ac555 external auditing chapter 2 test wk 1

8/13/2019 AC555 External Auditing Chapter 2 Test Wk 1

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Auditing and Assurance Services, 14e(Arens)

Chapter 2 The CPA Profession

Learning Objective 2-1

1) The legal right to perform audits is granted to a CPA firm by regulation ofA) each state!") the #inancial Accounting $tandards "oard %#A$")!

C) the American &nstitute of Certified Public Accountants %A&CPA)!

') the Audit $tandards "oard!

Ans(er ATerms Legal rights to perform audits'iff oderate

Objective LO 2-1

AAC$" *eflective thin+ing s+ills

2) The four categories for describing the si,e of audit firms include the "ig #our international firms- national firms-

regional and local firms- and small firms! .hich of the follo(ing is not a characteristic of a small firm/

A) ost have fe(er than 20 professionals!

") They perform audits on small and not-for-profit businesses!C) Ta services are more important to their practice than auditing!

') They do not audit publically traded companies!Ans(er 'Terms #our categories for describing si,e of audit firms'iff oderateObjective LO 2-1


) $arbanes-Oley and the $ecurities 3change Commission restrict auditors from providing many consulting

services to their publically traded audit clients! .hich of the follo(ing is true for auditors of publically traded

companies/

&! They are restricted from providing consulting services to privately held companies!

&&! There is no restriction on providing consulting services to non-audit clients!

A) & only") && only

C) & and &&

') 4either & or &&

Ans(er "Terms $arbanes-Oley and $ecurities 3change Commission restrictions

'iff oderateObjective LO 2-1

AAC$" *eflective thin+ing s+illsTopic $O5

1

Copyright 6 2712 Pearson 3ducation8 &nc! publishing as Prentice 9all


2/23

:) .hich of the follo(ing statements is true as it relates to limited liability partnerships/

A) Only senior partners are liable for the partnership;s debts!

") Partners have no liability in a limited liability partnership arrangement!

C) Partners are personally liable for the acts of those under their supervision!

') All partners must be A&CPA members!Ans(er CTerms Limited liability partnerships'iff ChallengingObjective LO 2-1


0) List and describe the three factors that influence the organi,ational structure of all CPA firms! .hat are the most

common forms of CPA firm organi,ation/

Ans(er The three factors that influence the organi,ation of a CPA firm include

1! &ndependence from clients! &ndependence is important as it allo(s the auditors to remain unbiased in dra(ing

conclusions on client financial statements!

2! Auditor Competency! Competency allo(s auditors to conduct audits and perform services effectively and

efficiently!

! Litigation! The increased litigation ris+ faced by auditors increases audit firm business ris+! Certain organi,ational

structures allo( a degree of personal protection to individual firm members!

Common forms of audit firm organi,ation include

< Limited Liability Partnerships< Limited Liability Companies

< Professional Corporations

< =eneral Corporations

< =eneral Partnerships

< $ole ProprietorshipTerms #actors that influence that influence the organi,ational structure of CPA firms



2



3/23

>) List and describe the si organi,ational structures available to CPA firms!

Ans(er CPA firms can ta+e one of si organi,ational forms

< Proprietorship.This form is limited to firms (ith only one o(ner!

< General partnership! This form is similar to a proprietorship8 ecept that it applies to multiple o(ners!

< General corporation! ?nli+e a general partnership8 shareholders in a general corporation are liable only to theetent of their investment in the corporation!

< Professional corporation! Professional corporations can have one or more shareholders! Personal liabilityprotection for shareholders in professional corporations varies (idely from state to state!

< Limited liability company! This form combines the most favorable attributes of a general corporation and a

general partnership! LLCs are taed li+e a general partnership8 but its o(ners have limited personal liability li+e

shareholders of a general corporation!

< Limited liability partnership! An LLP is structured and taed li+e a general partnership! 9o(ever8 the personal

liability protection of an LLP is less than that of a general corporation or an LLC8 but it is greater than a generalpartnership! any accounting firms no( operate as LLPs!Terms Organi,ational structures available to CPA firms'iff oderateObjective LO 2-1


@) any smalllocal accounting firms do not perform audits as their primary services to their clients include

accounting and ta!A) True

") #alse

Ans(er ATerms $mall accounting firms do not perform audits'iff 3asyObjective LO 2-1


B) All of the "ig #our and many of the smaller CPA firms no( operate as Limited Liability Partnerships!

