Chapter 02 - The Financial Statement Auditing Environment

Chapter 02 The Financial Statement Auditing Environment

True / False Questions

1. A series of business and related auditing failures led to the passage of the Sarbanes- !le" Act #2002$. True False

2. The primar" audit conte!t %ith %hich an auditor is concerned is the client&s industr" or business. True False

'. The audit committee generall" includes senior e!ecutives of the organi(ation. True False

). A financial statement audit is generall" organi(ed based on the five basic business processes or c"cles. True False

*. ne of the five basic business processes is the %arehousing c"cle. True False

+. The ,AAS- and the AS- collaborated on a replacement for the 10 .AAS standards %hich include principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. True False

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Chapter 02 - The Financial Statement Auditing Environment

/. 0CA - auditing standards must be follo%ed on all financial statement audits performed in the 1.S. True False

2. A financial statement audit must be conducted based on .AA0. True False

3. .enerall"4 the financial statements of 1.S. companies must be prepared based on .AA0. True False

10. 0CA - auditing standards must be follo%ed on all audits of public companies& financial statements. True False

Multiple Choice Questions

11. The Audit Committee consists of A. 5embers of management. -. A subcommittee of the A,C0A %ho establish the SAS. C. 5embers of the -oard of 6irectors. 6. Appointed government overseers.

12. 7hat organi(ation is responsible for setting auditing standards for audits of publicl"traded companies in the 1.S.8 A. A,C0A. -. FAS-. C. .AS-. 6. 0CA -.

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Chapter 02 - The Financial Statement Auditing Environment

1'. The 0ublic Compan" Accounting versight -oard&s role is to A. Conduct the final revie% of auditors& %or9 before the auditor&s opinion is issued. -. versee the auditors of public companies in order to protect the interests of investors. C. Conduct audits of governmental entities. 6. Sanction auditors %ho fail to follo% .AAS.

1). The authoritative bod" designed to promulgate standards concerning an accountant&s association %ith audited financial statements of an entit" that is re:uired to file financial statements %ith the SEC is the A. Financial Accounting Standards -oard. -. .eneral Accounting ffice. C. 0ublic Compan" Accounting versight -oard. 6. Auditing Standards -oard.

1*. The auditor must be independent of the audit client unless A. The lac9 of independence does not influence his or her professional ;udgment. -. -oth parties agree that the independence issue is not a problem. C. The lac9 of independence is insignificant. 6. <one of the above=the auditor cannot lac9 independence.

1+. 7hich of the follo%ing describes the 0CA - generall" accepted auditing standard re:uiring a critical revie% of the %or9 done and the ;udgment e!ercised b" those assisting in an audit at ever" level of supervision8 A. 0roficienc". -. Audit ris9. C. ,nspection. 6. 6ue care.

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Chapter 02 - The Financial Statement Auditing Environment

1/. 7hich of the follo%ing best describes the general character of the three 0CA - generall" accepted auditing standards that are classified as standards of field%or98 A. The competence4 independence4 and professional care of persons performing the audit. -. Criteria for the content of the auditor&s report on financial statements and related footnote disclosures. C. The criteria of audit planning and evidence-gathering. 6. The need to maintain independence in mental attitude in all matters relating to the audit.

12. The first 0CA - general standard re:uires that the e!amination of financial statements is to be performed b" a person or persons having ade:uate technical training and A. ,ndependence %ith respect to the financial statements and supplementar" disclosures. -. E!ercising professional care as ;udged b" peer revie%ers. C. 0roficienc" as an auditor %hich li9el" has been ac:uired from previous e!perience. 6. b;ectivit" as an auditor as verified b" proper supervision.

13. The first 0CA - standard of reporting re:uires that4 >the report shall state %hether the financial statements are presented in accordance %ith generall" accepted accounting principles.> This passage re:uires A. A statement of fact b" the auditor. -. An opinion b" the auditor. C. An implied measure of fairness. 6. An ob;ective measure of compliance.

20. -ecause of the ris9 of material misstatement4 an audit of financial statements in accordance %ith generall" accepted auditing standards should be planned and performed %ith an attitude of A. b;ective c"nicism. -. ,ndependent differentialism. C. 0rofessional s9epticism. 6. ,mpartial conservatism.

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Chapter 02 - The Financial Statement Auditing Environment

21. The accurac" of information included in footnotes accompan"ing the audited financial statements issued b" a compan" %hose shares are traded on a stoc9 e!change is the primar" responsibilit" of A. The stoc9 e!change officials. -. The independent auditor. C. The compan"&s management. 6. The Securities and E!change Commission.

22. The primar" responsibilit" for the ade:uac" of disclosures in the financial statements of a publicl" held compan" rests %ith the A. 0artner assigned to the audit engagement. -. 5anagement of the compan". C. Auditor in charge of the field%or9. 6. Securities and E!change Commission.

2'. The largest public accounting firms t"picall" are structured as A. Subchapter S corporations. -. 0rofessional corporations. C. ?imited liabilit" partnerships. 6. ?imited liabilit" corporations.

2). T"picall"4 an e!ternal auditor first gets supervisor" e!perience at %hat level of authorit"8 A. Associate. -. Senior. C. 5anager. 6. 0artner.

2*. An >in-charge> auditor t"picall" holds the ran9 of A. Associate. -. Senior. C. 5anager. 6. 0artner.

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Chapter 02 - The Financial Statement Auditing Environment

2+. 7hich of the follo%ing best describes the concept of ris9 assessment on %hich auditors can provide independent assurance8 A. The ris9 that financial statements are misstated because of fraud. -. The ris9 that financial statements are misstated because of error or fraud. C. 7hether management has s"stems in place to evaluate and effectivel" manage the entit"&s business ris9s. 6. 6eveloping client acceptance and continuance practices that minimi(e the li9elihood of la%suits against the auditor.

2/. Forensic audits include all of the follo%ing e!cept A. Criminal investigations. -. 5anufacturers& assertions about product :ualit". C. Emplo"ee fraud. 6. 5anagement fraud.

22. A t"pical ob;ective of an operational audit is for the auditor to A. 6etermine %hether the financial statements present fairl" the entit"&s operations. -. Evaluate the feasibilit" of attaining the entit"&s operational ob;ectives. C. 5a9e recommendations for improving performance. 6. @eport on the entit"&s relative success in attaining profit ma!imi(ation.

