Chapter 2 Homework 2.26 Which of the following categories of principles is most closely related to gathering audit evidence? a. Performance. b. Reasonable assurance. c. Reporting. d. Responsibilities.
2.27 Which of the following is not related to ethical
requirements of auditors? a. Due care. b. Independence in appearance. c. Independence in fact. d. Professional judgment.
2.28 One of an accounting firm's basic objectives is to provide
professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following a. Generally accepted auditing standards. b. Standards within a system of quality control. c. Generally accepted accounting principles. d. International auditing standards.
2.29 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 entity's financial statements. c. Critically assessing verbal evidence received from the entity's management. d. Evaluating potential financial interests held by auditors in the client. 2.30 The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is a. To determine the nature, timing, and extent of substantive procedures to be performed. b. To make consulting suggestions to the entity's management. c. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. d. To determine whether the entity has changed any accounting principles.
2.31 Ordinarily, what source of evidence should least affect
audit conclusions? a. External documentary evidence. b. Inquiry of management. c. Documentation prepared by the audit team. d. Inquiry of entity legal counsel.
2.32 The most reliable evidence regarding the existence of newly
acquired computer equipment is a. Inquiry of management. b. Documentation prepared externally. c. Evaluation of the client's procedures. d. Physical observation.
2.33 Which of the following procedures would provide the most
reliable audit evidence? a. Inquiries of the client's internal audit staff. b. Inspection of prenumbered client purchase orders filed in the vouchers payable department. c. Inspection of vendor sales invoices received from client personnel. d. Inspection of bank statements obtained directly from the client's financial institution. 2.34 Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? a. Independence. b. Adequate competence and capabilities. c. Adequate planning and supervision. d. Gathering sufficient appropriate evidence.
2.35 Which of the following concepts is least related to the
standard of due care? a. Independence in fact. b. Professional skepticism. c. Prudent auditor. d. Reasonable assurance.
2.36 The evidence considered most appropriate by auditors is
best described as a. Internal documents such as sales invoice copies produced under conditions of strong internal 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 mathematical recalculation.
2.37 Auditors' understanding of the internal control in an
entity provides information for a. Determining whether members of the audit team have the required competence and capabilities 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 with new auditing standards. d. Planning the nature, timing, and extent of substantive procedures on an audit. 2.38 Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? a. Acceptance and continuance of client relationships and specific engagements. b. Engagement performance. c. Monitoring. d. Relevant ethical requirements.
2.39 Which of the following is most closely related to the
responsibilities principle? a. The auditors' responsibility to issue a report as a result of their examination. b. The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements. c. The auditors' compliance with relevant ethical requirements of independence and due care. d. The auditors' responsibility to plan the audit and properly supervise assistants.
2.40 Kramer, CPA, consulted an independent appraiser regarding
the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would a. Be considered as exercising proper due care. b. Be considered a failure to follow generally accepted auditing standards because Kramer should have known how to value fine art before accepting the engagement. c. Not be considered a violation of generally accepted auditing standards because generally accepted auditing standards does not apply to not-for-profit entities. d. None of the above.
2.41 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 entity's financial statements in accordance with GAAP. c. A description of an audit engagement. d. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.
2.42 Which of the following recognizes that an audit conducted
under generally accepted auditing standards may not detect all material misstatements? a. Absolute assurance. b. Professional judgment. c. Reliability of audit evidence. d. Reasonable assurance.
2.43 Which of the following combinations would provide the
auditor the most reliable evidence? Source of Evidence Effectiveness of Internal Control a. Internal More effective b. Internal Less Effective c. External More Effective d. External Less Effective
2.44 Which of the following is most closely related to the
relevance of audit evidence? a. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. b. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. c. In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year. d. Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period. 2.45 Which of the following statements is not true with respect to the performance principle? a. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits. b. Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements. c. In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements. d. Auditors are required to consider both the relevance and the reliability of evidence in evaluating whether the evidence they have gathered is appropriate.
2.46 Which of the following is true with respect to PCAOB
inspections of accounting firms? a. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. b. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. c. All results of PCAOB inspections are made available to the public following the inspection. d. Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection.
2.47 The particular and specialized actions that auditors take
to obtain evidence during a specific engagement are known as a. Audit procedures. b. Audit standards. c. Interpretive publications. d. Statements on Auditing Standards.
2.48 Which of the following combinations of standards and types
of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a. Develop Auditing Standards for the audits of nonpublic entities. b. Develop Auditing Standards for the audits of public entities. c. Develop Statements on Auditing Standards for the audits of nonpublic entities. d. Develop Statements on Auditing Standards for the audits of public entities.
2.49 Which of the following best describes the general contents
of the 8introductory paragraph of LO 2-4, LO 2-4 Exercises and Problems LO 2-1, 2-5, LO 2-1, LO 2-2 in the auditors' report? a. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. b. The auditors' conclusion with respect to the fairness of the entity's financial statements. c. Statements identifying the responsibility of auditors and management in the financial reporting process. d. The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting.
