An audit performed in accordance with generally accepted auditing standards generally should

Professional Standards

True / False Questions

1. To express an opinion on financial statements, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. True False

2. The auditors' report on a corporation's financial statements usually is addressed to the president of the company. True False

3. The auditors are primarily responsible for preparing the financial statements and expressing an opinion on whether they follow generally accepted auditing standards. True False

4. Partners in CPA firms usually have the responsibility for signing the audit report. True False

5. An audit is more likely to detect tax evasion than violations of antitrust laws. True False

6. The attestation standards do not supersede generally accepted auditing standards. True False

7. A peer review is generally performed by employees of the AICPA. True False

8. If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement. True False

9. An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws. True False

10. The pronouncements of the International Auditing and Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company. True False

Multiple Choice Questions

1. Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to:

A. Option A B. Option B C. Option C D. Option D

1. Financial statements are prepared following a(an) A. Applicable financial reporting framework. B. Appropriate subject matter. C. Generally accepted auditing standards. D. Set of quality control standards.

2. An attestation engagement: A. Has as its primary source of standards the assurance standards. B. Includes a report on subject matter, or on an assertion about subject matter. C. Includes search and verification procedures for all major accounts. D. Is ordinarily an examination, review or compilation engagement.

3. Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards? A. The audit provides reasonable assurance the client will remain in business for at least one year. B. The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement. C. Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation. D. An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.

4. A set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing in the financial statements is referred to as a(n) A. Financial reporting framework. B. Public Company Accounting Oversight Board Criteria. C. Quality control presentation standard. D. Special purpose audit standard.

5. An audit should be designed to obtain reasonable assurance of detecting material misstatements due to: A. Errors. B. Errors and fraud. C. Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts. D. Errors, fraud and noncompliance with all laws.

6. Which of the following is accurate, as indicated in the principles underlying an audit? A. Management is expected to provide the auditors with all needed evidence prior to the beginning of audit work. B. An auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement. C. Auditors are responsible for having appropriate competence to perform the audit without the assistance of outside specialists. D. Management is responsible for preparing accurate financial statement amounts, while auditors are responsible for auditing those amounts and for preparing note disclosures related to those amounts.

7. Which of the following is not an underlying premise of an audit? A. Management must provide the auditor with all information relevant to the preparation and fair presentation of the financial statements. B. Management and the auditors have responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework. C. Where appropriate, the auditor may obtain information from those charged with governance. D. The auditors should be provided unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.

8. By definition, proper professional skepticism on an audit requires

A. Option A B. Option B C. Option C D. Option D

1. When a Statement Auditing Standards uses the word "should" relating to a requirement, it means that the auditor: A. Must fulfill the responsibilities under all circumstances. B. Must comply with requirements unless the auditor demonstrates and documents that alternative actions are sufficient to achieve the objectives of the standards. C. Should consider whether to follow the advice based on the exercise of professional judgment in the circumstances. D. May choose to change responsibilities relating to various professional standards that remain under consideration.

2. An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s)

A. Option A B. Option B C. Option C D. Option D 27. Which of the following best describes a portion of the auditors' responsibility regarding noncompliance with laws by clients? A. The auditors have a responsibility to discover all material noncompliance. B. If audit procedures reveal noncompliance, the auditors should take appropriate actions. C. If the auditors suspect noncompliance, they should conduct a legal audit of the company. D. The auditors' responsibility for the detection of all noncompliance is the same as their responsibility regarding material misstatements due to errors and fraud.

1. The Auditing Standards Board's guidance on matters such as the purpose of an audit, the premise of an audit, and auditor personal responsibilities is included in: A. The 10 Generally Accepted Auditing Standards. B. The Code of Professional Conduct. C. Accounting Series Releases. D. Principles Underlying an Audit Conducted in Accordance with GAAS.

2. A requirement that working papers be reviewed by the supervisor, and any deficiencies be discussed with the preparer is an example of a quality control procedure in the area of: A. Acceptance and continuance of client relationships and specific engagements. B. Engagement performance. C. Human resources. D. Relevant ethical requirements.