23. .overnmental auditing often e!tends be"ond e!aminations leading to the e!pression of an opinion on the fairness of financial presentation and includes audits of efficienc"4 effectiveness4 and A. 5onetar" stimulus. -. Evaluation. C. Accurac". 6. Compliance.

'0. E!ternal auditors are referred to as >e!ternal> because A. The" report to users outside of the audited entit". -. The" are paid b" parties outside of the audited entit". C. The" are not emplo"ees of the entit" being audited. 6. Their offices are not at the entit"&s place of business.

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Chapter 02 - The Financial Statement Auditing Environment

'1. 7hich is not an attribute of an e!ternal auditor8 A. ,ndependence. -. Client advocac". C. b;ectivit". 6. Concern for the public interest.

'2. 7hat is the general character of the %or9 conducted in performing a forensic audit for a compan"8 A. 0roviding assurance that the financial statements are not materiall" misstated. -. 6etecting or deterring fraudulent activit". C. ffering an opinion on the reliabilit" of the specific assertions made b" management. 6. ,dentif"ing the causes of an entit"&s financial difficulties.

''. 7hich of the follo%ing is < T a re:uirement of the Sarbanes- !le" Act8 A. Audit firms cannot provide most t"pes of nonaudit services to their public compan" audit clients. -. Audit firms are re:uired to rotate audit partners off audit engagements ever" five "ears for public compan" audits. C. Firms that audit public companies are sub;ect to inspection b" the 0CA -. 6. A certain number of hours4 %hich is based on the si(e of the compan" being audited4 must be spent on each audit engagement.

'). A C0A is most li9el" to refer to one or more of the three 0CA - general auditing standards in determining A. The nature of the C0A&s report :ualification. -. The scope of the C0A&s auditing procedures. C. @e:uirements for the revie% of the entit" and its environment. 6. 7hether the C0A should underta9e an audit engagement.

'*. 7ho bears ultimate responsibilit" for the financial statements8 A. 5anagement of the organi(ation4 e:uall" %ith the e!ternal auditor that audits the statements. -. 5anagement and the shareholders of the organi(ation. C. The e!ternal auditor that audits the statements. 6. 5anagement of the organi(ation.

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Chapter 02 - The Financial Statement Auditing Environment

'+. The three 0CA - general standards are concerned %ith A. Ade:uate training and proficienc" of the auditor4 proper planning and supervision4 and due professional care. -. Ade:uate training and independence. C. 6ue professional care. 6. -oth b and c.

'/. The first 0CA - general standard recogni(es that regardless of ho% capable an individual ma" be in other fields4 the individual cannot meet the re:uirements of the auditing standards %ithout the proper A. -usiness and finance courses. -. Aualit" control and peer revie%. C. Education and e!perience in auditing. 6. Supervision and revie% s9ills.

'2. The main difference bet%een SAS and A1 is A. The" are the same e!cept that SAS are organi(ed chronologicall" and the A1 are organi(ed b" topical area. -. SAS are issued b" the AS- and A1 are issued b" the 0CA -. C. SAS are issued b" the 0CA - and A1 are issued b" the AS-. 6. SAS define minimum standards of performance for auditors %hile A1 define financial accounting principles that must be follo%ed according to .AA0.

'3. The A,C0A&s Statements on Auditing Standards can be described as A. 0roviding ver" specific guidance about the specific activities an auditor must perform on each engagement. -. Similar to financial accounting standards in that the" are developed b" the government. C. 6efining the minimum standards of performance for an auditor. 6. 0roviding assurance that an auditor %ill not issue an incorrect opinion.

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Chapter 02 - The Financial Statement Auditing Environment

)0. 6ue professional care re:uires auditors to A. btain independent4 third part" #non-client$ documentation as evidence for all information presented in the financial statements. -. E!ercise professional s9epticism during the audit. C. 6isregard an" evidence generated b" the client during the audit. 6. Find ever" error contained in the financial statements prepared b" management.

)1. The ob;ective of the second 0CA - Standard of @eporting is to provide assurance that A. There are no variations in the format and presentation of financial statements. -. Substantiall" different transactions and events are not accounted for on an identical basis. C. The auditor is consulted before material changes are made in the application of accounting principles. 6. The comparabilit" of financial statements bet%een periods is not materiall" affected b" changes in accounting principles that are not disclosed.

)2. An internal auditor is li9el" to be more concerned %ith BBBBBBBBBBBBBBBBB than the e!ternal auditor. A. ,nternal administrative procedures. -. Cost accounting procedures. C. The efficienc" of operations. 6. ,nternal control.

)'. 7hich of the follo%ing is not included in the broad categor" of assurance services8 A. perational audit. -. @eporting on internal control. C. Accounting or revie% services. 6. Evaluation of the client&s ris9 management frame%or9.

)). 7hich of the follo%ing is not e!plicitl" a part of the ,,A&s definition of internal auditing8 A. ,nternal auditing is an ob;ective assurance activit". -. ,nternal auditing is a consulting activit". C. ,nternal auditing should help an organi(ation accomplish its ob;ectives. 6. ,nternal auditors should help e!ternal auditors complete the annual financial statement audit.

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Chapter 02 - The Financial Statement Auditing Environment

)*. 7hich of the follo%ing statements regarding the 0CA - is incorrect8 A. ,t is a public-sector4 nonprofit corporation. -. ,t is overseen b" the SEC. C. ,t sets standards for public compan" audits. 6. ,t has delegated all of its standard-setting authorit" to the A,C0A.

)+. 6ue professional care re:uires A. Auditors to plan and perform their duties %ith the s9ill and care that is commonl" e!pected of accounting professionals. -. The e!amination of all available corroborating evidence. C. The e!ercise of error-free ;udgment. 6. A stud" and revie% of internal controls that includes tests of controls.

)/. 7hich of the follo%ing best describes the role of corporate governance8 A. 5anagement decides %hich accounting principles are the most appropriate. -. Shareholders vote to decide %ho should be members of the board of directors. C. Colding the management team accountable to shareholders and other constituents for the utili(ation of the entit"&s resources. 6. 5anagement often is compensated based on the compan"&s profitabilit".

)2. The four 0CA - standards of reporting are concerned %ith all of the follo%ing e!cept A. The presentation of the financial statements based on .AAS. -. The presentation of the financial statements based on .AA0. C. 7hether principles are consistentl" applied4 %hether all informative disclosures have been made and the degree of responsibilit" the auditor is ta9ing. 6. The degree of responsibilit" the auditor is ta9ing.

