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Auditing Theory > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

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

A

A) Your firm must be registered with the PCAOB

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2
Q

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

A

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

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3
Q

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

A

C) professional judgment be exercised by the auditor

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4
Q

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

A

C) The criteria of audit planning and evidence gathering

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5
Q

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

A

Each state

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6
Q

Who are the Big Four International CPA Firms?

A
  1. Deloitte
  2. Pricewaterhousecoopers
  3. Ernst & Young
  4. KPMG
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7
Q

What services do CPA firms perform for clients?

A
  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)
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8
Q

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

A
  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
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9
Q

What are the six organizational structures a company can have?

A
  1. Proprietorship
  2. General Partnership
  3. General Corporation
  4. Professional Corporation
  5. Limited Liability Company
  6. Limited Liability Partnership
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10
Q

What is a proprietorship?

A

Only firms with one owner can operate in this form

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11
Q

What is a General Partnership?

A

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

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12
Q

What is a General Corporation?

A

Shareholders are liable only to the extent of their investment.

Most CPA firms prohibited by law from organizing a corporation.

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13
Q

What is a Professional Corporation?

A

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

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14
Q

What is a Limited Liability Company (LLC)?

A

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.

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15
Q

What is a Limited Liability Partnership (LLP)?

A

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
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16
Q

What is the hierarchy of a typical CPA firm?

A
  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)
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17
Q

What is the Sarbanes-Oxley Act?

A

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).

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18
Q

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

A

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.

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19
Q

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

A

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)
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20
Q

Form S-1

A

General form to issue new securities

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21
Q

Form 8-K

A

Report significant events that are of interest to public investors

22
Q

Form 10-K

A

Must be filed annually within 60-90 days

23
Q

Form 10-Q

A

Must be filed quarterly for all publicly held companies

24
Q

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

A
  1. Sets professional requirements
  2. Conducts research
  3. Publishes materials related to services performed
25
Q

What are Statements on Auditing Standards (SASs)?

A

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

26
Q

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

A

Provide guidance for performing compilation and review services

27
Q

What are compilation services?

A

Help the client prepare financial statements without providing any assurance

28
Q

What are review services?

A

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

29
Q

What are Statements on Standards for Attestation Engagements?

A

Provide framework for the development of standards for attestation engagements

30
Q

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

A

AICPA Professional Ethics Executive Committee

31
Q

What other functions does the AICPA perform?

A
  1. Writing and grading CPA examination
  2. Supports research and provides grants
  3. Publishes a variety of materials
  4. Provides seminars and continuing education
32
Q

What are the International Standards on Auditing (ISAs)?

A

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.

33
Q

__________ is the worldwide organization for the accountancy profession.

A

International Federation of Accountants (IFAC)

34
Q

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

A

International Auditing and Assurance Standards Board (IAASB)

35
Q

International Standards on Auditing is applicable to:

A

Entities OUTSIDE the U.S.

36
Q

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

A

Private entities in the U.S.

37
Q

PCAOB Auditing Standards is applicable to:

A

U.S. Public companies & other SEC registrants

38
Q

Define Principles

A

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

39
Q

What are the PCAOB General Standards?

A
  1. Adequate training and proficiency
  2. Independence in mental attitude
  3. Due professional care
40
Q

What are the PCAOB Standards of Field Work?

A
  1. Proper planning and supervision
  2. Understanding the entity
  3. Sufficient appropriate evidence
41
Q

What are the PCAOB Standards of Reporting?

A
  1. Statements prepared in accordance with GAAP
  2. Circumstances when GAAP not followed
  3. Adequacy of disclosures
  4. Expression of opinion on financial statements
42
Q

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

A

Public Company Accounting Oversight Board (PCAOB)

Auditing Standards Board (ASB)

43
Q

Define Quality Control

A

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

44
Q

What are the elements of quality control?

A
  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
45
Q

Define Peer Review

A

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

46
Q

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

A

Peer review

47
Q

A peer review is usually conducted once every __________ years.

A

3

48
Q

What is the Center for Audit Quality (CAQ)?

A

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.

49
Q

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

A

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

50
Q

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

A

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.

51
Q

What is the Generally Accepted Auditing Standards (GAAS)?

A

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.

Auditing Theory (6 decks)

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