AUDITING - CHAPTER 2

1. Statements on Auditing Standards issued by the AICPA's Auditing Standards Executive Committee are

a. part of the generally accepted auditing standards under the AICPA Code of Professional Conduct.

b. interpretations of generally accepted auditing standards under the AICPA Code of Professional Conduct, and departures from such statements must be justified.

c. interpretations of generally accepted auditing standards under the AICPA Code of Professional Conduct, and such statements must be followed in every engagement.

d. generally accepted auditing procedures that are not covered by the AICPA Code of Professional Conduct.

2. Which one of the following is not a General Standard?

a. Proper planning and supervision.

b. Independence of mental attitude.

c. Adequate training and proficiency.

d. Due professional care.

3. The Statements on Auditing Standards issued by the American Institute of CPAs (AICPA)

a. are interpretations of generally accepted auditing standards.

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.

4. A basic objective of a CPA firm is to provide professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is provided through

a. continuing professional education.

b. compliance with generally accepted reporting standards.

c. a system of quality control.

d. a system of peer review.

5. 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 which denote excellent work.

c. minimum standards of performance which must be achieved on each audit engagement.

d. benchmarks to be used on all audits, reviews, and compilations.

6. The AICPA's division for CPA firms has two sections: the SEC Practice Section and the Private Companies Practice Section. Which one of the following is not a requirement for belonging to the Private Companies Section?

a. Adherence to quality control standards.

b. Mandatory peer review.

c. Partner rotation after a period of seven consecutive years.

d. Continuing education.

7. 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.

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

a. the amount involved is immaterial.

b. the requirement of the standard is impractical to perform.

c. the requirement of the standard is impossible to perform.

d. any of the above three are correct.

9. Which one of the following is not a Field Work Standard?

a. Proper planning and supervision.

b. Due professional care.

c. Study the internal control structure.

d. Gather sufficient competent evidence.

10. The general standards stress the importance of

a. evidence accumulation.

b. the personal qualities which the auditor should have.

c. communicating the auditor's findings to the reader.

d. all of the above.

11. The decision as to how much evidence to accumulate for a given set of circumstances

a. is based on the auditor's professional judgment.

b. is provided by following the generally accepted accounting principles.

c. is determined by statistical analysis.

d. is provided in the AICPA's Industry Audit Guides.

12. Williams & Co., a large international CPA firm, is to have an "external peer review." The peer review will most likely be performed by

a. employees and partners of Williams & Co. who are not associated with the particular audits being reviewed.

b. audit review staff of the Securities and Exchange Commission.

c. audit review staff of the American Institute of Certified Public Accountants.

d. employees and partners of another CPA firm.

13. The Audit Standard which requires "Adequate technical training and proficiency" is normally interpreted as requiring the auditor to have

a. formal education in auditing and accounting.

b. adequate practical experience for the work being performed.

c. continuing professional education.

d. all of the above.

14. The form which must be completed and filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the

a. S-1 form.

b. 8-K form.

c. 10-K form.

d. 10-Q form.

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

a. investors in Shalini Corporation's stock.

b. stock exchange.

c. Securities and Exchange Commission.

d. management of Shalini Corporation.

16. International Standards on Auditing, issued by the International Auditing Practice Committee, are most similar to U.S.

a. generally accepted accounting principles.

b. rules of the AICPA Code of Professional Conduct.

c. generally accepted auditing standards.

d. interpretations of statements on auditing standards issued by the ASB.

17. The third general standard states that due care is to be exercised in the performance of an audit. This standard is generally interpreted to require

a. objective review of the adequacy of the technical training and proficiency 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.

18. In any case in which the CPA or the CPA's assistants are not qualified to perform the work, a professional obligation exists to

a. acquire the requisite knowledge and skills.

b. suggest someone else who is qualified to perform the work.

c. decline the engagement.

d. any of the above.

19. A member CPA firm is required by the AICPA to belong to the SEC Practice Section if it

a. audits at least one company listed on a major stock exchange.

b. does any audits.

c. does any reviews or audits.

d. audits one or more publicly-held companies.

20. The fourth standard of reporting requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent

a. an auditor from expressing different opinions on each of the basic financial statements.

b. restrictions on the scope of the examination, whether imposed by the client or by the inability to obtain evidence.

c. misinterpretations regarding the degree of responsibility the auditor is assuming.

d. an auditor from reporting on one basic financial statement and not the others.