2.50 Which of the following opinions would be issued if auditors
believed that the entity's financial statements were not presented in conformity with GAAP? a. Adverse opinion. b. Disclaimer of opinion. c. Qualified opinion. d. Unmodified opinion.
2.51 Which of the following principles is most closely
associated with the auditors' conclusion as to the fair presentation of the entity's financial statements? a. Communication principle. b. Performance principle. c. Reporting principle. d. Responsibilities principle. 2.56 Professional Skepticism. An important principle for auditors is the need to maintain an appropriate level of professional skepticism. Required: a. Define Professional Skepticism. - Professional skepticism can be defined in the professional auditing standards as having an attitude that includes a questioning mind and a critical assessment of evidence.
b. During which stages of audit are auditors required to
exhibit professional skepticism? - Evidence obtained through different procedures that seems contradictory on its face should be met with professional skepticism. - The reliability of some evidence itself should be represented in the light of professional skepticism.
c. How does each of the following independent issues
potentially relate to the principle of professional skepticism? a. The auditors firm has served the client for a long period of time, and strong friendships have developed between the firm personnel and the clients officers. - A conflict of interest exits in that the auditor may not act objectively because of the will to retain any relationships that have developed between he, his team, and the firm being audited.
b. Auditors are anxious to complete the audit shortly
before other workload demands and deadlines related to other engagements. - If the auditors are in a rush, a possibility exists that they are not being as thorough as they possibly could as in a scenario where no other engagements or deadlines existed.
c. The client has mentioned on a number of occasions its
desire to reduce (or limit) the audit fee. - As the client has expressed their interest in a lower audit fee, the auditing team may be pressed to cut come corners to minimize their own costs of service, thus not being as thorough as they perhaps need to be.
2.60 Performance Principle. You have accepted the engagement of
auditing the financial statements of the C. Reis Company, a small firm that has been your client for several years. Because you were busy writing the report for another engagement, your sent a staff accountant to begin the audit with the suggestion that she starts with accounts receivable. Using the prior years audit documentation as a guide, she prepared a trial balance of the accounts, aged them, prepared and mailed positive confirmation requests, examined underlying support for charges and credits, and performed other work she considered necessary to obtain evidence about the validity and collectability of the receivables. At the conclusion of her work, you reviewed the prior years audit documentation. Required: The opinion rendered by auditors states that the audit was made in accordance with generally accepted auditing standards. Identify the important components of the performance principle and relate them to the audit of C. Reis Company by indicating how they were fulfilled or, if appropriate, how they were not fulfilled. - The key components of the performance principle are 1) reasonable assurance, 2) planning and supervision, 3) materiality, 4) risk assessment, and 5) audit evidence. In regard to the audit of C. Regis Company, an issue present is the fact that the prior years financial statements and audit report were reviewed, but each and every fiscal year of a firm can differ greatly, and thus new material can be missed. Thus, under the performance principle, a lack of due care in obtaining all possible evidence could exist. Furthermore, the staff accountant was not supervised as thoroughly as may be necessary, as the auditor who accepted the engagement had not been present during the audit by the staff accountant. Finally, the investigation into the firms risks as not been mentioned in the background information, which should be assessed during the audit.
2.65 Fundamental Principles (Comprehensive). In each of the
following, identify which of the elements of the fundamental principles is most applicable. In addition, discuss what action(s) (if any) you believe auditors should take with respect to these issues. a. An entity has contacted you about performing its audit engagement. You have not previously served a client in the entitys industry, which has many industry-specific accounting issues that are both technical and complex. - A lack of understanding in the industry could be attributable to a deficiency in the auditors performance, so they must make a judgement call as to whether or not they will be able to train properly in all of the industry-specific accounting issues mentioned. b. An entity has entered into a number of lease agreements. Based on the requirements of GAAP, you believe that these obligations meet the criteria for being classified as capital leases; however, the entity has elected to treat these as operating leases, providing full and complete disclosure of this treatment in the footnotes to the financial statements. - In this case, either an exception in a Qualified, or conversely, an Adverse opinion would have to be issued. This could come down to the total materiality of the difference in each lease treatment. c. Because of a disagreement with its current auditors, an entity has contacted you about conducting its current-year audit. However, because the previous auditors have just recently resigned from the engagement, you have some question as to whether an audit can be completed in time to meet the entitys deadlines for providing audited financial statements to a lender. -The issue in this case would be regarding the Responsibilities Principle. The auditors need to ensure that they do not rush the audit so that their analysis will be as thorough as it needs to be, regardless of a time constraint; otherwise, if the auditor does not feel that they will be able to complete the analysis on-time and with as much thoroughness required, they should not accept the engagement. d. Based on the effectiveness of the entitys internal control, you have assessed control risk at low levels and decided that a smaller number of customer accounts need to be confirmed. - In this case, if the internal controls risk of control has been assessed at low levels, the auditor may choose to analyze fewer customer accounts IF these accounts are less risky in general; for example, if a clients account is at higher risk of late, missed, or erroneous payments, the auditors should ensure that they were recorded properly. Furthermore, larger customer accounts