3. A requirement to design recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm is an example of a quality control procedure in the area of: A. Acceptance and continuance of client relationships and specific engagements. B. Engagement performance. C. Human resources. D. Relevant ethical requirements.

4. The body that issues international pronouncements providing auditing procedural and reporting guidance is the: A. International Federation of Auditors. B. Multinational Reporting Commission. C. International Auditing and Assurance Standards Board. D. AICPA Auditing Standards Board.

5. To present fairly in conformity with generally accepted accounting principles the financial statements must: A. Be consistently applied. B. Inform users of all matters that could materially affect a decision. C. Reflect transactions and events within a range of reasonable limits. D. Be considered preferable to the users of those financial statements.

6. Which of the following is not included in the auditors' standard unmodified audit report? A. The procedures selected by the auditor depend on the auditor's judgment. B. An audit includes evaluating the appropriateness of accounting policies used. C. An audit includes evaluating the overall presentation of the financial statements. D. Accounting principles have been consistently applied.

7. An audit performed in accordance with generally accepted auditing standards generally should: A. Be expected to provide absolute assurance that noncompliance with all laws will be detected where internal control is effective. B. Be relied upon to disclose violations of truth in lending laws. C. Encompass a plan to actively search for all illegalities which relate to operating aspects. D. Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.

8. When the auditors express an opinion on financial statements their responsibilities extend to: A. The underlying wisdom of their client's management decisions. B. Whether the results of their client's operating decisions are fairly presented in the financial statements. C. Active participation in the implementation of the advice given to their client. D. An ongoing responsibility for their client's solvency.

9. Authoritative GAAP sources include:

A. Option A B. Option B C. Option C D. Option D

1. An investor reading the financial statements of The Sundby Corporation observes that the statements are accompanied by an unmodified auditors' report. From this the investor may conclude that: A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction. B. The auditors are satisfied that Sundby is operationally efficient. C. The auditors have ascertained that Sundby's financial statements have been prepared accurately. D. Informative disclosures in the financial statements but not necessarily in the footnotes are to be regarded as reasonably adequate.

2. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the: A. Partner assigned to the audit engagement. B. Management of the company. C. Auditor in charge of the fieldwork. D. Securities and Exchange Commission.

3. Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with: A. Technical training that assures proficiency as an auditor. B. Professional education that is required in order to perform with due professional care. C. Knowledge required to fulfill assigned responsibilities and to progress within the firm. D. Knowledge required in order to perform a peer review.

4. In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control objective would this be most likely to satisfy? A. Acceptance and continuance of clients and engagements. B. Engagement performance. C. Personnel management. D. Relevant ethical requirements.

5. A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is: A. To enable the auditor to attest to the integrity or reliability of a client. B. To comply with the quality control standards established by regulatory bodies. C. To minimize the likelihood of association with clients whose managements lack integrity. D. To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.

6. Which of the following is not an element of quality control? A. Documentation. B. Engagement performance. C. Monitoring. D. Relevant ethical requirements.

7. Generally accepted auditing standards established by the AICPA through April of 2003: A. Have been accepted as interim standards by the Public Company Accounting Oversight Board. B. Provide accounting guidance for nonpublic companies. C. Have all been superseded by Public Company Accounting Oversight Board standards. D. Are now developed by the Securities and Exchange Commission.

8. The Public Company Accounting Oversight Board has authority to establish which of the following relating to public companies?

A. Option A B. Option B C. Option C D. Option D

1. Which of the following is least likely to be directly examined in an inspection performed by the PCAOB? A. Audit engagements. B. Review engagements. C. Compilation engagements. D. CPA firm quality control system.

2. As compared with the US public company audit report, the international audit report: A. Is shorter in length. B. Includes enhanced explanation of the audit process. C. Includes the name of the partner and managers on the audit, while the US report includes only the CPA firm name. D. Is dated as of year-end, whereas the US report is dated as of the last date of significant field work.

Matching Questions

1. Indicate whether you agree or disagree with the following statements concerning a financial statement audit conducted in accordance with generally accepted auditing standards.

