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Chap002

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  • 1. Chapter 02 - Professional Standards Chapter 02 Professional StandardsMultiple Choice Questions1. The attestation standards of reporting do not require the attestation report to include astatement thatA. Provides a conclusion whether the subject matter is presented in conformity withestablished or stated criteria.B. Indicates that the practitioner has significant reservations about the engagement.C. Identifies the subject matter or assertion being reported on.D. Indicates that the accountant assumes no responsibility to update the report.2. Control risk isA. The probability that a material misstatement could not be prevented or detected by theentitys internal control policies and procedures.B. The probability that a material misstatement could occur and not be detected by auditorsprocedures.C. The risk that auditors will not be able to complete the audit on a timely basis.D. The risk that auditors will not properly control the staff on the audit engagement.3. The responsibilities principle under generally accepted auditing standards does not includewhich of the following?A. Competence and capabilities.B. Independent attitude.C. Due care.D. Planning and supervision.4. Which of the following types of auditors reports does not require an explanatory paragraphto support the opinion?A. Unqualified opinion.B. Adverse opinion.C. Qualified opinion.D. Disclaimer of opinion. 2-1
  • 2. Chapter 02 - Professional Standards5. Which of the following is an element of a system of quality control that should beconsidered by a public accounting firm in establishing its quality control policies andprocedures?A. Lending credibility to a clients financial statements.B. Using statistical sampling techniques.C. Acceptance and continuance of clients.D. Membership in the Center for Public Company Audit Firms (CPCAF).6. Which of the following presumptions does not relate to the reliability of audit evidence?A. The more effective the clients internal control, the more assurance it provides about theaccounting data and financial statements.B. The auditors opinion, to be economically useful, is formed within reasonable time andbased on evidence obtained at a reasonable cost.C. Evidence obtained from independent sources outside the entity is more reliable thanevidence secured solely within the entity.D. The independent auditors direct personal knowledge, obtained through observation andinspection, is more persuasive than information obtained indirectly.7. An important role of the Public Company Accounting Oversight Board (PCAOB) is tooversee theA. Issuance of statements by the Financial Accounting Standards Board.B. Preparation and grading of the Uniform CPA Examination.C. Peer review of member firms of the Private Companies Practice Section.D. Regulation of firms that audit public companies.8. Audit evidence is usually considered sufficient whenA. It is reliable.B. There is enough quantity to afford a reasonable basis for an opinion on financialstatements.C. It has the qualities of being relevant, objective, and free from unknown bias.D. It has been obtained through random selection methods. 2-2
  • 3. Chapter 02 - Professional Standards9. Which of the following is not considered a type of audit evidence?A. The companys trial balance.B. Auditors calculations.C. Physical observation.D. Verbal statements made by client personnel.10. The AICPA attestation standards differ from the AICPA responsibilities principle,performance principle and reporting principle in that:A. The attestation standards contain no requirement to obtain an understanding of the entityand assess the risk of material misstatement.B. The attestation standards do not require competence and capabilities.C. The attestation standards do not require planning for attestation engagements orsupervision of accountants and consultants who perform the work.D. The attestation standards do not require a report that states the character of theengagement.11. An audit of the financial statements of Camden Corporation is being conducted byexternal auditors. The external auditors are expected to:A. Certify the correctness of Camdens financial statements.B. Make a complete examination of Camdens records and verify all of Camdens transactions.C. Give an opinion on the fair presentation of Camdens financial statements in conformitywith the applicable financial reporting framework (e.g., GAAP, IFRS).D. Give an opinion on the attractiveness of Camden for investment purposes and critique thewisdom and legality of its business decisions.12. Auditors try to achieve independence in appearance in order to:A. Maintain public confidence in the profession.B. Become independent in fact.C. Comply with the responsibilities principle.D. Maintain an unbiased mental attitude. 2-3
  • 4. Chapter 02 - Professional Standards13. The independent auditors plan prepared prior to the start of field work is appropriatelyconsidered documentation ofA. Planning.B. Supervision.C. Information evaluation.D. Quality assurance.14. Which of the following procedures would provide the most reliable audit evidence?A. Inquiries of the clients accounting staff held in private.B. Inspection of pre-numbered client shipping documents.C. Inspection of bank statements obtained directly from the clients financial institution.D. Analytical procedures performed by auditors on the clients trial balance.15. Which of the following is not an attestation standard?A. The practitioner must obtain sufficient evidence to provide a reasonable basis for theconclusion expressed in the report.B. The practitioner must identify the subject matter or the assertion being reported on andstate the character of the engagement.C. The practitioner must adequately plan the work and must properly supervise any assistants.D. A sufficient understanding of the clients internal controls shall be obtained to plan theengagement.16. Which of the following would most likely be a violation of the independence requirementfound in the responsibilities principle under generally accepted auditing standards?A. An auditor on the engagement has a distant relative who is employed by a vendor that doesa significant amount of business with clients.B. The clients Chief Executive Officer graduated from the same university as the partner incharge of the accounting firm.C. An auditor on the engagement owns a financial interest in the stock of the client.D. The client provides financial support to a number of charitable causes that also receivesupport from the accounting firm. 2-4
  • 5. Chapter 02 - Professional Standards17. A vendors invoice received and held by the client would be considered what type ofevidence?A. External.B. Internal.C. External-internal.D. Written representation.18. Which of the following statements is generally correct about the appropriateness of auditevidence?A. Auditors direct personal knowledge, obtained through observation and inspection, is morepersuasive than information obtained indirectly from independent outside sources.B. To be reliable, audit evidence must be either valid or relevant, but need not be both.C. Client accounting data alone may be considered sufficient appropriate audit evidence toissue an unqualified opinion on client financial statements.D. Appropriateness of audit evidence refers to the amount of corroborative evidence to beobtained.19. The standard auditors report refers to GAAS and GAAP in which paragraph?A. GAAS: Scope only; GAAP: Opinion onlyB. GAAS: Introductory only; GAAP: Scope and opinionC. GAAS: Introductory and scope; GAAP: Opinion onlyD. GAAS: Introductory only; GAAP: All paragraphs20. Which of the following is not included in the auditors standard report representing anunqualified opinion?A. A brief indication of the responsibility of auditors and management for the financialstatements.B. An indication that all appropriate disclosures have been made and included in the financialstatements.C. An indication that the audit was conducted in accordance with standards established by thePCAOB.D. The auditors opinion on the fairness of the financial statements. 2-5
  • 6. Chapter 02 - Professional Standards21. Internal evidenceA. Is obtained directly from third parties independent of the client.B. Originates outside of the clients system but has been received and processed by the client.C. Consists of documents that are produced, used, and stored within the clients informationsystem.D. Consists of representations made by the clients officers, directors, owners, and employees.22. Which of the following presumptions is correct about the reliability of audit evidence?A. Information obtained indirectly from outside sources is the most reliable form of auditevidence.B. To be reliable, audit evidence should be convincing rather than persuasive.C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.D. An effective system of internal control provides more assurance about the reliability ofaudit evidence.23. When auditors do not mention consistency in the auditors report, a reader of the financialstatements may inferA. That the applicable financial reporting framework (e.g., GAAP) has been consistentlyobserved in the current period in relation to the preceding period.B. That no material departure from the applicable financial reporting framework (e.g., GAAP)has been detected.C. That no reclassification of items or change in classifications has occurred.D. Nothing about application of accounting principles within the period.24. The auditors responsibility to express an opinion on the financial statements isA. Implicitly represented in the auditors standard report.B. Explicitly represented in the introductory paragraph of the auditors standard report.C. Explicitly represented in the scope paragraph of the auditors standard report.D. Explicitly represented in the opinion paragraph of the auditors standard report. 2-6
