Auditing and Assurance Services - Ch02

8/13/2019 Auditing and Assurance Services - Ch02

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Chapter 02 - The Financial Statement Auditing Environment

Chapter 02

The Financial Statement Auditing Environment

True / False Questions

1. A series of business and related auditing failures led to the passage of the Sarbanes-!le"

Act #2002$.

True False

2. The primar" audit conte!t %ith %hich an auditor is concerned is the client&s industr" orbusiness.

True False

'. The audit committee generall" includes senior e!ecutives of the organi(ation.

True False

). A financial statement audit is generall" organi(ed based on the five basic businessprocesses or c"cles.

True False

*. ne of the five basic business processes is the %arehousing c"cle.True False

+. Audit procedures are designed to test management assertions.

True False

,. CA auditing standards must be follo%ed on all financial statement audits performed in

the /.S.True False

2-1


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. A financial statement audit must be conducted based on AA.

True False

. enerall"3 the financial statements of /.S. companies must be prepared based on AA.

True False

10. CA auditing standards must be follo%ed on all audits of public Companies& financialstatements.

True False

Multiple Choice Questions

11. The Audit committee consists of4A. 5embers of management

. A subcommittee of the A6CA %ho establish the SAS

C. 5embers of the oard of 7irectors

7. Appointed government overseers

12. 8hat organi(ation is responsible for setting auditing standards for audits of publicl"-

traded companies in the /.S.9A. A6CA

. FAS

C. AS7. CA

1'. The ublic Compan" Accounting versight oard&s role is to

A. Conduct the final revie% of auditors& %or: before the auditor&s opinion is issued. versee the auditors of public companies in order to protect the interests of investors

C. Conduct audits of governmental entities

7. Sanction auditors %ho fail to follo% AAS

2-2


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1). The authoritative bod" designed to promulgate standards concerning an accountant&s

association %ith audited financial statements of an entit" that is re;uired to file financialstatements %ith the SEC is the

A. Financial Accounting Standards oard

. eneral Accounting fficeC. ublic Companies Accounting versight oard7. Auditing Standards oard

1*. The auditor must be independent of the audit client unless4

A. The lac: of independence does not influence his or her professional


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1. The first general standard re;uires that the e!amination of financial statements is to be

performed b" a person or persons having ade;uate technical training andA. 6ndependence %ith respect to the financial statements and supplementar" disclosures

. E!ercising professional care as This

passage re;uiresA. A statement of fact b" the auditor

. An opinion b" the auditor

C. An implied measure of fairness

7. An ob


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22. The primar" responsibilit" for the ade;uac" of disclosures in the financial statements of a

publicl" held compan" rests %ith theA. artner assigned to the audit engagement

. 5anagement of the compan"

C. Auditor in charge of the field%or:7. Securities and E!change Commission

2'. The largest public accounting firms t"picall" are structured as

A. Subchapter S corporations

. rofessional corporationsC. ?imited liabilit" partnerships

7. ?imited liabilit" corporations

2). T"picall"3 an e!ternal auditor first gets supervisor" e!perience at %hat level of authorit"9

A. Associate

. Senior

C. 5anager7. artner

2*. An >in-charge> auditor t"picall" holds the ran: of

A. Associate. Senior

C. 5anager

7. artner

2+. 8hich of the follo%ing best describes the concept of ris: assessment on %hich auditors

can provide independent assurance9

A. The ris: that financial statements are misstated because of fraud. The ris: that financial statements are misstated because of error or fraud

C. 8hether management has s"stems in place to evaluate and effectivel" manage the entit"&sbusiness ris:s7. 7eveloping client acceptance and continuance practices that minimi(e the li:elihood of

la%suits against the auditor

2-*


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2,. Forensic audits include all of the follo%ing e!cept

A. Criminal investigations. 5anufacturers& assertions about product ;ualit"

C. Emplo"ee fraud

7. 5anagement fraud

2. A t"pical ob


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'2. 8hat is the general character of the %or: conducted in performing a forensic audit for a

compan"9A. roviding assurance that the financial statements are not materiall" misstated

. 7etecting or deterring fraudulent activit"

C. ffering an opinion on the reliabilit" of the specific assertions made b" management7. 6dentif"ing the causes of an entit"&s financial difficulties

''. 8hich of the follo%ing is =T a re;uirement of the Sarbanes-!le" Act9

A. Audit firms cannot provide most t"pes of nonaudit services to their public compan" audit

clients. Audit firms are re;uired to rotate audit partners off audit engagements ever" five "ears for

public compan" audits

C. Firms that audit public companies are sub


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'+. The three general standards are concerned %ith4

A. Ade;uate training and proficienc" of the auditor3 proper planning and supervision3 and dueprofessional care.

. Ade;uate training and independence.

