Chapter 2

Question 1

You have been engaged to audit the final statements of a U.S. Public company. Which of the following statements is correct?

A) Your firm must be registered with the PCAOB
B) Your firm will be subject to auditing and quality control standards issued by the Securities and Exchange Commission
C) Your firm must either be a National or Big Four CPA firm
D) You will be engaged to audit both the quarterly and annual financial statements of your client

Answer 1

A) Your firm must be registered with the PCAOB

Question 2

Which of the following best describes what is meant by U.S. Auditing standards?

A) Acts to be performed by the auditor
B) Measures of the quality of the auditor’s performance
C) Procedures to be used to gather evidence to support financial statements
D) Audit objectives generally determined on audit engagements

Answer 2

B) Measures of the quality of the auditor’s performance

Question 3

The Responsibilities principle underlying AICPA auditing standards includes a requirement that

A) field work be adequately planned and supervised
B) the auditor’s report state whether or not the financial statements conform to generally accepted accounting principles
C) professional judgment be exercised by the auditor
D) Informative disclosures in the financial statements be reasonably adequate

Answer 3

C) professional judgment be exercised by the auditor

Question 4

What is the general character of the responsibilities characterized by the Performance principles?

A) The competence, independence, and professional care of persons performing the audit
B) 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
D) The need to maintain an independence in mental attitude in all matters pertaining to the audit

Answer 4

C) The criteria of audit planning and evidence gathering

Question 5

The legal right to perform audits is granted to CPA firms by regulation in:

Answer 5

Each state

Question 6

Who are the Big Four International CPA Firms?

Answer 6

1. Deloitte
2. Pricewaterhousecoopers
3. Ernst & Young
4. KPMG

Question 7

What services do CPA firms perform for clients?

Answer 7

1. Accounting and bookkeeping services (major source of revenue for large CPA firms)
2. Tax services (major source of revenue for many small firms)
3. Management consulting services (Significant source of revenue for most accounting firms)

Question 8

What are the three main factors that influence the organizational structure of all CPA firms?

Answer 8

1. The need for independence from clients (allow auditors to remain unbiased)
2. The importance of a structure to encourage competence (allow auditors to be more effective and efficient)
3. The increased litigation risk faced by auditors

Question 9

What are the six organizational structures a company can have?

Answer 9

1. Proprietorship
2. General Partnership
3. General Corporation
4. Professional Corporation
5. Limited Liability Company
6. Limited Liability Partnership

Question 10

What is a proprietorship?

Answer 10

Only firms with one owner can operate in this form

Question 11

What is a General Partnership?

Answer 11

This form of organization is the same as a proprietorship except that it applies to multiple owners.

Question 12

What is a General Corporation?

Answer 12

Shareholders are liable only to the extent of their investment.

Most CPA firms prohibited by law from organizing a corporation.

Question 13

What is a Professional Corporation?

Answer 13

Provides professional services and is owned my one or more shareholders.

Question 14

What is a Limited Liability Company (LLC)?

Answer 14

Combines the most favorable attributes of a general corporation and general partnership.

All of the states have LLC laws, and most allow accounting firms to operate as LLCs.

Question 15

What is a Limited Liability Partnership (LLP)?

Answer 15

Owned by one or more partners

• Structured and taxed like a general partnership
• Personal liability protection less than that of a general corporation or LLC
• All of the Big Four firms and many smaller firms now operate as LLPs

Question 16

What is the hierarchy of a typical CPA firm?

Answer 16

1. Partners (10+ years experience)
2. Managers (5-10 years experience)
3. Seniors & In-Charge Auditors (2-5 years experience)
4. Staff Assistants (0-2 years experience)

Question 17

What is the Sarbanes-Oxley Act?

Answer 17

This act is considered to be the most important legislation affecting the auditing profession since the 1930s.

The provisions of the act apply to publicly held companies and their audit firms.

Established the Public Accounting Oversight Board (PCAOB).

Question 18

What is the Public Company Accounting Oversight Board (PCAOB)?

Answer 18

Provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits, and performs inspections of quality controls at audit firms performing those audits.

Question 19

What was the purpose for established the Securities and Exchange Commission (SEC)?

Answer 19

The purpose is to assist in providing investors with reliable information upon which to make investment decisions.

• The Securities Act of 1933 (require registration statement for new securities)
• The Securities Exchange Act of 1934 (require filing of detailed annual reports)

Question 20

Form S-1

Answer 20

General form to issue new securities

Question 21

Form 8-K

Answer 21

Report significant events that are of interest to public investors

Question 22

Form 10-K

Answer 22

Must be filed annually within 60-90 days

Question 23

Form 10-Q

Answer 23

Must be filed quarterly for all publicly held companies

Question 24

What services does the American Institute of Certified Public Accountants (AICPA) provide for CPAs?

