Deck 1: The Role of the Public Accountant in the American Economy

Question 1

The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:

A) Auditing Standards Board.
B) Financial Accounting Standards Board.
C) Government Accounting Standards Boards.
D) Securities and Exchange Commission.

Answer 1

D

Question 2

The SEC does not pass on the merits of the securities that are registered with the agency.

Answer 2

True

Question 3

Historically, which of the following has the AICPA been most concerned with providing?

A) Professional standards for CPAs.
B) Professional guidance for regulating financial markets.
C) Standards guiding the conduct of internal auditors.
D) Staff support to Congress.

Answer 3

A

Question 4

Independent audits of today place more emphasis on sampling than did the audits of the 19^th century.

Question 5

An annual peer review is a requirement of the AICPA.

Question 6

The Sarbanes-Oxley Act requires that auditors of certain publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations.

Question 7

Auditing is frequently only a small part of the practice of local CPA firms.

Question 8

The Statements on Auditing Standards have been issued by the:

A) Auditing Standards Board.
B) Financial Accounting Standards Board.
C) Securities and Exchange Commission.
D) Federal Bureau of Investigation.

Question 9

An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):

A) Peer Review Engagement.
B) Quality Control Engagement.
C) Quality Assurance Engagement.
D) Attestation Engagement.

Question 10

The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice.

Question 11

Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit.

Question 12

The risk associated with a company's survival and profitability is referred to as:

A) Business Risk.
B) Information Risk.
C) Detection Risk.
D) Control Risk.

Question 13

The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as:

A) Auditing Statements of Position (ASPs).
B) Accounting Series Releases (ASRs).
C) Statements on Auditing Standards (SASs).
D) Statements on Auditing Principles (SAPs).

Question 14

The risk that information is misstated is referred to as:

A) Information risk.
B) Inherent risk.
C) Relative risk.
D) Business risk.

Question 15

The American Institute of Certified Public Accountants has the primary authority to establish accounting standards.

Question 16

A summary of findings rather than assurance is most likely to be included in a(n):

A) Agreed-upon procedures report.
B) Compilation report.
C) Examination report.
D) Review report.

Question 17

Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements.

Question 18

The Government Accountability Office (GAO):

A) Is primarily concerned with rapid processing of all accounts payable incurred by the federal government.
B) Conducts operational audits and reports the results to Congress.
C) Is a multinational organization of professional accountants.
D) Is primarily concerned with budgets and forecasts approved by the SEC.

Question 19

The risk that a company will not be able to meet its obligations when they become due is an aspect of:

A) Information risk.
B) Inherent risk.
C) Relative risk.
D) Business risk.

Question 20

A company is either audited by the GAO or internal auditors, but not both.

Question 21

Attestation risk is limited to a low level in which of the following engagement(s)?

A) Both examinations and reviews.
B) Examinations, but not reviews.
C) Reviews, but not examinations.
D) Neither examinations nor reviews.

Question 22

A typical objective of an operational audit is for the auditor to:

A) Determine whether the financial statements fairly present the entity's operations.
B) Evaluate the feasibility of attaining the entity's operational objectives.
C) Make recommendations for improving performance.
D) Report on the entity's relative success in attaining profit maximization.

Question 23

An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?

A) The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement.
B) The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period.
C) Operational audits do not ordinarily result in the preparation of a report.
D) The operational audit deals with pre-tax income.

Question 24

Which of the following is not correct relating to the Sarbanes-Oxley Act?

A) It toughens penalties for corporate fraud.
B) It restricts the types of consulting CPAs may perform for audit clients.
C) It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board.
D) It eliminates a significant portion of the accounting profession's system of self-regulation.

Question 25

The attest function:

A) Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services.
B) Includes the preparation of a report of the CPA's findings.
C) Requires a consideration of internal control.
D) Requires a complete review of all transactions during the period under examination.

