Professional Standards Practice Questions – Flashcards
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Auditors may be independent in fact but no independent in appearance. T/F
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True
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Auditing Standards issued by the PCAOB are the sole source of guidance for audits of public entities. T/F
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False
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Attestation standards provide guidance for a wide variety of engagements different in scope than an audit.
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True
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The reporting principle relates to a firm's system of quality control criteria for conducting an audit.
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False
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Substantive procedures performed by the audit team are most closely related to the risk of material misstatement.
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False
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The concept of due care reflects the need to plan and perform the audit with an appropriate level of professional skepticism.
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True
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The performance principle sets forth the quality criteria for conducting an audit.
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True
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Auditors of public entities registered with the Securities and Exchange Commission are required to register with the Public Company Accounting Oversight Board.
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True
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The word appropriateness refers to the number of transactions or components of an account balance examined by auditors.
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False. Sufficient refers to the quantity. Appropriate refers to quality.
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To be considered material, an item must be one that would influence the decision of financial statement users.
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True
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An unqualified opinion indicates that the financial statements present the entity's financial condition, results of operations, and cash flows in conformity with GAAP.
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True
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The auditors' report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.
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True
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The purpose of a system of quality control is to provide reasonable assurance that the firm and its personnel issue reports that are appropriate under the circumstances.
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True
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) The attestation standards do not require the attestation report to include a statement that A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria. B. Indicates that the practitioner has significant reservations about the engagement. C. Identifies the subject matter or assertion being reported on. D. Indicates that the accountant assumes no responsibility to update the report.
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D.
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Control risk is A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B. The probability that a material misstatement could occur and not be detected by auditors' procedures. C. The risk that auditors will not be able to complete the audit on a timely basis. D. The risk that auditors will not properly control the staff on the audit engagement.
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A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.
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The responsibilities principle under generally accepted auditing standards does not include which of the following? A. Competence and capabilities. B. Independent attitude. C. Due care. D. Planning and supervision.
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D. Planning and supervision
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An important role of the Public Company Accounting Oversight Board is to oversee the A. Issuance of statements by the Financial Accounting Standards Board. B. Preparation and grading of the Uniform CPA Examination. C. Peer review of member firms of the Private Companies Practice Section. D. Regulation of firms that audit public entities.
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D. Regulation of firms that audit public entities
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Audit evidence is usually considered sufficient when A. It is reliable. B. There is enough quantity to afford a reasonable basis for an opinion on financial statements. C. It has the qualities of being relevant, objective, and free from unknown bias. D. It has been obtained through random selection methods.
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B. Sufficient refers to quantity.
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Which of the following is not considered a type of audit evidence? A. Entity's trial balance. B. Auditors' calculations. C. Physical observation. D. Verbal statements made by client personnel.
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A. Trial balance
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Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's accounting staff held in private. B. Inspection of prenumbered client shipping documents. C. Inspection of bank statements obtained directly from the client's financial institution. D. Analytical procedures performed by auditors on the client's trial balance.
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C. Inspection of bank statements obtained directly from the client's financial institution.
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Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B. The client's chief executive officer graduated from the same university as the partner in charge of the accounting firm. C. An auditor on the engagement owns a financial interest in the client's stock. D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.
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C. An auditor on the engagement owns a financial interest in the client's stock.
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The standard auditors' report refers to standards of the PCAOB and GAAP in which paragraph? A. Standards of the PCAOB: Scope only; GAAP: Opinion only B. Standards of the PCAOB: Introductory only; GAAP: Scope and opinion C. Standards of the PCAOB: Introductory and scope; GAAP: Opinion only D. Standards of the PCAOB: Introductory only; GAAP: All paragraphs
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A.
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Which of the following is not included in the auditors' standard report representing an unqualified opinion? A. A brief indication of the responsibility of auditors and management for the financial statements. B. An indication that all appropriate disclosures have been made and included in the financial statements. C. An indication that the audit was conducted in accordance with standards established by the PCAOB. D. The auditors' opinion on the fairness of the financial statements.
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B. An indication that all appropriate disclosures have been made and included in the financial statements.
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The primary purpose of the auditors' study of internal control for a nonpublic entity is: A. To provide constructive suggestions to the client for improving its internal control. B. To report on internal control as required by Auditing Standard No. 5. C. To identify and detect fraud and irregularities perpetrated by client personnel. D. To determine the nature, timing, and extent of substantive procedures.
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D.
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Which of the following concepts is least related to the risk of material misstatement? A. Control risk. B. Detection risk. C. Inherent risk. D. Materiality.
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B. Detection Risk
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Which of the following statements describes an appropriate relationship with respect to the reliability of audit evidence? A. Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities. B. Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers. C. A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor. D. Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.
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C.
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60. Which of the following would normally be considered earliest in the audit examination? A. Determination of materiality levels to use during the audit. B. Consideration of the ability of the entity's internal control to prevent or detect errors. C. Preparation of a written audit plan. D. Evaluation of the type of audit opinion to be issued based on the auditor's findings.
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A.
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To exercise due care, an accountant should A. Take continuing professional education classes. B. Report whether the financial statements are in accordance with GAAP. C. Gather enough audit evidence to have complete assurance that there is enough support for the opinion on the financial statements. D. Conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis.
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D.
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The most persuasive evidence regarding the existence of newly acquired computer equipment is A. Inquiry of management. B. Documentation prepared externally. C. Observation of auditee's procedures. D. Physical observation.
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D.
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Which of the following concepts is least related to the standard of due care? A. Independence in fact. B. Professional skepticism. C. Prudent auditor. D. Reasonable assurance.
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D.
