Chapter 2 Professional Standards True/False Questions 1. The generally accepted auditing standards of field work include a requirement that the auditors obtain sufficient competent evidential matter. Answer: True Difficulty: Easy 2. The auditors' report on a corporation's financial statements usually is addressed to the president of the company. Answer: False Difficulty: Easy 3. The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards. Answer: False Difficulty: Medium 4. Partners in CPA firms usually have the responsibility for signing the audit report. Answer: True Difficulty: Medium 5. An audit is more likely to detect tax evasion than violations of antitrust laws. Answer: True Difficulty: Hard 6. The attestation standards do not supersede any of the generally accepted auditing standards. Answer: True Difficulty: Medium 7. A peer review is generally performed by employees of the AICPA. Answer: False Difficulty: Medium 8. If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement. Answer: False Difficulty: Medium 9. An audit should be designed to provide reasonable assurance of detecting all illegal acts. Answer: False Difficulty: Medium Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 10. The pronouncements of the International Auditing Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company. Answer: True Difficulty: Medium Multiple Choice Questions 11. Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: A) B) C) D) Fraudulent Financial Reporting Yes Yes No No Misappropriation of Assets Yes No Yes No Answer: A Difficulty: Hard 12. Which of the following has the highest level of accounting authority within the “GAAP Hierarchy”? A) Authoritative body pronouncements. B) Pronouncements of bodies composed of expert accountants exposed for public comment. C) Pronouncements of bodies composed of expert accountants, not exposed for public comment. D) Pronouncements of the Federal Accounting Reserve Board. Answer: A Difficulty: Easy 13. An attestation engagement: A) Has as its primary source of standards the assurance standards. B) Includes a report on subject matter, or on an assertion about subject matter. C) Includes search and verification procedures for all major accounts. D) Is ordinarily an examination, review or compilation engagement. Answer: B Difficulty: Hard Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 14. An audit provides reasonable assurance of detecting which of the following types of important illegal acts? A) B) C) D) Direct Effect Yes Yes No No Indirect Effect Yes No Yes No Answer: B Difficulty: Medium 15. Which of the following is not a type of auditors' opinion? A) Adverse. B) Ordinary . C) Qualified. D) Unqualified. Answer: B Difficulty: Medium 16. Which of the following is one of the elements of quality control? A) Acceptance and continuance of clients and engagements. B) Assurance of proper levels of association. C) Due professional care. D) Supervision. Answer: A Difficulty: Hard 17. A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element? A) Engagement performance. B) Independence, integrity and objectivity. C) Monitoring. D) Personnel management. Answer: C Difficulty: Hard Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 18. Requirements for training, independence and due professional care are included in which group of the generally accepted auditing standards? A) Fieldwork. B) General. C) Reporting. D) Quality control. Answer: B 19. Which of the following is considered an interpretive publication in the GAAS Hierarchy? A) Appendices to Statements on Auditing Standards. B) Statements on Auditing Standards. C) Interpretations of FASB Standards. D) Auditing articles explaining Statements on Auditing Standards in the Journal of Accountancy. Answer: A Difficulty: Hard 20. In which paragraph of an audit report are auditing standards generally accepted in the United States explicitly mentioned in an audit report of a nonpublic company? A) B) C) D) Scope Yes Yes No No Opinion Yes No Yes No Answer: B Difficulty: Medium 21. In which paragraph of an audit report are auditing standards generally accepted in the United States explicitly mentioned in an audit report of a nonpublic company? A) B) C) D) Scope Yes Yes No No Opinion Yes No Yes No Answer: D Difficulty: Hard Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 22. An audit should be designed to achieve reasonable assurance of detecting material misstatements due to: A) Errors. B) Errors and fraud. C) Errors, fraud, and those illegal acts with a direct effect on financial statement amounts. D) Errors, fraud and illegal acts. Answer: C Difficulty: Hard 23. The expression "accounting principles generally accepted in the United States of America": A) Appears in both the scope paragraph and the opinion paragraph of the auditors' report. B) Appears in the introductory paragraph of the auditors' report. C) Appears in the opinion paragraph of the auditors' report. D) Does not appear in the auditors' report. Answer: C Difficulty: Medium 24. To qualify as "generally accepted," an accounting principle must: A) Have substantial authoritative support. B) Be covered in one or more of the SASs issued by the AICPA. C) Be set forth in a Financial Reporting Release issued by the SEC. D) Have received the approval of the FASB. Answer: A Difficulty: Medium 25. The generally accepted auditing standards adopted by the AICPA include a requirement that the CPAs: A) Assume responsibility for any losses to the client from fraud which existed during the audit but was not detected by the auditors. B) Follow accounting principles adopted by the SEC. C) Not accept as audit clients companies which compete directly with one another. D) Exercise due professional care in the performance of the examination and the preparation of the report. Answer: D Difficulty: Easy Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 26. Which of the following best describes a portion of the auditors' responsibility regarding illegal acts by clients? A) The auditors have a responsibility to discover all material illegal acts. B) If audit procedures reveal illegal acts, the auditors should take appropriate actions. C) If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the company. D) The auditors' responsibility for the detection of all illegal acts is the same as their responsibility regarding material misstatements due to errors and fraud. Answer: B Difficulty: Medium 27. The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the: A) Management fails to take appropriate corrective action. B) Illegal act has material financial statement implications. C) Illegal act has received widespread publicity. D) Auditors cannot reasonably estimate the effect of the illegal act on the financial statements. Answer: A Difficulty: Medium 28. The first paragraph of the standard unqualified audit report is referred to as the: A) Introductory paragraph. B) Opening paragraph. C) Opinion paragraph. D) Scope paragraph. Answer: A Difficulty: Easy 29. Primary responsibility for the financial statements lies with: A) B) C) D) Auditors Yes Yes No No Management Yes No Yes No Answer: C Difficulty: Medium Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 30. When a conflict exists between an accounting principle supported by a pronouncement of an authoritative body and an accounting principle supported by widely recognized practice, which standard prevails? A) The authoritative body pronouncement. B) The widely recognized pronouncement. C) Both are of equal authority and the form of the transaction prevails over its substance. D) Neither, other accounting literature must be consulted to determine the appropriate accounting treatment. Answer: A Difficulty: Medium 31. The auditors' report should indicate: A) That the examination was made in accordance with auditing standards generally accepted in the United States of America. B) Any weakness in internal control observed by the auditors. C) That accounting principles have been consistently applied. D) That no illegal acts have been identified. Answer: A Difficulty: Medium 32. Which of the following is not one of the five elements of quality control? A) Engagement performance. B) Personnel management. C) Review. D) Monitoring. Answer: C Difficulty: Medium 33. A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of: A) Acceptance and continuance of clients and engagements. B) Engagement performance. C) Personnel management. D) Independence, integrity and objectivity. Answer: B Difficulty: Hard Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 34. A requirement that all professional staff obtain a minimum number of hours of continuing professional education each year is an example of a quality control procedure in the area of: A) Acceptance and continuance of clients and engagements. B) Engagement performance. C) Personnel management. D) Independence, integrity and objectivity. Answer: C Difficulty: Hard 35. The body that issues international pronouncements providing auditing procedural and reporting guidance is the: A) International Federation of Auditors. B) Multinational Reporting Commission. C) International Auditing and Assurance Standards Board. D) Auditing Standards Board. Answer: C Difficulty: Medium 36. To present fairly in conformity with generally accepted accounting principles the financial statements must: A) Be consistently applied. B) Inform users of all matters that could materially affect a decision. C) Reflect transactions and events within a range of reasonable limits. D) Be considered preferable to the users of those financial statements. Answer: C Difficulty: Medium 37. What is the general character of the three generally accepted auditing standards classified as general standards? A) Criteria for competence, independence, and professional care of individuals performing the audit. B) Criteria for the content of the financial statements and related footnote disclosures. C) Criteria for the content of the auditors' report on financial statements and related footnote disclosures. D) The requirements for the planning of the audit and supervision of assistants, if any. Answer: A Difficulty: Medium