Chapter 02 - The Financial Statement Auditing Environment

Chapter 02 The Financial Statement Auditing Environment

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" or business. 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 business processes 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

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Chapter 02 - The Financial Statement Auditing Environment

0. A financial statement audit must be conducted based on 1AA-. True False

2. 1enerall"3 the financial statements of /.S. companies must be prepared based on 1AA-. True False

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

Multiple Choice Questions

11. The Audit committee consists of4 A. 5embers of management .. A subcommittee of the A6C-A %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.9 A. A6C-A .. FAS. C. 1AS. 7. -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% 1AAS

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Chapter 02 - The Financial Statement Auditing Environment

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 financial statements %ith the SEC is the A. Financial Accounting Standards .oard .. 1eneral Accounting ffice C. -ublic Companies Accounting versight .oard 7. 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 <udgment. .. .oth parties agree that the independence issue is not a problem. C. The lac: of independence is insignificant. 7. =one of the above--the auditor cannot lac: independence.

1+. 8hich of the follo%ing describes the generall" accepted auditing standard re;uiring a critical revie% of the %or: done and the <udgment e!ercised b" those assisting in an audit at ever" level of supervision9 A. -roficienc" .. Audit ris: C. 6nspection 7. 7ue care

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:9 A. 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 disclosures C. The criteria of audit planning and evidence-gathering 7. The need to maintain independence in mental attitude in all matters relating to the audit

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Chapter 02 - The Financial Statement Auditing Environment

10. 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 and A. 6ndependence %ith respect to the financial statements and supplementar" disclosures .. E!ercising professional care as <udged b" peer revie%ers C. -roficienc" as an auditor %hich li:el" has been ac;uired from previous e!perience 7. b<ectivit" as an auditor as verified b" proper supervision

12. 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.> This passage re;uires A. A statement of fact b" the auditor .. An opinion b" the auditor C. An implied measure of fairness 7. An ob<ective measure of compliance

20. .ecause of the ris: of material misstatement3 an audit of financial statements in accordance %ith generall" accepted auditing standards should be planned and performed %ith an attitude of A. b<ective c"nicism .. 6ndependent differentialism C. -rofessional s:epticism 7. 6mpartial conservatism

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 auditor C. The compan"&s management 7. The Securities and E!change Commission

2-)

Chapter 02 - The Financial Statement Auditing Environment

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

2'. The largest public accounting firms t"picall" are structured as A. Subchapter S corporations .. -rofessional corporations C. ?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. 5anager 7. -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"&s business ris:s 7. 7eveloping client acceptance and continuance practices that minimi(e the li:elihood of la%suits against the auditor

2-*

Chapter 02 - The Financial Statement Auditing Environment

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

20. A t"pical ob<ective of an operational audit is for the auditor to A. 7etermine %hether the financial statements present fairl" the entit"&s operations .. Evaluate the feasibilit" of attaining the entit"&s operational ob<ectives C. 5a:e recommendations for improving performance 7. @eport on the entit"&s relative success in attaining profit ma!imi(ation

22. 1overnmental auditing often e!tends be"ond e!aminations leading to the e!pression of an opinion on the fairness of financial presentation and includes audits of efficienc"3 effectiveness3 and A. 5onetar" stimulus .. Evaluation C. Accurac" 7. Compliance

'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

'1. 8hich is not an attribute of an e!ternal auditor9 A. 6ndependence .. Client advocac" C. b<ectivit" 7. Concern for the public interest

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Chapter 02 - The Financial Statement Auditing Environment

'2. 8hat is the general character of the %or: conducted in performing a forensic audit for a compan"9 A. -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" management 7. 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<ect to inspection b" the -CA . 7. A certain number of hours3 %hich is based on the si(e of the compan" being audited3 must be spent on each audit engagement

'). A C-A is most li:el" to refer to one or more of the three general auditing standards in determining A. The nature of the C-A&s report ;ualification .. The scope of the C-A&s auditing procedures C. @e;uirements for the revie% of the entit" and its environment 7. 8hether the C-A should underta:e an audit engagement

'*. 8ho bears ultimate responsibilit" for the financial statements9 A. 5anagement of the organi(ation3 e;uall" %ith the e!ternal auditor that audits the statements. .. 5anagement and the shareholders of the organi(ation. C. The e!ternal auditor that audits the statements. 7. 5anagement of the organi(ation.

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Chapter 02 - The Financial Statement Auditing Environment

'+. The three general standards are concerned %ith4 A. Ade;uate training and proficienc" of the auditor3 proper planning and supervision3 and due professional 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 proper A. .usiness and finance courses .. Aualit" control and peer revie% C. Education and e!perience in auditing 7. Supervision and revie% s:ills

'0. 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/ are organi(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 1AA-.

