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Chapter 2

Multiple-Choice Questions
1. easy a Which one of the following is not one of the three General Standards? a. Proper planning and supervision. . !ndependence of "ental attitude. c. #de$uate training and proficiency. d. %ue professional care. Which one of the following is not a 'ield Wor( Standard? a. #de$uate planning and supervision. . %ue professional care. c. )nderstand the entity and its environ"ent including internal control. d. Sufficient appropriate audit evidence. +he General Standards stress the i"portance of, a. evidence accu"ulation. . personal $ualities the auditor should possess. c. co""unicating the auditor-s findings to the reader. d. general supervision of the audit. +he generally accepted auditing standard that re$uires /#de$uate technical training and proficiency0 is nor"ally interpreted as re$uiring the auditor to have, a. for"al education in auditing and accounting. . wor(ed for an entity si"ilar to the entity eing audited. c. independence in "ental attitude d. a graduate degree in a usiness field. Me" ers of the Pu lic Co"pany #ccounting 3versight 6oard are appointed and overseen y, a. the ).S. Congress. . the #"erican !nstitute of Certified Pu lic #ccountants. c. the #uditing Standards 6oard. d. the Securities and 78change Co""ission. State"ents on #uditing Standards provide auditors of privately held co"panies with :::::: guidance regarding the conduct of financial state"ent audits. a. fairly e8tensive . so"e li"ited c. practically no d. specific and detailed

&. easy

*. easy

.. easy a

1. 2S345 easy d

9. easy

Arens/Elder/Beasley

;. easy c

Which of the following state"ents "ost accurately captures the intent of the standards of field wor(? a. 'ield wor( standards are pri"arily concerned with personal attri utes necessary during the conduct of the audit. . 'ield wor( standards provide e8tensive guidance regarding the conduct of an audit. c. 'ield wor( standards are pri"arily directed at the auditor-s planning< understanding of internal control< and evidence accu"ulation. d. 'ield wor( standards are pri"arily concerned with the conduct of su stantive testing as opposed to testing of internal controls. Prior to the passage of the Sar anes-38ley #ct< which of the following was responsi le for esta lishing auditing standards? a. Securities and 78change Co""ission . Pu lic Co"pany #ccounting 3versight 6oard c. #uditing Standards 6oard d. >ational #ssociation of #ccounting Standards issued y the Pu lic Co"pany #ccounting 3versight 6oard "ust e followed y CP#s who audit, a. oth private and pu lic co"panies. . pu lic co"panies only. c. private co"panies< pu lic co"panies< and nonprofit entities. d. private co"panies only. Which of the following is the least li(ely for" of usiness for a CP# fir"? a. General partnership . General corporation c. Ai"ited lia ility co"pany d. Ai"ited lia ility partnership +he State"ents on #uditing Standards issued y the #uditing Standards 6oard, a. are interpretations of generally accepted auditing standards. . are the e$uivalent of laws for audit practitioners. c. "ust e followed in all situations. d. are optional guidelines which an auditor "ay choose to follow or not follow when conducting an audit. #n auditor need not a ide y a particular auditing standard if the auditor elieves that, a. the issue in $uestion is i""aterial in a"ount. . "ore e8pertise is needed to fulfill the re$uire"ent. c. the re$uire"ent of the standard has not een addressed y the PC#36. d. any of the a ove three are correct. +he Pu lic Co"pany #ccounting 3versight 6oard does not, a. perfor" inspections of the $uality controls at audit fir"s that audit pu lic co"panies. . esta lish auditing standards that "ust e followed y CP#s on all audits. c. oversee auditors of pu lic co"panies. d. perfor" any of the a ove functions. +he for" that "ust e co"pleted and filed with the Securities and 78change Co""ission whenever a co"pany e8periences a significant event that is of interest to pu lic investors is the, a. 'or" S-1. . 'or" =-B. c. 'or" 1@-B.

=. 2S345 easy c

?. 2S345 "ediu"

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11. "ediu" a

1&. "ediu" a

1*. 2S345 "ediu"

1.. "ediu"

Arens/Elder/Beasley

d. 11. "ediu" a

'or" 1@-Q.