  • 7. Chapter 02 - Professional Standards25. Which of the following is not a concept from the performance principle under generallyaccepted auditing standards?A. The auditor must plan the work and properly supervise any assistants.B. The auditor must express an opinion in accordance with the auditors findings.C. The auditor must obtain sufficient appropriate evidence about whether materialmisstatements exist.D. The auditor must determine and apply an appropriate materiality level throughout theaudit.26. Under generally accepted auditing standards, which of the following reflects a conceptrelated to the responsibilities principle?A. The initial planning of the audit engagement should occur with the audit partner, manager,senior, and client personnel.B. The confirmation of accounts receivable should occur on each audit.C. The completion of an internal control questionnaire.D. Maintaining professional skepticism and exercising professional judgment.27. Which of the following represent audit quality guides that remain stable over time and areapplicable for all audits?A. Auditing procedures.B. Auditing standards.C. Due care.D. System of quality control.28. Which of the following situations would most likely be in conflict with the responsibilitiesprinciple?A. Auditors perform the engagement with prudent auditors, but not expert auditors.B. Auditors obtain expertise in their clients industry as they are conducting the auditexamination.C. Auditors are directly involved with a client manager in a strategic decision-makingcapacity.D. Auditors fail to document their assessment of control risk following their study of internalcontrol. 2-7
  • 8. Chapter 02 - Professional Standards29. Which of the following statements is not true with respect to the evidence that would begathered when assessments of control risk are high?A. Auditors would be required to rely on external (rather than internal) forms of evidence.B. Auditors would be required to perform procedures at interim periods, rather than at yearend.C. Auditors would be required to confirm a larger number of customer accounts receivablebalances.D. Auditors would be required to obtain more evidence through direct personal observation.30. As it relates to audit evidence, appropriateness refers to theA. Originality of evidence gathered.B. Quality of evidence gathered.C. Quantity of evidence gathered.D. Timeliness of evidence gathered.31. Which of the following information would not be included in the auditors standardreport?A. The names of the financial statements audited.B. A description of the nature of an audit.C. An indication that all necessary disclosures have been presented.D. An opinion on the entitys financial statements.32. The primary purpose of the auditors study of internal control for a nonpublic entity is:A. To provide constructive suggestions to the client for improving its internal control.B. To report on internal control as required by Auditing Standard No. 5.C. To identify and detect fraud and irregularities perpetrated by client personnel.D. To determine the nature, timing, and extent of substantive procedures.33. Which reporting options do auditors have if the clients financial statements are notpresented according to the applicable financial framework (e.g., GAAP, IFRS)?A. Unqualified or disclaimer of opinion.B. Qualified or disclaimer of opinion.C. Unqualified or adverse.D. Qualified or adverse. 2-8
  • 9. Chapter 02 - Professional Standards34. Which of the following is most closely related to system of quality control regardingengagement performance?A. Requiring all of the firms personnel to provide a summary of their investments and otherfinancial relationships.B. Evaluating the firms system of quality controls on a periodic basis.C. Utilizing standardized audit plans and audit documentation on engagements in a particularindustry.D. Evaluating the firms ability to provide a quality audit to a prospective client.Question also found in textbook35. Which of the following categories of principles is most closely related to gathering auditevidence?A. Performance.B. Reasonable assurance.C. Reporting.D. Responsibilities.36. To exercise due care, an accountant shouldA. Take continuing professional education classes.B. Report whether the financial statements are in accordance with the applicable financialreporting framework (e.g., GAAP, IFRS).C. Gather enough audit evidence to have complete assurance that there is enough support forthe accountants opinion on the financial statements.D. Conduct the engagement in accordance with GAAS and ensure that the engagement iscompleted on a timely basis.37. One of an accounting firms basic objectives is to provide professional services thatconform to professional standards. Reasonable assurance of achieving this objective can beobtained by followingA. Generally Accepted Auditing Standards (GAAS).B. Standards within a system of quality control.C. Generally Accepted Accounting Practices (GAAP).D. International Auditing Standards. 2-9
  • 10. Chapter 02 - Professional Standards38. Which of the following best demonstrates the concept of professional skepticism?A. Relying more extensively on external evidence rather than internal evidence.B. Focusing on items that have a more significant quantitative effect on the entitys financialstatements.C. Critically assessing verbal evidence received from the entitys management.D. Evaluating potential financial interests held by auditors in the client.39. The primary purpose for obtaining an understanding of the entitys environment (includingits internal control) in a financial statement audit isA. To determine the nature, timing, and extent of further audit procedures to be performed.B. To make consulting suggestions to the management.C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for anopinion on the financial statements.D. To determine whether the entity has changed any accounting principles.40. Ordinarily, what source of evidence should least affect audit conclusions?A. External.B. Inquiry of management.C. Auditor prepared.D. Inquiry of entity legal counsel.41. The most persuasive evidence regarding the existence of newly acquired computerequipment isA. Inquiry of management.B. Documentation prepared externally.C. Observation of auditees procedures.D. Physical observation.42. Which of the following procedures would provide the most reliable audit evidence?A. Inquiries of the clients internal audit staff held in private.B. Inspection of pre-numbered client purchase orders filed in the vouchers payabledepartment.C. Inspection of vendor sales invoices received from client personnel.D. Inspection of bank statements obtained directly from the clients financial institution. 2-10
  • 11. Chapter 02 - Professional Standards43. Breaux & Co., CPAs require that all audit documentation contain the initials of thepreparer and the reviewer in the top right-hand corner. This procedure provides evidence ofBreaux & Co., CPAs professional concern regarding which of the following?A. Independence.B. Adequate competence and capabilities.C. Adequate planning and supervision.D. Gathering sufficient appropriate evidence.44. The attestation standards do not contain a requirement that auditors obtainA. Adequate knowledge in the subject matter of the assertions being examined.B. An understanding of the auditees internal controls.C. Sufficient evidence for the conclusions expressed in an attestation report.D. Independence in mental attitude.45. Which of the following concepts is least related to the standard of due care?A. Independence in factB. Professional skepticismC. Prudent auditorD. Reasonable assurance46. The evidence considered most appropriate by auditors is best described asA. Internal documents such as sales invoice copies produced under conditions of stronginternal control.B. Written representations made by the president of the entity.C. Documentary evidence obtained directly from independent external sources.D. Direct personal knowledge obtained through physical observation and mathematicalrecalculation. 2-11
  • 12. Chapter 02 - Professional Standards47. Auditors understanding of the internal control in an entity contributes information forA. Determining whether members of the audit team have the required competence andcapabilities to perform the audit.B. Ascertaining the independence in mental attitude of members of the audit team.C. Planning the professional development courses the audit staff needs to keep up to date withnew auditing standards.D. Planning the nature, timing, and extent of further audit procedures on an audit.48. Which of the following elements of a system of quality control is related to firmsreceiving independence confirmations from its professionals with respect to clients?A. Acceptance and continuance of clients.B. Engagement performance.C. Monitoring.D. Relevant ethical requirements.49. Which of the following standards is not correctly associated with its rule-making body?A. Public Company Accounting Oversight Board, Auditing StandardsB. Governmental Accounting Standards Board, Government Auditing StandardsC. Auditing Standards Board, Statements on Auditing StandardsD. International Auditing and Assurance Standards Board, International Statements onAuditing50. Kramer, CPA consulted with an independent appraiser regarding the valuation of fine artfor a not-for-profit museum. Consultation with a specialist in this case wouldA. Be considered proper due care.B. Be considered a failure to follow GAAS because Kramer should have known how to valuefine art before accepting the engagement.C. Not be considered a violation of GAAS because GAAS does not apply to not-for-profitentities.D. None of the above. 2-12