C. 7ue professional care.7. oth b and c.

',. The first general standard recogni(es that regardless of ho% capable an individual ma" be

in other fields3 the individual cannot meet the re;uirements of the auditing standards %ithout

the properA. usiness and finance courses

. ualit" control and peer revie%

C. Education and e!perience in auditing

7. Supervision and revie% s:ills

'. The main difference bet%een SAS and A/ is4

A. The" are the same e!cept that SAS are organi(ed chronologicall" and the A/ areorgani(ed b" topical area.

. SAS are issued b" the AS and A/ are issued b" the CA.

C. SAS are issued b" the CA and A/ are issued b" the AS.7. SAS define minimum standards of performance for auditors %hile A/ define financial

accounting principles that must be follo%ed according to AA.

'. The A6CA&s Statements on Auditing Standards can be described asA. roviding ver" specific guidance about the specific activities an auditor must perform on

each engagement

. Similar to financial accounting standards in that the" are developed b" the governmentC. 7efining the minimum standards of performance for an auditor

7. roviding assurance that an auditor %ill not issue an incorrect opinion

2-


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)0. 8ith regard to detecting fraud3 auditing standards re;uire auditors to

A. erform procedures designed to detect all instances of fraud that might affect the financialstatements

. rovide reasonable assurance that the financial statements are not materiall" misstated

because of fraudC. 6ssue an un;ualified opinion onl" %hen the auditor is satisfied that no instances of fraudhave occurred

7. 7esign the audit program to meet financial statement users& e!pectations concerning fraud

)1. The ob


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)). 8hich of the follo%ing is not e!plicitl" a part of the 66A&s definition of internal auditing9

A. 6nternal auditing is an ob


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). 8hich of the follo%ing best describes %hat is meant b" generall" accepted auditing

standards9A. Audit assertions generall" determined on audit engagements

. Acts to be performed b" the auditor

C. Standards of ;ualit" for the auditor&s performance7. rocedures to be used to gather evidence to support financial statements

*0. The fourth standard of reporting re;uires an auditor to render a report %henever an

auditor&s name is associated %ith financial statements. The overall purpose of the fourth

standard of reporting is to re;uire that reportsA. State that the e!amination of financial statements has been conducted in accordance %ith

generall" accepted auditing standards

. 6ndicate the character of the auditor&s e!amination and the degree of responsibilit" assumed

b" the auditorC. 6mpl" that the auditor is independent in fact as %ell as in appearance %ith respect to the

financial statements under e!amination

7. E!press %hether the accounting principles used in preparing the financial statements havebeen applied consistentl" in the period under e!amination

*1. The three standards of field%or: are concerned %ith4A. lanning and supervision and understanding the client&s internal control s"stem.

. Choosing evidence %ith due professional care.

C. Ade;uate training to understand the client&s internal controls s"stem.7. Ensuring consistenc" in financial statements for periods presented.

*2. The fourth reporting standard re;uires the auditor&s report to contain either an e!pression

of opinion regarding the financial statements ta:en as a %hole or an assertion to the effect thatan opinion cannot be e!pressed. The ob


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*'. 8hich assertions ma" be tested for the >account balances> categor" of management

assertions9A. E!istence3 accurac"3 rights and obligations3 completeness

. E!istence3 rights and obligations3 completeness3 valuation and allocation

C. ccurrence3 rights and obligations3 completeness3 valuation and allocation7. ccurrence3 accurac"3 rights and obligations3 completeness

*). 8hich assertions ma" be tested for the >transactions and events> categor" of management

assertions9

A. E!istence3 completeness3 rights and obligations3 accurac"3 cutoff and classification. ccurrence3 completeness3 rights and obligations3 accurac"3 cutoff and classification

C. ccurrence3 completeness3 authori(ation3 accurac"3 cutoff and classification

7. E!istence3 rights and obligations3 accurac"3 authori(ation3 and completeness

**. 8hich assertions ma" be tested for the >presentation and disclosure> categor" of

management assertions9

A. E!istence3 rights and obligations3 cutoff and classification3 completeness3 accurac" andvaluation

. ccurrence3 rights and obligations3 e!istence3 accurac" and valuation3 cutoff and

classificationC. ccurrence3 completeness3 classification and understandabilit"3 cutoff and classification

7. ccurrence3 rights and obligations3 completeness3 classification and understandabilit"3

accurac" and valuation

Short Answer Questions

*+. Dou are the o%ner of a small grocer" store3 Corner 5ar:etplace. E!plain the five process

categories and ho% the" appl" to "our business.

