ACCT 311 Ch. 1 - The Role of the Public Accountant in the American Economy

Which of the following best describes the relationship between assurance services and attest services?

• While attest services involve financial data, assurance services involve nonfinancial data.

• While attest services require objectivity, assurance services do not require objectivity.

• Both attest and assurance services require independence.

• Attest and assurance services are different terms referring to the same types of services.

Both attest and assurance services require independence.

Which of the following has primary responsibility for the fairness of the representations made in financial statements?

• Client’s management.

• Independent auditor.

• Audit committee.

• AICPA.

Client’s management.

(The client's management is primarily responsible for representations contained in the financial statements. The independent auditors are responsible for performing their audit in accordance with generally accepted auditing standards.)

The most important benefit of having an annual audit by a public accounting firm is to:

Provide assurance to investors and other outsiders that the financial statements are reliable.

(The most important benefit of having an annual audit by a public accounting firm is to provide assurance to investors and other outsiders that the financial statements are dependable. The expansion of the securities markets has tremendously increased the need for verification of financial statements performed by competent, independent persons. Answer (2) is incorrect because management cannot avoid responsibility for the financial statements by retaining independent auditors. Answer (3) gives no recognition to the fact that many nonpublic corporations and other business entities have no obligation to file audited financial statements with governmental agencies. It also disregards the fact that large corporations which secure capital from the general public would continue to provide audited statements even though there were no such requirements by governmental agencies. Answer (4) is unacceptable because it implies that an audit is designed to detect illegal acts without regard to type or size.)

The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB). Which of the following is not one of the responsibilities of that board?

• Establish independence standards for auditors of public companies.

• Review financial reports filed with the SEC.

• Establish auditing standards for audits of public companies.

• Sanction registered audit firms.

Review financial reports filed with the SEC.

(The PCAOB ordinarily does not review financial reports filed with the Securities and Exchange Commission—although, if they so desire, they may review such reports to accomplish their other responsibilities. The other three replies are all explicit responsibilities of the PCAOB.)

Which organization has the responsibility to perform inspections of auditors of public companies?

Public Company Accounting Oversight Board.

(The Public Company Accounting Oversight Board was given the authority by the Sarbanes-Oxley Act of 2002 to establish or adopt auditing standards for audits of public companies.)

Governmental auditing, in addition to including audits of financial statements, often includes audits of efficiency, effectiveness, and:

Compliance.

In general, internal auditors’ independence will be greatest when they report directly to the:

Audit committee of the board of directors.

(Normally, the higher in an organization an internal auditor reports, the greater the degree of independence. Accordingly, reporting to the audit committee of the board of directors increases the likelihood that the internal auditor will be able to act independently of those being audited. Answers (1) and (2) may lead to a lesser degree of independence because when an internal auditor reports to the financial vice-president or the controller they cannot objectively review their work. Answer (4) is incorrect because it is generally not practical or effective for the internal auditor to report to stockholders on a timely basis.)

Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting firms:

• Disclosures related to accounting irregularities at Enron and WorldCom.

• Restatements of financial statements by a number of public companies.

• Conviction of the accounting firm of Arthur Andersen LLP.

• Ethical scandals at the AICPA.

Ethical scandals at the AICPA.

Which of the following organizations establishes accounting standards for U.S. government agencies?

• The Financial Accounting Standards Board.

• The Governmental Accounting Standards Board.

• The Federal Accounting Standards Advisory Board.

• The Public Company Accounting Oversight Board.

The Federal Accounting Standards Advisory Board.

(The Federal Accounting Standards Advisory Board establishes accounting standards for United States governmental agencies. The Governmental Accounting Standards Board establishes accounting standards for state and local government entities.)

Which of the following is correct about forensic audits?

• All audit engagements are forensic in nature.

• Forensic audits are performed by law firms; they are not performed by CPA firms.

• Forensic audits are equivalent to compliance audits.

• Forensic audits are usually performed in situations in which fraud has been found or is suspected.

Forensic audits are usually performed in situations in which fraud has been found or is suspected.

What best describes the purpose of the auditors’ consideration of internal control in a financial statement audit for a nonpublic company?

To determine the nature, timing, and extent of audit testing.

(Because the auditors’ purposes for considering internal control are to (a) plan the audit and (b) to determine the nature, timing, and extent of the tests to be performed, answer (1) is correct.)

Which of the following is an example of a compliance audit?

• An audit of financial statements.

• An audit of a company’s policies and procedures for adhering to environmental laws and regulations.

• An audit of a company’s internal control over financial reporting.

