Ch 1- role of a public accountant

Question 1

purpose of an audit?
(PCAOB definition)

Answer 1

Provide/obtain “reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

Question 2

T/F: reasonable assurance is objective.

Answer 2

False; reasonable assurance is subjective (meaning the audit can’t provide 100% assurance)

Question 3

who is responsible for misstated financial statements?

Answer 3

Management (not auditors)

Question 4

the auditor’s final opinion on the financial statements is conveyed to the public in an…

Answer 4

audit report

Question 5

T/F: The audit is only focused on the big, decision changing misstatements.

Answer 5

true (small misstatements don’t matter to auditors because they don’t heavily impact the financial statements)

Question 6

what is the fastest growing practice in public accounting?

Answer 6

Consulting/advisory

Question 7

A type of assurance that has to do with improving the quality of information in the financial statements

Answer 7

Assurance services

Question 8

Due diligence engagements (prior to a merger) and IT system security reviews are examples of ___________ services.

Answer 8

Assurance services

Question 9

A subset of Assurance Services that provide assurance over the assertions of a 3rd party

Answer 9

Attest services

Question 10

6 fundamental financial statement assertions:

Answer 10

PREVCC acronym:
1. Presentation/ classification
2. Rights & obligations
3. Existence or occurrence
4. Valuation or allocation
5. Completeness
6. Cut-off (AICPA only)

Question 11

Assets or liabilities of the company exist at a given date, and recorded transactions have occurred during a given period.

Answer 11

Existence/occurrence
(making sure stuff wasn’t made up)

Question 12

Which fundamental assertion focuses on overstating assets?

Answer 12

Existence/occurrence

Question 13

All transactions and accounts that should be presented in the financial statements are so included.

Answer 13

Completeness (making sure stuff isn’t left out)

Question 14

Which fundamental assertion focuses on understating liabilities?

Answer 14

Completeness

Question 15

Asset, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.

Answer 15

Valuation/allocation (making sure stuff is listed at the correct $ amounts)

Question 16

The company holds or controls rights to the assets, and liabilities are obligations of the company at a given date.

Answer 16

Rights & obligations (things can exist but the client does not have a right to list them in the financial statements)

Question 17

Consignment sale is an example of which fundamental assertion?

Answer 17

Rights & obligations (legal ownership/title doesn’t change)

Question 18

The components of the financial statements are properly classified, described, and disclosed.

Answer 18

Presentation/classification
(saying something is something else)

Question 19

Saying an upcoming merger/business purchase is complete when it is not, or calling an Available for Sale security as a Held to Maturity security, is an example of which fundamental assertion?

Answer 19

Presentation/classification

Question 20

Transactions and events have been recorded in the correct accounting period.

Answer 20

Cut-off

Question 21

What are the 3 attest services that auditors provide to clients?

Answer 21

1. Financial statement audit (fundamental assertions)
2. Reviews
3. Agreed-upon procedures

Question 22

____________ provide a lower level of assurance (moderate/limited), have a moderate risk of material misstatements, and consist of a limited set of tests done (inquiries and analytical procedures)

Answer 22

Reviews

Question 23

____________ provide a summary of findings, have a varied risk of material misstatements, and the auditor does only/exactly what tests the client prescribes and merely reports the results.

Answer 23

Agreed-upon procedures

Question 24

T/F: In the US, annual financial statements get reviews.

Answer 24

False; QUARTERLY f/s get reviews

Question 25

An engagement where the CPA actually creates the financial statements.

Answer 25

Compilation

Question 26

T/F: A Compilation is not an Assurance or Attest service

Answer 26

True; CPAs are banned from providing Assurance/Attestation over their own work/creations (keeps objectivity and independence)

Question 27

Any threat/risk that would disrupt/harm the business.

Answer 27

Business risk

Question 28

The risk that the information used to evaluate Business Risk is incorrect (ex: studying the wrong chapters for an exam)

Answer 28

Information risk

Question 29

T/F: Audits directly influence business risks.

Answer 29

False; audits only directly influence information risks

Question 30

The appointer is the _________ & the appointee is the _________

Answer 30

Principle ; Agent

Question 31

The owners of large corporations (or shareholders) are the _________, while the management team of the corporation (or CEO, CFO) are the _________.

Answer 31

Shareholders are principles; CEO/CFOs are agents

Question 32

The costs imposed on the Principle because the Agent is acting in their own self-interest are called... (CEOs doing what they want, rather than what shareholders want)

Answer 32

Agency costs

Question 33

The Principle's main monitoring control over Agents is the...

Answer 33

Financial statements

Question 34

T/F: Audits allow for better monitoring of Agents by Principles and reduce agency costs

Answer 34

True; audits provide better quality information that is more reliable for Principles

Question 35

4 industry tiers for CPA firms:

Answer 35

1. Big 4 (Deloitte, EY, PwC, KPMG) 2. National firms - mid-tier and operate internationally 3. Regional firms - concentrated in a particular geographic area, not international 4. Local firms - limited to small area and don't typically do public company audits

Question 36

An audit team consists of...

Answer 36

A partner, manager, senior associate, and staff associate (highest to lowest)

Question 37

T/F: The External Auditor is believed to be more independent than the Internal Auditor.

Answer 37

True; internal auditors work at the company and can't be truly independent

Question 38

T/F: The Internal Auditor is believed to be less competent than the External Auditor.

Answer 38

False; internal auditors are more competent than external auditors because they work at the company everyday and have a deeper knowledge of the company

Question 39

T/F: Internal and External Auditors offer different trade-offs between independence and competence which are needed for quality audits.

Answer 39

True; need both independence and competence for audits

Question 40

What are the responsibilities of the AICPA?

Answer 40

1. Create the content of the CPA Exam. 2. Write and enforce CPA Ethics standards. 3. Write standards for audits of private companies. 4. Conduct Peer Reviews of auditors of private companies.

Question 41

What are the main responsibilities of the PCAOB

Answer 41

1. Write standards for audits of publicly traded companies. 2. Conduct (gov) Inspections of public company audits. ** created by SOX, reports to SEC ** 5 board members with majority being non-accountants ** “Quasi-Governmental” organization