A change in the financial statement that causes a reasonable person to change a decision is

A company files for bankruptcy after it becomes known that the CFO stole millions of dollars and fraudulently manipulated the financial statements to cover theft. The theft had been going on for years, and the the auditor had consistently issued unqualified audit reports on the financial statements during the period of fraud. In a fed court the CFO was found guild of fraud, and CEO and CFO guilty of lesser charges. The damage settlement was assessed 80% against the CFO and 10% each against the CEO and audit firm. Even though the CFO has no assets to pay the damage award, the audit firm only has to pay 10%. This is an example of:

material

separate and proportionate liability theory

disclosing information gained about the client during the audit without the client's permission and when none of the exceptions to disclosure are met

A CPA should be concerned about violating AICPA Rule 301 on Confidential Client Information when

A CPA who performs audits will likely have to adhere to A non-PCAOB audit is performed on a A specialist who assists on an audit can be A walk through is combination of

the code of conduct in the state where he is licensed nonpublic company

an employee of the audit firm, client, or neither

inquiry, observation, inspection, and reperformance used for understanding the system and assessing design effectiveness

Accountants who are employees of corporations can have job descriptions that
After the auditor has determined materiality at the financial statement level, he evaluates the amount of misstatement that would be material at the account balance level. The term for this threshold amount is

include audit functions

tolerable misstatement

AICPA membership is

voluntary

AICPA still sets standards that govern the audits of... and designs the...

nonpublic companies and nonaudit engagements in the US and designs and administers the CPA examination

All of the 10 generally accepted auditing standards apply to

Among the things that a plaintiff must prove for an auditor to be liable for damages under 10b-5 of the 1934 Securities Exchange Act is:

a financial statement audit

the financial statements were materially misstated

audit firm in client acceptance decisions to determine whether the firm has the competence to provide the professional services requested

An audit firm's knowledge and experience must be considered by the

An audit of internal control over financial reporting (ICFR) is integrated with

a financial statement audit

An auditor investigates a potential client's business activities because An auditor issues a going concern opinion when
An auditor will only enter into negotiation or arbitration related to a lawsuit if

one needs to confirm that the company's business activities are compatible with that the audit firm wants in its client portfolio
there is uncertainty about whether the company will have or be able to obtain sufficient resources to meet its obligations in the upcoming year

the auditor is guilty, the auditor is not guilty but is concerned that the plaintiff may prevail, or the auditor believes it will cost less to settle a case than pursue defending against the allegations.

An auditor's report at the completion of an engagement includes a reference to

the audit standards used for the audit

An engagement letter distinguishes

those responsibilities that are managements vs. those that are the auditors

An engagement letter does what?

documents the understanding of the engagement between the auditor and client

An engagement letter is

drafted and agreed upon at the beginning of the audit

financial statement audit and an audit of internal control over financial reporting

An integrated audit is composed of:

An integrated audit is what type of process? An RFP contains

systematic: audit has a plan of action and specific steps to achieve and outcome

information about the proposal process and engagement

during the planning staged, throughout the audit of the financial statements, and designed to consider relationships The problems in the financial statements did not make them materially misstated

Analytical procedures are used

Assume a CPA conducts an audit in accordance with GAAS and issued unqualified audition opinions that contain misstatements that are immaterial both individually and on an aggregated basis. The CPA is sued under common law by shareholders, what could be a defense of the CPA?

Audit planning is

revisited throughout the audit as more information is obtained to be a good auditor you have to be a good accountant
prior auditors, published documents, and business documents... not from shareholders

Auditing and accounting are highly related because

Auditors obtain information about potential clients from all the following.. and not from...

Auditors of public companies must follow Auditors review the financial information of potential clients to Audits are of value because when financial statements are audited... Audits are performed because (2 reasons)
Based on AICPA guidance, an auditor's independence is impaired by

PCAOB Auditing Standards when performing integrating audits look for information about related parties investors have more confidence in their fairness and reliability required and contribute value

owning any of audit client's stock, any material amount of the stock of the parent company, or his/her spouse owning any of an audit client's stock

Based only on the original outcome of the Ultramares case, to which of the following parties will an accountant be liable for negligence

parties in privity: status of someone who is party to a contract that carries with it rights and flow from the agreement

Being found guilty of criminal fraud results from

Client acceptance and continuance procedures may inform the auditor about what type of risk of a client?

a charge made by the governement

engagement risk

Client cannot sue if CPAs issue an audit report with unqualified opinions if

allegation was not for gross negligence or constructive fraud

there are standards for entry and membership, there is some self discipline and regulation as well as governance with other organizations, and CPAs are recognize a commitment to the public interest

CPAs constitute a profession because

Design effectiveness of ICFR is evaluated to determine

Doll, CPA performed an integrated audit for Show Corp and, though unintentionally, failed to follow PCAOB Audit Standards. Doll issued unqualified opinions on ICFR and the financial statements weren't qualified. Doll knew Show was trying to obtain financing with the audit reports, and they were successful in negotiations and received a loan from Urban Bank. Show experienced business down turn and failed to repay the loan and Urban sued Doll. Based on application of Restatement of Torts extension what is most likely outcome?

