CHAPTER MULTIPLE CHOICE b To become a Certified Public Accountant (CPA), an individual must pass the Uniform CPA Examination and a Demonstrate his or her independence b Comply with state education and experience requirements c Obtain employment with a public accounting firm d Become a member of the AICPA b Which of the following statements is an example of an assertion made by management in an entity's financial statements? a The financial statements were prepared in an unbiased manner b Reported inventory balances reflect all related transactions for the period c Reported accounts receivable does not include any uncollectible accounts d The scope of the auditors' investigation was not limited in any way by management d Statements on Auditing Standards a Relate to the filing requirements and enforcement activities of the SEC b Describe procedures to be applied in specific areas of audit activity to eliminate inconsistencies in audit practice c Are intended to limit the degree of auditor judgment needed to fulfill the attest function d Interpret standards that provide guidelines or measures of quality for an independent audit d a b c d The primary purpose of an independent financial statement audit is to Provide a basis for assessing management's performance Comply with state and federal regulatory requirements Assure management that the financial statements are unbiased and free from material error Provide users with an unbiased opinion about the fairness of information reported in the financial statements b a b c d Independent auditing can best be described as a Branch of accounting Discipline that attests to the results of accounting and other operations and data Professional activity that measures and communicates financial and business data Regulatory function that prevents the issuance of improper financial information (AICPA ADAPTED) b a b c d An independent audit aids in the communication of economic data because the audit Confirms the accuracy of management's financial representations Lends credibility to the financial statements Guarantees that financial data are fairly presented Assures the readers of financial statements that any fraudulent activity has been corrected (AICPA ADAPTED) c a b c d Which of the following types of audits are most similar? Operational audits and compliance audits Independent financial statement audits and operational audits Compliance audits and independent financial statement audits Internal audits and independent financial statement audits c a b c c a b c d The essence of the attest function is to Detect fraud Examine individual transactions so that the auditor can certify as to their validity Determine whether the client's financial statements are fairly stated Ensure the consistent application of correct accounting procedures (AICPA ADAPTED) d 10 a b c d Which of the following criteria is unique to the independent auditor's attest function? General competence Familiarity with the particular industry of each client Due professional care Independence (AICPA ADAPTED) c 11 The definition of auditing contained within A Statement of Basic Auditing Concepts recognizes that auditing includes both a(an) a Documentation process and an evaluation process b Evaluation process and a reporting process c Investigative process and a reporting process d Documentation process and a reporting process a 12 An operational audit is designed to a Assess the efficiency and effectiveness of management's operating procedures b Assess the presentation of management's financial statements in accordance with generally accepted accounting principles c Determine whether management has complied with applicable laws and regulations d Determine whether the audit committee of the board of directors is effectively discharging its responsibility to oversee management's operations b 13 a b c d The Auditing Standards Board Sets rules and regulations that govern public accounting firms Is an arm of the Financial Accounting Standard Board Is a senior technical body of the AICPA designated to issue authoritative auditing pronouncements d Reports directly to the Securities and Exchange Commission The market for auditing services is driven by The regulatory authority of the Securities and Exchange Commission A demand by external users of financial statements Pronouncements issued by the Auditing Standards Board Congress at the federal level and elected legislative bodies at the state level a 14 a b c d The first contemporary audit related legislation was the Securities Act of 1933 Securities Exchange Act of 1934 British Joint Stock Companies Act of 1844 Companies Act of 1947 a 15 a b c d The first authoritative auditing pronouncement in the U.S was Statement on Auditing Procedures No 1, "Extensions of Auditing Procedures." Statement on Auditing Standards No 1, "Codification of SASs." "Uniform Accounting: A Tentative Proposal Submitted by the Federal Reserve Board (1917)." "Examination of Financial Statements by Independent Public Accountants (1936)." a 16 The first authoritative audit standards-setting body empowered to issue auditing pronouncements in the U.S was the a The Committee on Auditing Procedure b The Auditing Standards Executive Committee c The Auditing Standards Board d The Accounting and Review Services Committee c 17 Which of the following incorrectly matches the authoritative body with its authoritative pronouncements? a Accounting and Review Services Committee: "Statements on Standards for Accounting and Review Services" b Auditing Standards Board: "Statements on Auditing Standards" c Auditing Standards Executive Committee: "Statements on Auditing Procedure" d Securities and Exchange Commission: "Financial Reporting Releases" a 18 a b c d b 19 The purpose of a compliance audit for a governmental entity is to determine whether a Financial statements comply with GAAP and whether the entity is operating efficiently b Financial statements comply with GAAP and the entity has complied with applicable laws and regulations c The entity has complied with applicable laws and regulations d Financial statements comply with GAAP a 20 a b c d A license to practice as a certified public accountant is granted by State boards of accountancy The AICPA State societies of CPAs The SEC The audit process is A special application of the scientific method of inquiry Regulated by the AICPA The only service a CPA is allowed to perform by law Performed only by CPAs d 21 Which of the following has historically had the least influence on the practice of public accounting? a The Governmental Accounting Standards Board b The Institute of Internal Auditors c The Securities and Exchange Commission d The U.S Congress b 22 Independent auditing can best be described as a A subset of accounting b A professional activity that attests to the fair presentation of financial statements c A professional activity that measures and communicates financial accounting data d A regulatory activity that prevents the issuance of improper financial information (AICPA ADAPTED) c 23 a b c d An