2. When an auditing standard uses the word "should," this indicates that the auditor must in all cases follow it if the requirement is relevant to the company being audited Disagree ____

3. Audits provide absolute assurance of detecting material misstatements and reasonable assurance of detecting immaterial misstatements Disagree ____

4. At one point, the Public Company Oversight Board adopted the AICPA auditing standards in existence as its interim auditing standards Agree ____

5. International auditing standards are developed by the International Auditing and Assurance Standards Board

Disagree (auditing standards, not accounting principles) ____ 5. For audit purposes, professional skepticism includes a questioning mind and a critical assessment of audit evidence and should be maintained throughout the planning and performance of an audit Agree ____ 6. The Auditing Standards Board issues accounting principles for nonpublic company audits while the Public Company Accounting Oversight Board issues accounting principles for public company audits Disagree ____ 7. Auditors have a higher responsibility for detecting noncompliance with laws affecting financial statement amounts and disclosures than they do for other laws Agree ____ 8. Public companies are ordinarily audited by a CPA firm, with engagement review by the General Accounting Office Agree ____

Essay Questions

1. The standard unmodified auditors' report for audits of nonpublic companies consists of three paragraphs. Identify the three paragraphs and describe the purpose of each.

2. Auditors must consider the possibility of fraud by employees or management on every audit engagement. They must also consider the possibility that the client has not complied with laws. (a) Distinguish between employee and management fraud. (b) Describe the auditors' responsibility for the detection of fraud in an audit. (c) Describe the auditors' responsibility regarding noncompliance with laws by a client.

3. An audit is more likely to detect tax evasion than violations of antitrust laws. TRUE

Difficulty: Hard

1. The attestation standards do not supersede generally accepted auditing standards. TRUE

Difficulty: Medium

1. A peer review is generally performed by employees of the AICPA. FALSE

Difficulty: Medium

1. If the auditors discover illegal acts by a client, they ordinarily must immediately resign from the engagement. FALSE

Difficulty: Medium

1. An audit should be designed to obtain reasonable assurance of detecting non-compliance with all laws. FALSE

Difficulty: Medium

1. The pronouncements of the International Auditing and Assurance Standards Board do not override the national auditing standards of its members, even when financial statements are issued by a multinational company. TRUE

Difficulty: Medium

Multiple Choice Questions

1. Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to:

A. Option A B. Option B C. Option C D. Option D

Difficulty: Hard

1. Financial statements are prepared following a(an) A. Applicable financial reporting framework. B. Appropriate subject matter. C. Generally accepted auditing standards. D. Set of quality control standards.

Difficulty: Medium

1. An attestation engagement: A. Has as its primary source of standards the assurance standards. B. Includes a report on subject matter, or on an assertion about subject matter. C. Includes search and verification procedures for all major accounts. D. Is ordinarily an examination, review or compilation engagement.

Difficulty: Hard

1. Requirements for training, independence and due professional care are included in which group of the generally accepted auditing standards of the PCAOB? A. Fieldwork. B. General. C. Reporting. D. Quality control.

Difficulty: Medium

1. Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards? A. The audit provides reasonable assurance the client will remain in business for at least one year. B. The audit report expresses an opinion on whether the financial statements are free of material and immaterial misstatement. C. Auditors are responsible for, among other things, maintaining professional objectivism, exercising professional engagement, and obtaining appropriate documentation. D. An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.

Difficulty: Hard

1. A set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing in the financial statements is referred to as a(n) A. Financial reporting framework. B. Public Company Accounting Oversight Board Criteria. C. Quality control presentation standard. D. Special purpose audit standard.

Difficulty: Easy

1. An audit should be designed to obtain reasonable assurance of detecting material misstatements due to: A. Errors. B. Errors and fraud. C. Errors, fraud, and noncompliance with laws with a direct effect on financial statement amounts. D. Errors, fraud and noncompliance with all laws.

Difficulty: Hard

What is meant by generally accepted auditing standards?

Which of the following is required documentation in an audit performed in accordance with auditing standards?

Which of the following is a principle underlying an audit conducted in accordance with generally accepted auditing standards?

What is the general character of the three generally accepted auditing standards?