Question 26

Operational auditing is primarily oriented toward:

A) Future improvements to accomplish the goals of management.
B) The accuracy of data reflected in management's financial records.
C) The verification that a company's financial statements are fairly presented.
D) Past protection provided by existing internal control.

Question 27

The review of a company's financial statements by a CPA firm:

A) Is substantially less in scope of procedures than an audit.
B) Requires detailed analysis of the major accounts.
C) Is of similar scope as an audit and adds similar credibility to the statements.
D) Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.

Question 28

Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also:

A) Accuracy.
B) Evaluation.
C) Compliance.
D) Internal control.

Question 29

Which of the following professionals has primary responsibility for the performance of an audit?

A) The managing partner of the firm.
B) The senior assigned to the engagement.
C) The manager assigned to the engagement.
D) The partner in charge of the engagement.

Question 30

Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management?

A) Integrity.
B) Competence.
C) Independence.
D) Keeping informed on current professional developments.

Question 31

Passage of the Sarbanes-Oxley Act led to the establishment of the:

A) Auditing Standards Board.
B) Accounting Enforcement Releases Board.
C) Public Company Accounting Oversight Board.
D) Securities and Exchange Commission.

Question 32

When compared to an audit performed prior to 1900, an audit today:

A) Is more likely to include tests of compliance with laws and regulations.
B) Is less likely to include consideration of the effectiveness of internal control.
C) Has bank loan officers as the primary financial statement user group.
D) Includes a more detailed examination of all individual transactions.

Question 33

Which of the following are issued by the Securities and Exchange Commission?

A) Accounting Research Studies.
B) Accounting Trends and Techniques.
C) Industry Audit Guides.
D) Financial Reporting Releases.

Question 34

The right to practice as a CPA is given by which of the following organizations?

A) State Boards of Accountancy.
B) The AICPA.
C) The SEC.
D) The General Accounting Office.

Question 35

Which of the following best describes the reason why independent auditors report on financial statements?

A) A management fraud may exist and it is more likely to be detected by independent auditors.
B) Different interests may exist between the company preparing the statements and the persons using the statements.
C) A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.
D) Poorly designed internal control may be in existence.

Question 36

The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over:

A) Compliance with laws and regulations.
B) Financial reporting.
C) Effectiveness of operations.
D) Efficiency of operations.

Question 37

Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?

A) Operational audit.
B) Internal audit.
C) Compliance audit.
D) Government audit.

Question 38

Inquiries and analytical procedures ordinarily form the basis for which type of engagement?

A) Agreed-upon procedures.
B) Audit.
C) Examination.
D) Review.

Question 39

Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA?

A) Only members employed by the AICPA are required to take such courses.
B) Only members in public practice are required to take such courses.
C) Members, regardless of whether they are in public practice, are required to meet such requirements.
D) There is no requirement for members to participate in CPE.

Question 40

Which of the following types of services is generally provided only by CPA firms?

A) Tax audits.
B) Financial statement audits.
C) Compliance audits.
D) Operational audits.

Question 41

An investor is considering investing in one of two companies. The companies have very similar reported financial position and results of operations. However, only one of the companies has its financial statements audited.
a. Describe what creates the demand for an audit in this situation. Include a discussion of how audited financial statements facilitate this investment transaction, and the effect of the audit on business risk and information risk.
b. Identify the potential consequences to the company of not having its financial statements audited.

Question 42

The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors.
a. Describe the events that led up to the passage of the Act.
b. Describe the major changes made by the Act.

Question 43

An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on: $$\begin{array} { | l | c | c | } \hline & \text { Financial Statements } & \text { Internal Control } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 44

Many people confuse the responsibilities of the independent auditors and the client's management with respect to audited financial statements.
a. Describe management's responsibility regarding audited financial statements.
b. Describe the independent auditors' responsibility regarding audited financial statements.
c. Evaluate the following statement: "If the auditors disagree with management regarding an accounting principle used in the financial statements, the auditors should express their views in the notes to the financial statements."