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*,. =ame t%o account balance management assertions pertaining to inventor" and e!plain

%h" the" are considered in an audit.

*. 7efine corporate governance3 the board of directors3 and the audit committee and e!plainho% the" relate to each other.

*. 7escribe the organi(ations involved in standard setting for auditors and %hat their

respective roles are in setting current auditing standards.

+0. 8hat are the three general auditing standards found %ithin the 10 AAS #=T the three

main categories of AAS$ and %h" is each important9

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+1. ane oodperson performed an audit on the uagmire Corporation and issued an

un;ualified opinion. ane performed the audit %ith due professional care and in accordance%ith generall" accepted auditing standards. T%o months after the report is issued3 ane

discovers on the ne%s that the CE of uagmire3 ohnn" est had been stealing small

amounts of inventor". The amount3 ho%ever3 is immaterial compared to the overall inventor"of the corporation. ane soon receives a call from uagmire&s CF3 5ar: eastl". 5ar:%ants ane to refund her audit fees. 5ar: thin:s ane did not properl" perform the audit3 as

she did not discover this fraud. Further3 he feels that no% uagmire&s financial statements are

not fairl" stated because of ane. o% should ane respond to this claim9

+2. 5i:e has


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+). 8hat auditing standards are used to conduct an audit for a privatel"-held corporation9

8hat auditing standards are used to conduct an audit for a publicl" held-and-tradedcorporation9 8hat organi(ation is responsible for setting each of these sets of standards9

+*. There are several t"pes of audit services that are provided b" auditors. 6dentif" and define

three of these t"pes of audits.

2-1*


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Chapter 02 The Financial Statement Auditing Environment Ans%er e"

True / False Questions

1. A series of business and related auditing failures led to the passage of the Sarbanes-!le"Act #2002$.

TRE

AACSB: CommunicationsAICPA BB: Legal

AICPA FN: Measurement

Bloom's: Knowledge

Difficult: !as

Learning "#$ecti%e: &

2. The primar" audit conte!t %ith %hich an auditor is concerned is the client&s industr" or

business.

TRE

AACSB: Communications

AICPA BB: Industr

AICPA FN: Decision MaingBloom's: Knowledge

Difficult: !as

Learning "#$ecti%e: (

'. The audit committee generall" includes senior e!ecutives of the organi(ation.

FA!SE

AACSB: CommunicationsAICPA BB: Industr

AICPA FN: )e*orting

Bloom's: KnowledgeDifficult: Moderate

Learning "#$ecti%e: +

2-1+


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). A financial statement audit is generall" organi(ed based on the five basic business

processes or c"cles.

TRE


AICPA BB: Industr

AICPA FN: Decision Maing

Bloom's: KnowledgeDifficult: !as

Learning "#$ecti%e: ,

*. ne of the five basic business processes is the %arehousing c"cle.

FA!SE


AICPA BB: IndustrAICPA FN: Decision Maing

Bloom's: Knowledge

Difficult: !as


+. Audit procedures are designed to test management assertions.

TRE

AACSB: Analtic SillsAICPA BB: Critical -.ining

AICPA FN: )is Analsis

Bloom's: Com*re.ension

Difficult: ModerateLearning "#$ecti%e: /

,. CA auditing standards must be follo%ed on all financial statement audits performed inthe /.S.

FA!SE


AICPA FN: )e*orting


Difficult: !as

Learning "#$ecti%e: 0

2-1,


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. A financial statement audit must be conducted based on AA.

FA!SE


AICPA BB: Legal

AICPA FN: )e*orting


Difficult: !asLearning "#$ecti%e: 1

. enerall"3 the financial statements of /.S. companies must be prepared based on AA.

TRE


AICPA FN: )e*ortingBloom's: Com*re.ension

Difficult: !as


10. CA auditing standards must be follo%ed on all audits of public Companies& financial

statements.

