and appropriate responses to significant risks.

Question 47

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

Answer 47

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

Question 48

According to PCAOB quality control standards applying to audits, the engagement quality reviewer most likely

Answer 48

Must be an associated person of a registered public accounting firm. The objective of the reviewer is to evaluate the significant judgments made and the related conclusions reached. (S)he must be an associated person of a registered public accounting firm and may be from outside the firm. Moreover, the reviewer must have the competence to serve as a partner on the engagement and have independence, integrity, and objectivity. But an engagement partner on either of the two preceding audits ordinarily may not be the reviewer.

Question 49

The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants

Answer 49

How the results of various auditing procedures performed by the assistants should be evaluated. Assistants should be informed of their responsibilities and the objectives of the work they are to perform. They should be informed about the matters that affect the nature, timing, and extent of procedures, including how the results of tests should be evaluated (AS No. 10).

Question 50

Assertions for Classes of Transactions & Events (CPA-CO)

Answer 50

Completeness
Period Cutoff
Accuracy
Classification
Occurrence

Question 51

Account Balances at YE (RACE)

Answer 51

Rights and Obligations
Allocation and Valuation
Completeness
Existence

Question 52

Presentation & Disclosures (RACU)

Answer 52

Rights and Obligations and Occurrence
Accuracy and Valuation
Completeness
Understandability and Classification