  • 13. Chapter 02 - Professional Standards51. Which of the following topics is not addressed in the auditors report for a public entity?A. Responsibilities of the auditor and management in the financial reporting process.B. Absolute assurance regarding the fairness of the entitys financial statements in accordancewith the applicable financial reporting framework (e.g., GAAP).C. A description of an audit engagement.D. A summary of the auditors opinion on the effectiveness of the entitys internal control overfinancial reporting.52. Which of the following is a conceptual difference between attestation standards andgenerally accepted auditing standards?A. The attestation standards provide a framework for the attest function beyond historicalfinancial statements.B. The requirement that the practitioner be independent is not required under attestationstandards.C. The attestation standards do not permit an attestation engagement to examine prospective"what-if" financial statements.D. Requirements related to evidence are not included in the attestation standards.Questions also found in Study Guide53. The attestation standards are a general set of standards intended to guide work inA. Audits of financial statements.B. Financial forecasts and prospective financial information.C. Areas other than audits of financial statements.D. Understanding internal control.54. Statements on Auditing Standards (SASs) are considered to beA. Specialized to obtain evidence to render an opinion.B. Detailed interpretations of the fundamental principles.C. Standards for preparation of financial statements.D. Standards to govern the quality of a specific firms audit practice. 2-13
  • 14. Chapter 02 - Professional Standards55. Which of the following is not a subject related to the performance principle of GAAS?A. Risk of material misstatementB. Planning and supervisionC. Sufficient appropriate evidenceD. Due care56. Which of the following statements is true for attestation standards, but not for thefundamental principles of generally accepted auditing standards?A. The practitioner or practitioners must have reason to believe that the subject matter iscapable of evaluation against criteria that are suitable and available to users.B. The work shall be adequately planned and assistants, if any, are to be properly supervised.C. Due care shall be exercised.D. A sufficient understanding of the internal control is to be obtained.57. The quality control of personnel management in a public accounting firm includes whichof the following?A. Supervision appropriate for the competencies of the personnel assigned to the work isimportant.B. Professional development continuing education should be provided so that personnel willhave the knowledge required to enable them to fulfill their responsibilities.C. People at all organizational levels must maintain independence in fact and appearance.D. When accepting and continuing client relationships, firms should consider their owncompetence.58. Which of the following is not an implicit message in the opinion paragraph in the auditorsunqualified opinion?A. The accounting principles in the financial statements have general acceptance.B. The accounting principles used by the entity are appropriate in the circumstances.C. The audit was performed in accordance with generally accepted auditing standards.D. The financial statements are accurate within practical materiality limits. 2-14
  • 15. Chapter 02 - Professional Standards59. Auditors opinions on statements "taken as a whole" would not includeA. Disclaimers of opinion.B. Adverse opinions.C. Qualified opinions.D. Unqualified opinions.60. The opinion paragraph of the auditors standard report includes a statement thatA. The financial statements are the responsibility of management.B. The audit was conducted in accordance with generally accepted auditing standards.C. The audit provides a reasonable basis for an opinion.D. The financial statements are presented in conformity with generally accepted accountingprinciples.61. The auditors standard report should be dated with the dateA. The report was delivered to the client.B. When all significant procedures have been completed and auditors have gathered sufficientappropriate evidence.C. When the clients fiscal year ended.D. When the audit was completely reviewed by supervisory personnel.62. To ensure that a public accounting firm is providing services that conform to professionalstandards, the firm should followA. The performance principle of GAAS.B. Its system of quality controls.C. Generally accepted accounting principles.D. International auditing standards. 2-15
  • 16. Chapter 02 - Professional StandardsMatching Questions63. For each of the matters below, indicate through the appropriate letter the fundamentalprinciple to which the matter is most closely related.1. Responsibilitiesprinciple Maintaining professional skepticism. ____2. Responsibilities An auditors overall conclusion of the fairness ofprinciple the clients financial statements. ____3. Reporting The use of an audit plan to identify auditprinciple procedures to be performed during the engagement. ____4. Performance Auditors assessment of the risk of materialprinciple misstatement. ____5. Performance Accounting firm policies with respect to the levelprinciple of expected continuing professional education. ____6. Performance Expressing an opinion in accordance with theprinciple auditors findings. ____7. Reportingprinciple Proper supervision of assistants on the audit. ____ Auditors requests to obtain bank statements8. Performance directly from financial institutions with whom theprinciple client does business. ____9. Reporting An expression that an opinion cannot beprinciple expressed. ____10. Performance Determining and applying an appropriateprinciple materiality level. ____True / False QuestionsQuestion also Found in Study Guide64. Auditors may be independent in fact but not independent in appearance.True False65. Standards for accountants in public practice are limited to auditing services.True False 2-16
  • 17. Chapter 02 - Professional Standards66. The attestation standards provide guidance for a wide variety of attestation engagements.True False67. The AICPAs Generally Accepted Auditing Standards must be followed on all auditengagements.True False68. The reporting principle relates to a firms system of quality control criteria for conductingan audit.True False69. Auditors cannot effectively satisfy the responsibilities principle requiring due care if theyhave not also satisfied the performance principle.True False70. Auditing procedures are quality guides that are less specific than auditing standards.True False71. Auditing procedures are the same as auditing standards.True False72. The concept of due care requires auditors to observe the performance, responsibilities andreporting principles.True False73. Attestation standards require the practitioner to obtain a sufficient understanding of theclients internal control.True False 2-17
  • 18. Chapter 02 - Professional Standards74. The performance principle sets forth the quality criteria for conducting an audit.True False75. Auditors of entities registered with the Securities and Exchange Commission are requiredto register with the Public Company Accounting Oversight Board (PCAOB).True False76. Control risk is the probability that a material misstatement (error or fraud) could occur andnot be prevented or detected on a timely basis by the entitys external auditors.True False77. Evidence that is considered "appropriate" in auditing means that all underlying accountingdata and corroborating information must be absolutely compelling to auditors.True False78. Even in the audit of historical cost financial statements, auditors may have to makeinferences about the future.True False79. The contents of the auditors report are guided exclusively by the reporting principle ofGAAS.True False80. The auditors standard report should always make direct reference to consistency anddisclosure.True False 2-18
  • 19. Chapter 02 - Professional Standards81. The auditors standard report should either contain an expression of opinion on thefinancial statements taken as a whole or an assertion to the effect that an opinion cannot beexpressed.True False82. Evidence is considered appropriate when it is both valid and relevant.True False83. The statement on quality control standards No. 7 notes that the purpose of a system ofquality control is to provide reasonable assurance that the firm and its personnel issue reportsthat are appropriate under the circumstances.True FalseFill in the Blank QuestionsQuestion also found in Study Guide84. The _____________________________ standards are a general set of standards to guideattestation engagements in areas other than audits of financial statements.________________________________________85. Audits of historical financial statements are guided by a broad set of principles referred toas _______________________ ______________________________________________________ _____________________________.________________________________________ 2-19
  • 20. Chapter 02 - Professional Standards86. Attestation reporting is different because attestation engagements related to nonfinancialinformation do not require information to be presented in accordance with_____________________________ __________________________________________________________ _____________________________.________________________________________87. The AICPAs fundamental principles of generally accepted auditing standards areclassified in three categories: _______________________ principle,_______________________ principle, and the _____________________________ principle.________________________________________88. A(n) _____________________________ _____________________________ is a list ofauditing procedures that will be performed during the engagement to gather sufficientappropriate evidence.________________________________________89. The responsibilities principle of GAAS highlights the importance of complying withethical requirements, including those pertaining to __________________________ and_____________________________.________________________________________90. The three aspects of practical independence are _____________________________independence, _____________________________ independence, and_____________________________ independence.________________________________________91. The concept of _____________________________ relates to financial statement usersperceptions of auditors independence.________________________________________ 2-20