• An audit of the efficiency and effectiveness of a company’s legal department.

An audit of a company’s policies and procedures for adhering to environmental laws and regulations.

(A compliance audit measures the compliance of an organization with established criteria such as laws and regulations.)

Which of the following is not an example of an assurance service?

• Preparation of a tax return.

• Attesting to the reliability of a financial forecast.

• Review of internal control over operations.

• Audit of financial statements.

Preparation of a tax return.

Which of the following is a type of attest engagement?

• Tax advisory services.

• Agreed-upon procedures.

• Internal audit services.

• Consulting services.

Agreed-upon procedures.

Which of the following has oversight responsibility of the Public Company Accounting Oversight Board?

• American Accounting Association.

• Governmental Oversight Operations Board.

• American Institute of Certified Public Accountants.

• Securities and Exchange Commission.

Securities and Exchange Commission.

Some of the following criteria are essential to satisfactory performance in several professions. Which one is unique to audit work by CPAs?

• Familiarity with a complex body of technical knowledge.

• Due professional care.

• Independence.

• General competence.

Independence.

An effect of the Sarbanes-Oxley Act of 2002 was to:

reduce the accounting profession’s level of self-regulation.

Which of the following is an area in which the Public Company Accounting Oversight Board is not empowered to establish or adopt standards?

• Accounting.

• Auditing.

• Independence.

• Quality Control.

Accounting.

In a review engagement the CPA issues a report with:

limited assurance.

Senior auditors typically perform all of the following tasks, except:

• sign the audit report.

• draft the audit report.

• supervise staff assistants.

• review the working papers prepared by staff assistants.

sign the audit report.

An audit designed to study a unit of an organization for the purpose of measuring its performance is referred to as:

an operational audit.

To improve the quality of financial statements filed with it, the SEC has adopted.

Regulation S-X.

Activity or Work: Generally accepted auditing standards

Related Term, Phrase, or Organization: SASs

Activity or Work: Compliance audits

Related Term, Phrase, or Organization: Internal Revenue Service

Activity or Work: Operational audits

Related Term, Phrase, or Organization: Internal auditor

Activity or Work: Providing credibility to various types of information

Related Term, Phrase, or Organization: Attest function

Activity or Work: Reasonable assurance they follow GAAP

Related Term, Phrase, or Organization: Audited financial statements

Activity or Work: Peer review

Related Term, Phrase, or Organization: Quality control

Activity or Work: Protection of investors

Related Term, Phrase, or Organization: SEC

Activity or Work: Compilation and preparation of financial statements

Related Term, Phrase, or Organization: Accounting services by CPA

Activity or Work: Guide to scope of substantive procedures

Related Term, Phrase, or Organization: Consideration of internal control

Activity or Work: Essential element for the attest function

Related Term, Phrase, or Organization: Independence

Description: Administers the Securities Acts.

Organization: SEC

Description: Body designated to establish accounting standards for entities other than state and local governments.

Organization: FASB

Description: The audit arm of Congress.

Organization: GAO

Description: International organization of internal auditors.

Organization: IIA

Description: Body designated to establish accounting standards for the federal government.

Organization: FASAB

Description: Group created to oversee and discipline CPAs and public accounting firms that audit public companies.

Organization: PCAOB

Description: National organization of CPAs.

Organization: AICPA

Description: Body designated to establish accounting standards for state and local governments.

Organization: GASB

Publication: Statements on Auditing Standards (SASs).

Sponsor: American Institute of Certified Public Accountants (AICPA).

Publication: The Journal of Accountancy.

Sponsor: American Institute of Certified Public Accountants (AICPA).

Publication: Regulation S-X, Form and Content of Financial Statements.

Sponsor: Securities and Exchange Commission (SEC).

Publication: Statements on Standards for Accounting and Review Services (SSARSs).

Sponsor: American Institute of Certified Public Accountants (AICPA).

Publication: Financial Reporting Releases (FRRs).

Sponsor: Securities and Exchange Commission (SEC).

Publication: Accounting and Reporting Standards for Corporate Financial Statements.

Sponsor: Financial Accounting Standards Board (FASB).

Publication: Accounting and Reporting Standards for Governmental Entities.

Sponsor: Governmental Accounting Standards Board (GASB).

Publication: Industry Audit and Accounting Guides.

Sponsor: American Institute of Certified Public Accountants (AICPA).

Publication: Audit Risk Alerts.

Sponsor: American Institute of Certified Public Accountants (AICPA).

Publication: The Tax Advisor.