)3. 7hich of the follo%ing best describes %hat is meant b" generall" accepted auditing standards8 A. Audit assertions generall" determined on audit engagements. -. Acts to be performed b" the auditor. C. Standards of :ualit" for the auditor&s performance. 6. 0rocedures to be used to gather evidence to support financial statements.

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Chapter 02 - The Financial Statement Auditing Environment

*0. The fourth 0CA - standard of reporting re:uires an auditor to render a report %henever an auditor&s name is associated %ith financial statements. The overall purpose of the fourth standard of reporting is to re:uire that reports A. State that the e!amination of financial statements has been conducted in accordance %ith generall" accepted auditing standards. -. ,ndicate the character of the auditor&s e!amination and the degree of responsibilit" assumed b" the auditor. C. ,mpl" that the auditor is independent in fact as %ell as in appearance %ith respect to the financial statements under e!amination. 6. E!press %hether the accounting principles used in preparing the financial statements have been applied consistentl" in the period under e!amination.

*1. The three 0CA - standards of field%or9 are concerned %ith A. 0lanning and supervision and understanding the client&s internal control s"stem. -. Choosing evidence %ith due professional care. C. Ade:uate training to understand the client&s internal controls s"stem. 6. Ensuring consistenc" in financial statements for periods presented.

*2. The fourth 0CA - reporting standard re:uires the auditor&s report to contain either an e!pression of opinion regarding the financial statements ta9en as a %hole or an assertion to the effect that an opinion cannot be e!pressed. The ob;ective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others. -. An auditor from e!pressing different opinions on each of the basic financial statements. C. 5anagement from reducing its final responsibilit" for the basic financial statements. 6. 5isinterpretations regarding the degree of responsibilit" the auditor is assuming.

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Chapter 02 - The Financial Statement Auditing Environment

Short Answer Questions

*'. The ,AAS- and the AS- have collaborated on the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. These principles are grouped into four categories. 7hat are the four categories8

*). The principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards are grouped into four categories. The second categor" is that of >personal responsibilit" of the auditor.> .enerall" e!plain %hat is intended b" this principle.

**. Dou are the o%ner of a small grocer" store4 Corner 5ar9etplace. E!plain the five process categories and ho% the" appl" to "our business.

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Chapter 02 - The Financial Statement Auditing Environment

*+. 6efine corporate governance4 the board of directors4 and the audit committee and e!plain ho% the" relate to each other.

*/. 6escribe the organi(ations involved in standard setting for auditors in the 1nited States and %hat their respective roles are in setting current auditing standards for companies in the 1nited States.

*2. 7hat are the three 0CA - general auditing standards found %ithin the 10 .AAS #< T the three main categories of .AAS$ and %h" is each important8

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Chapter 02 - The Financial Statement Auditing Environment

*3. Eane .oodperson performed an audit on the Auagmire Corporation and issued an un:ualified opinion. Eane performed the audit %ith due professional care and in accordance %ith generall" accepted auditing standards. T%o months after the report is issued4 Eane discovers on the ne%s that the CE of Auagmire4 Eohnn" -est4 had been stealing small amounts of inventor". The amount4 ho%ever4 is immaterial compared to the overall inventor" of the corporation. Eane soon receives a call from Auagmire&s CF 4 5ar9 -eastl". 5ar9 %ants Eane to refund her audit fees. 5ar9 thin9s Eane did not properl" perform the audit4 as she did not discover this fraud. Further4 he feels that no% Auagmire&s financial statements are not fairl" stated because of Eane. Co% should Eane respond to this claim8

+0. 5i9e has ;ust graduated from State 1niversit" %ith a bachelor&s degree in accounting. Ce %ould li9e to pursue a career in auditing. 7hat options does 5i9e have8 6escribe three auditing career options4 including a description of the organi(ation 5i9e %ould %or9 for.

+1. 7ith respect to an entit"&s financial statements4 describe both the responsibilit" of management and of the auditor.

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Chapter 02 - The Financial Statement Auditing Environment

+2. 7hat auditing standards are used to conduct an audit for a privatel"-held corporation8 7hat auditing standards are used to conduct an audit for a publicl"-traded corporation8 7hat organi(ation is responsible for setting each of these sets of standards8

+'. There are several t"pes of audit services that are provided b" auditors. ,dentif" and define three of these t"pes of audits.

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Chapter 02 - The Financial Statement Auditing Environment

Chapter 02 The Financial Statement Auditing Environment Ans%er Fe"

True / False Questions

1. A series of business and related auditing failures led to the passage of the Sarbanes- !le" Act #2002$. TR E

AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$' (n)erstan) t*e significant c*anges t*at *a#e ta+en ,lace in t*e au)iting ,rofession o#er t*e ,ast )eca)e.o,ic: A Deca)e of C*allenge an) C*ange for Financial Statement Au)itors

2. The primar" audit conte!t %ith %hich an auditor is concerned is the client&s industr" or business. TR E

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$/ Recogni0e t*at au)iting is s*a,e) by t*e client1s business2 in)ustry2 an) economic en#ironment.o,ic: .*e Conte3t of Financial Statement Au)iting

'. The audit committee generall" includes senior e!ecutives of the organi(ation. FA!SE

AACSB: Communication AICPA BB: In)ustry AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity.o,ic: A Mo)el of Business

2-1+

Chapter 02 - The Financial Statement Auditing Environment

). A financial statement audit is generall" organi(ed based on the five basic business processes or c"cles. TR E

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$5 Be familiar 6it* a fi#e&com,onent mo)el of business ,rocesses.o,ic: A Mo)el of Business Process: Fi#e Com,onents

*. ne of the five basic business processes is the %arehousing c"cle. FA!SE

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$5 Be familiar 6it* a fi#e&com,onent mo)el of business ,rocesses.o,ic: A Mo)el of Business Process: Fi#e Com,onents

+. The ,AAS- and the AS- collaborated on a replacement for the 10 .AAS standards %hich include principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. TR E

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

2-1/

Chapter 02 - The Financial Statement Auditing Environment

/. 0CA - auditing standards must be follo%ed on all financial statement audits performed in the 1.S. FA!SE

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

2. A financial statement audit must be conducted based on .AA0. FA!SE

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

3. .enerall"4 the financial statements of 1.S. companies must be prepared based on .AA0. TR E

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

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Chapter 02 - The Financial Statement Auditing Environment

10. 0CA - auditing standards must be follo%ed on all audits of public companies& financial statements. TR E

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

Multiple Choice Questions

11. The Audit Committee consists of A. 5embers of management. -. A subcommittee of the A,C0A %ho establish the SAS. C" 5embers of the -oard of 6irectors. 6. Appointed government overseers.

