Auditing And Assurance Services, 17e (Arens/Elder/Beasley .

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Auditing and Assurance Services, 17e (Arens/Elder/Beasley)Chapter 2 The CPA Profession2.1 Learning Objective 2-11) The legal right to perform audits is granted to a CPA firm by regulation ofA) each state.B) the Financial Accounting Standards Board (FASB).C) the American Institute of Certified Public Accountants (AICPA).D) the Auditing Standards Board.Answer: ATerms: Legal rights to perform auditsDifficulty: ModerateObjective: LO 2-1AACSB: Reflective thinking2) Which of the following is not a characteristic of a small local CPA firm?A) Most small firms have fewer than 25 professionals.B) Small firms perform audits on small and not-for-profit businesses.C) Tax services are more important than auditing services to the small firm.D) Small firms are prohibited by the SEC from auditing publicly traded companies.Answer: DTerms: Characteristics of a small firmDifficulty: ModerateObjective: LO 2-1AACSB: Reflective thinking3) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providingmany consulting services to their publicly traded audit clients. Which of the following is true forauditors of publicly traded companies?I. They are restricted from providing consulting services to privately held companies.II. There is no restriction on providing consulting services to non-audit clients.A) I onlyB) II onlyC) I and IID) Neither I nor IIAnswer: BTerms: Sarbanes-Oxley and Securities Exchange Commission restrictionsDifficulty: ModerateObjective: LO 2-1AACSB: Reflective thinking1Copyright 2020 Pearson Education, Inc.

4) Which of the following does not describe a size category for a CPA firm?A) Big Four national firmsB) Big Four international firmsC) local firmsD) national and regional firmsAnswer: ATerms: Three categories for describing size of audit firmsDifficulty: EasyObjective: LO 2-1AACSB: Reflective thinking5) is one of the Big Four international CPA firms.A) DeloitteB) KPMGC) Ernst & YoungD) All of the above are classified as Big Four international CPA firms.Answer: DTerms: Three categories for describing size of audit firmsDifficulty: EasyObjective: LO 2-1AACSB: Reflective thinking6) In which type of service does the CPA assemble the financial statements but provide noassurance to third parties?A) auditB) compilationC) reviewD) bookkeepingAnswer: BTerms: CompilationDifficulty: ModerateObjective: LO 2-1AACSB: Reflective thinking7) is not one of the National/Regional CPA Firms.A) PwCB) BDO USAC) Grant ThorntonD) RSM US.Answer: ATerms: Three categories for describing size of audit firmsDifficulty: EasyObjective: LO 2-1AACSB: Reflective thinking2Copyright 2020 Pearson Education, Inc.

8) Which of the following is not an accurate definition or description of a local CPA firm?A) Some local CPA firms have several offices.B) Local CPA firms do not compete for clients with the Big Four CPA firms.C) Some local CPA firms are affiliated with other CPA firms to share resources.D) Many local CPA firms provide primarily accounting and tax services to their clients only.Answer: BTerms: Three categories for describing size of audit firmsDifficulty: ModerateObjective: LO 2-1AACSB: Reflective thinking9) Many small, local accounting firms perform audits as their primary service to their clients.Answer: FALSETerms: Small accounting firms do not perform audits as their primary service to their clientsDifficulty: EasyObjective: LO 2-1AACSB: Reflective thinking10) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors fromproviding many consulting services to their publicly traded audit clients.Answer: TRUETerms: Sarbanes-Oxley and Securities Exchange Commission restrictionsDifficulty: EasyObjective: LO 2-1AACSB: Reflective thinking11) Small local CPA Firms are allowed under Sarbanes-Oxley and the Securities and ExchangeCommission a special exemption to perform audits of publicly-listed firms.Answer: FALSETerms: Sarbanes-Oxley and Securities and Exchange Commission restrictionsDifficulty: EasyObjective: LO 2-1AACSB: Reflective thinking12) In addition to attestation and assurance services, CPA firms provide other services to theirclients. List three of these services.Answer: Other services performed by a CPA firm include: accounting and bookkeeping services tax services management consulting and risk advisory services.Terms: Activities of CPA firmsDifficulty: ModerateObjective: LO 2-1AACSB: Reflective thinking3Copyright 2020 Pearson Education, Inc.