21. A CPA should comply with applicable generally accepted auditing standards on every engagement

a. without exception.

b. except in examinations that result in a qualified report.

c. except in engagements where the CPA is associated with unaudited financial statements.

d. except in examinations of interim financial statements.

22. 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, and are intended to limit the degree of auditor judgment.

d. They are interpretations which are intended to clarify the meaning of "generally accepted auditing standards."

23. The auditor's report would have to note an inconsistency of a client's accounting principles in which of the following situations?

a. Client's previous year's financial statements valued inventory using LIFO, and the current statements use FIFO.

b. During client's first year of operations, they began using LIFO, but changed to FIFO after six months, and finished their first year with their financial statements using FIFO.

c. During the previous year the client, a privately-held company which did not publish its financial statements and was not audited, valued inventory using LIFO. This year it changed to FIFO. The amount of the inventory was immaterial in both years using either method.

d. All three situations above would require the auditor's report to note the inconsistency.

24. If an auditor finds him/herself in a situation where no specific guidance or standard exists, he/she should look to which of the following authorities for guidance:

a. Statements on Auditing Standards (SASs).

b. Statements on Standards for Accounting and Review Services (SSARS).

c. Statement on Standards for Attestation Engagements.

d. The AICPA Code of Professional Conduct.

25. 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 auditor's report on financial statements and related footnote disclosures.

d. The requirements for the planning of the audit and supervision of assistants, if any.

26. Auditing interpretations are issued by the staff of the AICPA Auditing Standards Division in order to provide timely guidance on the application of pronouncements of the Auditing Standards Board. These auditing interpretations are

a. more authoritative than a pronouncement of the Auditing Standards Board.

b. equally authoritative as a pronouncement of the Auditing Standards Board.

c. less authoritative than a pronouncement of the Auditing Standards Board.

d. nonauthoritative opinions which are issued without consulting members of the Auditing Standards Board.

27. The SEC requirements of greatest interest to CPAs are set forth in the SEC's

a. Regulation S-X and Accounting Series Releases.

b. S-1 through S-16 forms.

c. director's newsletter.

d. forms 8-K, 10-K, and 10-Q.

28. Rogers, a CPA, not in public practice, works as an internal auditor for a large conglomerate. The management of the conglomerate asked Rogers to perform an examination and report on a potential acquisition. Rogers' report will be used by the management for internal purposes. Under these circumstances, how should Rogers sign the report?

a. Rogers, CPA.

b. Rogers, CPA (Internal Auditor).

c. Rogers, Internal Auditor.

d. Rogers, Internal Auditor (CPA).

29. The third general standard states that due care is to be exercised in the performance of the examination. This standard should be interpreted to mean that a CPA who undertakes an engagement assumes a duty to perform

a. with reasonable diligence and without fault or error.

b. as a professional who will assume responsibility for losses consequent upon error of judgment.

c. to the satisfaction of the client and third parties who may rely upon it.

d. as a professional possessing the degree of skill commonly possessed by others in the field.

30. The use of the title Certified Public Accountant (CPA) is regulated by

a. state law through the licensing department of each state.

b. the American Institute of Certified Public Accountants (AICPA) through the licensing departments of the tax and auditing committees.

c. the federal government through the licensing department of the Commerce Department.

d. the Securities and Exchange Commission (SEC).

31. Auditing standards are

a. rules imposed by the U.S. Congress.

b. rules imposed by the Securities and Exchange Commission.

c. rules imposed by the American Institute of CPAs.

d. general guidelines to aid auditors.

32. The auditor's judgment concerning the overall fairness of presentation of financial position, results of operations, and changes in cash flow is applied within the framework of

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.

33. Which one of the following statements is not true?

a. The auditor's report must state whether the client has provided adequate disclosure on the financial statements and in the accompanying notes.

b. The auditor's report must disclose if GAAP was not consistently followed from the prior period to the current period.

c. The auditor's report must state whether the financial statements were prepared with GAAP.

d. The auditor's report must express an opinion on the financial statements taken as a whole, or explain why there is no opinion provided.

34. In the context of auditing, explain what is meant by an independent mental attitude. Discuss how internal auditors can have an independent mental attitude when they are employed by the company they audit.

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

ANSWERS

1 - 10. b, a, a, c, c, c, c, d, b, b

11 - 20. a, d, d, a, a, c, c, d, d, d

21 - 30. a, d, a, c, a, c, a, c, d, a

31 - 33. d, d, a

34. 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(ies) being examined.

35. 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.