  • 21. Chapter 02 - Professional Standards92. _____________________________ ________________________ reflects a level ofperformance that would be exercised by reasonable auditors in similar circumstances.________________________________________93. Since audit samples are used, audit evidence is considered to be_____________________________, rather than _____________________________.________________________________________94. The auditors report must state whether the financial statements are presented inaccordance with __________________________ __________________________________________________________ _____________________________.________________________________________95. Under the reporting principle of GAAS, the auditor expresses an opinion in accordancewith the ___________________ ______________.________________________________________96. Under the reporting principle of GAAS, the report will contain either an expression of_____________________________ regarding the financial statements, taken as a whole, oran assertion to the effect that an opinion cannot be expressed.________________________________________97. An overall opinion that the financial statements present the financial condition, results ofoperations, and cash flows according to generally accepted accounting principles is a(n)_____________________________ opinion.________________________________________98. If a material departure from GAAP is noted, auditors can choose between a(n)__________________________ opinion or a(n) ___________________________ opinion.________________________________________ 2-21
  • 22. Chapter 02 - Professional Standards99. Auditors indication that no opinion is given is referred to as a(n)_______________________ ___________________________________________________________________________________100. The _____________________________ paragraph of the auditors report declares thatthe audit was conducted in accordance with generally accepted_________________________________________________________________________________________________101. A(n) _____________________________ _____________________________ is a studyof an accounting firms quality control policies and procedures, followed by a report on thefirms quality of audit practice in accordance with the system of quality controls.________________________________________102. The _____________________________ _____________________________ Act of2002 created the Public Company Accounting Oversight Board (PCAOB).________________________________________103. The PCAOB has two primary roles: _____________________________ and_____________________________.________________________________________ 2-22
  • 23. Chapter 02 - Professional StandardsEssay Questions104. Distinguish between attestation standards and the fundamental principles of generallyaccepted auditing standards by identifying and describing major differences between the twosets of standards. 2-23
  • 24. Chapter 02 - Professional Standards105. Alan Fallon was recently promoted to senior accountant. He was put in charge of theMellow Markets audit because of his experience with other grocery clients. Mellow Marketshas a small, but growing, chain of natural food stores. This is the first year Mellow Marketshas been audited. Because of their growth, Mellow Markets needs additional capital andintend to use their audited financial statements to secure a loan.Alan has been assigned two inexperienced staff assistants for the audit. Because this is hisfirst engagement as a senior, he intends to bring the job in on budget. To save time, heprovided his assistants with a copy of the audit plan for Happy Time Food Stores. He toldthem that this would make things go more quickly. He also told them that he could not spendmuch time with them at the clients place of business, because "my time is billed out at such ahigh rate, well go right over budget." However, he did call them once a day from anotheraudit on which he was working.After beginning their work, the assistants told Alan that the audit plan did not always matchup with what they found at Mellow Markets. Alan responded, "just cross out whatever is notrelevant in the audit plan and dont add anything - it will only make us go over the budget."When Alan came to the client near the end of field Work, one assistant was concerned that noinventory observation was done at the out-of-town locations of Mellow Markets (the auditplan had stipulated that inventory should be observed for in-town stores only). Happy Timehad only one out-of-town location, while three of Mellow Markets five stores were in othercities. Alan told the assistant to get inventory sheets from the client for the other stores andadded "make sure that the inventory balance in the general ledger agrees with the total for allthe inventory sheets." The next day, Alan reviewed all audit documentation and submitted thejob for review by the manager.Required:1. Describe the performance principle of GAAS.2. Do you believe that the Mellow Markets audit complies with these standards? Explain.Matching QuestionsQuestion also Found in Study Guide 2-24
  • 25. Chapter 02 - Professional Standards106. Using I (introductory), S (scope), O (opinion), A (additional), or N (none), indicate theparagraph in which the following statements or topics would be included in the auditorsreport. The titles of the financial statements examined by the1. none auditors. ____ A description of any scope limitation(s) encountered2. none during the audit. ____ A statement that auditors were independent with respect3. introductory to the entity. ____ The auditors conclusion with respect to the fairness of4. additional the entitys financial statements. ____ A statement that an audit was conducted in accordance5. opinion with generally accepted auditing standards. ____ A statement that the entitys management is responsible6. opinion for the fairness of the financial statements. ____ A description of an audit, which includes examining7. introductory evidence in support of the financial statements. ____8. scope Reference to generally accepted accounting principles. ____ A description of any specific departures from GAAP9. scope noted during the audit that were material. ____ A statement that the financial statements were10. additional consistently prepared compared to those of prior period(s). ____ 2-25
  • 26. Chapter 02 - Professional StandardsChapter 02 Professional Standards Answer KeyMultiple Choice Questions1. The attestation standards of reporting do not require the attestation report to include astatement thatA. Provides a conclusion whether the subject matter is presented in conformity withestablished or stated criteria.B. Indicates that the practitioner has significant reservations about the engagement.C. Identifies the subject matter or assertion being reported on.D. Indicates that the accountant assumes no responsibility to update the report.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy2. Control risk isA. The probability that a material misstatement could not be prevented or detected by theentitys internal control policies and procedures.B. The probability that a material misstatement could occur and not be detected by auditorsprocedures.C. The risk that auditors will not be able to complete the audit on a timely basis.D. The risk that auditors will not properly control the staff on the audit engagement.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: KnowledgeDifficulty: Easy 2-26
  • 27. Chapter 02 - Professional Standards3. The responsibilities principle under generally accepted auditing standards does not includewhich of the following?A. Competence and capabilities.B. Independent attitude.C. Due care.D. Planning and supervision.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy4. Which of the following types of auditors reports does not require an explanatory paragraphto support the opinion?A. Unqualified opinion.B. Adverse opinion.C. Qualified opinion.D. Disclaimer of opinion.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Easy 2-27
  • 28. Chapter 02 - Professional Standards5. Which of the following is an element of a system of quality control that should beconsidered by a public accounting firm in establishing its quality control policies andprocedures?A. Lending credibility to a clients financial statements.B. Using statistical sampling techniques.C. Acceptance and continuance of clients.D. Membership in the Center for Public Company Audit Firms (CPCAF).OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium6. Which of the following presumptions does not relate to the reliability of audit evidence?A. The more effective the clients internal control, the more assurance it provides about theaccounting data and financial statements.B. The auditors opinion, to be economically useful, is formed within reasonable time andbased on evidence obtained at a reasonable cost.C. Evidence obtained from independent sources outside the entity is more reliable thanevidence secured solely within the entity.D. The independent auditors direct personal knowledge, obtained through observation andinspection, is more persuasive than information obtained indirectly.AICPAAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ComprehensionDifficulty: Hard 2-28
  • 29. Chapter 02 - Professional Standards7. An important role of the Public Company Accounting Oversight Board (PCAOB) is tooversee theA. Issuance of statements by the Financial Accounting Standards Board.B. Preparation and grading of the Uniform CPA Examination.C. Peer review of member firms of the Private Companies Practice Section.D. Regulation of firms that audit public companies.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy8. Audit evidence is usually considered sufficient whenA. It is reliable.B. There is enough quantity to afford a reasonable basis for an opinion on financialstatements.C. It has the qualities of being relevant, objective, and free from unknown bias.D. It has been obtained through random selection methods.AICPAAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-29