AACSB: Analytic AICPA BB: Critical .*in+ing AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity.o,ic: A Mo)el of Business

12. 7hat organi(ation is responsible for setting auditing standards for audits of publicl"traded companies in the 1.S.8 A. A,C0A. -. FAS-. C. .AS-. #" 0CA -.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

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Chapter 02 - The Financial Statement Auditing Environment

1'. The 0ublic Compan" Accounting versight -oard&s role is to A. Conduct the final revie% of auditors& %or9 before the auditor&s opinion is issued. $" versee the auditors of public companies in order to protect the interests of investors. C. Conduct audits of governmental entities. 6. Sanction auditors %ho fail to follo% .AAS.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

1). The authoritative bod" designed to promulgate standards concerning an accountant&s association %ith audited financial statements of an entit" that is re:uired to file financial statements %ith the SEC is the A. Financial Accounting Standards -oard. -. .eneral Accounting ffice. C" 0ublic Compan" Accounting versight -oard. 6. Auditing Standards -oard.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

1*. The auditor must be independent of the audit client unless A. The lac9 of independence does not influence his or her professional ;udgment. -. -oth parties agree that the independence issue is not a problem. C. The lac9 of independence is insignificant. #" <one of the above=the auditor cannot lac9 independence.

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: A,,ly Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

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Chapter 02 - The Financial Statement Auditing Environment

1+. 7hich of the follo%ing describes the 0CA - generall" accepted auditing standard re:uiring a critical revie% of the %or9 done and the ;udgment e!ercised b" those assisting in an audit at ever" level of supervision8 A. 0roficienc". -. Audit ris9. C. ,nspection. #" 6ue care.

AACSB: Analytic AICPA BB: Resource Management AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

1/. 7hich of the follo%ing best describes the general character of the three 0CA - generall" accepted auditing standards that are classified as standards of field%or98 A. The competence4 independence4 and professional care of persons performing the audit. -. Criteria for the content of the auditor&s report on financial statements and related footnote disclosures. C" The criteria of audit planning and evidence-gathering. 6. The need to maintain independence in mental attitude in all matters relating to the audit.

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 Learning !b"ecti#e: $%&19 (n)erstan) t*at au)iting is a ,rofession t*at ,laces a ,remium on et*ical be*a#ior an) t*at is go#erne) by a Co)e of Professional Con)uct.o,ic: Au)iting Stan)ar)s .o,ic: t*ics: In)e,en)ence: an) t*e Co)e of Professional Con)uct

2-21

Chapter 02 - The Financial Statement Auditing Environment

12. The first 0CA - general standard re:uires that the e!amination of financial statements is to be performed b" a person or persons having ade:uate technical training and A. ,ndependence %ith respect to the financial statements and supplementar" disclosures. -. E!ercising professional care as ;udged b" peer revie%ers. C" 0roficienc" as an auditor %hich li9el" has been ac:uired from previous e!perience. 6. b;ectivit" as an auditor as verified b" proper supervision.

AACSB: Analytic AICPA BB: Resource Management AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 Learning !b"ecti#e: $%&19 (n)erstan) t*at au)iting is a ,rofession t*at ,laces a ,remium on et*ical be*a#ior an) t*at is go#erne) by a Co)e of Professional Con)uct.o,ic: Au)iting Stan)ar)s .o,ic: t*ics: In)e,en)ence: an) t*e Co)e of Professional Con)uct

13. The first 0CA - standard of reporting re:uires that4 >the report shall state %hether the financial statements are presented in accordance %ith generall" accepted accounting principles.> This passage re:uires A. A statement of fact b" the auditor. $" An opinion b" the auditor. C. An implied measure of fairness. 6. An ob;ective measure of compliance.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

2-22

Chapter 02 - The Financial Statement Auditing Environment

20. -ecause of the ris9 of material misstatement4 an audit of financial statements in accordance %ith generall" accepted auditing standards should be planned and performed %ith an attitude of A. b;ective c"nicism. -. ,ndependent differentialism. C" 0rofessional s9epticism. 6. ,mpartial conservatism.

AACSB: Analytic AICPA BB: Legal AICPA FN: Ris+ Analysis Blooms: A,,ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal actsLearning !b"ecti#e: $%&19 (n)erstan) t*at au)iting is a ,rofession t*at ,laces a ,remium on et*ical be*a#ior an) t*at is go#erne) by a Co)e of Professional Con)uct.o,ic: t*ics: In)e,en)ence: an) t*e Co)e of Professional Con)uct .o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

21. The accurac" of information included in footnotes accompan"ing the audited financial statements issued b" a compan" %hose shares are traded on a stoc9 e!change is the primar" responsibilit" of A. The stoc9 e!change officials. -. The independent auditor. C" The compan"&s management. 6. The Securities and E!change Commission.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal acts.o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

2-2'

Chapter 02 - The Financial Statement Auditing Environment

22. The primar" responsibilit" for the ade:uac" of disclosures in the financial statements of a publicl" held compan" rests %ith the A. 0artner assigned to the audit engagement. $" 5anagement of the compan". C. Auditor in charge of the field%or9. 6. Securities and E!change Commission.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal acts.o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

2'. The largest public accounting firms t"picall" are structured as A. Subchapter S corporations. -. 0rofessional corporations. C" ?imited liabilit" partnerships. 6. ?imited liabilit" corporations.

AACSB: Communication AICPA BB: Legal AICPA FN: Researc* Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$9 (n)erstan) t*e organi0ation an) com,osition of ,ublic accounting firms.o,ic: Public Accounting Firms

2). T"picall"4 an e!ternal auditor first gets supervisor" e!perience at %hat level of authorit"8 A. Associate. $" Senior. C. 5anager. 6. 0artner.

AACSB: Communication AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$9 (n)erstan) t*e organi0ation an) com,osition of ,ublic accounting firms.o,ic: Public Accounting Firms

2-2)

Chapter 02 - The Financial Statement Auditing Environment

2*. An >in-charge> auditor t"picall" holds the ran9 of A. Associate. $" Senior. C. 5anager. 6. 0artner.