A) True

") #alse

Ans(er ATerms Limited liability partnerships

'iff 3asyObjective LO 2-1


) $arbanes-Oley and the $ecurities 3change Commission restrict auditors from providing many consulting

services to their publically traded audit clients!

A) True

") #alseAns(er "Terms $arbanes-Oley and $ecurities 3change Commission restrict auditors





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17) Limited liability companies are structured and taed li+e a general partnership8 but their o(ners have limited

personal liability similar to that of a general corporation!

A) True

") #alse

Ans(er ATerms Limited liability companies'iff oderate

Objective LO 2-1AAC$" *eflective thin+ing s+ills


1) The organi,ation that is responsible for providing oversight for auditors of public companies is called the

DDDDDDDD!

A) Auditing $tandards "oard!

") American &nstitute of Certified Public Accountants!

C) Public Oversight "oard!

') Public Company Accounting Oversight "oard!

Ans(er 'Terms Organi,ation responsible for providing oversight for auditors of public companies



2) embers of the Public Company Accounting Oversight "oard are appointed and overseen byA) the ?!$! Congress!

") the American &nstitute of Certified Public Accountants!

C) the Auditing $tandards "oard!

') the $ecurities and 3change Commission!

Ans(er 'Terms embers of Public Company Accounting Oversight "oard



) The Public Company Accounting Oversight "oardA) perform inspections of the Euality controls at audit firms that audit public companies!

") establish auditing standards that must be follo(ed by CPAs on all audits!C) oversee auditors of private companies!

') perform any of the above functions!

Ans(er ATerms Public Company Accounting Oversight "oard



:



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:) Assume the Public Company Accounting Oversight "oard %PCAO") identifies a violation during its inspection of

a registered accounting firm! The PCAO"

A)

can enforce disciplinary

action against the

accounting firm

report the matter to the

$ecurities and 3change

Commission

suspend the license to

practice of the CPA guilty

of the violation

Fes Fes Fes

")


action against the

accounting firm



Commission



of the violation

Fes Fes 4o

C)


action against the

accounting firm



Commission



of the violation

Fes 4o 4o

')


action against the

accounting firm



Commission



of the violation

4o 4o 4o

Ans(er "Terms Public Company Accounting Oversight "oard inspection violations'iff oderate

Objective LO 2-2


Topic $O5

0) The $arbanes-Oley Act established the Public Company Accounting Oversight "oard %PCAO")! .hat are thePCAO";s primary functions/ .ho performed these functions prior to the PCAO"/

Ans(er The PCAO" has responsibility for providing oversight to auditors of public companies8 establishing

auditing and Euality control standards for public company audits and performing inspections of the Euality controls

at audit firms performing those audits! These functions (ere formerly the responsibility of the American &nstitute of

Certified Public Accountants!Terms $arbanes-Oley Act- Public Company Accounting Oversight "oard primary functions



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>) The Public Company Accounting Oversight "oard %PCAO") provides oversight to auditors of publically traded

and private companies!

A) True

") #alse

Ans(er "Terms Public Company Accounting Oversight "oard'iff 3asy

Objective LO 2-2AAC$" *eflective thin+ing s+ills

@) All CPA firms registered (ith the PCAO" are reEuired to undergo a peer revie( annually!

A) True

") #alse

Ans(er "Terms PCAO" reEuirement for peer revie('iff oderate

Objective LO 2-2


Topic $O5

Learning Objective 2-

1) The form that must be completed and filed (ith the $ecurities and 3change Commission (henever a companyeperiences a significant event that is of interest to public investors is the

A) #orm $-1!

") #orm B-G!

C) #orm 17-G!

') #orm 17-H!

Ans(er "Terms $ec form B-+8 reporting significant events

'iff oderate

Objective LO 2-


2) The form that must be filed (ith the $ecurities and 3change Commission (henever a company plans to issuene( securities to the public is the

A) #orm $-1!

") #orm B-G!

C) #orm 17-G!