Sponsor: American Institute of Certified Public Accountants (AICPA).

Publication: Auditing Standards

Sponsor: Public Company Accounting Oversight Board (PCAOB).

Statement: When financial statements are involved, this is referred to as an audit.

Type of Engagement: Examinations

Statement: The term “We are not aware of any material modifications that should be made” is often included in the report.

Type of Engagement: Reviews

Statement: The report issued provides a summary of procedures performed (determined by the user) and findings.

Type of Engagement: Agreed-upon procedures

Statement: The report issued provides “reasonable assurance.”

Type of Engagement: Examinations

Statement: The procedures involved are generally limited to inquiry and analytical procedures.

Type of Engagement: Reviews

Statement: The report issued provides “absolute assurance.”

Type of Engagement: None

Statement: The report issued provides “limited assurance.”

Type of Engagement: Reviews

Statement: The procedures followed are agreed upon with the specified user or users.

Type of Engagement: Agreed-upon procedures

Statement: This type of engagement provides more assurance than a review.

Type of Engagement: Examinations

Statement: The CPA need not be independent to perform this service.

Type of Engagement: None

Definition (or Partial Definition): An attest engagement in which the CPAs agree to perform procedures for a specified party and issue a report that is restricted to use by that party.

Service: Agreed-upon procedures engagement

Definition (or Partial Definition): An engagement designed to express limited assurance relating to subject matter or an assertion.

Service: Review

Definition (or Partial Definition): An engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g., management).

Service: Attest engagement

Definition (or Partial Definition): An examination designed to provide an opinion that is the CPA’s highest level of assurance that the financial statements follow generally accepted accounting principles, or another acceptable basis of accounting.

Service: Audit of financial statements

Definition (or Partial Definition): As required by the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board, an audit that includes providing assurance on both the financial statements and internal control over financial reporting.

Service: Integrated audit

Definition (or Partial Definition): Professional services that enhance the quality of information, or its context, for decision makers.

Service: Assurance services

Definition (or Partial Definition): An attest engagement designed to provide the highest level of assurance that CPAs provide on an assertion.

Service: Examination

Definition (or Partial Definition): A government agency authorized to regulate companies seeking approval to issue securities for sale to the public.

Service: Securities and Exchange Commission

Definition (or Partial Definition): A representation or declaration made by the responsible party, typically management of the entity.

Service: Assertion

Definition (or Partial Definition): A series of statements issued by the Auditing Standards Board of the AICPA. Generally accepted auditing standards are developed and issued in the form of these statements.

Service: Statements on Auditing Standards

Definition (or Partial Definition): A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements.

Service: Financial reporting framework

Definition (or Partial Definition): A set of reforms that toughened penalties for corporate fraud, restricted the kinds of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board to oversee CPAs and public accounting firms.

Service: Sarbanes-Oxley Act of 2002

Definition (or Partial Definition): The five-member board established in 2002 to oversee the audit of public (issuer) companies that are subject to the securities laws. The board has authority to establish or adopt (or both) rules for auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports.

Service: Public Company Accounting Oversight Board

Definition (or Partial Definition): The national professional organization of CPAs engaged in promoting high professional standards to ensure that CPAs serve the public interest.

Service: American Institute of Certified Public Accountants

Definition (or Partial Definition): The standards or benchmarks used to measure and present the subject matter and against which the CPA evaluates the subject matter. They are criteria that are established or developed by groups composed of experts that follow due process procedures, including exposure of the proposed criteria for public comment.

Service: Suitable criteria

Auditing Term/Organization Name: Quality control

Most Closely Related Term: Peer review

Auditing Term/Organization Name: Operational audit

Most Closely Related Term: Measurement of effectiveness and efficiency of a unit of an organization

Auditing Term/Organization Name: Internal control

Most Closely Related Term: Basis for sampling and testing

Auditing Term/Organization Name: Government Accountability Office

Most Closely Related Term: Auditing staff reporting to Congress

Auditing Term/Organization Name: Disclosure

Most Closely Related Term: Material information

Auditing Term/Organization Name: Critical characteristic that must be maintained by the accounting profession

Most Closely Related Term: Credibility

Auditing Term/Organization Name: Public Company Accounting Oversight Board

Most Closely Related Term: Regulation of auditors of public companies

Auditing Term/Organization Name: Securities and Exchange Commission

Most Closely Related Term: Registration statement

Auditing Term/Organization Name: Audited financial Statements

Most Closely Related Term: Opinion

Auditing Term/Organization Name: Compilation of financial statements

Most Closely Related Term: Accounting service