'2. The A6C-A&s Statements on Auditing Standards can be described as A. -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

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Chapter 02 - The Financial Statement Auditing Environment

)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 financial statements .. -rovide reasonable assurance that the financial statements are not materiall" misstated because of fraud C. 6ssue an un;ualified opinion onl" %hen the auditor is satisfied that no instances of fraud have occurred 7. 7esign the audit program to meet financial statement users& e!pectations concerning fraud

)1. The ob<ective of the second Standard of @eporting is to provide assurance that A. There are no variations in the format and presentation of financial statements .. Substantiall" different transactions and events are not accounted for on an identical basis C. The auditor is consulted before material changes are made in the application of accounting principles 7. The comparabilit" of financial statements bet%een periods is not materiall" affected b" changes in accounting principles that are not disclosed

)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 operations 7. 6nternal control

)'. 8hich of the follo%ing is not included in the broad categor" of assurance services9 A. operational audit .. reporting on internal control C. accounting or revie% services 7. evaluation of the client&s ris: management frame%or:

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Chapter 02 - The Financial Statement Auditing Environment

)). 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<ective assurance activit" .. 6nternal auditing is a consulting activit" C. 6nternal auditing should help an organi(ation accomplish its ob<ectives 7. 6nternal auditors should help e!ternal auditors complete the annual financial statement audit

)*. 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 7. 6t has delegated all of its standard-setting authorit" to the A6C-A

)+. 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 <udgment 7. A stud" and revie% of internal controls that includes tests of controls

),. 8hich of the follo%ing best describes the role of corporate governance9 A. 5anagement decides %hich accounting principles are the most appropriate. .. Shareholders vote to decide %ho should be members of the board of directors. C. Colding the management team accountable to shareholders and other constituents for the utili(ation of the entit"&s resources. 7. 5anagement often is compensated based on the compan"&s profitabilit".

)0. The four standards of reporting are concerned %ith all of the follo%ing e!cept4 A. The presentation of the financial statements based on 1AAS. .. The presentation of the financial statements based on 1AA-. 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.

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Chapter 02 - The Financial Statement Auditing Environment

)2. 8hich of the follo%ing best describes %hat is meant b" generall" accepted auditing standards9 A. 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

*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 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" assumed b" the auditor C. 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 have been applied consistentl" in the period under e!amination

*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.

*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 that an opinion cannot be e!pressed. The ob<ective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others .. An auditor from e!pressing different opinions on each of the basic financial statements C. 5anagement from reducing its final responsibilit" for the basic financial statements 7. 5isinterpretations regarding the degree of responsibilit" the auditor is assuming

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Chapter 02 - The Financial Statement Auditing Environment

*'. 8hich assertions ma" be tested for the >account balances> categor" of management assertions9 A. 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 allocation 7. 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" and valuation .. ccurrence3 rights and obligations3 e!istence3 accurac" and valuation3 cutoff and classification C. 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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Chapter 02 - The Financial Statement Auditing Environment

*,. =ame t%o account balance management assertions pertaining to inventor" and e!plain %h" the" are considered in an audit.

*0. 7efine corporate governance3 the board of directors3 and the audit committee and e!plain ho% the" relate to each other.

*2. 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 1AAS #= T the three main categories of 1AAS$ and %h" is each important9

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Chapter 02 - The Financial Statement Auditing Environment

+1. Eane 1oodperson performed an audit on the Auagmire Corporation and issued an un;ualified opinion. Eane performed the audit %ith due professional care and in accordance %ith generall" accepted auditing standards. T%o months after the report is issued3 Eane discovers on the ne%s that the CE of Auagmire3 Eohnn" .est had been stealing small amounts of inventor". The amount3 ho%ever3 is immaterial compared to the overall inventor" of the corporation. Eane soon receives a call from Auagmire&s CF 3 5ar: .eastl". 5ar: %ants Eane to refund her audit fees. 5ar: thin:s Eane did not properl" perform the audit3 as she did not discover this fraud. Further3 he feels that no% Auagmire&s financial statements are not fairl" stated because of Eane. Co% should Eane respond to this claim9

+2. 5i:e has <ust graduated from State /niversit" %ith a bachelor&s degree in accounting. Ce %ould li:e to pursue a career in auditing. 8hat options does 5i:e have9 7escribe three auditing career options3 including a description of the organi(ation 5i:e %ould %or: for.

+'. 8ith respect to an entit"&s financial statements3 describe both the responsibilit" of management and of the auditor.

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Chapter 02 - The Financial Statement Auditing Environment

+). 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-traded corporation9 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.

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Chapter 02 - The Financial Statement Auditing Environment

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

True / False Questions

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

AACSB: Communications AICPA 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. TR E

AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: (

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

AACSB: Communications AICPA BB: Industr AICPA FN: )e*orting Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: +

2-1+

Chapter 02 - The Financial Statement Auditing Environment

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

AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: ,

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

AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: ,

+. Audit procedures are designed to test management assertions. TR E

AACSB: Anal tic S'ills AICPA BB: Critical -.in'ing AICPA FN: )is' Anal sis Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: /

,. -CA . auditing standards must be follo%ed on all financial statement audits performed in the /.S. FA!SE

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: 0

2-1,

Chapter 02 - The Financial Statement Auditing Environment

0. A financial statement audit must be conducted based on 1AA-. FA!SE

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: 1

2. 1enerall"3 the financial statements of /.S. companies must be prepared based on 1AA-. TR E

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: 1

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

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: 1

Multiple Choice Questions

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Chapter 02 - The Financial Statement Auditing Environment

11. The Audit committee consists of4 A. 5embers of management .. A subcommittee of the A6C-A %ho establish the SAS C" 5embers of the .oard of 7irectors 7. Appointed government overseers

AACSB: Anal tic AICPA BB: Critical -.in'ing AICPA FN: Measurement Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: +

12. 8hat organi(ation is responsible for setting auditing standards for audits of publicl"traded companies in the /.S.9 A. A6C-A .. FAS. C. 1AS. #" -CA .