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The evidence considered most appropriate by auditors is best described as A. Internal documents such as sales invoice copies produced under conditions of strong internal control. B. Written representations made by the president of the entity. C. Documentary evidence obtained directly from independent external sources. D. Direct personal knowledge obtained through physical observation and mathematical recalculation.
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D.
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Which of the following is most closely related to the relevance of audit evidence? A. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. B. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. C. In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year. D. Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.
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B.
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Which of the following best describes the general contents of the introductory paragraph of the auditors' report? A. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. B. The auditors' conclusion with respect to the fairness of the entity's financial statements. C. Statements identifying the responsibility of auditors and management in the financial reporting process. D. The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting. Reference: Question also found in textbook
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C.
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Which of the following opinions would be issued if auditors believed that the entity's financial statements were not presented in conformity with GAAP? A. Adverse opinion. B. Disclaimer of opinion. C. Qualified opinion. D. Unqualified opinion.
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A.
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The attestation standards are a general set of standards intended to guide work in A. Audits of financial statements. B. Financial forecasts and prospective financial information. C. Areas other than audits of financial statements. D. Understanding internal control.
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C.
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Auditing standards are considered to be A. Specialized to obtain evidence to render an opinion. B. Guides for the quality of audits that apply to all audits. C. Standards for preparation of financial statements. D. Standards to govern the quality of a specific firm's audit practice.
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B.
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Which of the following situations would provide auditors with a lower level of detection risk? A. Inspecting an item rather than directly confirming the existence of that item with third parties. B. Evaluating a smaller number of transactions or components of an account balance. C. Relying extensively on verbal inquiry of client personnel in gathering evidence. D. Examining an account that is more susceptible to misstatement because of complex calculations and accounting methods.
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A.
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When financial statements do not present fairly the financial condition, results of operations, and cash flows of an entity, an auditor would mostly likely issue a(n): A. Adverse opinion. B. Disclaimer of opinion. C. Qualified opinion. D. Unqualified opinion.
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A.
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_____________________________ standards are a general set of standards to guide engagements in areas other than audits of financial statements.
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Attestation
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Audits of historical financial statements are guided by a broad set of principles referred to as ___________________________________________________________.
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Generally Accepted Auditing Standards (GAAS)
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The concept of _______________ refers to the nature of information provided by evidence and the management assertions related to that evidence.
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relevance
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The AICPA's fundamental principles of generally accepted auditing standards are classified in three categories: _______________________ principle, _______________________ principle, and the _____________________________ principle.
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responsibilities; performance; reporting
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A(n) _______________________ is a list of auditing procedures that will be performed during the engagement to gather sufficient appropriate evidence.
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audit plan
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The exercise of ________________________ reflects a level of performance that would be exercised by reasonable auditors in similar circumstances.
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due care
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Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intends to use its audited financial statements to secure a loan. Fallon has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Fallon that the audit plan did not always match what they found at Mellow Markets. Fallon responded, "Just cross out whatever is not relevant in the audit plan and don't add anything - it will only make us go over the budget." When Fallon came to the client near the end of fieldwork, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location while three of Mellow Markets' five stores were in other cities. Fallon told the assistant to get inventory sheets from the client for the other stores and added, "Make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Fallon reviewed all audit documentation and submitted the job for review by the manager. 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with the performance principle? Explain.
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According to the performance principle, to obtain reasonable assurance, which is high but not an absolute level of assurance, the auditor: a. Plans the work and properly supervises any assistants. b. Determines and applies appropriate materiality level or levels throughout the audit. c. Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control. d. Obtains sufficient appropriate audit evidence about whether material misstatements exist through designing and implementing appropriate responses to the assessed risks. e. The Mellow Markets audit does not comply with the performance principle. With respect to planning, the failure to prepare an appropriate audit plan and the lack of time and attention the inexperienced staff received from Fallon violate the performance principle. In addition, there is no indication that any steps were taken to either understand the client's business or its internal control. Finally, these deficiencies suggest that the appropriate procedures were not performed to collect sufficient appropriate evidence. Furthermore, the lack of a relevant plan to observe inventory in other cities and Fallon's decision to limit inventory procedures to agreeing the inventory sheets and the general ledger inventory balance demonstrates the failure to gather sufficient appropriate evidence and represents an overall violation of the performance principle. 124. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intends to use its audited financial statements to secure a loan. Fallon has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Fallon that the audit plan did not always match what they found at Mellow Markets. Fallon responded, "Just cross out whatever is not relevant in the audit plan and don't add anything - it will only make us go over the budget." When Fallon came to the client near the end of fieldwork, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location while three of Mellow Markets' five stores were in other cities. Fallon told the assistant to get inventory sheets from the client for the other stores and added, "Make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Fallon reviewed all audit documentation and submitted the job for review by the manager. Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with the performance principle? Explain. According to the performance principle, to obtain reasonable assurance, which is high but not an absolute level of assurance, the auditor: a. Plans the work and properly supervises any assistants. b. Determines and applies appropriate materiality level or levels throughout the audit. c. Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control. d. Obtains sufficient appropriate audit evidence about whether material misstatements exist through designing and implementing appropriate responses to the assessed risks. e. The Mellow Markets audit does not comply with the performance principle. With respect to planning, the failure to prepare an appropriate audit plan and the lack of time and attention the inexperienced staff received from Fallon violate the performance principle. In addition, there is no indication that any steps were taken to either understand the client's business or its internal control. Finally, these deficiencies suggest that the appropriate procedures were not performed to collect sufficient appropriate evidence. Furthermore, the lack of a relevant plan to observe inventory in other cities and Fallon's decision to limit inventory procedures to agreeing the inventory sheets and the general ledger inventory balance demonstrates the failure to gather sufficient appropriate evidence and represents an overall violation of the performance principle.