TRE


AICPA FN: )e*orting

Bloom's: Knowledge

Difficult: !asLearning "#$ecti%e: 1

Multiple Choice Questions

2-1


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11. The Audit committee consists of4

A.5embers of management.A subcommittee of the A6CA %ho establish the SAS

C"5embers of the oard of 7irectors

7.Appointed government overseers

AACSB: AnalticAICPA BB: Critical -.ining


Bloom's: Knowledge

Difficult: !as


12. 8hat organi(ation is responsible for setting auditing standards for audits of publicl"-traded companies in the /.S.9

A.A6CA.FAS

C.AS

#"CA


AICPA BB: Legal

AICPA FN: )e*ortingBloom's: Knowledge

Difficult: !as


1'. The ublic Compan" Accounting versight oard&s role is to

A.Conduct the final revie% of auditors& %or: before the auditor&s opinion is issued

$"versee the auditors of public companies in order to protect the interests of investorsC.Conduct audits of governmental entities

7.Sanction auditors %ho fail to follo% AAS


AICPA FN: )e*orting



2-1


20/43


1). The authoritative bod" designed to promulgate standards concerning an accountant&s

association %ith audited financial statements of an entit" that is re;uired to file financialstatements %ith the SEC is the

A.Financial Accounting Standards oard

.eneral Accounting fficeC"ublic Companies Accounting versight oard7.Auditing Standards oard


AICPA BB: Legal


Difficult: !as


1*. The auditor must be independent of the audit client unless4A.The lac: of independence does not influence his or her professional


21/43


1,. 8hich of the follo%ing best describes the general character of the three generall" accepted

auditing standards that are classified as standards of field%or:9A.The competence3 independence3 and professional care of persons performing the audit

.Criteria for the content of the auditor&s report on financial statements and related footnote

disclosuresC"The criteria of audit planning and evidence-gathering7.The need to maintain independence in mental attitude in all matters relating to the audit

AACSB: Analtic

AICPA BB: Legal

AICPA FN: Decision MaingBloom's: Com*re.ension

Difficult: !as

Learning "#$ecti%e: &2


1. The first general standard re;uires that the e!amination of financial statements is to be

performed b" a person or persons having ade;uate technical training andA.6ndependence %ith respect to the financial statements and supplementar" disclosures

.E!ercising professional care as


22/43


1. The first standard of reporting re;uires that3 >the report shall state %hether the financial

statements are presented in accordance %ith generall" accepted accounting principles.> Thispassage re;uires

A.A statement of fact b" the auditor

$"An opinion b" the auditorC.An implied measure of fairness7.An ob


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21. The accurac" of information included in footnotes accompan"ing the audited financial

statements issued b" a compan" %hose shares are traded on a stoc: e!change is the primar"responsibilit" of

A.The stoc: e!change officials

.The independent auditorC"The compan"&s management7.The Securities and E!change Commission


AICPA BB: Legal


Difficult: !as

Learning "#$ecti%e: &&

22. The primar" responsibilit" for the ade;uac" of disclosures in the financial statements of apublicl" held compan" rests %ith the

A.artner assigned to the audit engagement

$"5anagement of the compan"

C.Auditor in charge of the field%or:

7.Securities and E!change Commission


AICPA BB: Legal

AICPA FN: )e*orting



2'. The largest public accounting firms t"picall" are structured asA.Subchapter S corporations

.rofessional corporations

C"?imited liabilit" partnerships7.?imited liabilit" corporations


AICPA FN: )esearc.Bloom's: Knowledge

Difficult: !as

Learning "#$ecti%e: &(

2-2'


24/43


2). T"picall"3 an e!ternal auditor first gets supervisor" e!perience at %hat level of authorit"9

A.Associate

$"Senior

C.5anager

7.artner

AACSB: CommunicationsAICPA BB: )esource Management


Bloom's: Knowledge

Difficult: !as


2*. An >in-charge> auditor t"picall" holds the ran: ofA.Associate

$"SeniorC.5anager

7.artner


AICPA BB: )esource Management




2+. 8hich of the follo%ing best describes the concept of ris: assessment on %hich auditors

can provide independent assurance9

A.The ris: that financial statements are misstated because of fraud

.The ris: that financial statements are misstated because of error or fraud

C"8hether management has s"stems in place to evaluate and effectivel" manage the entit"&s

business ris:s

7.7eveloping client acceptance and continuance practices that minimi(e the li:elihood ofla%suits against the auditor