') #orm 17-H!

Ans(er ATerms #orm must be completed and filed (ith $ecurities and 3change Commission (hen company plans to issue ne(securities

'iff oderateObjective LO 2-


>



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) The A&CPA has authority to establish standards and rules in all but (hich of the follo(ing areas/

A) Auditing standards applicable to financial statements of private companies

") Compilation and revie( standards

C) Professional conduct

') Auditing standards applicable to financial statements of private and public companiesAns(er 'Terms A&CPA has authority to establish standards and rules'iff ChallengingObjective LO 2-


:) 'iscuss the purpose of the $ecurities and 3change Commission and its influence on setting generally accepted

accounting principles!

Ans(er The overall purpose of the $3C is to assist in providing investors (ith reliable information upon (hich to

ma+e investment decisions! As a result of its authority for specifying financial reporting reEuirements8 the $3C has

considerable influence in setting generally accepted accounting principles! Although the $3C has ta+en the position

that accounting principles should be set by the profession %#A$")8 the $3C;s opinion is generally considered in any

major change in =AAP proposed by the #A$"!Terms $ecurities and 3change Commission influence on setting generally accepted accounting principles'iff oderate

Objective LO 2-


0) The difference bet(een the $ecurities Act of 1 and the $ecurities Act of 1: is that only the 1: act

reEuires audited financial statements!

A) True") #alse

Ans(er "Terms $ecurities Acts of 1 and 1:'iff 3asy

Objective LO 2-


>) #orm 17-G must be filed (ith the $3C (henever a public company eperiences a significant event!

A) True") #alse

Ans(er "Terms #orm 17-G- $3C

'iff oderate

Objective LO 2-


@) The overall purpose of the $ecurities and 3change Commission is to assist in providing investors (ith reliable

information upon (hich to ma+e investment decisions!

A) True

") #alse

Ans(er ATerms $ecurities and 3change Commission

'iff oderateObjective LO 2-


Learning Objective 2-:

1) $tatements on $tandards for Accounting and *evie( $ervices are issued by theA) Accounting and *evie( $ervices Committee!

") Professional 3thics 3ecutive Committee!

C) $ecurities and 3change Commission!

@



8/23

') #inancial Accounting $tandards "oard!

Ans(er ATerms $tatements on $tandards for Accounting and *evie( $ervices %$$A*$)

'iff oderateObjective LO 2-:


2) .hich of the follo(ing is not an essential component of Euality control/A) Policies and procedures to ensure that firm personnel are actively engaged in mar+eting strategies!

") Policies and procedures to ensure that the (or+ performed by firm personnel meet applicable professional

standards!C) Policies to ensure that personnel maintain their independence in fact and in appearance!

') Policies that ensure that monitoring activities are effectively applied!

Ans(er ATerms Component of Euality control'iff oderateObjective LO 2-:


) .hat are the major functions of the A&CPA/

Ans(er ajor functions of the A&CPA include

< 3stablishing standards and rules that practicing CPAs must follo(! These standards consist of auditingstandards for auditors of private companies8 compilation and revie( standards8 other attestation standards8 and the

Code of Professional Conduct!

< *esearch and publication on many different subjects related to accounting8 auditing8 attestation and assurance

services8 management consulting services8 and taes! A&CPA publications include theJournal of Accountancy8

industry audit guides8 periodic updates of the Codification of Statements on Auditing Standards8 and the Code ofProfessional Conduct!

< Promoting the accounting profession through organi,ing national advertising campaigns!

< 'eveloping specialist certifications to help mar+et and ensure the Euality of services in speciali,ed practice

areas!

< .riting and grading the uniform CPA eamination!

< Providing continuing education seminars for its members!Terms ajor functions of A&CPA

'iff oderateObjective LO 2-:


B



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:) embership in the A&CPA is restricted to CPAs (ho are currently practicing as independent auditors!

A) True

") #alse

Ans(er "Terms embership in A&CPA

'iff 3asyObjective LO 2-:


0) embership in the A&CPA is mandatory for all licensed practicing CPAs!