Source: AICPA Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 38. The auditors' examination performed in accordance with generally accepted auditing standards generally should: A) Be expected to provide absolute assurance that illegal acts will be detected where internal control is effective. B) Be relied upon to disclose violations of truth in lending laws. C) Encompass a plan to actively search for all illegalities which relate to operating aspects. D) Not be relied upon to provide absolute assurance that all illegal acts will be detected. Answer: D Difficulty: Medium Source: AICPA 39. When the auditors express an opinion on financial statements their responsibilities extend to: A) The underlying wisdom of their client's management decisions. B) Whether the results of their client's operating decisions are fairly presented in the financial statements. C) Active participation in the implementation of the advice given to their client. D) An ongoing responsibility for their client's solvency. Answer: B Difficulty: Medium Source: AICPA 40. The standard short-form auditors' report generally includes an introductory paragraph, a scope paragraph, and an opinion paragraph. In the report the auditors refer to both accounting principles generally accepted in the U.S. and auditing standards generally accepted in the U.S. In which of the paragraphs are these terms used? A) GAAP in the scope paragraph and GAAS in the opinion paragraph. B) GAAS in the scope paragraph and GAAP in the opinion paragraph. C) GAAS in all paragraphs and GAAP in the scope paragraph. D) GAAP in all paragraphs and GAAS in the opinion paragraph. Answer: B Difficulty: Medium Source: AICPA Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 41. An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unqualified auditors' report. From this the investor may conclude that: A) Any disputes over significant accounting issues have been settled to the auditors' satisfaction. B) The auditors are satisfied that Sundby is operationally efficient. C) The auditors have ascertained that Sundby's financial statements have been prepared accurately. D) Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate. Answer: A Difficulty: Hard Source: AICPA 42. The auditors' report may be addressed to the company whose financial statements are being examined or to that company's: A) Chief operating officer. B) President. C) Board of Directors. D) Chief financial officer. Answer: C Difficulty: Medium Source: AICPA 43. Which of the following best describes what is meant by generally accepted auditing standards? A) Acts to be performed by the auditors. B) Measures of the quality of the auditors' performance. C) Procedures to be used to gather evidence to support financial statements. D) Audit objectives generally determined on audit engagements. Answer: B Difficulty: Medium Source: AICPA 44. If an illegal act is discovered during the audit of a publicly held company, the auditors should first: A) Notify the regulatory authorities. B) Determine who was responsible for the illegal act. C) Intensify the examination to identify all illegal acts. D) Report the act to high level personnel within the client's organization and to the audit committee. Answer: D Difficulty: Hard Source: AICPA Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 45. Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the audit? A) Observance of the standards of field work and reporting. B) Critical review of the audit work performed at every level of supervision. C) Degree of skill commonly possessed by others in the profession. D) Responsibility for losses because of errors of judgment. Answer: D Difficulty: Easy Source: AICPA 46. 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 which are applicable to a variety of situations. B) They are procedural outlines which 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. D) They are interpretations which are intended which may be useful guidance to auditors. Answer: C Difficulty: Medium Source: AICPA 47. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the: A) Partner assigned to the audit engagement. B) Management of the company. C) Auditor in charge of the fieldwork. D) Securities and Exchange Commission. Answer: B Difficulty: Easy Source: AICPA 48. Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with: A) Technical training that assures proficiency as an auditor. B) Professional education that is required in order to perform with due professional care. C) Knowledge required to fulfill assigned responsibilities and to progress within the firm. D) Knowledge required in order to perform a peer review. Answer: C Difficulty: Hard Source: AICPA Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 49. In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy? A) Acceptance and continuance of clients and engagements. B) Engagement performance. C) Personnel management. D) Independence, integrity and objectivity. Answer: D Difficulty: Hard Source: AICPA 50. A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is: A) To enable the auditor to