ACC 521 Study Guide - Final Guide: Engagement Letter, Financial Statement, Accountant

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10 Feb 2016

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Document Summary

Understand and explain these essential terms and concepts. The essential purpose of auditing in the economy is to provide assurance to third parties in a three-party accountability situation so they can place more reliance on the information provided by the parties who owe them accountability. We explore this type of engagement in depth. These requirements are enforced to protect the interests of the public. Before an audit engagement can even be started, the people who would perform it need to check whether they can comply with all the ethical standards that apply to the engagement. The final engagement acceptance decision usually is made by audit firm partners, who are the most senior people in an audit firm. The auditor, at the audit firm and/or individual level, next has to determine whether independence and other professional ethical requirements can be met.

Related Questions

1â28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Clientâs management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditorsâ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditorsâ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the clientâs operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a companyâs policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a companyâs internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a companyâs legal department.

coralbadger702

Question 1

In recent years, the large CPA firms have performed a highvolume of consulting services for many of their audit clients. Thishas become a highly controversial issue, because it is allegedthat:

	a.	The CPAs are not competent to perform these services.
	b.	The potential of earning large revenues from audit clientsimpairs auditor independence.
	c.	CPA firms are inclined to "cut corners" on the audits becausethey are devoting the bulk of their time to consulting.
	d.	CPA firms are engaged in unfair competition with consultingfirms.

Question 2

An auditor's report states: "...we do not express an opinion."This constitutes what type of opinion?

	a.	Qualified.
	b.	Adverse.
	c.	Unqualified.
	d.	Disclaimer.

Question 3

Which statement is NOT true?

	a.	The FASB is a federal regulatory agency.
	b.	The FASB encourages comments on exposure drafts from interestedthird parties.
	c.	To date, the FASB has issued over 100 authoritativepronouncements.
	d.	Pronouncements of GAAP-establishing bodies preceding the FASBwere widely criticized for lacking a theoretical basis.

Question 4

Third parties are NOT entitled to place any reliance upon a CPAin the case of what type of engagement?

	a.	Compilation.
	b.	Compliance audit.
	c.	Attestation.
	d.	Review.

Question 5

Which statement best reflects the business entity concept?

	a.	It is assumed that the entity will continue in businessindefinitely.
	b.	The financial results of legally separate entities should not becombined.
	c.	The business is viewed as an entity separate from theowners.
	d.	Entities should report their results of operations annually.

Question 6

Which principle determines the fiscal period in which an expenseshould be recorded?

	1.	Realization.
	2.	Matching.
	3.	Fiscal period
	4.	Conservatism.

Question 7

Form 10-Qis used for:

	a.	Annual reporting to the SEC.
	b.	Quarterly reporting to the SEC.
	c.	Reporting of special events to the SEC.
	d.	Determination of standards to be followed in reporting to theSEC.

Question 8

Which of the following attributes is the primary argument forthe historical cost principle?

	a.	Predictive value.
	b.	Relevance.
	c.	Understandability.
	d.	Verifiability.

Question 9

The standard, unqualified audit report of a public company:

	a.	Is addressed to the SEC.
	b.	Covers the financial statements but not the footnotes.
	c.	States that the financial statements are fairly presented inaccordance with GAAP.
	d.	More than one of the above is correct.
	e.	None of the above are correct.

Question 10

The most frequent cause of audit failure in audits of publiccompanies is:

	a.	Incompetence or improper supervision of audit staff.
	b.	Cleverly concealed employee frauds.
	c.	Unwillingness of the partner in charge to compel the client tocorrect misleading financial statements.
	d.	Bribery of key audit personnel by the audit client.

Question 11

In most audits, the greatest concern faced by the auditor is therisk of:

	a.	Clerical errors not detected by the client's system of internalcontrol.
	b.	Incompetence and carelessness of audit staff.
	c.	Management fraud.
	d.	Employee irregularities.

violetseal270

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.