A) True") #alse

Ans(er "Terms embership in A&CPA'iff 3asy

Objective LO 2-:


>) Any public accounting firm can be a member of the A&CPA if the firm meets the membership reEuirements!A) True

") #alse

Ans(er ATerms embership in A&CPA

'iff 3asyObjective LO 2-:




10/23


1) .hich of the follo(ing are audit standards used in professional practice by audit firms/

A)

&nternational

$tandards

on Auditing

?!$! =enerally Accepted

Auditing $tandards

PCAO" Auditing

$tandards

Fes 4o 4o

")

&nternational

$tandards

on Auditing


Auditing $tandards

PCAO" Auditing

$tandards

Fes Fes 4o

C)

&nternational

$tandards

on Auditing


Auditing $tandards

PCAO" Auditing

$tandards

Fes Fes Fes

')

&nternational

$tandards

on Auditing


Auditing $tandards

PCAO" Auditing

$tandards

4o Fes Fes

Ans(er CTerms $tandards used in professional practice'iff 3asy

Objective LO 2-0


2) #or privately held companies (ho of the follo(ing is responsible for establishing auditing standards/

A) $ecurities and 3change Commission

") Public Company Accounting Oversight "oardC) Auditing $tandards "oard

') 4ational Association of AccountingAns(er CTerms 3stablishing auditing standards for privately held companies'iff 3asyObjective LO 2-0


17



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) $tandards issued by the Public Company Accounting Oversight "oard must be follo(ed by CPAs (ho audit

A) both private and public companies!

") public companies only!

C) private companies8 public companies8 and nonprofit entities!

') private companies only!Ans(er "Terms Public Company Accounting Oversight "oard $tandards'iff oderateObjective LO 2-0


:) The Audit $tandards "oard of the A&CPA has underta+en the Clarity I Convergence Project to ma+e =AA$

easier to read understand and apply- as (ell as converge =AA$ (ith the &nternational $tandards on Auditing %&$As)!

.hich of the follo(ing statements concerning the Clarity I Convergence Project is%are) true/

&! The J=eneralJ standards of =AA$ (ill be termed J*esponsibilitiesJ!

&&! The J#ield(or+J standards (ill be termed JPerformanceJ!

&&&! The J*eportingJ standards (ill be termed JCommunicationsJ!

A) & and &&") & and &&&

C) && and &&&') &8 && and &&&

Ans(er 'Terms Clarity and Convergence Project'iff oderate

Objective LO 2-0


0) &f an auditor of a public company cannot find guidance issued by the PCAO" on a particular audit matter8 the

auditor should generally see+ guidance from (hich of the follo(ing sources/

A) $tatements on Auditing $tandards

") $tatements on $tandards for Accounting and *evie( $ervices

C) *egulations issued by the $ecurities and 3change Commission') The A&CPA Code of Professional Conduct

Ans(er ATerms =uidance issued by PCAO"'iff Challenging

Objective LO 2-0


Topic $O5

11



12/23

>) The Auditing $tandards "oard of the A&CPA has underta+en a Clarity and Convergence Project (hose aim is to

ma+e =AA$ easier to read8 apply and converge (ith &nternational Audit $tandards! As a result the =AA$ (ill

become JAuditing PrinciplesJ! The principles (ill be consistent (ith the three categories of =AA$! Accordingly8

(hich of the follo(ing is true/

& The =eneral $tandards (ill be termed *esponsibilities Principles!&&! The #ield(or+ $tandards (ill be termed Performance Principles!

&&&! The *eporting $tandards (ill be termed Communication Principles!A) & and &&

") & and &&&

C) && and &&&

') &8 && and &&&

Ans(er ATerms Clarity and Convergence Project

'iff ChallengingObjective LO 2-0


@) Auditors of public companies should8 in the absence of guidance issued by the PCAO"8 follo( auditing standards

issued by the $3C!

A) True

") #alseAns(er "Terms Auditors of pubic companies- PCAO" and $3C'iff 3asyObjective LO 2-0


B) &nternational $tandards on Auditing are issued by the &nternational Auditing Practices Committee!

A) True

") #alse

Ans(er ATerms &nternational $tandards on Auditing- &nternational Auditing Practices Committee

'iff oderate

Objective LO 2-

0AAC$" *eflective thin+ing s+ills

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13/23

Learning Objective 2->

1) .hich one of the follo(ing is not one of the three =eneral $tandards/

A) Proper planning and supervision!") &ndependence of mental attitude!