AACSB: Communication AICPA BB: Resource Management AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$9 (n)erstan) t*e organi0ation an) com,osition of ,ublic accounting firms.o,ic: Public Accounting Firms

2+. 7hich of the follo%ing best describes the concept of ris9 assessment on %hich auditors can provide independent assurance8 A. The ris9 that financial statements are misstated because of fraud. -. The ris9 that financial statements are misstated because of error or fraud. C" 7hether management has s"stems in place to evaluate and effectivel" manage the entit"&s business ris9s. 6. 6eveloping client acceptance and continuance practices that minimi(e the li9elihood of la%suits against the auditor.

AACSB: Analytic AICPA BB: Critical .*in+ing AICPA FN: Ris+ Analysis Blooms: A,,ly Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

2/. Forensic audits include all of the follo%ing e!cept A. Criminal investigations. $" 5anufacturers& assertions about product :ualit". C. Emplo"ee fraud. 6. 5anagement fraud.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging .ec*nology Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

2-2*

Chapter 02 - The Financial Statement Auditing Environment

22. A t"pical ob;ective of an operational audit is for the auditor to A. 6etermine %hether the financial statements present fairl" the entit"&s operations. -. Evaluate the feasibilit" of attaining the entit"&s operational ob;ectives. C" 5a9e recommendations for improving performance. 6. @eport on the entit"&s relative success in attaining profit ma!imi(ation.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging .ec*nology Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

23. .overnmental auditing often e!tends be"ond e!aminations leading to the e!pression of an opinion on the fairness of financial presentation and includes audits of efficienc"4 effectiveness4 and A. 5onetar" stimulus. -. Evaluation. C. Accurac". #" Compliance.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging .ec*nology Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

'0. E!ternal auditors are referred to as >e!ternal> because A. The" report to users outside of the audited entit". -. The" are paid b" parties outside of the audited entit". C" The" are not emplo"ees of the entit" being audited. 6. Their offices are not at the entit"&s place of business.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty,es of au)itors.o,ic: .y,es of Au)itors an) Ser#ices

2-2+

Chapter 02 - The Financial Statement Auditing Environment

'1. 7hich is not an attribute of an e!ternal auditor8 A. ,ndependence. $" Client advocac". C. b;ectivit". 6. Concern for the public interest.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty,es of au)itors.o,ic: .y,es of Au)itors an) Ser#ices

'2. 7hat is the general character of the %or9 conducted in performing a forensic audit for a compan"8 A. 0roviding assurance that the financial statements are not materiall" misstated. $" 6etecting or deterring fraudulent activit". C. ffering an opinion on the reliabilit" of the specific assertions made b" management. 6. ,dentif"ing the causes of an entit"&s financial difficulties.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Le#eraging .ec*nology Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

2-2/

Chapter 02 - The Financial Statement Auditing Environment

''. 7hich of the follo%ing is < T a re:uirement of the Sarbanes- !le" Act8 A. Audit firms cannot provide most t"pes of nonaudit services to their public compan" audit clients. -. Audit firms are re:uired to rotate audit partners off audit engagements ever" five "ears for public compan" audits. C. Firms that audit public companies are sub;ect to inspection b" the 0CA -. #" A certain number of hours4 %hich is based on the si(e of the compan" being audited4 must be spent on each audit engagement.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$' (n)erstan) t*e significant c*anges t*at *a#e ta+en ,lace in t*e au)iting ,rofession o#er t*e ,ast )eca)eLearning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: A Deca)e of C*allenge an) C*ange for Financial Statement Au)itors .o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

'). A C0A is most li9el" to refer to one or more of the three 0CA - general auditing standards in determining A. The nature of the C0A&s report :ualification. -. The scope of the C0A&s auditing procedures. C. @e:uirements for the revie% of the entit" and its environment. #" 7hether the C0A should underta9e an audit engagement.

AACSB: Communication AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: A,,ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$/ Recogni0e t*at au)iting is s*a,e) by t*e client1s business2 in)ustry2 an) economic en#ironmentLearning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s .o,ic: .*e Conte3t of Financial Statement Au)iting

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Chapter 02 - The Financial Statement Auditing Environment

'*. 7ho bears ultimate responsibilit" for the financial statements8 A. 5anagement of the organi(ation4 e:uall" %ith the e!ternal auditor that audits the statements. -. 5anagement and the shareholders of the organi(ation. C. The e!ternal auditor that audits the statements. #" 5anagement of the organi(ation.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal acts.o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

'+. The three 0CA - general standards are concerned %ith A. Ade:uate training and proficienc" of the auditor4 proper planning and supervision4 and due professional care. -. Ade:uate training and independence. C. 6ue professional care. #" -oth b and c.

AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

2-23

Chapter 02 - The Financial Statement Auditing Environment

'/. The first 0CA - general standard recogni(es that regardless of ho% capable an individual ma" be in other fields4 the individual cannot meet the re:uirements of the auditing standards %ithout the proper A. -usiness and finance courses. -. Aualit" control and peer revie%. C" Education and e!perience in auditing. 6. Supervision and revie% s9ills.

AACSB: Di#ersity AICPA BB: Mar+eting AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

'2. The main difference bet%een SAS and A1 is A" The" are the same e!cept that SAS are organi(ed chronologicall" and the A1 are organi(ed b" topical area. -. SAS are issued b" the AS- and A1 are issued b" the 0CA -. C. SAS are issued b" the 0CA - and A1 are issued b" the AS-. 6. SAS define minimum standards of performance for auditors %hile A1 define financial accounting principles that must be follo%ed according to .AA0.

AACSB: Communication AICPA BB: Resource Management AICPA FN: Decision Ma+ing Blooms: Analy0e Difficulty: % Me)ium Learning !b"ecti#e: $%&1% (n)erstan) t*e nature of t*e Statements on Au)iting Stan)ar)s.o,ic: Au)iting Stan)ar)s an) t*e A( Co)ification

2-'0

Chapter 02 - The Financial Statement Auditing Environment

'3. The A,C0A&s Statements on Auditing Standards can be described as A. 0roviding ver" specific guidance about the specific activities an auditor must perform on each engagement. -. Similar to financial accounting standards in that the" are developed b" the government. C" 6efining the minimum standards of performance for an auditor. 6. 0roviding assurance that an auditor %ill not issue an incorrect opinion.

AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1% (n)erstan) t*e nature of t*e Statements on Au)iting Stan)ar)s.o,ic: Au)iting Stan)ar)s an) t*e A( Co)ification

)0. 6ue professional care re:uires auditors to A. btain independent4 third part" #non-client$ documentation as evidence for all information presented in the financial statements. $" E!ercise professional s9epticism during the audit. C. 6isregard an" evidence generated b" the client during the audit. 6. Find ever" error contained in the financial statements prepared b" management.

AACSB: Communication AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal acts.o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

2-'1

Chapter 02 - The Financial Statement Auditing Environment

)1. The ob;ective of the second 0CA - Standard of @eporting is to provide assurance that A. There are no variations in the format and presentation of financial statements. -. Substantiall" different transactions and events are not accounted for on an identical basis. C. The auditor is consulted before material changes are made in the application of accounting principles. #" The comparabilit" of financial statements bet%een periods is not materiall" affected b" changes in accounting principles that are not disclosed.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

)2. An internal auditor is li9el" to be more concerned %ith BBBBBBBBBBBBBBBBB than the e!ternal auditor. A. ,nternal administrative procedures. -. Cost accounting procedures. C" The efficienc" of operations. 6. ,nternal control.

AACSB: Analytic AICPA BB: In)ustry AICPA FN: Ris+ Analysis Blooms: A,,ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty,es of au)itorsLearning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

2-'2

Chapter 02 - The Financial Statement Auditing Environment

)'. 7hich of the follo%ing is not included in the broad categor" of assurance services8 A. perational audit. -. @eporting on internal control. C" Accounting or revie% services. 6. Evaluation of the client&s ris9 management frame%or9.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Re,orting Blooms: A,,ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

)). 7hich of the follo%ing is not e!plicitl" a part of the ,,A&s definition of internal auditing8 A. ,nternal auditing is an ob;ective assurance activit". -. ,nternal auditing is a consulting activit". C. ,nternal auditing should help an organi(ation accomplish its ob;ectives. #" ,nternal auditors should help e!ternal auditors complete the annual financial statement audit.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Researc* Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty,es of au)itors.o,ic: .y,es of Au)itors an) Ser#ices

)*. 7hich of the follo%ing statements regarding the 0CA - is incorrect8 A. ,t is a public-sector4 nonprofit corporation. -. ,t is overseen b" the SEC. C. ,t sets standards for public compan" audits. #" ,t has delegated all of its standard-setting authorit" to the A,C0A.

AACSB: Communication AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironment.o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

2-''

Chapter 02 - The Financial Statement Auditing Environment

)+. 6ue professional care re:uires A" Auditors to plan and perform their duties %ith the s9ill and care that is commonl" e!pected of accounting professionals. -. The e!amination of all available corroborating evidence. C. The e!ercise of error-free ;udgment. 6. A stud" and revie% of internal controls that includes tests of controls.

AACSB: t*ics AICPA BB: Critical .*in+ing AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&$/ Recogni0e t*at au)iting is s*a,e) by t*e client1s business2 in)ustry2 an) economic en#ironmentLearning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s .o,ic: .*e Conte3t of Financial Statement Au)iting

)/. 7hich of the follo%ing best describes the role of corporate governance8 A. 5anagement decides %hich accounting principles are the most appropriate. -. Shareholders vote to decide %ho should be members of the board of directors. C" Colding the management team accountable to shareholders and other constituents for the utili(ation of the entit"&s resources. 6. 5anagement often is compensated based on the compan"&s profitabilit".

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity.o,ic: A Mo)el of Business

2-')

Chapter 02 - The Financial Statement Auditing Environment

)2. The four 0CA - standards of reporting are concerned %ith all of the follo%ing e!cept A" The presentation of the financial statements based on .AAS. -. The presentation of the financial statements based on .AA0. C. 7hether principles are consistentl" applied4 %hether all informative disclosures have been made and the degree of responsibilit" the auditor is ta9ing. 6. The degree of responsibilit" the auditor is ta9ing.

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

)3. 7hich of the follo%ing best describes %hat is meant b" generall" accepted auditing standards8 A. Audit assertions generall" determined on audit engagements. -. Acts to be performed b" the auditor. C" Standards of :ualit" for the auditor&s performance. 6. 0rocedures to be used to gather evidence to support financial statements.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

2-'*

Chapter 02 - The Financial Statement Auditing Environment

*0. The fourth 0CA - standard of reporting re:uires an auditor to render a report %henever an auditor&s name is associated %ith financial statements. The overall purpose of the fourth standard of reporting is to re:uire that reports A. State that the e!amination of financial statements has been conducted in accordance %ith generall" accepted auditing standards. $" ,ndicate the character of the auditor&s e!amination and the degree of responsibilit" assumed b" the auditor. C. ,mpl" that the auditor is independent in fact as %ell as in appearance %ith respect to the financial statements under e!amination. 6. E!press %hether the accounting principles used in preparing the financial statements have been applied consistentl" in the period under e!amination.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

*1. The three 0CA - standards of field%or9 are concerned %ith A" 0lanning and supervision and understanding the client&s internal control s"stem. -. Choosing evidence %ith due professional care. C. Ade:uate training to understand the client&s internal controls s"stem. 6. Ensuring consistenc" in financial statements for periods presented.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

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Chapter 02 - The Financial Statement Auditing Environment

*2. The fourth 0CA - reporting standard re:uires the auditor&s report to contain either an e!pression of opinion regarding the financial statements ta9en as a %hole or an assertion to the effect that an opinion cannot be e!pressed. The ob;ective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others. -. An auditor from e!pressing different opinions on each of the basic financial statements. C. 5anagement from reducing its final responsibilit" for the basic financial statements. #" 5isinterpretations regarding the degree of responsibilit" the auditor is assuming.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

Short Answer Questions

*'. The ,AAS- and the AS- have collaborated on the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards. These principles are grouped into four categories. 7hat are the four categories8 The four categories of principles areG 1. 0urpose and premise of an audit4 2. 0ersonal responsibilities of the auditor4 '. Auditor actions in performing the audit and ). @eporting.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

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Chapter 02 - The Financial Statement Auditing Environment

