Question 1

PCAOB auditing standards must be followed on all audits of public companies' financial statements.

Accepted Answer

PCAOB auditing standards are mandatory for all audits of public companies' financial statements.

Question 2

The Audit Committee consists of:

Accepted Answer

The Audit Committee typically consists of members of the Board of Directors who are independent of management, according to auditing standards. They oversee the organization's financial reporting process, internal controls, and external audit. Option A is incorrect because the Audit Committee is separate from management. Option B is incorrect because the AICPA is a professional organization that provides auditing standards but does not establish an Audit Committee. Option D is incorrect because appointed government overseers are not typically members of the Audit Committee.

Question 3

One of the five basic business processes is the warehousing cycle.

Accepted Answer

The five basic business processes typically include revenue, expenditure, production, human resources, and financing cycles. Warehousing is part of the supply chain or logistics process, not a standalone basic business process.

Question 4

A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002).

Accepted Answer

The Sarbanes-Oxley Act (2002) was passed in response to a number of high-profile corporate accounting scandals, including Enron and WorldCom, which revealed serious deficiencies in corporate reporting and auditing practices. These failures highlighted the need for regulatory reform to address issues such as conflicts of interest, lack of transparency, and weak internal controls.

Question 5

The authoritative body designed to promulgate standards concerning a CPA's association with audited financial statements of an entity that is required to file financial statements with the SEC is the:

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) is the authoritative body established by the Sarbanes-Oxley Act of 2002 to promulgate standards concerning a CPA's association with audited financial statements of entities that are required to file financial statements with the SEC. The other options listed are not specifically responsible for promulgating standards related to CPA's association with audited financial statements of SEC filers.

Question 6

A financial statement audit is generally organized based on the five basic business processes or cycles.

Accepted Answer

This statement is true. Financial statement audits are typically organized based on the five basic business processes or cycles, which include revenue and cash receipts, purchases and cash disbursements, payroll and personnel, financing, and investment.

Question 7

The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS states that auditors are responsible for having appropriate competence and:

Accepted Answer

The Responsibilities section specifically states that auditors are responsible for having the capabilities to perform the audit, which refers to their technical competence, knowledge of the industry, and understanding of auditing standards and procedures. The other answer choices are also responsibilities of auditors, but they are not specifically mentioned in this section. Option A is covered in the Ethics and Independence section, Option B is covered in the Performance section, and Option D is covered in the General Principles section of the Principles Underlying an Audit Conducted in Accordance with GAAS.

Question 8

The auditor must be independent of the auditee unless:

Accepted Answer

The independence of the auditor is a fundamental principle of auditing, and the auditor cannot lack independence under any circumstances. It is critical to ensure that the auditor is objective, neutral, and free of any potential conflicts of interest, which may impair professional judgment. Any lack of independence undermines the integrity of the audit process and may lead to incorrect or biased audit opinions. Hence, the answer must be D - none of the above, as the auditor cannot lack independence.

Question 9

A financial statement audit must be conducted based on GAAP.

Accepted Answer

A financial statement audit is conducted based on auditing standards (such as Generally Accepted Auditing Standards (GAAS) in the United States or International Standards on Auditing (ISA) globally), not based on Generally Accepted Accounting Principles (GAAP), which are the guidelines for preparing the financial statements.

Question 10

The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS requires that the report, "states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework." This passage requires:

Accepted Answer

The passage requires an opinion by the auditor as to whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. The auditor must provide an opinion on the fairness of the financial statements, not just a statement of fact or an objective measure of compliance.

Question 11

The ASB's auditing standards contain a preface that includes Principles Underlying an Audit Conducted in Accordance with GAAS.

Accepted Answer

The preface of the ASB's auditing standards does indeed include the Principles Underlying an Audit Conducted in Accordance with GAAS.

Question 12

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

Accepted Answer

Professional skepticism is the appropriate attitude for auditors to adopt while conducting an audit. Professional skepticism encompasses an attitude of being alert to the possibility of misstatements, questioning information presented, and being intellectually curious. This attitude is necessary to ensure auditors obtain sufficient and appropriate audit evidence to form an opinion on the financial statements. Options A, B, and D are not appropriate attitudes for auditors to adopt while conducting an audit.

Question 13

The Public Company Accounting Oversight Board's role is to:

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002 in response to accounting scandals, such as Enron and WorldCom, to oversee the auditors of public companies in order to protect the interests of investors. The PCAOB's primary role is to ensure that auditors of public companies follow auditing standards and issue unbiased and accurate audit reports. It does not conduct audits of governmental entities, nor does it conduct the final review of auditors' work before the auditor's opinion is issued. While the PCAOB can sanction auditors who fail to follow Generally Accepted Auditing Standards (GAAS), its primary focus is on oversight and monitoring rather than punishment.

Question 14

What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?

Accepted Answer

The PCAOB, or Public Company Accounting Oversight Board, is responsible for setting auditing standards for audits of publicly-traded companies in the U.S. The AICPA, FASB, and GASB all have other roles in the accounting industry, but they do not set auditing standards for public companies.

Question 15

The audit committee generally includes senior executives of the organization.

Accepted Answer

The audit committee is typically composed of independent members of the organization's board of directors, with financial and accounting expertise. While senior executives may attend committee meetings, they are not typically members of the committee itself.

Question 16

Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants?

Accepted Answer

Responsibilities describes where auditors are required to plan the work and properly supervise any assistants.

Question 17

Generally, the financial statements of U.S. companies must be prepared based on GAAP.

Accepted Answer

Generally, the financial statements of U.S. companies must be prepared based on Generally Accepted Accounting Principles (GAAP), which are a set of accounting standards and principles that companies must follow when preparing their financial statements.

Question 18

The primary audit context with which an auditor is concerned is the auditee's industry or business.

Accepted Answer

The primary audit context with which an auditor is concerned is the auditee's industry or business. This is because industry-specific regulations, standards, and risks can affect the financial statements and operations of the auditee. The auditor must have a good understanding of the industry to properly evaluate the information presented in the financial statements and identify any potential accounting issues or fraud.

Question 19

Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS?

Accepted Answer

The Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS outlines the responsibilities of auditors in performing an effective audit, including planning and supervision, obtaining sufficient evidence, and forming an opinion on the financial statements. The section does not address the purpose and value of an audit or the characteristics of an auditor. The requirement to provide a written report expressing the auditor's opinion is addressed in a separate section.

Question 20

PCAOB auditing standards must be followed on all financial statement audits performed in the U.S.

Accepted Answer

PCAOB auditing standards are required for audits of public companies, while audits of private companies typically follow AICPA standards.

Quiz 2: The Financial Statement Auditing Environment