that make up larger portions of the companys accounts receivable or income should still be checked. e. An entity has contacted you about performing its engagement audit. This entity became aware of your firm because the husband of one of your partners is currently serving as the entitys chief financial officer. - The issue in this case regards the Responsibilities Principles, in that the auditing firm is not independent in appearance due to the marital relationship outlined above. Thus, they cannot/should not accept the engagement. f. One of yours clients is currently a potential defendant in several cases because of the damage caused by one if its products. Because this entity does not believe that it is likely to receive an unfavorable outcome from this litigation, it did not disclose the potential litigation in the footnotes accompanying their financial statements. - In this case, the Reporting Principle should be called into analysis, as the firm may not be following a GAAP rule in the recording/representation in the footnotes of the contingent loss mentioned above. Thus, the auditor should either issue a Qualified opinion (with exceptions) to mention the lack of disclosure in the footnotes, or if the contingent loss is substantial, significant, or most likely to occur, the auditor may have to issue an adverse opinion. g. You are performing tests of the clients controls over the processing of revenue transactions to determine whether these controls are operation effectively and can be relied upon to prevent or detect misstatements. - The Performance, and more specifically, Risk Assessment aspects/principles are the ones most significant to this case, in ensuring that internal controls pose the lowest level of risk possible in relying on their evidence. Otherwise, further analysis and more evidence from external sources may be required. h. One of your supervisors has requested a number of clarifications based on her review of your work on an audit engagement. A subsequent meeting with her has resolved these clarifications, and you both have concluded that your work supports the opinion on the clients financial statements. - Performance Principle, Review and Supervision aspects, Are most relevant to this case, where the due care and follow-up meeting between the auditors shows no immediate issue.
2.67 Fundamental Principles (Comprehensive). Comment upon each
of the following statements you heard in a conversation between two newly hired staff auditors. a. Of course, Im qualified to be assigned to this engagement, I have an accounting degree from a top university and was an honors graduate. I know some of the accounting rules have changed since I graduated, but Ill be able to figure that out as we go through the audit. - This attitude shows a lack of understanding in the complexities of new and modified FASB codification terms, as well as other code that is changed from year to year. The auditors degree certified that he/she was once qualified to be assigned to any specific engagement, but a thorough understanding of the specific industry the client is engaged in, and more specifically, the altering Accounting codifications they must keep track of, are more significant qualifying factors. b. It really doesnt matter what others thinkIm completely independent of ACME industries and should be a member of the audit team. While I own some stock, its a small amount and Im holding it for the long term, anyway. - This auditor is clearly not independent from the firm in both fact and appearance; they have not divested themselves from any ownership in the firm and thus cannot be included in the engagement. c. You really have to question everything the client tells you. Thats what professional skepticism is all about. Its a shame you cant believe a word they say. - This approach seems overtly disrespectful to the client; yes, while professional skepticism is encouraged at every stage in the auditing process, the auditor should still take everything the client has to say into consideration during their analysis, while keeping a questioning and routinely analytical mind about what is being presented to them. d. The evidence is lower in quality, but we typically use internal evidence when we audit property, plant, and equipment. It just takes too much time and costs too much to get more reliable evidence. - While P, P, & E are typically fixed assets and thus do not need evidence that is costly and time-prohibiting to acquire, if, as in the above example, management is aware of more reliable evidence that exists, they should exercise all possible due care in attaining as much reliable evidence as they feasibly could. e. On that last job, we really planned the audit well. We were able to finish everything by November 1st and didnt need to do any work after year-end. - While this auditing team may have planned their audit well from their point of view, a significant issue exists in that some two full months of activities took place after the date they had finished on and are therefore blatantly ignoring several transactions and reporting work, violating the standards set out by GAAS. f. Were not too worried about internal control. We always do the same substantive procedures anyway, so why take the time to look at the clients controls? - This quote ignores the fact that not all substantive procedures an auditor may carry out are relevant to all industries or all facets of a clients internal control, and that the industry as well as internal control processes may change from year to year. While the auditors are not required to follow or rely on the clients internal control, they are indeed required to at least understand them. g. Because the client isnt accounting for its leases properly, we need to issue either a qualified opinion or a disclaimer of opinion. Just how large a dollar impact does this have on the financial statements? - The auditors need to determine if the difference between the methods of evaluating their leases is indeed material and would change the end users perception and usage of the financial statements. Otherwise, the auditors should issue a Qualified opinion (with the exception for the lease), or if the difference is significant and the firm does not follow the guidelines set out by GAAP, an adverse opinion may be necessary. h. When we evaluate items for materiality, the only thing we need to worry about is the absolute dollar amount, There really isnt anything else we need to consider. - The issue I would take up with this quote is that in many cases, several qualitative factors also accompany items that are being evaluated for materiality. For example, a small fine from the EPA may come with the demand that the company cease operations in one of its major plants. Thus, a quantitative piece of evidence was not sufficient on its own in determining the materiality of an item.