  • 30. Chapter 02 - Professional Standards9. Which of the following is not considered a type of audit evidence?A. The companys trial balance.B. Auditors calculations.C. Physical observation.D. Verbal statements made by client personnel.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium10. The AICPA attestation standards differ from the AICPA responsibilities principle,performance principle and reporting principle in that:A. The attestation standards contain no requirement to obtain an understanding of the entityand assess the risk of material misstatement.B. The attestation standards do not require competence and capabilities.C. The attestation standards do not require planning for attestation engagements orsupervision of accountants and consultants who perform the work.D. The attestation standards do not require a report that states the character of theengagement.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Hard 2-30
  • 31. Chapter 02 - Professional Standards11. An audit of the financial statements of Camden Corporation is being conducted byexternal auditors. The external auditors are expected to:A. Certify the correctness of Camdens financial statements.B. Make a complete examination of Camdens records and verify all of Camdens transactions.C. Give an opinion on the fair presentation of Camdens financial statements in conformitywith the applicable financial reporting framework (e.g., GAAP, IFRS).D. Give an opinion on the attractiveness of Camden for investment purposes and critique thewisdom and legality of its business decisions.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Easy12. Auditors try to achieve independence in appearance in order to:A. Maintain public confidence in the profession.B. Become independent in fact.C. Comply with the responsibilities principle.D. Maintain an unbiased mental attitude.OriginalAACSB: EthicsAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-31
  • 32. Chapter 02 - Professional Standards13. The independent auditors plan prepared prior to the start of field work is appropriatelyconsidered documentation ofA. Planning.B. Supervision.C. Information evaluation.D. Quality assurance.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy14. Which of the following procedures would provide the most reliable audit evidence?A. Inquiries of the clients accounting staff held in private.B. Inspection of pre-numbered client shipping documents.C. Inspection of bank statements obtained directly from the clients financial institution.D. Analytical procedures performed by auditors on the clients trial balance.AICPAAACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: KnowledgeDifficulty: Hard 2-32
  • 33. Chapter 02 - Professional Standards15. Which of the following is not an attestation standard?A. The practitioner must obtain sufficient evidence to provide a reasonable basis for theconclusion expressed in the report.B. The practitioner must identify the subject matter or the assertion being reported on andstate the character of the engagement.C. The practitioner must adequately plan the work and must properly supervise any assistants.D. A sufficient understanding of the clients internal controls shall be obtained to plan theengagement.AICPAAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium16. Which of the following would most likely be a violation of the independence requirementfound in the responsibilities principle under generally accepted auditing standards?A. An auditor on the engagement has a distant relative who is employed by a vendor that doesa significant amount of business with clients.B. The clients Chief Executive Officer graduated from the same university as the partner incharge of the accounting firm.C. An auditor on the engagement owns a financial interest in the stock of the client.D. The client provides financial support to a number of charitable causes that also receivesupport from the accounting firm.OriginalAACSB: EthicsAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy 2-33
  • 34. Chapter 02 - Professional Standards17. A vendors invoice received and held by the client would be considered what type ofevidence?A. External.B. Internal.C. External-internal.D. Written representation.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy18. Which of the following statements is generally correct about the appropriateness of auditevidence?A. Auditors direct personal knowledge, obtained through observation and inspection, is morepersuasive than information obtained indirectly from independent outside sources.B. To be reliable, audit evidence must be either valid or relevant, but need not be both.C. Client accounting data alone may be considered sufficient appropriate audit evidence toissue an unqualified opinion on client financial statements.D. Appropriateness of audit evidence refers to the amount of corroborative evidence to beobtained.AICPAAACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: ComprehensionDifficulty: Medium 2-34
  • 35. Chapter 02 - Professional Standards19. The standard auditors report refers to GAAS and GAAP in which paragraph?A. GAAS: Scope only; GAAP: Opinion onlyB. GAAS: Introductory only; GAAP: Scope and opinionC. GAAS: Introductory and scope; GAAP: Opinion onlyD. GAAS: Introductory only; GAAP: All paragraphsAICPAAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Medium20. Which of the following is not included in the auditors standard report representing anunqualified opinion?A. A brief indication of the responsibility of auditors and management for the financialstatements.B. An indication that all appropriate disclosures have been made and included in the financialstatements.C. An indication that the audit was conducted in accordance with standards established by thePCAOB.D. The auditors opinion on the fairness of the financial statements.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Medium 2-35
  • 36. Chapter 02 - Professional Standards21. Internal evidenceA. Is obtained directly from third parties independent of the client.B. Originates outside of the clients system but has been received and processed by the client.C. Consists of documents that are produced, used, and stored within the clients informationsystem.D. Consists of representations made by the clients officers, directors, owners, and employees.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium22. Which of the following presumptions is correct about the reliability of audit evidence?A. Information obtained indirectly from outside sources is the most reliable form of auditevidence.B. To be reliable, audit evidence should be convincing rather than persuasive.C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.D. An effective system of internal control provides more assurance about the reliability ofaudit evidence.AICPAAACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: ComprehensionDifficulty: Hard 2-36
  • 37. Chapter 02 - Professional Standards23. When auditors do not mention consistency in the auditors report, a reader of the financialstatements may inferA. That the applicable financial reporting framework (e.g., GAAP) has been consistentlyobserved in the current period in relation to the preceding period.B. That no material departure from the applicable financial reporting framework (e.g., GAAP)has been detected.C. That no reclassification of items or change in classifications has occurred.D. Nothing about application of accounting principles within the period.AICPAAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Hard24. The auditors responsibility to express an opinion on the financial statements isA. Implicitly represented in the auditors standard report.B. Explicitly represented in the introductory paragraph of the auditors standard report.C. Explicitly represented in the scope paragraph of the auditors standard report.D. Explicitly represented in the opinion paragraph of the auditors standard report.AICPAAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Hard 2-37
  • 38. Chapter 02 - Professional Standards25. Which of the following is not a concept from the performance principle under generallyaccepted auditing standards?A. The auditor must plan the work and properly supervise any assistants.B. The auditor must express an opinion in accordance with the auditors findings.C. The auditor must obtain sufficient appropriate evidence about whether materialmisstatements exist.D. The auditor must determine and apply an appropriate materiality level throughout theaudit.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium26. Under generally accepted auditing standards, which of the following reflects a conceptrelated to the responsibilities principle?A. The initial planning of the audit engagement should occur with the audit partner, manager,senior, and client personnel.B. The confirmation of accounts receivable should occur on each audit.C. The completion of an internal control questionnaire.D. Maintaining professional skepticism and exercising professional judgment.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-38
  • 39. Chapter 02 - Professional Standards27. Which of the following represent audit quality guides that remain stable over time and areapplicable for all audits?A. Auditing procedures.B. Auditing standards.C. Due care.D. System of quality control.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy28. Which of the following situations would most likely be in conflict with the responsibilitiesprinciple?A. Auditors perform the engagement with prudent auditors, but not expert auditors.B. Auditors obtain expertise in their clients industry as they are conducting the auditexamination.C. Auditors are directly involved with a client manager in a strategic decision-makingcapacity.D. Auditors fail to document their assessment of control risk following their study of internalcontrol.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ApplicationDifficulty: Medium 2-39