AACSB: AnalticAICPA BB: Critical -.ining

AICPA FN: )is AnalsisBloom's: A**lication

Difficult: !as

Learning "#$ecti%e: &+

2-2)


25/43


2,. Forensic audits include all of the follo%ing e!cept

A.Criminal investigations

$"5anufacturers& assertions about product ;ualit"

C.Emplo"ee fraud

7.5anagement fraud


AICPA FN: Le%eraging -ec.nolog

Bloom's: A**lication

Difficult: !as

Learning "#$ecti%e: &+Learning "#$ecti%e: &,

2. A t"pical ob


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'0. E!ternal auditors are referred to as >e!ternal> because

A.The" report to users outside of the audited entit".The" are paid b" parties outside of the audited entit"

C"The" are not emplo"ees of the entit" being audited

7.Their offices are not at the entit"&s place of business

age *2




Difficult: !as

Learning "#$ecti%e: &,

'1. 8hich is not an attribute of an e!ternal auditor9A.6ndependence

$"Client advocac"C.b


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''. 8hich of the follo%ing is =T a re;uirement of the Sarbanes-!le" Act9

A.Audit firms cannot provide most t"pes of nonaudit services to their public compan" auditclients

.Audit firms are re;uired to rotate audit partners off audit engagements ever" five "ears for

public compan" auditsC.Firms that audit public companies are sub


28/43


'*. 8ho bears ultimate responsibilit" for the financial statements9

A.5anagement of the organi(ation3 e;uall" %ith the e!ternal auditor that audits thestatements.

.5anagement and the shareholders of the organi(ation.

C.The e!ternal auditor that audits the statements.#"5anagement of the organi(ation.

AACSB: Analtic

AICPA BB: Legal




'+. The three general standards are concerned %ith4

A.Ade;uate training and proficienc" of the auditor3 proper planning and supervision3 and dueprofessional care.

.Ade;uate training and independence.C.7ue professional care.

#"oth b and c.



Bloom's: Knowledge

Difficult: Moderate


',. The first general standard recogni(es that regardless of ho% capable an individual ma" be

in other fields3 the individual cannot meet the re;uirements of the auditing standards %ithoutthe proper

A.usiness and finance courses

.ualit" control and peer revie%

C"Education and e!perience in auditing

7.Supervision and revie% s:ills

AACSB: Di%ersitAICPA BB: Mareting



Difficult: Moderate


2-2


29/43


'. The main difference bet%een SAS and A/ is4

A"The" are the same e!cept that SAS are organi(ed chronologicall" and the A/ areorgani(ed b" topical area.

.SAS are issued b" the AS and A/ are issued b" the CA.

C.SAS are issued b" the CA and A/ are issued b" the AS.7.SAS define minimum standards of performance for auditors %hile A/ define financialaccounting principles that must be follo%ed according to AA.


AICPA BB: )esource Management

AICPA FN: Decision MaingBloom's: Analsis

Difficult: Moderate


'. The A6CA&s Statements on Auditing Standards can be described asA.roviding ver" specific guidance about the specific activities an auditor must perform on

each engagement.Similar to financial accounting standards in that the" are developed b" the government

C"7efining the minimum standards of performance for an auditor

7.roviding assurance that an auditor %ill not issue an incorrect opinion


AICPA BB: Legal


Bloom's: Com*re.ensionDifficult: Moderate


2-2


30/43


)0. 8ith regard to detecting fraud3 auditing standards re;uire auditors to

A.erform procedures designed to detect all instances of fraud that might affect the financialstatements

$"rovide reasonable assurance that the financial statements are not materiall" misstated

because of fraudC.6ssue an un;ualified opinion onl" %hen the auditor is satisfied that no instances of fraudhave occurred

7.7esign the audit program to meet financial statement users& e!pectations concerning fraud




Difficult: Moderate


)1. The ob


31/43


)2. An internal auditor is li:el" to be more concerned %ith BBBBBBBBBBBBBBBBB than the

e!ternal auditor.A.6nternal administrative procedures

.Cost accounting procedures

C"The efficienc" of operations7.6nternal control

age *)

