Auditing And Assurance Services 13th Edition by Arens - Test Bank

Auditing And Assurance Services 13th Edition by Arens – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

 

 

 

 

 

Chapter 2

 

Multiple-Choice Questions

 

 

1.	Which one of the following is not one of the three General Standards?
easy	a.	Proper planning and supervision.
a	b.	Independence of mental attitude.
	c.	Adequate training and proficiency.
	d.	Due professional care.
2.	Which one of the following is not a Field Work Standard?
easy	a.	Adequate planning and supervision.
b	b.	Due professional care.
	c.	Understand the entity and its environment including internal control.
	d.	Sufficient appropriate audit evidence.
3.	The General Standards stress the importance of:
easy	a.	evidence accumulation.
b	b.	personal qualities the auditor should possess.
	c.	communicating the auditor’s findings to the reader.
	d.	general supervision of the audit.
4.	The	generally  accepted  auditing  standard  that  requires  “Adequate  technical  training  and
easy	proficiency” is normally interpreted as requiring the auditor to have:
a	a.	formal education in auditing and accounting.
	b.	worked for an entity similar to the entity being audited.
	c.	independence in mental attitude
	d.	a graduate degree in a business field.
5. (SOX)	Members of the Public Company Accounting Oversight Board are appointed and overseen by:
easy	a.	the U.S. Congress.
d	b.	the American Institute of Certified Public Accountants.
	c.	the Auditing Standards Board.
	d.	the Securities and Exchange Commission.
6.	Statements on Auditing Standards provide auditors of privately held companies with ______
easy	guidance regarding the conduct of financial statement audits.
b	a.	fairly extensive
	b.	some limited
	c.	practically no
	d.	specific and detailed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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7.	Which of the following statements most accurately captures the intent of the standards of field
easy	work?
c	a.	Field work standards are primarily concerned with personal attributes necessary during the
		conduct of the audit.
	b.	Field work standards provide extensive guidance regarding the conduct of an audit.
	c.	Field work standards are primarily directed at the auditor’s planning, understanding of
		internal control, and evidence accumulation.
	d.	Field work standards are primarily concerned with the conduct of substantive testing as
		opposed to testing of internal controls.
8. (SOX)	Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for
easy	establishing auditing standards?
c	a.	Securities and Exchange Commission
	b.	Public Company Accounting Oversight Board
	c.	Auditing Standards Board
	d.	National Association of Accounting
9. (SOX)	Standards issued by the Public Company Accounting Oversight Board must be followed by
medium	CPAs who audit:
b	a.	both private and public companies.
	b.	public companies only.
	c.	private companies, public companies, and nonprofit entities.
	d.	private companies only.
10.	Which of the following is the least likely form of business for a CPA firm?
medium	a.	General partnership
b	b.	General corporation
	c.	Limited liability company
	d.	Limited liability partnership
11.	The Statements on Auditing Standards issued by the Auditing Standards Board:
medium	a.	are interpretations of generally accepted auditing standards.
a	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.
12.	An auditor need not abide by a particular auditing standard if the auditor believes that:
medium	a.	the issue in question is immaterial in amount.
a	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.
13. (SOX)	The Public Company Accounting Oversight Board does not:
medium	a.	perform inspections of the quality controls at audit firms that audit public companies.
b	b.	establish auditing standards that must be followed by CPAs on all audits.
	c.	oversee auditors of public companies.
	d.	perform any of the above functions.
14.	The form that must be completed and filed with the Securities and Exchange Commission
medium	whenever a company experiences a significant event that is of interest to public investors is the:
b	a.	Form S-1.
	b.	Form 8-K.
	c.	Form 10-K.
	d.	Form 10-Q.

 

 

 