  • 40. Chapter 02 - Professional Standards29. Which of the following statements is not true with respect to the evidence that would begathered when assessments of control risk are high?A. Auditors would be required to rely on external (rather than internal) forms of evidence.B. Auditors would be required to perform procedures at interim periods, rather than at yearend.C. Auditors would be required to confirm a larger number of customer accounts receivablebalances.D. Auditors would be required to obtain more evidence through direct personal observation.OriginalAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplicationDifficulty: Hard30. As it relates to audit evidence, appropriateness refers to theA. Originality of evidence gathered.B. Quality of evidence gathered.C. Quantity of evidence gathered.D. Timeliness of evidence gathered.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy 2-40
  • 41. Chapter 02 - Professional Standards31. Which of the following information would not be included in the auditors standardreport?A. The names of the financial statements audited.B. A description of the nature of an audit.C. An indication that all necessary disclosures have been presented.D. An opinion on the entitys financial statements.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Easy32. The primary purpose of the auditors study of internal control for a nonpublic entity is:A. To provide constructive suggestions to the client for improving its internal control.B. To report on internal control as required by Auditing Standard No. 5.C. To identify and detect fraud and irregularities perpetrated by client personnel.D. To determine the nature, timing, and extent of substantive procedures.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: KnowledgeDifficulty: Easy 2-41
  • 42. Chapter 02 - Professional Standards33. Which reporting options do auditors have if the clients financial statements are notpresented according to the applicable financial framework (e.g., GAAP, IFRS)?A. Unqualified or disclaimer of opinion.B. Qualified or disclaimer of opinion.C. Unqualified or adverse.D. Qualified or adverse.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Medium34. Which of the following is most closely related to system of quality control regardingengagement performance?A. Requiring all of the firms personnel to provide a summary of their investments and otherfinancial relationships.B. Evaluating the firms system of quality controls on a periodic basis.C. Utilizing standardized audit plans and audit documentation on engagements in a particularindustry.D. Evaluating the firms ability to provide a quality audit to a prospective client.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: MediumQuestion also found in textbook 2-42
  • 43. Chapter 02 - Professional Standards35. Which of the following categories of principles is most closely related to gathering auditevidence?A. Performance.B. Reasonable assurance.C. Reporting.D. Responsibilities.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy36. To exercise due care, an accountant shouldA. Take continuing professional education classes.B. Report whether the financial statements are in accordance with the applicable financialreporting framework (e.g., GAAP, IFRS).C. Gather enough audit evidence to have complete assurance that there is enough support forthe accountants opinion on the financial statements.D. Conduct the engagement in accordance with GAAS and ensure that the engagement iscompleted on a timely basis.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-43
  • 44. Chapter 02 - Professional Standards37. One of an accounting firms basic objectives is to provide professional services thatconform to professional standards. Reasonable assurance of achieving this objective can beobtained by followingA. Generally Accepted Auditing Standards (GAAS).B. Standards within a system of quality control.C. Generally Accepted Accounting Practices (GAAP).D. International Auditing Standards.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ApplicationDifficulty: Medium38. Which of the following best demonstrates the concept of professional skepticism?A. Relying more extensively on external evidence rather than internal evidence.B. Focusing on items that have a more significant quantitative effect on the entitys financialstatements.C. Critically assessing verbal evidence received from the entitys management.D. Evaluating potential financial interests held by auditors in the client.OriginalAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ComprehensionDifficulty: Medium 2-44
  • 45. Chapter 02 - Professional Standards39. The primary purpose for obtaining an understanding of the entitys environment (includingits internal control) in a financial statement audit isA. To determine the nature, timing, and extent of further audit procedures to be performed.B. To make consulting suggestions to the management.C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for anopinion on the financial statements.D. To determine whether the entity has changed any accounting principles.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium40. Ordinarily, what source of evidence should least affect audit conclusions?A. External.B. Inquiry of management.C. Auditor prepared.D. Inquiry of entity legal counsel.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: KnowledgeDifficulty: Easy 2-45
  • 46. Chapter 02 - Professional Standards41. The most persuasive evidence regarding the existence of newly acquired computerequipment isA. Inquiry of management.B. Documentation prepared externally.C. Observation of auditees procedures.D. Physical observation.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium42. Which of the following procedures would provide the most reliable audit evidence?A. Inquiries of the clients internal audit staff held in private.B. Inspection of pre-numbered client purchase orders filed in the vouchers payabledepartment.C. Inspection of vendor sales invoices received from client personnel.D. Inspection of bank statements obtained directly from the clients financial institution.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Hard 2-46
  • 47. Chapter 02 - Professional Standards43. Breaux & Co., CPAs require that all audit documentation contain the initials of thepreparer and the reviewer in the top right-hand corner. This procedure provides evidence ofBreaux & Co., CPAs professional concern regarding which of the following?A. Independence.B. Adequate competence and capabilities.C. Adequate planning and supervision.D. Gathering sufficient appropriate evidence.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium44. The attestation standards do not contain a requirement that auditors obtainA. Adequate knowledge in the subject matter of the assertions being examined.B. An understanding of the auditees internal controls.C. Sufficient evidence for the conclusions expressed in an attestation report.D. Independence in mental attitude.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-47
  • 48. Chapter 02 - Professional Standards45. Which of the following concepts is least related to the standard of due care?A. Independence in factB. Professional skepticismC. Prudent auditorD. Reasonable assuranceOriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ComprehensionDifficulty: Medium46. The evidence considered most appropriate by auditors is best described asA. Internal documents such as sales invoice copies produced under conditions of stronginternal control.B. Written representations made by the president of the entity.C. Documentary evidence obtained directly from independent external sources.D. Direct personal knowledge obtained through physical observation and mathematicalrecalculation.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Hard 2-48
  • 49. Chapter 02 - Professional Standards47. Auditors understanding of the internal control in an entity contributes information forA. Determining whether members of the audit team have the required competence andcapabilities to perform the audit.B. Ascertaining the independence in mental attitude of members of the audit team.C. Planning the professional development courses the audit staff needs to keep up to date withnew auditing standards.D. Planning the nature, timing, and extent of further audit procedures on an audit.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: KnowledgeDifficulty: Medium48. Which of the following elements of a system of quality control is related to firmsreceiving independence confirmations from its professionals with respect to clients?A. Acceptance and continuance of clients.B. Engagement performance.C. Monitoring.D. Relevant ethical requirements.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-49
  • 50. Chapter 02 - Professional Standards49. Which of the following standards is not correctly associated with its rule-making body?A. Public Company Accounting Oversight Board, Auditing StandardsB. Governmental Accounting Standards Board, Government Auditing StandardsC. Auditing Standards Board, Statements on Auditing StandardsD. International Auditing and Assurance Standards Board, International Statements onAuditingOriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium50. Kramer, CPA consulted with an independent appraiser regarding the valuation of fine artfor a not-for-profit museum. Consultation with a specialist in this case wouldA. Be considered proper due care.B. Be considered a failure to follow GAAS because Kramer should have known how to valuefine art before accepting the engagement.C. Not be considered a violation of GAAS because GAAS does not apply to not-for-profitentities.D. None of the above.OriginalAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplicationDifficulty: Medium 2-50