which controls to test for operating effectiveness

Urban Bank will win because Doll knew that Show was presenting the financial statement and audit reports to banks that would rely on the financial statements

During audit planning the auditor finds that gross profit is much greater in the current year than in prior years and decides to increase the audit emphasis on sales and inventories. The auditor most likely discovered the change in gross profit by

analytical procedures

Economic events and actions are represented in Entity level controls can affect the

fairly presented financial statements

audit plan for tests of program controls various items including underlying records of accounts and documents relevant

evidence is composed of

Evidence that is sufficient is

Financial statement restatements are

important consideration for an auditor investigating a potential client, may be needed to correct an error, may be an indicator of the possibility of material weaknesses in ICFR

For the accounts receivable account, consider management's assertion about "valuation" The audit objective for this assertion would be

to determine that the allowance for doubtful accounts is fair

a partner involved with the engagement leaves the CPA firm and takes a job with the audit client in the position of CEO within six months of when the firm started the audit engagement

For the audit of a public company an audit firm's independence is impaired if

For the ICFR audit of an integrated audit, outsourced operations may be For the purposes of an integrated audit, materiality is
If a CPa is sued using the 1934 Act, 10b-5, what does a shareholder need to prove the prevail in the suit?

material to the audit client's ICFR and in that case audit evidence must be obtained and evaluated

assessed within the context of users with certain qualifications

Intentional misleading conduct intended to damage the shareholders by the auditor

In order for evidence to be sufficient it must be

In the Arthur Andersen case, the Supreme Court did not uphold the finding of the lower court because

persuasive

only the individuals within Arthur Andersen could be charged with obstruction of justice
the ideal standard for auditors, and auditor's state of mind, with no bias toward or against a client related to an audit engagement

Independence in fact is

Independence issues that would stop an audit firm from proposing on a potential client may result from

financial and business interest in the potential company

client acceptance and continuance procedures, auditors experience, and client deadlines on deliverables documented in the engagement letter

Information for developing the audit strategy comes from all the follow sources

Inquiry of the predecessor auditor is

helpful even if the predecessor responds with a statement indicating that no information or only a limited response can be made

Intentionally helping the client's CEO and CFO to redraft the company's financial statements to include material fraudulent information would cause an auditor to be vulnerable to

a criminal lawsuit under the Securities Act

Management and the auditor both

provide reports on ICFR

Misstated financial statements should be

Moral development theory describes the conventional level as a belief that Obtaining an understanding of ICFR and assessing its design effectiveness contribute to the auditor accomplishing
Old CPA is sued by Young Corp using 10b5. If young Corp prevails in the suit, it will be entitled to recover
Out of all risks, what might be the greatest concern for a large international audit firm considering accepting a new client?

detected regardless of whether they are a result of error or fraud

obeying the law and acting out of concern for what others think is behaving in a moral manner

selecting the controls to test, and developing the audit strategy the amount of any loss caused by fraud
Management authority is concentrated in one or two people, even thought the client company is very large
the PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.

PCAOB is a...

Professional guidance useful to the client acceptance and continuance process is found in

Quality Control Standards and Auditing Standards on fraud, COSO Enterprise Risk management and internal control frameworks, Auditing Standards on risk and Auditing Standards on ICFR

Professional standards related to client acceptance are legally required by

SOX

Quality control standards are required by

Sarbanes-Oxley Act

Reasonable assurance means

a high level assurance

Related party transactions must

be disclosed

Rule 102 of the AICPA Code of Conduct discusses integrity and objectivity, and includes a prohibition on subordinating judgment to others. This means that

the CPa should not let others make a decision that is his responsibility a member departs from them

Rulings and Interpretations of the AICPA Code of Conduct require justification if

Scoping decisions include

consideration of multiple client locations, not direction of individual auditors, nor number of professional staff at audit firm, nor audit fee

Shareholders of large multinational companies need audits to State governance over CPAs have ultimate control over Tests of controls can be combined with The AICPA Code of Conduct applies to The AICPA rule on contingent fees prohibits

have assurance regarding the fairness of financial statements the ability of an individual to be licensed as a CPA
substantive procedures, substantive procedures are those activities performed by the auditor to detect material misstatement at the assertion level.

all members

audit fees that vary based on the type of audit opinion issued

The amount of supervision required for a staff auditor The audit committee is a subset of

will depend on the difficulty of the task and the skills and experience of the individual

the board of directors, requires at least one "professional" with experience

an opportunity to instruct assistants on the need to communicate accounting and auditing matters they feel are significant to the financial statements to the auditor responsible