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15.	The form that must be filed with the Securities and Exchange Commission whenever a company
medium	plans to issue new securities to the public is the:
a	a.	Form S-1.
	b.	Form 8-K.
	c.	Form 10-K.
	d.	Form 10-Q.
16.	The third general standard states that due care is to be exercised in the performance of an audit.
medium	This standard is generally interpreted to require:
c	a.	objective review of the adequacy of the technical training of firm personnel.
	b.	thorough review of the existing internal control structure.
	c.	critical review of work done at every level of supervision.
	d.	periodic review of a CPA firm’s quality control procedures.
17. (SOX)	Assume the Public  Company Accounting Oversight Board (PCAOB) identifies a  violation
medium	during its inspection of a registered accounting firm.
d	a.	The PCAOB may not enforce some disciplinary action against the accounting firm.
	b.	The PCAOB may not report the matter to the Securities and Exchange Commission.
	c.	The PCAOB may not report the matter to the appropriate state accountancy board
	d.	The PCAOB may not suspend the license to practice of the CPA guilty of the violation.
18.	Which  of  the  following  statements  best  describes  the  primary  purpose  of  Statements  on
medium	Auditing Standards?
d	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.”
19.	Statements on Standards for Accounting and Review Services are issued by the:
medium	a.	Accounting and Review Services Committee.
a	b.	Professional Ethics Executive Committee.
	c.	Securities and Exchange Commission.
	d.	Financial Accounting Standards Board.
20.	Consulting Standards are issued by the:
medium	a.	Accounting and Review Services Committee.
c	b.	Securities and Exchange Commission.
	c.	Management Consulting Services Executive Committee.
	d.	Financial Accounting Standards Board.
21.	The auditor’s judgment concerning the overall fairness of presentation of financial position,
medium	results of operations, and changes in cash flow is applied within the framework of:
d	a.	quality control.
	b.	generally accepted auditing standards which include the concept of materiality.
	c.	the auditor’s evaluation of the audited company’s internal control.
	d.	generally accepted accounting principles.
22.	A basic objective of a CPA firm is to provide professional services to conform to professional
medium	standards. Reasonable assurance of achieving this basic objective is provided through:
c	a.	continuing professional education.
	b.	compliance with generally accepted reporting standards.

 

 

 

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	c.	a system of quality control.
	d.	a system of peer review.
23.	Within the context of quality control, the primary purpose of continuing professional education
medium	and training activities is to enable a CPA firm to provide its personnel with:
c	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.
24.	Williams & Co., a member of the Private Companies Practice Section, is to have a “peer
medium	review.” The peer review can be performed by:
d	a.	a CPA firm selected by Williams & Co.
	b.	a review team selected by the state society.
	c.	internal auditors.
	d.	either a or b.
25.	Hansen Corporation’s stock is listed on a national stock exchange and registered with the
medium	Securities  and  Exchange  Commission.  Hansen’s  management  hires  a  CPA  to  perform  an
a	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.
26.	Which of the following is not an essential component of quality control?
medium	a.	Policies and procedures to ensure that firm personnel are actively engaged in marketing
a		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.
27.	Which of the following is true regarding the AICPA-approved practice monitoring programs?
challenging	a.	The Center for Public Company Audit Firms does not offer a peer review program.
c	b.	Firms  registered  with  the  PCAOB  must  not  enroll  in  an  AICPA-approved  practice
		monitoring program.
	c.	Public accounting firms must be enrolled in an  AICPA-approved practice monitoring
		program for members in the firm to be eligible for membership in the AICPA.
	d.	The AICPA peer review program is administered through the SEC.
28.	Which of the following statements is true as it relates to limited liability partnerships?
challenging	a.	Only senior partners are liable for the partnership’s debts.
c	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.
29. (SOX)	If an auditor of a public company cannot find guidance issued by the PCAOB on a particular
challenging	audit matter, the auditor should generally seek guidance from which of the following sources?
a	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.
30.	The SEC requirements of greatest interest to CPAs are set forth in the SEC’s:

 

 

 

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challenging	a.	Regulation S-X and Accounting Series Releases.
a	b.	S-1 through S-16 forms.
	c.	Director’s newsletter.
	d.	Forms 8-K, 10-K, and 10-Q.
31.	The AICPA has authority to establish standards and rules in all but which of the following
challenging	areas?
d	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.
32.	Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS)
challenging	should be looked upon by practitioners as:
c	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.
33.	Which one of the following is not a requirement for belonging to the Private Companies
challenging	Practice Section of the American Institute of Certified Public Accountants?
c	a.	Adherence to quality control standards.
	b.	Mandatory peer review.
	c.	Partner rotation after a period of ten consecutive years.
	d.	Continuing education.
34.	Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board are:
challenging	a.	part of the generally accepted auditing standards under the AICPA Code of Professional
b		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.

 

 

Essay Questions

 

35. Distinguish between generally accepted auditing standards (GAAS) and generally accepted

 

easy                            accounting principles (GAAP). What professional organization establishes GAAS? What professional organization establishes GAAP?