  • 51. Chapter 02 - Professional Standards51. Which of the following topics is not addressed in the auditors report for a public entity?A. Responsibilities of the auditor and management in the financial reporting process.B. Absolute assurance regarding the fairness of the entitys financial statements in accordancewith the applicable financial reporting framework (e.g., GAAP).C. A description of an audit engagement.D. A summary of the auditors opinion on the effectiveness of the entitys internal control overfinancial reporting.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Easy52. Which of the following is a conceptual difference between attestation standards andgenerally accepted auditing standards?A. The attestation standards provide a framework for the attest function beyond historicalfinancial statements.B. The requirement that the practitioner be independent is not required under attestationstandards.C. The attestation standards do not permit an attestation engagement to examine prospective"what-if" financial statements.D. Requirements related to evidence are not included in the attestation standards.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: MediumQuestions also found in Study Guide 2-51
  • 52. Chapter 02 - Professional Standards53. The attestation standards are a general set of standards intended to guide work inA. Audits of financial statements.B. Financial forecasts and prospective financial information.C. Areas other than audits of financial statements.D. Understanding internal control.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy54. Statements on Auditing Standards (SASs) are considered to beA. Specialized to obtain evidence to render an opinion.B. Detailed interpretations of the fundamental principles.C. Standards for preparation of financial statements.D. Standards to govern the quality of a specific firms audit practice.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy55. Which of the following is not a subject related to the performance principle of GAAS?A. Risk of material misstatementB. Planning and supervisionC. Sufficient appropriate evidenceD. Due careOriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-52
  • 53. Chapter 02 - Professional Standards56. Which of the following statements is true for attestation standards, but not for thefundamental principles of generally accepted auditing standards?A. The practitioner or practitioners must have reason to believe that the subject matter iscapable of evaluation against criteria that are suitable and available to users.B. The work shall be adequately planned and assistants, if any, are to be properly supervised.C. Due care shall be exercised.D. A sufficient understanding of the internal control is to be obtained.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Easy57. The quality control of personnel management in a public accounting firm includes whichof the following?A. Supervision appropriate for the competencies of the personnel assigned to the work isimportant.B. Professional development continuing education should be provided so that personnel willhave the knowledge required to enable them to fulfill their responsibilities.C. People at all organizational levels must maintain independence in fact and appearance.D. When accepting and continuing client relationships, firms should consider their owncompetence.OriginalAACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ResearchBlooms: ComprehensionDifficulty: Medium 2-53
  • 54. Chapter 02 - Professional Standards58. Which of the following is not an implicit message in the opinion paragraph in the auditorsunqualified opinion?A. The accounting principles in the financial statements have general acceptance.B. The accounting principles used by the entity are appropriate in the circumstances.C. The audit was performed in accordance with generally accepted auditing standards.D. The financial statements are accurate within practical materiality limits.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBlooms: CommunicationDifficulty: Medium59. Auditors opinions on statements "taken as a whole" would not includeA. Disclaimers of opinion.B. Adverse opinions.C. Qualified opinions.D. Unqualified opinions.OriginalAACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Medium 2-54
  • 55. Chapter 02 - Professional Standards60. The opinion paragraph of the auditors standard report includes a statement thatA. The financial statements are the responsibility of management.B. The audit was conducted in accordance with generally accepted auditing standards.C. The audit provides a reasonable basis for an opinion.D. The financial statements are presented in conformity with generally accepted accountingprinciples.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBlooms: CommunicationDifficulty: Easy61. The auditors standard report should be dated with the dateA. The report was delivered to the client.B. When all significant procedures have been completed and auditors have gathered sufficientappropriate evidence.C. When the clients fiscal year ended.D. When the audit was completely reviewed by supervisory personnel.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBlooms: CommunicationDifficulty: Medium 2-55
  • 56. Chapter 02 - Professional Standards62. To ensure that a public accounting firm is providing services that conform to professionalstandards, the firm should followA. The performance principle of GAAS.B. Its system of quality controls.C. Generally accepted accounting principles.D. International auditing standards.OriginalAACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: EasyMatching Questions 2-56
  • 57. Chapter 02 - Professional Standards63. For each of the matters below, indicate through the appropriate letter the fundamentalprinciple to which the matter is most closely related.1. Responsibilitiesprinciple Maintaining professional skepticism. 12. Responsibilities An auditors overall conclusion of the fairness of theprinciple clients financial statements. 3 The use of an audit plan to identify audit procedures3. Reporting principle to be performed during the engagement. 44. Performance Auditors assessment of the risk of materialprinciple misstatement. 45. Performance Accounting firm policies with respect to the level ofprinciple expected continuing professional education. 16. Performance Expressing an opinion in accordance with theprinciple auditors findings. 37. Reporting principle Proper supervision of assistants on the audit. 4 Auditors requests to obtain bank statements directly8. Performance from financial institutions with whom the client doesprinciple business. 49. Reporting principle An expression that an opinion cannot be expressed. 310. Performance Determining and applying an appropriate materialityprinciple level. 4AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: MediumTrue / False QuestionsQuestion also Found in Study Guide64. Auditors may be independent in fact but not independent in appearance.TRUE65. Standards for accountants in public practice are limited to auditing services.FALSE 2-57
  • 58. Chapter 02 - Professional Standards66. The attestation standards provide guidance for a wide variety of attestation engagements.TRUE67. The AICPAs Generally Accepted Auditing Standards must be followed on all auditengagements.TRUE68. The reporting principle relates to a firms system of quality control criteria for conductingan audit.FALSE69. Auditors cannot effectively satisfy the responsibilities principle requiring due care if theyhave not also satisfied the performance principle.TRUE70. Auditing procedures are quality guides that are less specific than auditing standards.FALSE71. Auditing procedures are the same as auditing standards.FALSE72. The concept of due care requires auditors to observe the performance, responsibilities andreporting principles.TRUE73. Attestation standards require the practitioner to obtain a sufficient understanding of theclients internal control.FALSE 2-58
  • 59. Chapter 02 - Professional Standards74. The performance principle sets forth the quality criteria for conducting an audit.TRUE75. Auditors of entities registered with the Securities and Exchange Commission are requiredto register with the Public Company Accounting Oversight Board (PCAOB).TRUE76. Control risk is the probability that a material misstatement (error or fraud) could occur andnot be prevented or detected on a timely basis by the entitys external auditors.FALSE77. Evidence that is considered "appropriate" in auditing means that all underlying accountingdata and corroborating information must be absolutely compelling to auditors.FALSE78. Even in the audit of historical cost financial statements, auditors may have to makeinferences about the future.TRUE79. The contents of the auditors report are guided exclusively by the reporting principle ofGAAS.FALSE80. The auditors standard report should always make direct reference to consistency anddisclosure.FALSE 2-59
  • 60. Chapter 02 - Professional Standards81. The auditors standard report should either contain an expression of opinion on thefinancial statements taken as a whole or an assertion to the effect that an opinion cannot beexpressed.TRUE82. Evidence is considered appropriate when it is both valid and relevant.TRUE83. The statement on quality control standards No. 7 notes that the purpose of a system ofquality control is to provide reasonable assurance that the firm and its personnel issue reportsthat are appropriate under the circumstances.TRUEFill in the Blank QuestionsQuestion also found in Study Guide84. The _____________________________ standards are a general set of standards to guideattestation engagements in areas other than audits of financial statements.attestation85. Audits of historical financial statements are guided by a broad set of principles referred toas _______________________ ______________________________________________________ _____________________________.generally accepted auditing standards 2-60