AACSB: Analtic

AICPA BB: Industr


Bloom's: A**licationDifficult: Moderate


Learning "#$ecti%e: &,

)'. 8hich of the follo%ing is not included in the broad categor" of assurance services9A.operational audit

.reporting on internal control

C"accounting or revie% services

7.evaluation of the client&s ris: management frame%or:


AICPA BB: IndustrAICPA FN: )e*orting


Difficult: Moderate


)). 8hich of the follo%ing is not e!plicitl" a part of the 66A&s definition of internal auditing9

A.6nternal auditing is an ob


32/43


)*. 8hich of the follo%ing statements regarding the CA is incorrect9

A.6t is a public-sector3 nonprofit corporation.6t is overseen b" the SEC

C.6t sets standards for public compan" audits

#"6t has delegated all of its standard-setting authorit" to the A6CA



Bloom's: Knowledge

Difficult: Moderate

Learning "#$ecti%e: &/

)+. 7ue professional care re;uires

A"Auditors to plan and perform their duties %ith the s:ill and care that is commonl" e!pected

of accounting professionals.The e!amination of all available corroborating evidence

C.The e!ercise of error-free


33/43


). The four standards of reporting are concerned %ith all of the follo%ing e!cept4

A"The presentation of the financial statements based on AAS..The presentation of the financial statements based on AA.

C.8hether principles are consistentl" applied3 %hether all informative disclosures have been

made and the degree of responsibilit" the auditor is ta:ing.7.The degree of responsibilit" the auditor is ta:ing.

AACSB: Analtic

AICPA BB: Legal


Bloom's: Com*re.ensionDifficult: Moderate


). 8hich of the follo%ing best describes %hat is meant b" generall" accepted auditing

standards9A.Audit assertions generall" determined on audit engagements

.Acts to be performed b" the auditor

C"Standards of ;ualit" for the auditor&s performance

7.rocedures to be used to gather evidence to support financial statements

AACSB: AnalticAICPA BB: Legal



Difficult: 4ard


2-''


34/43


*0. The fourth standard of reporting re;uires an auditor to render a report %henever an

auditor&s name is associated %ith financial statements. The overall purpose of the fourthstandard of reporting is to re;uire that reports

A.State that the e!amination of financial statements has been conducted in accordance %ith

generall" accepted auditing standards$"6ndicate the character of the auditor&s e!amination and the degree of responsibilit" assumedb" the auditor

C.6mpl" that the auditor is independent in fact as %ell as in appearance %ith respect to the

financial statements under e!amination7.E!press %hether the accounting principles used in preparing the financial statements have

been applied consistentl" in the period under e!amination


AICPA BB: LegalAICPA FN: )e*orting


Difficult: 4ard


*1. The three standards of field%or: are concerned %ith4

A"lanning and supervision and understanding the client&s internal control s"stem..Choosing evidence %ith due professional care.

C.Ade;uate training to understand the client&s internal controls s"stem.

7.Ensuring consistenc" in financial statements for periods presented.


AICPA BB: Legal

AICPA FN: )e*orting

Bloom's: Knowledge

Difficult: 4ardLearning "#$ecti%e: 1

2-')


35/43


*2. The fourth reporting standard re;uires the auditor&s report to contain either an e!pression

of opinion regarding the financial statements ta:en as a %hole or an assertion to the effect thatan opinion cannot be e!pressed. The obtransactions and events> categor" of managementassertions9

A.E!istence3 completeness3 rights and obligations3 accurac"3 cutoff and classification

.ccurrence3 completeness3 rights and obligations3 accurac"3 cutoff and classification

C"ccurrence3 completeness3 authori(ation3 accurac"3 cutoff and classification

7.E!istence3 rights and obligations3 accurac"3 authori(ation3 and completeness



Bloom's: Knowledge

Difficult: Moderate

Learning "#$ecti%e: /

2-'*


36/43


**. 8hich assertions ma" be tested for the >presentation and disclosure> categor" of

management assertions9A.E!istence3 rights and obligations3 cutoff and classification3 completeness3 accurac" and

valuation

.ccurrence3 rights and obligations3 e!istence3 accurac" and valuation3 cutoff andclassificationC.ccurrence3 completeness3 classification and understandabilit"3 cutoff and classification

#"ccurrence3 rights and obligations3 completeness3 classification and understandabilit"3

accurac" and valuation


AICPA BB: Legal


Bloom's: Knowledge

Difficult: ModerateLearning "#$ecti%e: /

Short Answer Questions

2-'+


37/43


*+. Dou are the o%ner of a small grocer" store3 Corner 5ar:etplace. E!plain the five process

categories and ho% the" appl" to "our business.