Answer 24

1. Sets professional requirements
2. Conducts research
3. Publishes materials related to services performed

Question 25

What are Statements on Auditing Standards (SASs)?

Answer 25

Pronouncements issued by the AICPA to interpret the principles underlying generally accepted auditing standards.

Question 26

What are Statements on Standards for Accounting and Review Services (SSARS)?

Answer 26

Provide guidance for performing compilation and review services

Question 27

What are compilation services?

Answer 27

Help the client prepare financial statements without providing any assurance

Question 28

What are review services?

Answer 28

Perform inquiry and analytical procedures that provide a reasonable basis for expressing limited assurance on the financial statements

Question 29

What are Statements on Standards for Attestation Engagements?

Answer 29

Provide framework for the development of standards for attestation engagements

Question 30

The __________ sets rules of conduct that CPAs are required to meet.

Answer 30

AICPA Professional Ethics Executive Committee

Question 31

What other functions does the AICPA perform?

Answer 31

1. Writing and grading CPA examination 2. Supports research and provides grants 3. Publishes a variety of materials 4. Provides seminars and continuing education

Question 32

What are the International Standards on Auditing (ISAs)?

Answer 32

statements issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) to promote international acceptance of auditing standards.

Question 33

__________ is the worldwide organization for the accountancy profession.

Answer 33

International Federation of Accountants (IFAC)

Question 34

The __________ works to improve the uniformity of auditing practices and related services throughout the world.

Answer 34

International Auditing and Assurance Standards Board (IAASB)

Question 35

International Standards on Auditing is applicable to:

Answer 35

Entities OUTSIDE the U.S.

Question 36

U.S. Generally Accepted Auditing Standards (GAAS) is applicable to:

Answer 36

Private entities in the U.S.

Question 37

PCAOB Auditing Standards is applicable to:

Answer 37

U.S. Public companies & other SEC registrants

Question 38

Define Principles

Answer 38

Framework helpful in understanding and explaining an audit; provide a structure for the Codification of Statements on Auditing Standards

Question 39

What are the PCAOB General Standards?

Answer 39

1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care

Question 40

What are the PCAOB Standards of Field Work?

Answer 40

1. Proper planning and supervision 2. Understanding the entity 3. Sufficient appropriate evidence

Question 41

What are the PCAOB Standards of Reporting?

Answer 41

1. Statements prepared in accordance with GAAP 2. Circumstances when GAAP not followed 3. Adequacy of disclosures 4. Expression of opinion on financial statements

Question 42

___________ responsible for public company audits. __________ responsible for private company audits.

Answer 42

Public Company Accounting Oversight Board (PCAOB) | Auditing Standards Board (ASB)

Question 43

Define Quality Control

Answer 43

Methods used by a CPA firm to ensure that the firm meets its professional responsibilities to clients and others

Question 44

What are the elements of quality control?

Answer 44

1. Leadership responsibilities for quality 2. Relevant ethical requirements 3. Acceptance and continuation of clients and engagements 4. Human resources 5. Engagement performance 6. Monitoring

Question 45

Define Peer Review

Answer 45

The review by CPAs of a CPA firm's compliance with its quality control system

Question 46

CPA firms need a __________ to maintain eligibility for AICPA membership.

Answer 46

Peer review

Question 47

A peer review is usually conducted once every __________ years.

Answer 47

3

Question 48

What is the Center for Audit Quality (CAQ)?

Answer 48

An autonomous public policy organization with a mission to foster confidence in the audit process and to make public company audits even more reliable and relevant to investors.

Question 49

Which of the following statements accurately describes the U.S. CPA firms that are not sole proprietorships? A) Most derive the majority of their revenues from tax services B) The most common organizational structure is the limited liability partnership structure C) The firm will be subject to an annual peer review D) The number of other professionals within a firm generally equals the number of partners in the firm

Answer 49

B) The most common organizational structure is the limited liability partnership structure

Question 50

Identify classifications for: SAS No. 125, AU-C 905

Answer 50

SAS number identifies the order in which it was issued in relation to other SASs. The AU-C section number identifies its location in the AICPA Codification of all SASs.

Question 51

What is the Generally Accepted Auditing Standards (GAAS)?

Answer 51

Developed and issued in the form of Statements on Auditing Standards (SASs) and codified in AU-C sections in the Codification of Auditing Standards, often called auditing standards.