+he for" that "ust e filed with the Securities and 78change Co""ission whenever a co"pany plans to issue new securities to the pu lic is the, a. 'or" S-1. . 'or" =-B. c. 'or" 1@-B. d. 'or" 1@-Q. +he third general standard states that due care is to e e8ercised in the perfor"ance of an audit. +his standard is generally interpreted to re$uire, a. o Cective review of the ade$uacy of the technical training of fir" personnel. . thorough review of the e8isting internal control structure. c. critical review of wor( done at every level of supervision. d. periodic review of a CP# fir"-s $uality control procedures. #ssu"e the Pu lic Co"pany #ccounting 3versight 6oard 2PC#365 identifies a violation during its inspection of a registered accounting fir". a. +he PC#36 "ay not enforce so"e disciplinary action against the accounting fir". . +he PC#36 "ay not report the "atter to the Securities and 78change Co""ission. c. +he PC#36 "ay not report the "atter to the appropriate state accountancy oard d. +he PC#36 "ay not suspend the license to practice of the CP# guilty of the violation. Which of the following state"ents est descri es the pri"ary purpose of State"ents on #uditing Standards? a. +hey are guides intended to set forth auditing procedures that are applica le to a variety of situations. . +hey are procedural outlines that are intended to narrow the areas of inconsistency and divergence of auditor opinion. c. +hey are authoritative state"ents< enforced through the Code of Professional Conduct< and are intended to li"it the degree of auditor Cudg"ent. d. +hey are interpretations that are intended to clarify the "eaning of /generally accepted auditing standards.0 State"ents on Standards for #ccounting and Deview Services are issued y the, a. #ccounting and Deview Services Co""ittee. . Professional 7thics 78ecutive Co""ittee. c. Securities and 78change Co""ission. d. 'inancial #ccounting Standards 6oard. Consulting Standards are issued y the, a. #ccounting and Deview Services Co""ittee. . Securities and 78change Co""ission. c. Manage"ent Consulting Services 78ecutive Co""ittee. d. 'inancial #ccounting Standards 6oard. +he auditor-s Cudg"ent concerning the overall fairness of presentation of financial position< results of operations< and changes in cash flow is applied within the fra"ewor( of, a. $uality control. . generally accepted auditing standards which include the concept of "ateriality. c. the auditor-s evaluation of the audited co"pany-s internal control. d. generally accepted accounting principles. # asic o Cective of a CP# fir" is to provide professional services to confor" to professional standards. Deasona le assurance of achieving this asic o Cective is provided through, a. continuing professional education.

19. "ediu" c

1;. 2S345 "ediu" d

1=. "ediu" d

1?. "ediu" a

&@. "ediu" c

&1. "ediu" d

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Arens/Elder/Beasley

. c. d. &*. "ediu" c

co"pliance with generally accepted reporting standards. a syste" of $uality control. a syste" of peer review.

Within the conte8t of $uality control< the pri"ary purpose of continuing professional education and training activities is to ena le a CP# fir" to provide its personnel with, a. technical training that assures proficiency as a valuation e8pert. . professional education that is re$uired in order to perfor" with due professional care. c. (nowledge re$uired to fulfill assigned responsi ilities. d. (nowledge re$uired to perfor" a peer review. Willia"s E Co.< a "e" er of the Private Co"panies Practice Section< is to have a /peer review.0 +he peer review can e perfor"ed y, a. a CP# fir" selected y Willia"s E Co. . a review tea" selected y the state society. c. internal auditors. d. either a or . Fansen Corporation-s stoc( is listed on a national stoc( e8change and registered with the Securities and 78change Co""ission. Fansen-s "anage"ent hires a CP# to perfor" an independent audit of Fansen-s financial state"ents. +he pri"ary o Cective of this audit is to provide assurance to the, a. investors in Fansen Corporation-s stoc(. . stoc( e8change. c. Securities and 78change Co""ission. d. "anage"ent of Fansen Corporation. Which of the following is not an essential co"ponent of $uality control? a. Policies and procedures to ensure that fir" personnel are actively engaged in "ar(eting strategies. . Policies and procedures to ensure that the wor( perfor"ed y fir" personnel "eet applica le professional standards. c. Policies to ensure that personnel "aintain their independence in fact and in appearance. d. Policies that ensure that "onitoring activities are effectively applied. Which of the following is true regarding the #!CP#-approved practice "onitoring progra"s? a. +he Center for Pu lic Co"pany #udit 'ir"s does not offer a peer review progra". . 'ir"s registered with the PC#36 "ust not enroll in an #!CP#-approved practice "onitoring progra". c. Pu lic accounting fir"s "ust e enrolled in an #!CP#-approved practice "onitoring progra" for "e" ers in the fir" to e eligi le for "e" ership in the #!CP#. d. +he #!CP# peer review progra" is ad"inistered through the S7C. Which of the following state"ents is true as it relates to li"ited lia ility partnerships? a. 3nly senior partners are lia le for the partnership-s de ts. . Partners have no lia ility in a li"ited lia ility partnership arrange"ent. c. Partners are personally lia le for the acts of those under their supervision. d. #ll partners "ust e #!CP# "e" ers. !f an auditor of a pu lic co"pany cannot find guidance issued y the PC#36 on a particular audit "atter< the auditor should generally see( guidance fro" which of the following sources? a. State"ents on #uditing Standards. . State"ents on Standards for #ccounting and Deview Services. c. Degulations issued y the Securities and 78change Co""ission. d. +he #!CP# Code of Professional Conduct.