C) AdeEuate training and proficiency!

') 'ue professional care!Ans(er ATerms =eneral standards'iff 3asy

Objective LO 2->


2) .hich one of the follo(ing is not a #ield .or+ $tandard/

A) AdeEuate planning and supervision!

") 'ue professional care!

C) ?nderstand the entity and its environment including internal control!

') $ufficient appropriate audit evidence!

Ans(er "Terms #ield .or+ $tandards

'iff 3asyObjective LO 2->


) The generally accepted auditing standard that reEuires JAdeEuate technical training and proficiencyJ is normallyinterpreted as reEuiring the auditor to have

A) formal education in auditing and accounting!

") (or+ed for an entity similar to the entity being audited!

C) independence in mental attitude!

') a graduate degree in a business field!

Ans(er ATerms =eneral accepted auditing standards- AdeEuate technical training and proficiency'iff 3asy

Objective LO 2->


:) .hich of the follo(ing statements most accurately captures the intent of the standards of field (or+/

A) #ield (or+ standards are primarily concerned (ith personal attributes necessary during the conduct of the audit!

") #ield (or+ standards provide etensive guidance regarding the conduct of an audit!

C) #ield (or+ standards are primarily directed at the auditor;s planning8 understanding of internal control8 and

evidence accumulation!') #ield (or+ standards are primarily concerned (ith the conduct of substantive testing as opposed to testing of

internal controls!

Ans(er CTerms $tandards of field (or+

'iff 3asyObjective LO 2->


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14/23

0) The $tatements on Auditing $tandards issued by the Auditing $tandards "oard

A) interpret generally accepted auditing standards!

") are the eEuivalent of la(s for audit practitioners!

C) must be follo(ed in all situations!

') are optional guidelines (hich an auditor may choose to follo( or not follo( (hen conducting an audit!Ans(er ATerms $tatements on Auditing $tandards'iff oderateObjective LO 2->


>) An auditor need not abide by a particular auditing standard if the auditor believes that

A) the issue in Euestion is immaterial in amount!

") more epertise is needed to fulfill the reEuirement!

C) the reEuirement of the standard has not been addressed by the PCAO"!

') any of the above three are correct!

Ans(er ATerms Auditor need not abide by a particular auditing standard

'iff oderateObjective LO 2->


@) ?nder =AA$8 (hich of the follo(ing reflects a concept from thegeneralgroup/

A) The confirmation of accounts receivable!

") Completing an internal control Euestionnaire!

C) The initial planning of the audit (ith the audit partner8 manager8 senior8 staff and client personnel!') The assignment of audit personnel to an engagement (here they have no financial interest!

Ans(er 'Terms =AA$8 general standards'iff oderate

Objective LO 2->


B) The third general standard states that due care is to be eercised in the performance of an audit! This standard is

generally interpreted to reEuireA) objective revie( of the adeEuacy of the technical training of firm personnel!

") thorough revie( of the eisting internal control structure!

C) critical revie( of (or+ done at every level of supervision!

') periodic revie( of a CPA firm;s Euality control procedures!

Ans(er CTerms Third general standard- 'ue care'iff oderateObjective LO 2->


1:



15/23

) .hich of the follo(ing statements best describes the primary purpose of $tatements on Auditing $tandards/

A) They are guides intended to set forth auditing procedures that are applicable to a variety of situations!

") They are procedural outlines that are intended to narro( the areas of inconsistency and divergence of auditor

opinion!

C) They are authoritative statements8 enforced through the Code of Professional Conduct8 and are intended to limitthe degree of auditor judgment!

') They are interpretations that are intended to clarify the meaning of Jgenerally accepted auditing standards!JAns(er 'Terms Purpose of $tatements on Auditing $tandards'iff oderateObjective LO 2->


17) 9ansen Corporation;s stoc+ is listed on a national stoc+ echange and registered (ith the $ecurities and

3change Commission! 9ansen;s management hires a CPA to perform an independent audit of 9ansen;s financial

statements! The primary objective of this audit is to provide assurance to the

A) investors in 9ansen Corporation;s stoc+!