Financing4 The financing process involves loans or shareholder capital financing for assets

such as land3 buildings3 and e;uipment. Corner 5ar:etplace ma" have a ban: loan or lease forits store. 6t ma" also have solicited other means of financing3 such as additional o%ner funds.

urchasing4 usinesses ac;uire goods and services to support the sale of their o%n goods orservices through the purchasing process. Corner 5ar:etplace %ould purchase food inventor"

to sell to customers. 6t might also need to purchase displa" cases3 free(ers3 etc. to store and

displa" the inventor".

uman @esource 5anagement4 usiness organi(ations hire personnel to perform variousfunctions in accordance %ith the enterprise&s mission and strateg". Corner 5ar:etplace should

have established policies for hiring3 training3 evaluating3 counseling3 promoting3

compensating3 and terminating emplo"ees.6nventor" 5anagement4 A grocer" store %ould have significant inventor" to manage3 %hich it

accomplishes as part of the inventor" management process. The store %ould need to allocateproper costs to inventor" and %ould need to account for produce3 etc. that is e!pired.@evenue4 Corner 5ar:etplace %ould generate revenue through sales of food to customers and

%ould collect the proceeds of those sales. T"picall"3 a small grocer" store %ould not have

accounts receivables from customers3 as customers %ould pa" immediatel". o%ever3 therevenue c"cle includes cash receipts and credit card transactions.

AACSB: Analtic

AICPA BB: IndustrAICPA FN: Measurement


Difficult: 4ardLearning "#$ecti%e: +


2-',


38/43


*,. =ame t%o account balance management assertions pertaining to inventor" and e!plain

%h" the" are considered in an audit.

Answers should include two o% the %ollowing&

E!istence4 A compan" has an incentive to overstate inventor" to improve the appearance ofits balance sheet. Auditors can perform procedures3 such as ph"sical e!amination3 to test that

the compan"&s stated liabilities actuall" e!ist.@ights4 Auditors also need to ensure that the compan" has rights to its stated inventor". For

instance3 a compan" ma" be storing customer goods or holding goods on consignmentG in

these cases3 the compan" does not actuall" hold the rights to the goods.

Haluation4 A compan" has an incentive to overvalue its inventor". Again3 this improves theappearance of the balance sheet. Auditors should understand the possibilit" that some

merchandise ma" be obsolete3 ma" not be valued at the mar:et cost or ma" include

improperl" allocated costs.Completeness4 A compan"&s inventor" ma" not be properl" stated due to inappropriate

e!clusion of inventor" items. The inventor" ma" not include ever"thing that should have beenrecorded. This event ma" occur %ith fault" internal controls3 so auditors should be a%are ofthis possibilit".

AACSB: Analtic

AICPA BB: Critical -.iningAICPA FN: Measurement


Difficult: Moderate

Learning "#$ecti%e: /

2-'


39/43


*. 7efine corporate governance3 the board of directors3 and the audit committee and e!plain

ho% the" relate to each other.

Corporate governance is all the people3 processes3 and activities in place to help ensure proper

ste%ardship over an entit"&s assets.The board of directors is the bod" primaril" responsible for management oversight in

corporations.The audit committee oversees internal and e!ternal audit %or: done for an entit".

The board of directors pla"s a part in ensuring proper corporate governance b" holding

management responsible for the usage of the entit"&s assets. The audit committee is made up

of members of the board of directors. The audit committee enhances corporate governance b"holding management accountable for their activities through audits of their %or:.

AACSB: Analtic

AICPA BB: Critical -.iningAICPA FN: Measurement


Difficult: Moderate


*. 7escribe the organi(ations involved in standard setting for auditors and %hat their

respective roles are in setting current auditing standards.

5ost auditing standards %ere developed b" the Accounting Standards oard #AS$. At that

time3 the profession %as self-regulated. o%ever3 the Sarbanes-!le" Act of 2002 transferred

the authorit" to set auditing standards for public compan" audits to the ublic Compan"

Accounting versight oard #CA$3 %hich is overseen b" the Securities and E!changeCommission #SEC$. o%ever3 the CA adopted the AS&s auditing standards on an

interim basis. CAs must still abide b" the A6CA&s Code of rofessional Conduct at all

times. The" must also follo% auditing standards set b" the AS %hen performing audits ofprivate companies and other entities that are not public companies.