independent audit is important to readers of financial statements because it Provides a measure of management's stewardship function Measures and communicates the financial data included in financial statements Objectively examines and reports on management's financial statements Reports on the accuracy of information in the financial statements (AICPA ADAPTED) a 24 a b c d The reason an independent auditor gathers evidence is to Form an opinion on the financial statements Detect fraud Evaluate management Evaluate internal controls (AICPA ADAPTED) SHORT ANSWER What measure of self-regulation is in place to monitor the performance of the public accounting profession in the area of assurance services? Answer: The Public Oversight Board (POB) is an autonomous body that monitors the performance of the public accounting firms that audit publicly traded U.S companies The POB is comprised of five members which meets eight times a year and oversees peer reviews, and issues status reports that recommend improvements in the self-regulation process Describe two attestation services that are common performed by public accounting firms Answer: (1) Agreed-upon procedures: An engagement where the attestor (or auditing firm) is engaged to examine an item using procedures agreed upon by the contracting parties (2) Reviews: An attestation service for financial statements where the public accounting firm gives limited assurance about whether an entity’s financial statements conform to generally accept accounting principles What is the economic value of a financial statement audit? Answer: Financial statement audits reduce the information risk (the risk that information in financial statements is misstated materially), and reductions in information risk which in turn reduce a company’s cost of capital (the cost a company endures to issue equity or incur debt) Define the attestation service of auditing Answer: Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users PROBLEMS In your role of Chief Financial Officer, you are requested to explain to the Board of Directors why audits of the company are made by (a) internal auditors, (b) independent auditors, and (c) governmental auditors The Board has voiced an opinion that it might be better if the company’s internal auditors completed all audits What are the issues that you would need to explain to the Board? Answer: It is important to explain the differences in the roles of the three types of accountants and the purpose of each different form of audit: I Internal auditors are auditors employed by the company to assess the efficiency and effectiveness of management’s operations Internal auditors perform operational audits Operational audits focus on information systems and operating procedures, not on recorded dollar amounts or reported financial information, and address an entity’s entire scope of operations or selected procedures II Independent auditors or governmental auditors perform compliance audits Compliance audits may be designed to determine whether an entity’s statements are presented fairly in accordance with GAAP and may also be designed to determine whether the entity has complied with applicable laws and regulations that may have a material effect on financial statements III Independent auditors perform financial statement audits Financial statement audits are an attestation service in which an independent auditor offers assurance about management’s written financial statement assertions It is imperative that the Board of Directors understands that the different types of auditors have different areas of professional expertise and authority The value of each form of audit would be negated if completed by the inappropriate audit professional The AICPA’s “CPA Vision Project: 2011 and Beyond,” contemplates values and competencies that improve an assurer’s ability to judge the quality of information assured List and define the elements outlined within the CPA Vision Project I Core Values:  Continuing Education and Lifelong Learning – CPAs believe in continuing education beyond certification and believe it is important to continually acquire new skills and knowledge  Competence – CPAs are able to perform high-quality work in a capable, efficient, and appropriate manner  Integrity – CPAs conduct themselves with honesty and professional ethics  Attuned to Broad Business Issues – CPAs are in tune with the overall realities of the business environment  Objectivity – CPAs are able to deal with information free of distortions, personal bias, or conflicts of interest II Core Competencies:  Communications and Leadership Skills – Able to give and exchange information within meaningful context and with appropriate delivery and interpersonal skills Able to influence, inspire, and motivate others to achieve results  Strategic and Critical Thinking Skills – Able to link data, knowledge, and insight together to provide quality advice for strategic decision making  Focus on the Customer, Client, and Market – Able to anticipate and meet the changing needs of clients, employers, customers, and markets better than competitors  Interpretation of Converging Information – Able to interpret and provide a broader context using financial and nonfinancial information  Technologically Adapt – Able to utilize and leverage technology in ways that add value to clients, customers, and employees III Core Services:  Assurance and Information Integrity – Provide a variety of services that improve and assure the quality of information, or its context, for business decision making  Management Consulting and Performance Management – Provide advice and insight on the financial and nonfinancial performance of an organization’s operational and strategic process through broad business knowledge and judgment  Technology Services – Provide services that leverage technology to improve objectives and decision making, including business application processes, system integrity, knowledge management, system security, and integration of new business processes and practices  Financial Planning – Provide a variety of services to organizations and individuals that interpret and add value by utilizing a wide range of financial information These include everything from tax planning and financial statement analysis to structuring investment portfolios and complex financial statements  International Services – Provide services to support and facilitate commerce in the global market ... Accounting and Review Services Committee: "Statements on Standards for Accounting and Review Services" b Auditing Standards Board: "Statements on Auditing Standards" c Auditing Standards Executive... to issue auditing pronouncements in the U.S was the a The Committee on Auditing Procedure b The Auditing Standards Executive Committee c The Auditing Standards Board d The Accounting and Review... Securities and Exchange Commission A demand by external users of financial statements Pronouncements issued by the Auditing Standards Board Congress at the federal level and elected legislative bodies