") stoc+ echange!C) $ecurities and 3change Commission!

') management of 9ansen Corporation!

Ans(er ATerms Primary objective of audit to provide assurance'iff oderateObjective LO 2->


11) .hich of the follo(ing statements about =enerally Accepted Audit $tandards are true/

&! They serve as broad guidelines to auditors for conducting an audit engagement!

&&! They are sufficiently specific to provide any meaningful guide to practitioners!

&&&! They represent a frame(or+ upon (hich the A&CPA can provide interpretations!!

A) & and &&

") & and &&&

C) && and &&&

') &8 && and &&&

Ans(er "Terms =enerally Accepted Audit $tandards'iff ChallengingObjective LO 2->


10



16/23

12) =enerally Accepted Auditing $tandards %=AA$) and $tatements on Auditing $tandards %$A$) should be loo+ed

upon by practitioners as

A) ideals to (or+ to(ards8 but (hich are not achievable!

") maimum standards that denote ecellent (or+!

C) minimum standards of performance that must be achieved on each audit engagement!') benchmar+s to be used on all audits8 revie(s8 and compilations!

Ans(er CTerms =enerally Accepted Auditing $tandards %=AA$) and $tatements on Auditing $tandards %$A$)'iff Challenging

Objective LO 2->


1) $tatements on Auditing $tandards issued by the A&CPA;s Auditing $tandards "oard are

A) part of the generally accepted auditing standards under the A&CPA Code of Professional Conduct!

") 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 follo(ed in every

engagement!

') generally accepted auditing procedures that are not covered by the A&CPA Code of Professional Conduct!Ans(er "Terms $tatements on Auditing $tandards

'iff ChallengingObjective LO 2->


1:) List the ten generally accepted auditing standards and divide them into their proper category!

Ans(er=eneral $tandards

< AdeEuate technical training and proficiency!

< &ndependence in mental attitude!

< 'ue professional care!

$tandards of #ield(or+

< AdeEuate planning and supervision!

< ?nderstand the entity and its environment including internal control!

< $ufficient appropriate audit evidence!

$tandards of *eporting

< .hether statements (ere prepared in accordance (ith =AAP!< Circumstances (hen =AAP (as not consistently follo(ed!

< AdeEuacy of informative disclosures!

< 3pression of opinion on financial statements as a (hole!Terms =enerally Accepted Auditing $tandards'iff oderateObjective LO 2->


1>



17/23

10) 'istinguish bet(een generally accepted auditing standards %=AA$) and generally accepted accounting

principles %=AAP)! .hat professional organi,ation establishes =AA$/ .hat professional organi,ation establishes

=AAP/

Ans(er =enerally accepted auditing standards are general guidelines to help auditors meet their professional

responsibilities in the audit of historical financial statements! The general standards stress the important personalEualities that the auditor should possess! The standards of field (or+ concern evidence accumulation and other

activities during the actual conduct of the audit! The reporting standards reEuire the auditor to prepare a report on thefinancial statements ta+en as a (hole8 stating (hether the statements are prepared in accordance (ith =enerally

Accepted Accounting Principles %=AAP)! They are considered to be the minimum standards of performance for

auditors to follo( and are established by the Auditing $tandards "oard of the American &nstitute of Certified Public

Accountants for private companies and by the Public Company Accounting Oversight "oard for public companies!

=enerally accepted accounting principles are the guidelines (hich an entity;s management normally follo(s (hen

preparing historical financial statements! =AAP is established by the #inancial Accounting $tandards "oard!Terms =enerally Accepted Auditing $tandards'iff 3asyObjective LO 2-0 and LO 2->


1>) $tatements on Auditing $tandards are considered authoritative literature!

A) True

") #alseAns(er ATerms $tatements on Auditing $tandards'iff 3asyObjective LO 2->


1@) $tatements on Auditing $tandards %$A$s) are issued by the Public Company Accounting Oversight "oard!

A) True

") #alse

Ans(er "Terms $tatements on Auditing $tandards %$A$)- Public Company Accounting Oversight "oard'iff 3asy

Objective LO 2->


1B) $tatements on Auditing $tandards %$A$s) are considered to be interpretations of the ten generally accepted

auditing standards!