&.. "ediu" d

&1. "ediu" a

&9. "ediu" a

&;. challenging c

&=. challenging c

&?. 2S345 challenging a

Arens/Elder/Beasley

*@. challenging a

+he S7C re$uire"ents of greatest interest to CP#s are set forth in the S7C-s, a. Degulation S-4 and #ccounting Series Deleases. . S-1 through S-19 for"s. c. %irector-s newsletter. d. 'or"s =-B< 1@-B< and 1@-Q. +he #!CP# has authority to esta lish standards and rules in all ut which of the following areas? a. #uditing standards applica le to financial state"ents of private co"panies. . Co"pilation and review standards. c. Professional conduct. d. #uditing standards applica le to financial state"ents of private and pu lic co"panies. Generally #ccepted #uditing Standards 2G##S5 and State"ents on #uditing Standards 2S#S5 should e loo(ed upon y practitioners as, a. ideals to wor( towards< ut which are not achieva le. . "a8i"u" standards that denote e8cellent wor(. c. "ini"u" standards of perfor"ance that "ust e achieved on each audit engage"ent. d. ench"ar(s to e used on all audits< reviews< and co"pilations. Which one of the following is not a re$uire"ent for elonging to the Private Co"panies Practice Section of the #"erican !nstitute of Certified Pu lic #ccountants? a. #dherence to $uality control standards. . Mandatory peer review. c. Partner rotation after a period of ten consecutive years. d. Continuing education. State"ents on #uditing Standards issued y the #!CP#-s #uditing Standards 6oard are, a. part of the generally accepted auditing standards under the #!CP# Code of Professional Conduct. . interpretations of generally accepted auditing standards and departures fro" such state"ents "ust e Custified. c. interpretations of generally accepted auditing standards and such standards "ust e followed in every engage"ent. d. generally accepted auditing procedures that are not covered y the #!CP# Code of Professional Conduct.

*1. challenging d

*&. challenging c

**. challenging c

*.. challenging

7ssay Questions
*1. easy %istinguish etween generally accepted auditing standards 2G##S5 and generally accepted accounting principles 2G##P5. What professional organiGation esta lishes G##S? What professional organiGation esta lishes G##P? #nswer, Generally accepted auditing standards are general guidelines to help auditors "eet their professional responsi ilities in the audit of historical financial state"ents. +hey are considered to e the "ini"u" standards of perfor"ance for auditors to follow and are esta lished y the #uditing Standards 6oard of the #"erican !nstitute of Certified Pu lic #ccountants for private co"panies and y the Pu lic Co"pany #ccounting 3versight 6oard for pu lic co"panies. Generally accepted accounting principles are the guidelines which an entity-s "anage"ent nor"ally follows when preparing historical financial state"ents. G##P is esta lished y the 'inancial #ccounting Standards 6oard.

Arens/Elder/Beasley

*9. easy

%iscuss the relationship etween $uality control and generally accepted auditing standards. #nswer, 'or a CP# fir"< $uality control enco"passes the "ethods used to "a(e sure that the fir" "eets its professional responsi ilities to clients. Quality control is closely related to< ut distinct fro"< G##S. # CP# fir" "ust "a(e sure that G##S are followed on every audit. Quality controls are the procedures used y the CP# fir" that help it "eet re$uire"ents de"anded y G##S on every engage"ent in a consistent "anner.