*). The principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards are grouped into four categories. The second categor" is that of >personal responsibilit" of the auditor.> .enerall" e!plain %hat is intended b" this principle. Auditors are responsible for having appropriate competence and capabilities to perform the auditH compl"ing %ith relevant ethical re:uirementsH and maintaining professional s9epticism and e!ercising professional ;udgment4 throughout the planning and performance of the audit.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

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Chapter 02 - The Financial Statement Auditing Environment

**. Dou are the o%ner of a small grocer" store4 Corner 5ar9etplace. E!plain the five process categories and ho% the" appl" to "our business. FinancingG The financing process involves loans or shareholder capital financing for assets such as land4 buildings4 and e:uipment. Corner 5ar9etplace ma" have a ban9 loan or lease for its store. ,t ma" also have solicited other means of financing4 such as additional o%ner funds. 0urchasingG -usinesses ac:uire goods and services to support the sale of their o%n goods or services through the purchasing process. Corner 5ar9etplace %ould purchase food inventor" to sell to customers. ,t might also need to purchase displa" cases4 free(ers4 etc. to store and displa" the inventor". Cuman @esource 5anagementG -usiness organi(ations hire personnel to perform various functions in accordance %ith the enterprise&s mission and strateg". Corner 5ar9etplace should have established policies for hiring4 training4 evaluating4 counseling4 promoting4 compensating4 and terminating emplo"ees. ,nventor" 5anagementG A grocer" store %ould have significant inventor" to manage4 %hich it accomplishes as part of the inventor" management process. The store %ould need to allocate proper costs to inventor" and %ould need to account for produce4 etc. that is e!pired. @evenueG Corner 5ar9etplace %ould generate revenue through sales of food to customers and %ould collect the proceeds of those sales. T"picall"4 a small grocer" store %ould not have accounts receivables from customers4 as customers %ould pa" immediatel". Co%ever4 the revenue c"cle includes cash receipts and credit card transactions.

AACSB: Analytic AICPA BB: In)ustry AICPA FN: Measurement Blooms: A,,ly Difficulty: 9 =ar) Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entityLearning !b"ecti#e: $%&$5 Be familiar 6it* a fi#e&com,onent mo)el of business ,rocesses.o,ic: A Mo)el of Business .o,ic: A Mo)el of Business Process: Fi#e Com,onents

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Chapter 02 - The Financial Statement Auditing Environment

*+. 6efine corporate governance4 the board of directors4 and the audit committee and e!plain ho% the" relate to each other. Corporate governance is all the people4 processes4 and activities in place to help ensure proper ste%ardship over an entit"&s assets. The board of directors is the bod" primaril" responsible for management oversight in corporations. The audit committee oversees internal and e!ternal audit %or9 done for an entit". The board of directors pla"s a part in ensuring proper corporate governance b" holding management responsible for the usage of the entit"&s assets. The audit committee is made up of members of the board of directors. The audit committee enhances corporate governance b" holding management accountable for its activities through audits of its %or9.

AACSB: Analytic AICPA BB: Critical .*in+ing AICPA FN: Measurement Blooms: (n)erstan) Difficulty: % Me)ium Learning !b"ecti#e: $%&$4 (n)erstan) a *ig*&le#el mo)el of a business entity.o,ic: A Mo)el of Business

2-)0

Chapter 02 - The Financial Statement Auditing Environment

*/. 6escribe the organi(ations involved in standard setting for auditors in the 1nited States and %hat their respective roles are in setting current auditing standards for companies in the 1nited States. 5ost auditing standards %ere developed b" the A,C0A&s Accounting Standards -oard #AS-$. At that time4 the profession %as self-regulated. Co%ever4 the Sarbanes- !le" Act of 2002 transferred the authorit" to set auditing standards for public compan" audits to the 0ublic Compan" Accounting versight -oard #0CA -$4 %hich is overseen b" the Securities and E!change Commission #SEC$. Co%ever4 the 0CA - adopted the AS-&s auditing standards on an interim basis. C0As must still abide b" the A,C0A&s Code of 0rofessional Conduct at all times. The" must also follo% auditing standards set b" the AS- %hen performing audits of private companies and other entities that are not public companies. The AS- has replaced the 10 .AAS %ith a more comprehensive and coherent description of the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards.

AACSB: t*ics AICPA BB: Legal AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 9 =ar) Learning !b"ecti#e: $%&$' (n)erstan) t*e significant c*anges t*at *a#e ta+en ,lace in t*e au)iting ,rofession o#er t*e ,ast )eca)eLearning !b"ecti#e: $%&$8 I)entify an) be familiar 6it* t*e ma"or organi0ations t*at affect t*e ,ublic accounting ,rofession1s en#ironmentLearning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: A Deca)e of C*allenge an) C*ange for Financial Statement Au)itors .o,ic: Au)iting Stan)ar)s .o,ic: !rgani0ations t*at Affect t*e Public Accounting Profession

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Chapter 02 - The Financial Statement Auditing Environment

*2. 7hat are the three 0CA - general auditing standards found %ithin the 10 .AAS #< T the three main categories of .AAS$ and %h" is each important8 The first standard states that an auditor must have ade:uate training and proficienc" as an auditor. This is gained through formal education4 continuing education programs4 and e!perience. This ongoing training is necessar" so auditors can sta" up to date %ith current developments in the industr". The second standard re:uires that the auditor maintain an attitude of independence on an engagement. Auditors must be independent in fact and in appearance to protect the profession&s image of ob;ectivit". The third standard focuses on due professional care4 %hich means that the auditor plans and performs his or her duties %ith a degree of s9ill commonl" possessed b" others in the profession. ,t is important that an"one %ho practices as a C0A is able to offer a certain level of service.

