Deck 2: The Audit Standards Setting Process

Question 1

The organization that is responsible for providing oversight for auditors of public companies is called the ________.

A) Auditing Standards Board
B) American Institute of Certified Public Accountants
C) Public Oversight Board
D) Public Company Accounting Oversight Board

Answer 1

D

Question 2

All of the Big Four accounting firms and many of the smaller CPA firms now operate as Limited Liability Partnerships.

Answer 2

True

Question 3

Limited liability companies are structured and taxed like a general partnership,but their owners have limited personal liability similar to that of a general corporation.

Answer 3

True

Question 4

Many small,local accounting firms do not perform audits as their primary services to their clients include accounting and tax.

Question 5

The Public Company Accounting Oversight Board:

A) performs inspections of the quality controls of audit 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 any of the above functions.

Question 6

The Public Company Accounting Oversight Board (PCAOB)provides oversight to auditors of publicly traded and private companies.

Question 7

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.

Question 8

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?

Question 9

The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the:

A) Form S-1.
B) Form 8-K.
C) Form 10-K.
D) Form 10-Q.

Question 10

The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the:

A) Form S-1.
B) Form 8-K.
C) Form 10-K.
D) Form 10-Q.

Question 11

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).
D) the Audit Standards Board.

Question 12

Members of the Public Company Accounting Oversight Board are appointed and overseen by:

A) the U.S. Congress.
B) the American Institute of Certified Public Accountants.
C) the Auditing Standards Board.
D) the Securities and Exchange Commission.

Question 13

Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.Which of the following is true for auditors 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 only
B) II only
C) I and II
D) Neither I or II

Question 14

Assume the Public Company Accounting Oversight Board (PCAOB)identifies a violation during its inspection of a registered accounting firm.The PCAOB:

A)
B)
C)
D)

Question 15

The four categories for describing the size of audit firms include: the Big Four international firms; national firms; regional and local firms; and small firms.Which of the following is not a characteristic of a small firm?

A) Most have fewer than 25 professionals.
B) They perform audits on small and not-for-profit businesses.
C) Tax services are more important to their practice than auditing.
D) They do not audit publicly traded companies.

Question 16

The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB).What are the PCAOB's primary functions?

Question 17

List and describe the six organizational structures available to CPA firms.

Question 18

Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

Question 19

The AICPA has authority to establish standards and rules in all but which of the following areas?

A) Auditing standards applicable to financial statements of private companies
B) Compilation and review standards
C) Professional conduct
D) Auditing standards applicable to financial statements of private and public companies

Question 20

All CPA firms registered with the PCAOB are required to undergo a peer review annually.

Question 21

Which of the following is a true statement regarding auditing standards?

A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies.
B) PCAOB auditing standards are applicable to entities outside the U.S.
C) There are no similarities between PCAOB standards and International Standards on Auditing.
D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

Question 22

International Standards on Auditing are issued by the International Auditing and Assurance Standards Board.

Question 23

What are the major functions of the AICPA?

Question 24

Form 10-K must be filed with the SEC whenever a public company experiences a significant event.

Question 25

Which of the following are audit standards used in professional practice by audit firms?

A)
B)
C)
D)

Question 26

Which of the following is not one of the responsibilities of an auditor under the principles underlying an audit?

A) Possess appropriate competence and capabilities
B) Comply with ethical requirements
C) Plan work and supervise assistants
D) Maintain professional skepticism and exercise professional judgment

Question 27

The "Principles Underlying an Audit in Accordance with Generally Accepted Auditing Principles" provides a framework to help auditors:

A) understand the ten GAAS standards.
B) obtain complete assurance that the financial statements are free from any error.
C) report on the financial statements.
D) prevent fraud.

Question 28

Membership in the AICPA is mandatory for all licensed practicing CPAs.

Question 29

Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit:

A) both private and public companies.
B) public companies only.
C) private companies, public companies, and nonprofit entities.
D) private companies only.

Question 30

The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.

Question 31

Historically auditing standards have been organized into three categories,including:

A) Standards of field work.
B) Purpose of an audit.
C) Responsibilities of the auditor.
D) Proper planning and supervision.

Question 32

Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles.

Question 33

If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter,the auditor should generally seek guidance from which of the following sources?

A) Statements on Auditing Standards
B) Statements on Standards for Accounting and Review Services
C) Regulations issued by the Securities and Exchange Commission
D) The AICPA Code of Professional Conduct

Question 34

Any public accounting firm can be a member of the AICPA if the firm meets the membership requirements.

Question 35

The International Standards on Auditing (ISAs):

A) are issued by the AICPA.
B) override a country's regulations governing the audit of a company.
C) has many of the same standards as the Auditing Standards Board (ASB).
D) must be followed by companies whose stock is traded in the U.S.

Question 36

The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements.

Question 37

Statements on Standards for Accounting and Review Services are issued by the:

A) Accounting and Review Services Committee.
B) Professional Ethics Executive Committee.
C) Securities and Exchange Commission.
D) Financial Accounting Standards Board.

Question 38

Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors.

Question 39

The PCAOB considers International Standards on Auditing (ISAs)when developing its standards.

Question 40

For privately held companies who is responsible for establishing auditing standards?

A) Securities and Exchange Commission
B) Public Company Accounting Oversight Board
C) Auditing Standards Board
D) National Association of Accounting

Question 41

Statements on Auditing Standards issued by the AICPA's Auditing Standards Board are:

A) part of the generally accepted auditing standards under the AICPA Code of Professional Conduct.
B) interpretations of generally accepted auditing standards and departures from such statements must be justified.
C) interpretations of generally accepted auditing standards and such standards must be followed in every engagement.
D) generally accepted auditing procedures that are not covered by the AICPA Code of Professional Conduct.