AACSB: !t.ics

AICPA BB: Legal

AICPA FN: Decision MaingBloom's: Com*re.ension

Difficult: 4ard

Learning "#$ecti%e: &

Learning "#$ecti%e: &/


2-'


40/43


+0. 8hat are the three general auditing standards found %ithin the 10 AAS #=T the three

main categories of AAS$ and %h" is each important9

The first standard states that an auditor must have ade;uate training and proficienc" as an

auditor. This is gained through formal education3 continuing education programs3 ande!perience. This ongoing training is necessar" so auditors can sta" up to date %ith current

developments in the industr".The second standard re;uires that the auditor maintain an attitude of independence on an

engagement. Auditors must be independent in fact and in appearance to protect the

profession&s image of ob


41/43


+1. ane oodperson performed an audit on the uagmire Corporation and issued an

un;ualified opinion. ane performed the audit %ith due professional care and in accordance%ith generall" accepted auditing standards. T%o months after the report is issued3 ane

discovers on the ne%s that the CE of uagmire3 ohnn" est had been stealing small

amounts of inventor". The amount3 ho%ever3 is immaterial compared to the overall inventor"of the corporation. ane soon receives a call from uagmire&s CF3 5ar: eastl". 5ar:%ants ane to refund her audit fees. 5ar: thin:s ane did not properl" perform the audit3 as

she did not discover this fraud. Further3 he feels that no% uagmire&s financial statements are

not fairl" stated because of ane. o% should ane respond to this claim9

ane should tell 5ar: that her responsibilit" %as to plan and perform the audit to obtainreasonable assurance about %hether the financial statements are free of material misstatement3

%hether caused b" error or fraud. She had no responsibilit" to plan and perform the audit to

obtain reasonable assurance that misstatements3 %hether caused b" errors or fraud that are notmaterial to the financial statements %ill be detected. uagmire&s management3 not ane3 has

responsibilit" for the financial statements. 6n fact3 because of the Sarbanes-!le" Act of 200235ar: had to ta:e e!plicit responsibilit" for the financial statements b" >certif"ing> that he asCF is responsible for establishing and maintaining internal control and that the financial

statements fairl" present the entit"&s financial conditions and operations. This statement is

probabl" still true3 since the amount stolen %as immaterial.


AICPA BB: Legal


Bloom's: A**licationDifficult: Moderate


2-)1


42/43


+2. 5i:e has


43/43


+). 8hat auditing standards are used to conduct an audit for a privatel"-held corporation9

8hat auditing standards are used to conduct an audit for a publicl" held-and-tradedcorporation9 8hat organi(ation is responsible for setting each of these sets of standards9

Auditing standards developed b" the Auditing Standards oard are used to conduct an auditfor a privatel"-held corporation or other entities that are not public companies. This includes

the ten generall" accepted auditing standards #AAS$ and the Statements on AuditingStandards #SAS$. Auditing standards developed b" the ublic Compan" Accounting

versight oard #CA$ must be used to conduct an audit for a publicl" held-and-traded

corporation. These standards include all those issued b" the AS until 200' and an" ne%

standards issued b" the CA after that point.


AICPA BB: Legal


Difficult: Moderate


+*. There are several t"pes of audit services that are provided b" auditors. 6dentif" and define

three of these t"pes of audits.

Answer should include an' three o% the %ollowing&

Financial Statement Audit4 Auditors test the transactions3 balances3 and disclosures in a set of

financial statements to determine if the" are materiall" correct.

6nternal Control Audit4 Auditors test the internal controls of a compan" to determine %hether

the control s"stem is functioning effectivel" #i.e. preventing3 detecting3 and correctingmisstatements in the financial statements$.

Compliance Audit4 Auditors test the e!tent to %hich rules3 policies3 la%s3 covenants3 or

government regulations are follo%ed b" the entit".perational Audit4 Auditors revie% part or all of an organi(ation&s activities to evaluate

%hether resources are being used effectivel" and efficientl". The auditor assesses the entit"&s

performance3 identifies areas for improvement3 and develops recommendations.Forensic Audit4 Auditors conduct forensic audits to detect or deter fraudulent activities.



Difficult: Moderate


Documents

Auditing and Assurance Services - Ch02