AACSB: Communication AICPA BB: Legal AICPA FN: Measurement Blooms: A,,ly Difficulty: 1 asy Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

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Chapter 02 - The Financial Statement Auditing Environment

*3. Eane .oodperson performed an audit on the Auagmire Corporation and issued an un:ualified opinion. Eane performed the audit %ith due professional care and in accordance %ith generall" accepted auditing standards. T%o months after the report is issued4 Eane discovers on the ne%s that the CE of Auagmire4 Eohnn" -est4 had been stealing small amounts of inventor". The amount4 ho%ever4 is immaterial compared to the overall inventor" of the corporation. Eane soon receives a call from Auagmire&s CF 4 5ar9 -eastl". 5ar9 %ants Eane to refund her audit fees. 5ar9 thin9s Eane did not properl" perform the audit4 as she did not discover this fraud. Further4 he feels that no% Auagmire&s financial statements are not fairl" stated because of Eane. Co% should Eane respond to this claim8 Eane should tell 5ar9 that her responsibilit" %as to plan and perform the audit to obtain reasonable assurance about %hether the financial statements are free of material misstatement4 %hether caused b" error or fraud. She had no responsibilit" to plan and perform the audit to obtain reasonable assurance that misstatements4 %hether caused b" errors or fraud4 that are not material to the financial statements %ill be detected. Auagmire&s management4 not Eane4 has responsibilit" for the financial statements. ,n fact4 because of the Sarbanes- !le" Act of 20024 5ar9 had to ta9e e!plicit responsibilit" for the financial statements b" >certif"ing> that he4 as CF 4 is responsible for establishing and maintaining internal control and that the financial statements fairl" present the entit"&s financial conditions and operations. This statement is probabl" still true4 since the amount stolen %as immaterial.

AACSB: Communication AICPA BB: Legal AICPA FN: Ris+ Analysis Blooms: A,,ly Difficulty: % Me)ium Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal acts.o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

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Chapter 02 - The Financial Statement Auditing Environment

+0. 5i9e has ;ust graduated from State 1niversit" %ith a bachelor&s degree in accounting. Ce %ould li9e to pursue a career in auditing. 7hat options does 5i9e have8 6escribe three auditing career options4 including a description of the organi(ation 5i9e %ould %or9 for. Answer could include an% three o& the &ollowing' E!ternalG 5i9e could become an e!ternal auditor. Ce %ould %or9 for a C0A firm providing independent audits to nonpublic or public companies. 5i9e %ould need to pass the 1niform C0A E!amination monitored b" the American ,nstitute of Certified 0ublic Accountants. Cis state ma" have other re:uirements4 such as 1*0 credit hours and e!perience. ,nternalG 5i9e could also be an internal auditor. Ce %ould be directl" emplo"ed b" the entit" on %hich he is performing audits. ,nternal auditors ma" conduct financial4 internal control4 compliance4 operational4 and forensic audits %ithin their organi(ation. ,nternal auditors are supported b" the ,nstitute of ,nternal Auditors. .overnmentalG Another option for 5i9e is governmental auditing. This is essentiall" a form of internal auditing and 5i9e could be emplo"ed b" federal #such as the .overnment Accountabilit" ffice or the ,nternal @evenue Service$4 state4 or local agencies. ForensicG 5i9e could also be a forensic auditor. Forensic auditors are emplo"ed b" corporations4 government agencies4 public accounting firms4 and consulting and investigative services firms. The" are trained in detecting4 investigating4 and deterring fraud and %hitecollar crime and are supported b" the Association of Certified Fraud E!aminers and the Association of Certified Fraud E!amines.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Decision Ma+ing Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$1 Be familiar 6it* t*e )ifferent ty,es of au)itors.o,ic: .y,es of Au)itors an) Ser#ices

+1. 7ith respect to an entit"&s financial statements4 describe both the responsibilit" of management and of the auditor. The financial statements are the responsibilit" of management. The auditor&s responsibilit" is to e!press an opinion on the financial statements based on the audit.

AACSB: Communication AICPA BB: Critical .*in+ing AICPA FN: Decision Ma+ing Blooms: (n)erstan) Difficulty: 1 asy Learning !b"ecti#e: $%&$; <no6 t*at management is ,rimarily res,onsible for t*e entity1s financial statements an) un)erstan) t*e au)itor1s res,onsibility for )etecting errors2 material frau)2 an) illegal acts.o,ic: Society1s 3,ectations an) t*e Au)itor1s Res,onsibility

2-))

Chapter 02 - The Financial Statement Auditing Environment

+2. 7hat auditing standards are used to conduct an audit for a privatel"-held corporation8 7hat auditing standards are used to conduct an audit for a publicl"-traded corporation8 7hat organi(ation is responsible for setting each of these sets of standards8 Auditing standards developed b" the A,C0A&s Auditing Standards -oard #AS-$ are used to conduct an audit for a privatel"-held corporation or other entities that are not public companies. This includes the principles underl"ing an audit conducted in accordance %ith generall" accepted auditing standards and the AS-&s Statements on Auditing Standards #SAS$. Auditing standards developed b" the 0ublic Compan" Accounting versight -oard #0CA -$ must be used to conduct an audit for a publicl"-traded corporation. These standards include all those issued b" the AS- through 200'4 %hich %ere codified b" the 0CA -4 and an" ne% standards issued b" the 0CA - after that point.

AACSB: Communication AICPA BB: Legal AICPA FN: Re,orting Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&1$ (n)erstan) t*at au)iting stan)ar)s are establis*e) by bot* (-S- an) international stan)ar) settersLearning !b"ecti#e: $%&11 Be familiar 6it* t*e 1$ 7generally acce,te) au)iting stan)ar)s7 an) t*e 7,rinci,les un)erlying an au)it con)ucte) in accor)ance 6it* generally acce,te) au)iting stan)ar)s-7 .o,ic: Au)iting Stan)ar)s

2-)*

Chapter 02 - The Financial Statement Auditing Environment

+'. There are several t"pes of audit services that are provided b" auditors. ,dentif" and define three of these t"pes of audits. Answer should include an% three o& the &ollowing' Financial Statement AuditG Auditors test the transactions4 balances4 and disclosures in a set of financial statements to determine if the" are materiall" correct. ,nternal Control AuditG Auditors test the internal controls of a compan" to determine %hether the control s"stem is functioning effectivel" #i.e. preventing4 or detecting and correcting4 misstatements in the financial statements$. Compliance AuditG Auditors test the e!tent to %hich rules4 policies4 la%s4 covenants4 or government regulations are follo%ed b" the entit". perational AuditG Auditors revie% part or all of an organi(ation&s activities to evaluate %hether resources are being used effectivel" and efficientl". The auditor assesses the entit"&s performance4 identifies areas for improvement4 and develops recommendations. Forensic AuditG Auditors conduct forensic audits to detect or deter fraudulent activities.

AACSB: Communication AICPA BB: In)ustry AICPA FN: Re,orting Blooms: Remember Difficulty: % Me)ium Learning !b"ecti#e: $%&$% Be familiar 6it* t*e #arious ser#ices offere) by assurance ,ro#i)ers.o,ic: .y,es of Au)itors an) Ser#ices

2-)+