attest to the integrity or reliability of a client. B) To comply with the quality control standards established by regulatory bodies. C) To minimize the likelihood of association with clients whose managements lack integrity. D) To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements. Answer: C Difficulty: Medium Source: AICPA 51. Which of the following is not an element of quality control? A) Documentation. B) Personnel management. C) Monitoring. D) Engagement performance. Answer: A Difficulty: Medium Source: AICPA 52. The generally accepted auditing standards established by the AICPA: A) Have been accepted as interim standards by the Public Company Accounting Oversight Board. B) Provide accounting guidance for nonpublic companies. C) Have been superseded by Public Company Accounting Oversight Board standards for all audits. D) Are now developed by the Securities and Exchange Commission. Answer: A Difficulty: Medium Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 53. The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies? A) B) C) D) Attestation Standards Yes Yes No No Ethics Standards Yes No Yes No Answer: A Difficulty: Hard 54. Which of the following is least likely to be directly examined in an inspection performed by the PCAOB? A) Audit engagements. B) Review engagements. C) Compilation engagements. D) CPA firm quality control system. Answer: C Difficulty: Medium 55. As compared with the US nonpublic company audit report, the international audit report: A) Is briefer. B) Includes enhanced explanation of the audit process. C) Includes the name of the partner and managers on the audit, while the US report includes only the CPA firm name. D) Is dated as of year-end, whereas the US report is dated as of the last date of significant field work. Answer: B Difficulty: Hard Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards Essay Questions 56. Auditors must be concerned with both generally accepted auditing standards and generally accepted accounting principles in performing an audit. (a) Compare generally accepted auditing standards with generally accepted accounting principles. (b) Summarize two of the three generally accepted auditing standards known as the general standards. Difficulty: Easy Answer: (a) Generally accepted auditing standards are authoritative rules for measuring the quality of audits. The ten generally accepted auditing standards were adopted by the membership of the AICPA. Generally accepted accounting principles are principles of measurement and presentation for financial statements that have "substantial authoritative support." (b) The general standards include (only two required): • Technical training and proficiency • Independence • Exercise due professional care 57. The standard unqualified auditors' report consists of three paragraphs. (a) Identify the three paragraphs and describe the purpose of each. (b) Describe the manner in which the report should be titled and the significance of its date. Difficulty: Medium Answer: (a) Introductory paragraph--describes the financial statements being auditing and the responsibilities of management and the auditors. Scope paragraph--describes the nature of an audit and indicates whether the audit was performed in accordance with generally accepted auditing standards. Opinion paragraph--expresses the auditors' opinion on the financial statements. (b) The report should be entitled "Independent Auditors' Report." The date is the "last day of significant field work." Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington Chapter 2 Professional Standards 58. Auditors must consider the possibility of fraud by employees or management on every audit engagement. They must also consider the possibility that the client has engaged in illegal acts. (a) Distinguish between employee and management fraud. (b) Describe the auditors' responsibility for the detection of fraud in an audit. (c) Describe the auditors' responsibility regarding illegal acts by a client. Difficulty: Hard Answer: (a) Employee fraud is dishonest actions by lower level employees that occur within a company despite management's efforts to prevent such actions. Management fraud occurs when the top executives of a company deliberately deceive stockholders, creditors, and the auditors by misstating the financial statements. (b) The auditors have a responsibility to design the audit to provide reasonable assurance of detecting material errors and fraud and to conduct the audit with due care and skepticism. (c) An audit cannot be relied upon to detect all illegal acts by the client. For illegal acts which have a direct and material effect on the financial statement amounts, the responsibility for detection is the same as that for errors and fraud--that is to design the audit to provide reasonable assurance of detection. For illegal acts having an indirect effect on the financial statement amounts, an audit provides no assurance of detection. Full file at http://testbank360.eu/test-bank-principles-of-auditing-and-other-assurance-services-16th-edition-ray-whittington