A) True

") #alse

Ans(er ATerms $tatements on Auditing $tandards %$A$)- =enerally accepted auditing standards'iff oderateObjective LO 2->


1@



18/23

Learning Objective 2-@

1) .hich of the follo(ing is not true for audit firms (ho audit publically traded companies/

A) They must undergo a PCAO" inspection on an annual basis if they audit more than 177 issuers") They must have an A&CPA peer revie( on all audit clients!

C) They must have an A&CPA peer revie( on all non-publically traded clients!

') The audit firm can choose (hich CPA firm they (ish to conduct their A&CPA peer revie(!Ans(er "Terms Audit firms (ho audit publically traded companies

'iff oderateObjective LO 2-@


2) A basic objective of a CPA firm is to provide professional services to conform to professional standards!

*easonable assurance of achieving this basic objective is provided through

A) continuing professional education!

") compliance (ith generally accepted reporting standards!

C) a system of Euality control!

') a system of peer revie(!Ans(er C

Terms Professional standards'iff oderateObjective LO 2-@


) .ithin the contet of Euality control8 the primary purpose of continuing professional education and training

activities is to enable a CPA firm to provide its personnel (ith

A) technical training that assures proficiency as a valuation epert!

") professional education that is reEuired in order to perform (ith due professional care!

C) +no(ledge reEuired to fulfill assigned responsibilities!

') +no(ledge reEuired to perform a peer revie(!

Ans(er CTerms Huality control- Continuing professional education and training activities

'iff oderate

Objective LO 2-@AAC$" *eflective thin+ing s+ills

:) The purpose of establishing Euality control policies and procedures to accept or continue a client relationship is

to

A) provide reasonable assurance that personnel are adeEuately trained to fulfill their responsibilities!

") monitor the ris+ factors concerning misstatements that arise from the misappropriation of assets!C) document objective criteria for the CPA firm;s peer revie(!

') minimi,e the li+elihood of associating (ith client;s (hose management may lac+ integrity!

Ans(er 'Terms Purpose of Euality control policies and procedures to accept or continue client relationship

'iff oderateObjective LO 2-@


1B



19/23

0) .hich of the follo(ing is an element of the CPA;s Euality control system that should be considered in

establishing it;s Euality control policies and procedures/

A) Considering audit ris+ and materiality!

") ?sing statistical sampling techniEues!

C) Assigning personnel to engagements!') Complying (ith la(s and regulations!

Ans(er CTerms Huality control policies and procedures'iff oderate

Objective LO 2-@


>) .hich one of the follo(ing is not true regarding the American &nstitute of Certified Public Accountants peer

revie( reEuirement/

A) A CPA firm must develop and adhere to Euality control standards!

") Peer revie(s are mandatory!

C) A CPA firm (ill lose A&CPA eligibility if a peer revie( is not performed!

') #irms reEuired to be registered (ith and inspected by the PCAO" are eempt!

Ans(er 'Terms A&CPA peer revie(

'iff ChallengingObjective LO 2-@


@) 'iscuss the relationship bet(een Euality control and generally accepted auditing standards!

Ans(er #or a CPA firm8 Euality control encompasses the methods used to ma+e sure that the firm meets its

professional responsibilities to clients! Huality control is closely related to8 but distinct from8 =AA$! The standardsrecogni,e that a Euality control system can provide only reasonable assurance8 not a guarantee that auditing

standards are follo(ed! A CPA firm must ma+e sure that =AA$ are follo(ed on every audit! Huality controls are

the procedures used by the entire CPA firm that help it meet reEuirements demanded by =AA$ on every

engagement in a consistent manner!Terms *elationship bet(een Euality control and generally accepted auditing standards'iff 3asy

Objective LO 2-@


1



20/23

B) List and describe the si elements of Euality control! .ho establishes the standards for Euality control/

Ans(er

< Leadership responsibilities for quality within the firm -#irm should promote that Euality is essential in

performing engagements and should establish policies and procedures that support that culture!