*;. easy

%escri e the various staff levels and responsi ilities of a typical pu lic accounting fir". #nswer, Staff assistant - Staff assistants< or staff accountants< perfor" "ost of the detailed audit wor(. Senior or In-charge auditor - Seniors coordinate and are responsi le for the audit field wor(< including the supervision and review of staff assistants- wor(. Manager - Managers assist the senior plan and "anage the audit< review the senior-s wor(< and "anages relations with the client. # "anager "ay e responsi le for "ultiple engage"ents at the sa"e ti"e. Partner - Partners review the overall audit wor( and they are involved in all significant audit decisions. #s owners of the fir"< partners are ulti"ately responsi le for conducting the audit and serving the client.

*=. "ediu"

%iscuss the five ele"ents of $uality control. Who esta lishes the standards for $uality control? #nswer, Independence, integrity and objectivity - Personnel on engage"ent should "aintain independence in fact and in appearance< perfor" all professional responsi ilities with integrity and "aintain o Cectivity in perfor"ing their professional responsi ilities. Personnel management - Policies and procedures should e esta lished to provide the fir" with reasona le assurance that all new personnel are $ualified to perfor" their wor(< wor( is assigned to personnel who have ade$uate training< and personnel should participate in continuing professional education. Acceptance and continuation of clients and engagements - Policies and procedures should e esta lished for deciding whether to accept or continue a client relationship. +hese policies should "ini"iGe the ris( of associating with a client whose "anage"ent lac(s integrity. Engagement performance - Policies and procedures should e8ist to ensure that engage"ent personnel perfor" wor( that "eets applica le professional standards and the fir"-s standards of $uality. Monitoring - Policies and procedures should e8ist to ensure that the other four $uality control ele"ents are eing effectively applied. Quality control standards are esta lished y the #uditing Standards 6oard for auditors of private co"panies and y the Pu lic Co"pany #ccounting 3versight 6oard for auditors of pu lic co"panies.

*?. "ediu"

%escri e the si8 organiGational structures availa le to CP# fir"s. #nswer, CP# fir"s can ta(e one of si8 organiGational for"s, Proprietorship +his for" is li"ited to fir"s with only one owner. !eneral partnership. +his for" is si"ilar to a proprietorship< e8cept that it applies to

Arens/Elder/Beasley

"ultiple owners. !eneral corporation. )nli(e a general partnership< shareholders in a general corporation are lia le only to the e8tent of their invest"ent in the corporation. Professional corporation. Professional corporations can have one or "ore shareholders. Personal lia ility protection for shareholders in professional corporations varies widely fro" state to state. "imited liability company. +his for" co" ines the "ost favora le attri utes of a general corporation and a general partnership. AACs are ta8ed li(e a general partnership< ut its owners have li"ited personal lia ility li(e shareholders of a general corporation. "imited liability partnership. #n AAP is structured and ta8ed li(e a general partnership. Fowever< the personal lia ility protection of an AAP is less than that of a general corporation or an AAC< ut it is greater than a general partnership. Many accounting fir"s now operate as AAPs.

.@. "ediu"

+here are ten generally accepted auditing standards< divided into three categories. Aist< y category< each of these ten standards. #nswer, General Standards #de$uate technical training and proficiency. !ndependence in "ental attitude. %ue professional care. Standards of 'ieldwor( #de$uate planning and supervision. )nderstand the entity and its environ"ent including internal control. Sufficient appropriate audit evidence. Standards of Deporting Whether state"ents were prepared in accordance with G##P. Circu"stances when G##P was not consistently followed. #de$uacy of infor"ative disclosures. 78pression of opinion on financial state"ents as a whole.

.1. "ediu"

!n the conte8t of auditing< e8plain what is "eant y an independent "ental attitude. %iscuss how internal auditors can have an independent "ental attitude when they are e"ployed y the co"pany they audit. #nswer, !ndependent "ental attitude refers to a state of "ind in which the CP# is totally un iased with respect to the client and the financial infor"ation under audit. #lthough internal auditors are e"ployees of the organiGation for which their audits are perfor"ed< internal auditors should e independent of the function eing e8a"ined and should report their findings to a level high enough in the organiGation to allow the auditor to e free fro" influence y the party< or parties< eing e8a"ined.

.&. 2S345 "ediu"

+he Sar anes-38ley #ct esta lished the Pu lic Co"pany #ccounting 3versight 6oard 2PC#365. What are the PC#36-s pri"ary functions? Who perfor"ed these functions prior to the PC#36?