2.2 Learning Objective 2-21) Which of the following statements is true as it relates to limited liability partnerships?A) Only senior partners are liable for the partnership's debts.B) Partners have no liability in a limited liability partnership arrangement.C) Partners are personally liable for the acts of those under their supervision.D) All partners must be AICPA members.Answer: CTerms: Limited liability partnershipsDifficulty: ChallengingObjective: LO 2-2AACSB: Reflective thinking2) Which staff level in a CPA firm performs most of the detailed audit work?A) partnerB) staff assistantC) senior auditorD) senior managerAnswer: BTerms: Staff levels in CPA firmDifficulty: EasyObjective: LO 2-2AACSB: Reflective thinking3) Which staff level in a CPA firm manages the overall relationship with the client and managesthe audit, in general?A) the audit partnerB) the audit staff assistantC) the senior or in-charge auditor with 2-5 years' experienceD) the audit managerAnswer: DTerms: Staff levels in CPA firmDifficulty: EasyObjective: LO 2-2AACSB: Reflective thinking4) All of the Big Four accounting firms and many of the smaller CPA firms now operate aslimited liability partnerships.Answer: TRUETerms: Limited liability partnershipsDifficulty: EasyObjective: LO 2-2AACSB: Reflective thinking4Copyright 2020 Pearson Education, Inc.

5) Limited liability companies are structured and taxed like a general partnership, but theirowners have limited personal liability similar to that of a general corporation.Answer: TRUETerms: Limited liability companiesDifficulty: ModerateObjective: LO 2-2AACSB: Reflective thinking6) In a CPA firm, the audit partner coordinates the performance of audit procedures.Answer: FALSETerms: Staff levels in CPA firmDifficulty: EasyObjective: LO 2-2AACSB: Reflective thinking7) In a CPA firm, the audit senior or the in-charge auditor performs most of the detailed auditwork.Answer: FALSETerms: Staff levels in CPA firmDifficulty: EasyObjective: LO 2-2AACSB: Reflective thinking8) List and describe the three factors that influence the organizational structure of all CPA firms.What are the most common forms of CPA firm organization?Answer: The three factors that influence the organization of a CPA firm include:1. The need for independence from clients. Independence permits auditors to remain unbiased indrawing conclusions about the financial statements.2. The importance of a structure to encourage competence. Competency permits auditors toconduct audits and perform other services effectively and efficiently.3. The increased litigation risk faced by auditors. Audit firms continue to experience increasesin litigation-related costs. Some organizational structures afford a degree of protection toindividual firm members.Common forms of audit firm organization include: Proprietorship General Partnership General Corporation Professional Corporation Limited Liability Company Limited Liability PartnershipTerms: Factors that influence the organizational structure of CPA firmsDifficulty: ModerateObjective: LO 2-2AACSB: Reflective thinking5Copyright 2020 Pearson Education, Inc.

9) List and describe the six organizational structures available to CPA firms.Answer: CPA firms can take one of six organizational forms: Proprietorship. This form is limited to firms with only one owner. General partnership. This form is similar to a proprietorship, except that it applies to multipleowners. General corporation. Shareholders in a general corporation are liable only to the extent oftheir investment in the corporation. Many states prohibit CPA firms from organizing as a generalcorporation. Professional corporation. A professional corporation provides professional services and isowned by one or more shareholders. Personal liability protection for shareholders in professionalcorporations varies widely from state to state. Limited liability company. This form combines the most favorable attributes of a generalcorporation and a general partnership. LLCs are typically structured and taxed like a generalpartnership, but its owners have limited personal liability similar to that of a general corporation. Limited liability partnership. An LLP is owned by one or more partners. It is structured andtaxed like a general partnership. However, the personal liability protection of an LLP is less thanthat of a general corporation or an LLC, but it is greater than a general partnership. Manyaccounting firms now operate as LLPs.Terms: Organizational structures available to CPA firmsDifficulty: ModerateObjective: LO 2-2AACSB: Reflective thinking2.3 Learning Objective 2-31) The organization that is responsible for providing oversight for auditors of public companiesis called theA) Auditing Standards Board.B) American Institute of Certified Public Accountants.C) Public Oversight Board.D) Public Company Accounting Oversight Board.Answer: DTerms: Organization responsible for providing oversight for auditors of public companiesDifficulty: EasyObjective: LO 2-3AACSB: Reflective thinking6Copyright 2020 Pearson Education, Inc.

2) Members of the Public Company Accounting Oversight Board are appointed and overseen bytheA) U.S. Congress.B) American Institute of Certified Public Accountants.C) Auditing Standards Board.D) Securities and Exchange Commission.Answer: DTerms: Members of Public Company Accounting Oversight BoardDifficulty: EasyObjective: LO 2-3AACSB: Reflective thinking3) The Public Company Accounting Oversight BoardA) performs inspections of the quality controls of firms that audit public companies.B) establishes auditing standards that must be followed by CPAs on all audits.C) oversees auditors of private companies.D) performs all of the above functions.Answer: ATerms: Public Company Accounting Oversight BoardDifficulty: ModerateObjective: LO 2-3AACSB: Reflective thinking7Copyright 2020 Pearson Education, Inc.

4) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violationduring its inspection of a registered accounting firm. The PCAOBA)can enforcereport the matter to suspend the license todisciplinary action the Securities andpractice of the CPAagainst theExchangeguilty of the violationaccounting firmCommissionYesYesYesB)can enforcedisciplinary actionagainst theaccounting firmYesreport the matter tothe Securities andExchangeCommissionYessuspend the license topractice of the CPAguilty of the violationreport the matter tothe Securities andExchangeCommissionNosuspend the license topractice of the CPAguilty of the violationreport the matter tothe Securities andExchangeCommissionNosuspend the license topractice of the CPAguilty of the violationNoC)can enforcedisciplinary actionagainst theaccounting firmYesNoD)can enforcedisciplinary actionagainst theaccounting firmNoNoAnswer: BTerms: Public Company Accounting Oversight Board inspection violationsDifficulty: ModerateObjective: LO 2-3AACSB: Reflective thinking8Copyright 2020 Pearson Education, Inc.

5) Has audit quality improved since the passage of Sarbanes-Oxley Act (SOX)? Which of thefollowing statements is true with regards to audit quality since the passage of SOX?A) The frequency of financial statement restatements has increased since SOX.B) PCAOB audit engagement findings continue to document a high level of audit deficiencies.C) Finally, the auditing professions agrees on the definition of audit quality.D) No progress has been made on the definition of what are called "Audit Quality Indicators"since SOX.Answer: BTerms: Public Company Accounting Oversight BoardDifficulty: ModerateObjective: LO 2-3AACSB: Reflective thinking6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors ofpublicly traded and private companies.Answer: FALSETerms: Public Company Accounting Oversight BoardDifficulty: EasyObjective: LO 2-3AACSB: Reflective thinking7) The PCAOB requires annual inspections of accounting firms that audit more than ten publiccompanies.Answer: FALSETerms: Public Company Accounting Oversight BoardDifficulty: ModerateObjective: LO 2-3AACSB: Reflective thinking8) The PCAOB requires annual inspections of other registered accounting firms that audit lessthan 100 publicly listed companies at least once every 3 years.Answer: TRUETerms: Public Company Accounting Oversight BoardDifficulty: ModerateObjective: LO 2-3AACSB: Reflective thinking9) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board(PCAOB). What are the PCAOB's primary functions?Answer: The PCAOB provides oversight for auditors of public companies; establishes auditing,attestation, and quality control standards for public company audits; and performs inspections ofaudit engagements as well as the quality controls at audit firms performing those audits.Terms: Sarbanes-Oxley Act; Public Company Accounting Oversight Board primary functionsDifficulty: ModerateObjective: LO 2-3AACSB: Reflective thinking9Copyright 2020 Pearson Education, Inc.

2.4 Learning Objective 2-41) The form that must be completed and filed with the Securities and Exchange Commissionwhenever a company experiences a significant event that is of interest to public investors is theA) Form S-1.B) Form 8-K.C) Form 10-K.D) Form 10-Q.Answer: BTerms: SEC Form 8-K, reporting significant eventsDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking2) The form that must be filed with the Securities and Exchange Commission whenever acompany plans to issue new securities to the public is theA) Form S-1.B) Form 8-K.C) Form 10-K.D) Form 10-Q.Answer: ATerms: Form must be completed and filed with Securities and Exchange Commission whencompany plans to issue new securitiesDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking3) Which of the following is a correct statement regarding the SEC?A) The Securities Act of 1934 requires most companies planning to issue new securities to thepublic to submit a registration statement to the SEC for approval.B) All public companies must file monthly statements with the SEC.C) The Form 10-K must be filed within 30 days after the close of the fiscal year.D) The SEC has the power to establish rules for any CPA associated with audited financialstatements submitted to the commission.Answer: DTerms: Securities and Exchange CommissionDifficulty: ChallengingObjective: LO 2-4AACSB: Reflective thinking10Copyright 2020 Pearson Education, Inc.