  • 61. Chapter 02 - Professional Standards86. Attestation reporting is different because attestation engagements related to nonfinancialinformation do not require information to be presented in accordance with_____________________________ __________________________________________________________ _____________________________.generally accepted accounting principles87. The AICPAs fundamental principles of generally accepted auditing standards areclassified in three categories: _______________________ principle,_______________________ principle, and the _____________________________ principle.responsibilities, performance, reporting88. A(n) _____________________________ _____________________________ is a list ofauditing procedures that will be performed during the engagement to gather sufficientappropriate evidence.audit plan89. The responsibilities principle of GAAS highlights the importance of complying withethical requirements, including those pertaining to __________________________ and_____________________________.independence, due care90. The three aspects of practical independence are _____________________________independence, _____________________________ independence, and_____________________________ independence.programming, investigative, reporting91. The concept of _____________________________ relates to financial statement usersperceptions of auditors independence.independence in appearance 2-61
  • 62. Chapter 02 - Professional Standards92. _____________________________ ________________________ reflects a level ofperformance that would be exercised by reasonable auditors in similar circumstances.Due care93. Since audit samples are used, audit evidence is considered to be_____________________________, rather than _____________________________.sufficient, absolute94. The auditors report must state whether the financial statements are presented inaccordance with __________________________ __________________________________________________________ _____________________________.generally accepted accounting principles95. Under the reporting principle of GAAS, the auditor expresses an opinion in accordancewith the ___________________ ______________.auditors findings96. Under the reporting principle of GAAS, the report will contain either an expression of_____________________________ regarding the financial statements, taken as a whole, oran assertion to the effect that an opinion cannot be expressed.opinion97. An overall opinion that the financial statements present the financial condition, results ofoperations, and cash flows according to generally accepted accounting principles is a(n)_____________________________ opinion.unqualified98. If a material departure from GAAP is noted, auditors can choose between a(n)__________________________ opinion or a(n) ___________________________ opinion.qualified, adverse 2-62
  • 63. Chapter 02 - Professional Standards99. Auditors indication that no opinion is given is referred to as a(n)_______________________ ___________________________________________disclaimer of opinion100. The _____________________________ paragraph of the auditors report declares thatthe audit was conducted in accordance with generally accepted_________________________________________________________Answer: scope, auditing standards101. A(n) _____________________________ _____________________________ is a studyof an accounting firms quality control policies and procedures, followed by a report on thefirms quality of audit practice in accordance with the system of quality controls.peer review102. The _____________________________ _____________________________ Act of2002 created the Public Company Accounting Oversight Board (PCAOB).Sarbanes-Oxley103. The PCAOB has two primary roles: _____________________________ and_____________________________.standard setting, monitoringEssay Questions 2-63
  • 64. Chapter 02 - Professional Standards104. Distinguish between attestation standards and the fundamental principles of generallyaccepted auditing standards by identifying and describing major differences between the twosets of standards.1. Attestation standards do not attempt to describe one type of engagement (such as a GAASaudit) or identify one type of information on which assurance is provided (such as thefinancial statements).2. In addition to general training and knowledge in the attest (audit) function, attestationstandards require that practitioners have adequate knowledge of the subject matter to whichthe attestation engagement relates. (Because of the wide range of attestation engagements, thisis a requirement that is necessary for attestation engagements but not audit engagements).3. Practitioners can only accept attestation engagements if the subject matter is capable ofbeing assessed against established criteria (since financial statements can always be assessedagainst GAAP, there is no requirement such as this in GAAS).4. Attestation standards do not require auditors to obtain an understanding of the client toassess the risk of material misstatement.5. Since attestation engagements may not depend upon one type of criteria (such as GAAP inan audit), information is evaluated based on "established or stated criteria".6. Since attestation engagements may be conducted on a wide range of information, the use ofthe attestation report may be limited to specified individuals (the use of auditors reports isgenerally available to any interested party).AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: KnowledgeDifficulty: Medium 2-64
  • 65. Chapter 02 - Professional Standards105. Alan Fallon was recently promoted to senior accountant. He was put in charge of theMellow Markets audit because of his experience with other grocery clients. Mellow Marketshas a small, but growing, chain of natural food stores. This is the first year Mellow Marketshas been audited. Because of their growth, Mellow Markets needs additional capital andintend to use their audited financial statements to secure a loan.Alan has been assigned two inexperienced staff assistants for the audit. Because this is hisfirst engagement as a senior, he intends to bring the job in on budget. To save time, heprovided his assistants with a copy of the audit plan for Happy Time Food Stores. He toldthem that this would make things go more quickly. He also told them that he could not spendmuch time with them at the clients place of business, because "my time is billed out at such ahigh rate, well go right over budget." However, he did call them once a day from anotheraudit on which he was working.After beginning their work, the assistants told Alan that the audit plan did not always matchup with what they found at Mellow Markets. Alan responded, "just cross out whatever is notrelevant in the audit plan and dont add anything - it will only make us go over the budget."When Alan came to the client near the end of field Work, one assistant was concerned that noinventory observation was done at the out-of-town locations of Mellow Markets (the auditplan had stipulated that inventory should be observed for in-town stores only). Happy Timehad only one out-of-town location, while three of Mellow Markets five stores were in othercities. Alan told the assistant to get inventory sheets from the client for the other stores andadded "make sure that the inventory balance in the general ledger agrees with the total for allthe inventory sheets." The next day, Alan reviewed all audit documentation and submitted thejob for review by the manager.Required:1. Describe the performance principle of GAAS.2. Do you believe that the Mellow Markets audit complies with these standards? Explain. 2-65
  • 66. Chapter 02 - Professional StandardsAccording to the performance principle, to obtain reasonable assurance, which is high but notan absolute level of assurance, the auditor:1. Plans the work and properly supervises any assistants.2. Determines and applies appropriate materiality level or levels throughout the audit.3. Identifies and assesses risks of material misstatement, whether due to fraud or error, basedon an understanding of the entity and its environment, including the entitys internal control4. Obtains sufficient appropriate audit evidence about whether material misstatements exist,through designing and implementing appropriate responses to the assessed risks.The Mellow Markets audit does not comply with these standards. With respect to planning,the failure to prepare an appropriate audit plan and lack of time and attention theinexperienced staff received from Alan violate the performance principle. In addition, there isno indication that any steps were taken to either understand the clients business or its internalcontrol. Finally, these deficiencies suggest that the appropriate procedures were not performedto collect sufficient appropriate evidence. Further, the lack of a relevant plan to observeinventory in other cities and Alans decision to limit inventory procedures to agreeing theinventory sheets and the general ledger inventory balance demonstrates the failure to gathersufficient appropriate evidence and represents an overall violation of the performanceprinciple.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplicationDifficulty: HardMatching QuestionsQuestion also Found in Study Guide 2-66
  • 67. Chapter 02 - Professional Standards106. Using I (introductory), S (scope), O (opinion), A (additional), or N (none), indicate theparagraph in which the following statements or topics would be included in the auditorsreport. The titles of the financial statements examined by the1. none auditors. 3 A description of any scope limitation(s) encountered during2. none the audit. 4 A statement that auditors were independent with respect to3. introductory the entity. 1 The auditors conclusion with respect to the fairness of the4. additional entitys financial statements. 5 A statement that an audit was conducted in accordance with5. opinion generally accepted auditing standards. 8 A statement that the entitys management is responsible for6. opinion the fairness of the financial statements. 3 A description of an audit, which includes examining7. introductory evidence in support of the financial statements. 88. scope Reference to generally accepted accounting principles. 5 A description of any specific departures from GAAP noted9. scope during the audit that were material. 4 A statement that the financial statements were consistently10. additional prepared compared to those of prior period(s). 1AACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBlooms: KnowledgeDifficulty: Hard 2-67

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