 

Answer:

 

Generally accepted auditing standards are general guidelines to help auditors meet their professional responsibilities in the audit of historical financial statements. They are considered to be the minimum standards of performance for auditors to follow and are established by the Auditing Standards Board of the American Institute of Certified Public Accountants for private companies and by the Public Company Accounting Oversight Board for public companies. Generally accepted accounting principles are the guidelines which an entity’s management normally follows when preparing historical financial statements. GAAP is established by the Financial Accounting Standards Board.

 

 

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

 

 

 

 

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easy

Answer:

For a CPA firm, quality control encompasses the methods used to make sure that the firm

meets its professional responsibilities to clients. Quality control is closely related to, but

 

distinct from, GAAS. A CPA firm must make sure that GAAS are followed on every

audit.  Quality  controls  are  the  procedures  used  by  the  CPA  firm  that  help  it  meet

requirements demanded by GAAS on every engagement in a consistent manner.

 

 

37. Describe the various staff levels and responsibilities of a typical public accounting firm.

easy

Answer:

 

Staff assistant – Staff assistants, or staff accountants, perform most of the detailed audit work.

 

Senior or In-charge auditor – Seniors coordinate and are responsible for the audit field work, including the supervision and review of staff assistants’ work.

Manager – Managers assist the senior plan and manage the audit, review the senior’s

work, and  manages  relations  with the  client.  A manager  may be responsible for

multiple engagements at the same time.

Partner  –  Partners  review  the  overall  audit  work  and  they  are  involved  in  all

significant audit decisions. As owners of the firm, partners are ultimately responsible

 

for conducting the audit and serving the client.

 

38. Discuss the five elements of quality control. Who establishes the standards for quality control?

medium

 

Answer:

Independence, integrity and objectivity – Personnel on engagement should maintain

independence in fact and in appearance, perform all professional responsibilities with

integrity and maintain objectivity in performing their professional responsibilities.

Personnel management – Policies and procedures should be established to provide the

firm with reasonable assurance that all new personnel are qualified to perform their

work,  work  is  assigned  to  personnel  who  have  adequate  training,  and  personnel

 

should participate in continuing professional education.

Acceptance and continuation of clients and engagements – Policies and procedures

should be established for deciding whether to accept or continue a client relationship.

These   policies    should   minimize   the   risk   of   associating   with    a  client   whose

management lacks integrity.

Engagement  performance  –  Policies  and  procedures  should  exist  to  ensure  that

 

engagement personnel perform work that meets applicable professional standards and

the firm’s standards of quality.

 

Monitoring – Policies and procedures should exist to ensure that the other four quality control elements are being effectively applied.

 

Quality control standards are established by the Auditing Standards Board for auditors

of private companies and by the Public Company Accounting Oversight Board for

auditors of public companies.

 

39. Describe the six organizational structures available to CPA firms.

medium

 

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

multiple owners.

General   corporation.   Unlike   a   general   partnership,   shareholders   in   a   general

 

 

 

 

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corporation are liable only to the extent of their investment in the corporation.

 

Professional corporation. Professional corporations can have one or more shareholders. Personal liability protection for shareholders in professional corporations varies widely from state to state.

Limited liability company. This form combines the most favorable attributes of a

general   corporation   and  a   general   partnership.   LLCs   are   taxed  like   a  general

partnership,  but  its  owners  have  limited  personal  liability like  shareholders  of  a

general corporation.

Limited   liability  partnership.   An   LLP   is   structured   and  taxed   like   a   general

partnership. However, the personal liability protection of an LLP is less than that of a

 

general corporation or an LLC, but it is greater than a general partnership. Many

accounting firms now operate as LLPs.

 

 

40. There are ten generally accepted auditing standards, divided into three categories. List, by

medium                     category, each of these ten standards.

 

Answer:

General Standards

Adequate technical training and proficiency.

 

Independence in mental attitude.

Due professional care.

 

Standards of Fieldwork

Adequate planning and supervision.

Understand the entity and its environment including internal control.

 

Sufficient appropriate audit evidence.

 

Standards of Reporting

Whether statements were prepared in accordance with GAAP.

Circumstances when GAAP was not consistently followed.

 

Adequacy of informative disclosures.

Expression of opinion on financial statements as a whole.

 

 

41. In the context of auditing, explain what is meant by an independent mental attitude. Discuss

medium                     how internal auditors can have an independent mental attitude when they are employed by the

 

company they audit.

 

Answer:

 

Independent mental attitude refers to a state of mind in which the CPA is totally unbiased with respect to the client and the financial information under audit.