4) With respect to the SEC,A) the attitude of the SEC is generally considered in any major change proposed by the FASB.B) the SEC is the sole agency responsible for setting generally accepted accounting principles.C) the SEC requirements of greatest interest to CPAs are set forth in their enforcementregulations.D) the SEC has the power to establish rules for all CPAs.Answer: ATerms: Securities and Exchange Commission influence on setting generally accepted accountingprinciplesDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking5) Which of the following is not a publication issued by the Securities and ExchangeCommission?A) Accounting and Auditing Enforcement ActionsB) Accounting Series ReleasesC) Regulation S-XD) State Board of Accountancy Enforcement ActionsAnswer: DTerms: Securities and Exchange CommissionDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking6) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that onlythe 1934 Act requires audited financial statements.Answer: FALSETerms: Securities Acts of 1933 and 1934Difficulty: EasyObjective: LO 2-4AACSB: Reflective thinking7) Form 10-K must be filed with the SEC whenever a public company experiences a significantevent.Answer: FALSETerms: Form 10-K; SECDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking11Copyright 2020 Pearson Education, Inc.

8) The overall purpose of the Securities and Exchange Commission is to assist in providinginvestors with reliable information upon which to make investment decisions.Answer: TRUETerms: Securities and Exchange CommissionDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking9) Form 10-Q must be filed monthly with the Securities and Exchange Commission by everypublicly held company.Answer: FALSETerms: Form 10-Q; SECDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking10) Discuss the purpose of the Securities and Exchange Commission and its influence on settinggenerally accepted accounting principles.Answer: The SEC, an agency of the federal government, assists in providing investors withreliable information upon which to make investment decisions. The SEC has considerableinfluence in setting generally accepted accounting principles (GAAP) and disclosurerequirements for financial statements as a result of its authority for specifying reportingrequirements considered necessary for fair disclosure to investors. The SEC has the power toestablish rules for any CPA associated with audited financial statements submitted to thecommission. The attitude of the SEC is generally considered in any major change proposed bythe Financial Accounting Standards Board (FASB), the independent organization that establishesU.S. GAAP.Terms: Securities and Exchange Commission influence on setting generally accepted accountingprinciplesDifficulty: ModerateObjective: LO 2-4AACSB: Reflective thinking2.5 Learning Objective 2-51) Statements on Standards for Accounting and Review Services (SSARS) are issued by theA) Accounting and Review Services Committee.B) Professional Ethics Executive Committee.C) Securities and Exchange Commission.D) Financial Accounting Standards Board.Answer: ATerms: Statements on Standards for Accounting and Review Services (SSARS)Difficulty: ModerateObjective: LO 2-5AACSB: Reflective thinking12Copyright 2020 Pearson Education, Inc.

2) The American Institute of Certified Public Accountants (AICPA)A) is responsible for issuing licenses to new CPAs.B) restricts its membership to CPAs who are independent auditors.C) sets auditing standards for both public and private companies.D) sets rules of conduct that CPAs are required to meet.Answer: DTerms: AICPA has authority to establish standards and rulesDifficulty: ModerateObjective: LO 2-5AACSB: Reflective thinking3) In 2017, the American Institute of CPAs joined with which of the following to form theAssociation of International Certified Public Accountants?A) the Chartered Institute of Management AccountantsB) the Securities and Exchange CommissionC) the Public Accounting Oversight BoardD) the Japanese Institute of Certified Public AccountantsAnswer: ATerms: AICPA joins with the CIMA (Chartered Institute of Management Accountants)Difficulty: ModerateObjective: LO 2-5AACSB: Reflective thinking4) Membership in the AICPA is restricted to CPAs who are currently practicing as independentauditors.Answer: FALSETerms: Membership in AICPADifficulty: EasyObjective: LO 2-5AACSB: Reflective thinking5) Membership in the AICPA is mandatory for all licensed practicing CPAs.Answer: FALSETerms: Membership in AICPADifficulty: EasyObjective: LO 2-5AACSB: Reflective thinking6) A CPA must meet continuing education requirements to maintain their license to practice.Answer: TRUETerms: Membership in AICPADifficulty: EasyObjective: LO 2-5AACSB: Reflective thinking13Copyright 2020 Pearson Education, Inc.

7) The Auditing Standards Board (ASB) of the AICPA is responsible for issuingpronouncements on auditing matters in the U.S. for the audits of every type of entity.Answer: TRUE

Auditing and Assurance Services, 17e (Arens/Elder/Beasley) Chapter 2 The CPA Profession 2.1 Learning Objective 2-1 1) The legal right to perform audits is granted to a CPA firm by regulation of A) each state. B) the Financial Accounting Standards Board (FASB). C) the American Institute of Certified Public Accountants (AICPA).

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