The audit planning meeting provides

The audit strategy for an integrated audit documents

The auditor can respond to the financial statements and management's reports by

the big picture issues of an audit

changing the audit report

The auditor in charge of engagement that requires the skills of an auditor particularly trained to deal with the impacts of IT

must be sufficiently knowledgeable to work with IT auditor

the auditor to assess whether internal controls over financial reporting (ICFR) are effective prudent officials, reasonable persons, and individual or aggregated matters

The COSO Internal Control Framework is a set of criteria used by The definition of materiality includes:

The ethical orientation known as ethic of care is applicable to The nature timing the extent of audit procedures may be influenced by

the team setting used in public accounting firms

information obtained on prior year audits of a recurring audit engagement once the information has been updated

The PCAOB adopted the

AICPA Statements on Auditing Standards on an interim basis and has replaced some of them with its Auditing Standards

The PCAOB is granted by SOX the power to The PCAOB top down approach to an integrated audit considers The responsibility of a CPA when performing an audit is to
The risk that an auditor may unknowingly fail to modify his opinion on financial statements that are materially misstated is

issue subpoenas

entity level controls because they may reduce risk behave as a reasonably prudent CPA would in performing the audit audit risk

The SEC and PCAOB have authority over

The SEC general standard of auditor independence includes guidance that the audit firm cannot

the standards that affect integrated audits

perform services that would result in it performing management tasks or auditing its own work

The SEC rules of practice can be used to bar The SEC will not accept the filings of a company if
The three part test for near privity established in the Credit Alliance case make is relatively difficult for third party financial statements users to

an auditor or audit firm from practicing before the SEC the audit is performed by a firm that is not registered with the PCAOB
establish near privity because it is uncommon for them to have direct interaction with a company's auditor

Using a moral decision making model is valuable because

Using the assumption that auditors are professionals who have a contract with society,

it helps decision makers recognize the moral components in a decision they are making
auditors receive prestige and economic reward for their commitment to behave as professionals and protect the public interest

Using the court system as a primary control for the behavior of auditors is not

effective at promoting public confidence because it occurs only after a problem has been discovered

Using the terms of the fraud triangle, if management places great importance on achieving the financial performance predicted by analysts and it seems that the predictions will not be achieved, this is an example of:

incentive for fraudulent financial reporting tests of year end closing processes

What audit procedure cannot be performed at an interim date?

What gives specific defenses to an auditor regarding due diligence: hence if an auditor can prove a reasonable audit examination was performed, then the auditor is not liable of the related damages

1933 Act, Section 11

What is important to the auditor when investigating a potential new audit client

whether audit committee has financial expert, existence of a company code of ethics, extensive amount of regulatory oversight in the company's industry
The general level of economic activity in the company's geographic environment vs. scoping is the company is a subsidiary and the parent is audited by a different firm,the company does business in multiple locations, and there are services that the company outsources

What is not scoping in an audit engagement vs. what is?

What is not true based on the Restatement of Torts, Section 522, affecting the auditor's liability to foreseen third parties

Liability for damages will extend to those who could have been expected to rely on the audited financial statements only when the auditor is found guilty of at a minimum gross negligence of constructive fraud

What is part of the risk assessment

brainstorming about fraud, understanding the client's system, and evaluating design effectiveness of ICFR

What is the most serious indicator of higher risk

What is true about significant, unusual, or highly complex transactions, especially close to period end What might be difficult information for an auditor to obtain prior to accepting a public company as a client
What must a plaintiff prove under the liability provisions of the Securities Act of 1933 to be awarded damages from a CPA who issued an unqualified opinion on financial statements included in a registration statement

competition in the industry is increasing, and the company is experiencing unexpected obsolescence of its products
they are expected as part of the financial closing process and represent typical risk

the amount and quality of information available to the people within the company who have the decision making responsibility

The financial statements audited by the CPA were materially misstated

Management stays fully informed about the financial performance of the company on a regular basis
The company is highly decentralized, top management delegates a significant amount of decision making authority and spends most of its management time on oversight of those decision makers

What should not cause the auditor to be concerned about management

What would the auditor not consider as an indicator of the need for further investigation of a potential client?
When a CPA is found guilty of being actively involved in a fraud, and as part of the fraud issued a misleading and inappropriate unqualified opinion on a company's financial statements, to whom will the audit probable be found liable under common law?

Anyone who suffered a loss as a result of the fraud

completeness. Others include existence, rights and obligations, valuation or allocation, and presentation and disclosure
the amount of misstatement that would influence an economic decision of a reasonable person with appropriate qualifications relying on the financial statements

When an auditor performs procedures to determine that a company has shown all of its liabilities on it year end financial statements, the related management assertion is

When evaluating the dollar amount of financial statement materiality, the auditor's judgment mainly addresses

When financial statements are restated it may result from

discovery of an error in past financial statements

When performing an audit, the auditor is objective, meaning

When the auditor considers whether a company's controls are capable of preventing errors, the auditor is

the auditor is not biased when evaluating evidence supporting management's assertions

assessing design effectiveness