Arens/Elder/Beasley

#nswer, +he PC#36 has responsi ility for providing oversight auditors of pu lic co"panies< esta lishing auditing and $uality control standards for pu lic co"pany audits and perfor"ing inspections of the $uality controls at audit fir"s perfor"ing those audits. +hese functions were for"erly the responsi ility of the #"erican !nstitute of Certified Pu lic #ccountants.

.*. challenging

What are four of the "aCor functions of the #!CP#? #nswer, MaCor functions of the #!CP# include, 7sta lishing standards and rules that practicing CP#s "ust follow. +hese standards consist of auditing standards for auditors of private co"panies< co"pilation and review standards< other attestation standards< and the Code of Professional Conduct. Desearch and pu lication. #!CP# pu lications include the #ournal of Accountancy< industry audit guides< periodic updates of the Codification of Statements on Auditing Standards< and the Code of Professional Conduct. Pro"oting the accounting profession. %eveloping specialist certifications. Writing and grading the unifor" CP# e8a"ination. Providing continuing education se"inars for its "e" ers.

... challenging

%iscuss the purpose of the Securities and 78change Co""ission and its influence on setting generally accepted accounting principles. #nswer, +he overall purpose of the S7C is to assist in providing investors with relia le infor"ation upon which to "a(e invest"ent decisions. #s a result of its authority for specifying financial reporting re$uire"ents< the S7C has considera le influence in setting generally accepted accounting principles. #lthough the S7C has ta(en the position that accounting principles should e set y the profession 2'#S65< the S7C-s opinion is generally considered in any "aCor change in G##P proposed y the '#S6.

.1. challenging

+he purpose of the #!CP#-s CP# Hision ProCect is to help CP#s "a(e sense of our changing and co"ple8 world. +he ProCect has identified core values that CP#s "ust e aware of in the future. What are the top five core values? #nswer, Continuing education and lifelong learning Co"petence !ntegrity #ttuned to road usiness issues 3 Cectivity

3ther 3 Cective #nswer 'or"at Questions


.9. Me" ership in the #!CP# is restricted to CP#s who are currently practicing as independent

Arens/Elder/Beasley

easy

auditors. a. +rue . 'alse Me" ership in the #!CP# is "andatory for all licensed practicing CP#s. a. +rue . 'alse #ny pu lic accounting fir" can e a "e" er of the #!CP# if the fir" "eets the "e" ership re$uire"ents. a. +rue . 'alse State"ents on #uditing Standards 2S#Ss5 are issued 3versight 6oard. a. +rue . 'alse y the Pu lic Co"pany #ccounting

.;. easy .=. easy a .?. easy

1@. 2S345 easy

#uditors of pu lic co"panies should< in the a sence of guidance issued y the PC#36< follow auditing standards issued y the S7C. a. +rue . 'alse +he ).S. Congress has oversight responsi ility for the PC#36. a. +rue . 'alse 'or" 1@-B "ust e filed with the S7C whenever a pu lic co"pany e8periences a significant event. a. +rue . 'alse !n a li"ited lia ility partnership< partners are personally lia le for lia ilities arising fro" negligent acts of other partners< ut not for lia ilities arising fro" acts of other e"ployees. a. +rue . 'alse Ai"ited lia ility co"panies are structured and ta8ed li(e a general partnership< ut their owners have li"ited personal lia ility si"ilar to that of a general corporation. a. +rue . 'alse #ll CP# fir"s registered with the PC#36 are re$uired to undergo a peer review at least once every two years. a. +rue . 'alse State"ents on #uditing Standards 2S#Ss5 are considered to generally accepted auditing standards. a. +rue . 'alse e interpretations of the ten

11. 2S345 "ediu" 1&. "ediu"

1*. "ediu"

1.. "ediu" a 11. 2S345 "ediu"

19. "ediu" a 1;. 2S345 "ediu" a

#ny CP# fir" that audits "ore than 1@@ pu lic co"panies is re$uired to have an annual inspection y the PC#36. a. +rue . 'alse

Arens/Elder/Beasley

1=. "ediu" a 1?. "ediu" a

+he overall purpose of the Securities and 78change Co""ission is to assist in providing investors with relia le infor"ation upon which to "a(e invest"ent decisions. a. +rue . 'alse !nternational Standards on #uditing are issued Co""ittee. a. +rue . 'alse y the !nternational #uditing Practices

Arens/Elder/Beasley