Question 42

Generally Accepted Auditing Standards (GAAS)and Statements on Auditing Standards (SAS)should be looked upon by practitioners as:

A) ideals to work towards, but which are not achievable.
B) maximum standards that denote excellent work.
C) minimum standards of performance that must be achieved on each audit engagement.
D) benchmarks to be used on all audits, reviews, and compilations.

Question 43

The methods used by a CPA firm to ensure that the firm meets is professional responsibilities to clients and others is:

A) continuing professional education.
B) compliance with generally accepted reporting standards.
C) quality control.
D) peer review.

Question 44

Professional skepticism must be maintained only if the auditor suspects fraud.

Question 45

The Statements on Auditing Standards issued by the Auditing Standards Board:

A) are regarded as authoritative literature.
B) are the equivalent of laws for audit practitioners.
C) must be followed in all situations.
D) are optional guidelines which an auditor may choose to follow or not follow when conducting an audit.

Question 46

The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to:

A) provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.
B) monitor the risk factors concerning misstatements that arise from the misappropriation of assets.
C) document objective criteria for the CPA firm's peer review.
D) minimize the likelihood of associating with a client whose management may lack integrity.

Question 47

Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

A) They are guides intended to set forth auditing procedures that are applicable to a variety of situations.
B) They are procedural outlines that are intended to narrow the areas of inconsistency and divergence of auditor opinion.
C) They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment.
D) They are interpretations that are intended to clarify the meaning of "generally accepted auditing standards."

Question 48

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,the auditor must fulfill several performance responsibilities,including:

A) verifying that all audit work is performed by a CPA with a minimum of three years experience.
B) obtaining sufficient, appropriate audit evidence.
C) exercising professional judgment.
D) providing an opinion on the financial statements.

Question 49

Which of the following is an element of the CPA's quality control system that should be considered in establishing its quality control policies and procedures?

A) Considering audit risk and materiality
B) Using statistical sampling techniques
C) Assigning personnel to engagements
D) Complying with laws and regulations

Question 50

Distinguish between generally accepted auditing standards (GAAS)and generally accepted accounting principles (GAAP).What professional organization establishes GAAS?
What professional organization establishes GAAP?

Question 51

In order to properly plan and perform an audit,an important fact for both the auditor and the client to understand is that:

A) the internal control policies and procedures are developed by the auditors.
B) the purpose of an audit is to prevent fraud.
C) management is responsible for the preparation of the financial statements.
D) management can restrict the auditor's access to important information relevant to the financial statements.

Question 52

The SAS number identifies the order in which it was issued in relation to all other SASs.

Question 53

Within the context of quality control,the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with:

A) technical training that assures proficiency as a valuation expert.
B) professional education that is required in order to perform with due professional care.
C) knowledge required to fulfill assigned responsibilities.
D) knowledge required to perform a peer review.

Question 54

An auditor need not abide by a particular auditing standard if the auditor believes that:

A) the issue in question is immaterial in amount.
B) more expertise is needed to fulfill the requirement.
C) the requirement of the standard has not been addressed by the PCAOB.
D) any of the above three are correct.

Question 55

Statements on Auditing Standards (SASs)are issued by the Public Company Accounting Oversight Board.

Question 56

Hansen Corporation's stock is listed on a national stock exchange and registered with the Securities and Exchange Commission.Hansen's management hires a CPA to perform an independent audit of Hansen's financial statements.The primary objective of this audit is to provide assurance to the:

A) investors in Hansen Corporation's stock.
B) stock exchange.
C) Securities and Exchange Commission.
D) management of Hansen Corporation.

Question 57

Which of the following statements about Generally Accepted Audit Standards are true?
I)They serve as broad guidelines to auditors for conducting an audit engagement.
II)They are sufficiently specific to provide any meaningful guide to practitioners.
III)They represent a framework upon which the AICPA can provide interpretations..

A) I and II
B) I and III
C) II and III
D) I, II and III

Question 58

Which of the following is not true for audit firms who audit publicly traded companies?

A) They must undergo a PCAOB inspection on an annual basis if they audit more than 100 issuers.
B) They must have an AICPA peer review on all audit clients.
C) They must have an AICPA peer review on all non-publicly traded clients.
D) The audit firm can choose which CPA firm they wish to conduct their AICPA peer review.

Question 59

List the four principles underlying an audit.

Question 60

When assessing the risk of material misstatements in the financial statements,

A) inadequate internal control procedures will mitigate client business risk.
B) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain.
C) company management is responsible for determining materiality levels.
D) the auditor must have an understanding of the client's business and industry.

Question 61

The following are definitions of terms that are listed on the right.Match the definition with its associated term.Each term can be used once,more than once or not at all.

Question 62

Which of the following is not an essential component of quality control?

A) Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies
B) Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards
C) Policies to ensure that personnel maintain their independence in fact and in appearance
D) Policies that ensure that monitoring activities are effectively applied

Question 63

Listed below are policies or procedures that the Crystal Cove audit firm has in place.For each identified policy or procedure state if it is a Generally Accepted Audit Standard (GAAS)or a Quality Control Standard.

Question 64

List and describe the six elements of quality control.Who establishes the standards for quality control?

Question 65

Quality controls are established for the entire CPA firm whereas GAAS are applicable to the individual engagement.

Question 66

Which one of the following is not true regarding the American Institute of Certified Public Accountants peer review requirement?

A) A CPA firm must develop and adhere to quality control standards.
B) Peer reviews are mandatory.
C) A CPA firm will lose AICPA eligibility if a peer review is not performed.
D) Firms required to be registered with and inspected by the PCAOB are exempt.

Question 67

Discuss the relationship between quality control and generally accepted auditing standards.