< Releant ethical requirements-Personnel on engagement should maintain independence in fact and in

appearance8 perform all professional responsibilities (ith integrity and maintain objectivity in performing their

professional responsibilities!< !uman Resources-Policies and procedures should be established to provide the firm (ith reasonable assurance

that all ne( personnel are Eualified to perform their (or+8 (or+ is assigned to personnel (ho have adeEuate

training8 and personnel should participate in continuing professional education!

< Acceptance and continuation of clients and engagements-Policies and procedures should be established for

deciding (hether to accept or continue a client relationship! These policies should minimi,e the ris+ of associating(ith a client (hose management lac+s integrity!

< "ngagement performance-Policies and procedures should eist to ensure that engagement personnel perform

(or+ that meets applicable professional standards and the firm;s standards of Euality!

< #onitoring-Policies and procedures should eist to ensure that the other four Euality control elements are

being effectively applied!

Huality control standards are established by the Auditing $tandards "oard for auditors of private companies and by

the Public Company Accounting Oversight "oard for auditors of public companies!Terms 3lements of Euality controls'iff oderateObjective LO 2-@


27



21/23

) Listed belo( are policies or procedures that the Crystal Cove audit firm has in place! #or each identified policy or

procedure state if it is a =enerally Accepted Audit $tandard %=AA$) or a Huality Control $tandard!

Audit firm Policy or Procedure

1! &ndependence in mental attitude!2! A client evaluation form!

! All personnel participate in continuing professionaleducation!

:! Conducting the audit (ith professional s+epticism!

0! Ans(ering an independence Euestionnaire!

>! ?nderstand the client industry!

@! Audit staff (or+papers are revie(ed by audit

seniors8 then managers!B! Audit staff are supervised!

$tandards Category

a! =AAP $tandards

b! Huality Control $tandards

Ans(er

1! a

2! b

! b:! a

0! b

>! a

@! b

B! aTerms =enerally Accepted Audit $tandards %=AA$) and Huality Control $tandards

'iff oderateObjective LO 2-> and LO 2-@


21



22/23

17) The follo(ing are definitions of terms that are listed on the right! atch the definition (ith its associated term!

3ach term can be used once8 more than once or not at all!

'efinition

1! An organi,ational structure (here professional services are

provided by one or more shareholders!

2! The grantor of the right to practice public accounting!

! A report filed to indicate a significant event!:! $ets professional standards and rules for auditors!

0! Oversees accounting firms (ho audit public companies!>! An organi,ational structure (here the o(ners are taed li+e

a partnership and have limited personal liability!

@! A report that is filed (hen a company (ishes to issue ne(

securities!

B! The methods used to ensure the firm meets its professional

responsibilities to clients and others!

! Assists in providing investors (ith reliable information!

17! *eEuires annual inspections of accounting firms auditing>177 issuers!

11! Practice monitoring by a CPA firm for another CPA firm!

12! #ulfilling duties diligently and carefully!

1! *eEuires a registration statement!

Audit Term

a! A&CPA

b! PCAO"

c! $ecurities 3change Commision

d! #orm 17-

+e! &AA$"

f! #orm $-1

g! 'ue professional care

h! Limited Liability Partnership

i! Professional Corporation

j! Limited Liability Company

+! Peer revie(

l! 1 $ecurities Act

m! 1: $ecurities Act

n! #orm B-+

o! $tate *egulation

p! Code of Professional Conduct

E! Huality Control $tandards

r! =AA$ $tandards

Ans(er

1! i

2! o

! n

:! a

0! b

>! j

@! fB! E

! c

17! b

11! +12! g

1! lTerms A&CPA- PCAO"- $ecurities 3change Commission- #orm $-1- #orm B-G- 'ue professional care- Professional

Corporation- Limited Liability Company- Peer revie(- 1 $ecurities Act- $tate *egulation- Huality Control $tandards

'iff oderateObjective LO 2-18 LO 2-28 LO 2-8 LO 2->8 and LO 2-@


22



23/23

11) Huality controls are established for the entire CPA firm (hereas =AA$ are applicable to the individual

engagement!

A) True

") #alse

Ans(er ATerms Huality controls and =AA$'iff oderate

Objective LO 2-@AAC$" *eflective thin+ing s+ills

2

ac555 external auditing chapter 2 test wk 1

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