 

Although internal auditors are employees of the organization for which their audits are

performed, internal auditors should be independent of the function being examined and

should report their findings to a level high enough in the organization to allow the auditor

to be free from influence by the party, or parties, being examined.

 

 

42. (SOX) The Sarbanes-Oxley   Act   established   the   Public   Company  Accounting   Oversight   Board

medium                     (PCAOB). What are the PCAOB’s primary functions? Who performed these functions prior to

 

the PCAOB?

 

Answer:

The PCAOB has responsibility for providing oversight auditors of public companies,

 

establishing   auditing   and  quality   control  standards  for   public   company  audits  and

 

 

 

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performing inspections of the quality controls at audit firms performing those audits. These functions were formerly the responsibility of the American Institute of Certified Public Accountants.

 

 

 

 

43. What are four of the major functions of the AICPA?

challenging

Answer:

 

Major functions of the AICPA include:

Establishing standards and rules that practicing CPAs must follow. These standards

consist  of  auditing  standards  for  auditors  of  private  companies,  compilation  and

 

review standards, other attestation standards, and the Code of Professional Conduct.

Research and publication. AICPA publications include the Journal of Accountancy,

industry audit guides, periodic updates of the Codification of Statements on Auditing

 

Standards, and the Code of Professional Conduct.

Promoting the accounting profession.

Developing specialist certifications.

Writing and grading the uniform CPA examination.

 

Providing continuing education seminars for its members.

 

 

44. Discuss the purpose of the Securities and Exchange Commission and its influence on setting

challenging                generally accepted accounting principles.

 

Answer:

The overall purpose of the SEC is to assist in providing investors with reliable information

upon which to make investment decisions. As a result of its authority for specifying

financial reporting requirements, the SEC has considerable influence in setting generally

accepted accounting principles. Although the SEC has taken the position that accounting

principles  should  be  set  by  the  profession  (FASB),  the  SEC’s  opinion  is  generally

 

considered in any major change in GAAP proposed by the FASB.

 

 

45. The purpose of the AICPA’s CPA Vision Project is to help CPAs make sense of our changing

challenging                and complex world. The Project has identified core values that CPAs must be aware of in the

future. What are the top five core values?

 

Answer:

Continuing education and lifelong learning

Competence

Integrity

 

Attuned to broad business issues

Objectivity

 

 

Other Objective Answer Format Questions

 

46.	Membership in the AICPA is restricted to CPAs who are currently practicing as independent
easy	auditors.
b	a.	True
	b.	False
47.	Membership in the AICPA is mandatory for all licensed practicing CPAs.

 

 

 

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easy	a.	True
b	b.	False
48.	Any public accounting firm can be a member of the AICPA if the firm meets the membership
easy	requirements.
a	a.	True
	b.	False
49.	Statements  on  Auditing  Standards  (SASs)  are  issued  by  the  Public  Company  Accounting
easy	Oversight Board.
b	a.	True
	b.	False
50. (SOX)	Auditors of public companies should, in the absence of guidance issued by the PCAOB, follow
easy	auditing standards issued by the SEC.
b	a.	True
	b.	False
51. (SOX)	The U.S. Congress has oversight responsibility for the PCAOB.
medium	a.	True
b	b.	False
52.	Form 10-K must be filed with the SEC whenever a public company experiences a significant
medium	event.
b	a.	True
	b.	False
53.	In  a  limited  liability  partnership,  partners  are  personally  liable  for  liabilities  arising  from
medium	negligent acts of other partners, but not for liabilities arising from acts of other employees.
b	a.	True
	b.	False
54.	Limited liability companies are structured and taxed like a general partnership, but their owners
medium	have limited personal liability similar to that of a general corporation.
a	a.	True
	b.	False
55. (SOX)	All CPA firms registered with the PCAOB are required to undergo a peer review at least once
medium	every two years.
b	a.	True
	b.	False
56.	Statements  on  Auditing  Standards  (SASs)  are  considered  to  be  interpretations  of  the  ten
medium	generally accepted auditing standards.
a	a.	True
	b.	False
57. (SOX)	Any CPA firm that audits more than 100 public companies is required to have an annual
medium	inspection by the PCAOB.
a	a.	True
	b.	False
58.	The overall purpose of the  Securities and Exchange Commission is to assist in providing
medium	investors with reliable information upon which to make investment decisions.
a	a.	True
	b.	False

 

 

 

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59.	International  Standards  on  Auditing  are  issued  by  the  International  Auditing  Practices
medium	Committee.
a	a.	True
	b.	False