Chapter 2 Terms + HW Questions

Provide an opinion that financial statements are in accordance with the applicable financial reporting framework

Purpose of an audit

Management have responsibility to: prepare financial statements, design/implement internal controls, and provide auditors iwth needed infor with unrestricted access

Premise of an audit

Appropriate competence and capabilities to perform audit in accordance with standards

Personal responsibility of auditor

Questioning mind and critical assessment

Professional Skepticism

What principle does professional skepticism fall under?

Personal responsibility of the auditor

An auditor must obtain _ about whether financial statements are free from material error or fraud

Reasonable assurance

The risk that the auditors may unknowingly fail to appropriately modify the opinion on financial statements

Audit Risk

What are the two types of fraud?

Fraudulent financial reporting and misappropriation of assets

FASB issues __ for nongovernmental entities

GAAP

1.) Leadership responsibilities for quality within the firm

2.) Relevant ethical requirements

3.) Acceptance and continuance of clients and engagements

4.) Human Resources

5.) Engagement performance

6.) Monitoring

Elements of Quality Control

Assign management responsibilities so that commercial considerations do not override the quality of work performed

Leadership responsibilites for quality within the firm

At least annually, the firm should obtain written confirmation of compliance with its independence policies and procedures from all firm personnel who are required to be independent

Relevant ethical requirements

Background information is gathered on all prospective audit clients, including the attitude of principal owners, key management, and those charged with governance on matters such as aggressive accounting and internal control over financial reporting

Acceptance and Continuance

Design effective recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm, and maturity, integrity, and leadership

Human resources

Design policies and procedures that address the tracking of progress of each engagement.

Engagement Performance

Communicate, at least annually, the results of monitoring to engagement partners and other appropriate individuals within the firm

Monitoring

How many members are on PCAOB? How many can be CPA?

5 members- only 2 may be CPA

How long can members appointed by SEC serve?

No more than 2 5 year terms

Study of CPA firms system of quality control

System Review

Sample of CPA work including reports to evaluate appropriateness. (less in scope)

Engagement Review

Financial Statements follow GAAP and auditor does not add additional commentary for any issue

Unmodified Report

Scope limitation or departure from GAAP

Qualified Opinion

Lack of consistency in application of accounting principles

Unmodified with emphasis of matter (or other emphasis)

Departure from GAAP so significant that financial statements are misleading

Adverse Opinion

Unable to arrive at an opinion due to very significant scope limitation

Disclamer of opinion

Which of the following is not one of the forms of attestation presented in the AICPA Statements on Standards for Attestation Services:

Inspection

Financial statement audits performed under PCAOB requirements are designed to provide which type(s) of assurance with respect to the detection of material misstatements due to errors or fraud?

Reasonable Assurance not absolute

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

A system of quality management (control)

The auditor is unable to determine the overall fairness

Disclaimer

Limitation on the scope of the audit is significant, but not so pervasive as to overshadow an overall opinion

Qualified

Material departure from GAAP exists, but not so material as to pervasively misstate the financial statements

Qualified

Which of the following does the FASB consider a source of nonauthoritative guidance for use when there is no authoritative guidance available?

FASB Concepts Statements

An auditor has concluded that the financial statements are not fairly presented in that they are pervasively misstated. The most appropriate type of audit opinion is:

Adverse

Which of the following is not included in an integrated audit report on the financial statements of a public company?

The report states that the audit was performed in accordance with AICPA standards

Which AICPA quality management standard is most associated with resolution of differences of opinion among staff members that may arise on an audit?

Engagement Performance

Which of the following is not explicitly included in an audit report with an unqualified opinion for a nonpublic company?

That all material instances of fraud have been identified

An audit provides reasonable assurance of detecting material

Fraudulent Financial Reporting and Misappropriation of Assets

Which of the following organizations can revoke the right of an individual to practice as a CPA?

The applicable state board of accountancy