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: 0

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% 1AAS

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: 0

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Chapter 02 - The Financial Statement Auditing Environment

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 financial statements %ith the SEC is the A. Financial Accounting Standards .oard .. 1eneral Accounting ffice C" -ublic Companies Accounting versight .oard 7. Auditing Standards .oard

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: 0

1*. The auditor must be independent of the audit client unless4 A. The lac: of independence does not influence his or her professional <udgment. .. .oth parties agree that the independence issue is not a problem. C. The lac: of independence is insignificant. #" =one of the above--the auditor cannot lac: independence.

AACSB: Anal tic AICPA BB: Legal AICPA FN: Decision Ma'ing Bloom's: A**lication Difficult : !as Learning "#$ecti%e: 1

1+. 8hich of the follo%ing describes the generall" accepted auditing standard re;uiring a critical revie% of the %or: done and the <udgment e!ercised b" those assisting in an audit at ever" level of supervision9 A. -roficienc" .. Audit ris: C. 6nspection #" 7ue care

AACSB: Anal tic AICPA BB: )esource Management AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: 1

2-20

Chapter 02 - The Financial Statement Auditing Environment

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:9 A. 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 disclosures C" The criteria of audit planning and evidence-gathering 7. The need to maintain independence in mental attitude in all matters relating to the audit

AACSB: Anal tic AICPA BB: Legal AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: &2 Learning "#$ecti%e: 1

10. 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 and A. 6ndependence %ith respect to the financial statements and supplementar" disclosures .. E!ercising professional care as <udged b" peer revie%ers C" -roficienc" as an auditor %hich li:el" has been ac;uired from previous e!perience 7. b<ectivit" as an auditor as verified b" proper supervision

AACSB: Anal tic AICPA BB: )esource Management AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &2 Learning "#$ecti%e: 1

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Chapter 02 - The Financial Statement Auditing Environment

12. 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.> This passage re;uires A. A statement of fact b" the auditor $" An opinion b" the auditor C. An implied measure of fairness 7. An ob<ective measure of compliance

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: 1

20. .ecause of the ris: of material misstatement3 an audit of financial statements in accordance %ith generall" accepted auditing standards should be planned and performed %ith an attitude of A. b<ective c"nicism .. 6ndependent differentialism C" -rofessional s:epticism 7. 6mpartial conservatism

AACSB: Anal tic AICPA BB: Legal AICPA FN: )is' Anal sis Bloom's: A**lication Difficult : !as Learning "#$ecti%e: &2 Learning "#$ecti%e: &&

2-22

Chapter 02 - The Financial Statement Auditing Environment

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 auditor C" The compan"&s management 7. The Securities and E!change Commission

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &&

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

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &&

2'. The largest public accounting firms t"picall" are structured as A. Subchapter S corporations .. -rofessional corporations C" ?imited liabilit" partnerships 7. ?imited liabilit" corporations

AACSB: Communications AICPA BB: Legal AICPA FN: )esearc. Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &(

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Chapter 02 - The Financial Statement Auditing Environment

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: Communications AICPA BB: )esource Management AICPA FN: Measurement Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &(

2*. An >in-charge> auditor t"picall" holds the ran: of A. Associate $" Senior C. 5anager 7. -artner

AACSB: Communications AICPA BB: )esource Management AICPA FN: Measurement Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &(

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 of la%suits against the auditor

AACSB: Anal tic AICPA BB: Critical -.in'ing AICPA FN: )is' Anal sis Bloom's: A**lication Difficult : !as Learning "#$ecti%e: &+

2-2)

Chapter 02 - The Financial Statement Auditing Environment

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

AACSB: Communications AICPA BB: Industr AICPA FN: Le%eraging -ec.nolog Bloom's: A**lication Difficult : !as Learning "#$ecti%e: &+ Learning "#$ecti%e: &,

20. A t"pical ob<ective of an operational audit is for the auditor to A. 7etermine %hether the financial statements present fairl" the entit"&s operations .. Evaluate the feasibilit" of attaining the entit"&s operational ob<ectives C" 5a:e recommendations for improving performance 7. @eport on the entit"&s relative success in attaining profit ma!imi(ation

AACSB: Communications AICPA BB: Industr AICPA FN: Le%eraging -ec.nolog Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &+ Learning "#$ecti%e: &,

22. 1overnmental auditing often e!tends be"ond e!aminations leading to the e!pression of an opinion on the fairness of financial presentation and includes audits of efficienc"3 effectiveness3 and A. 5onetar" stimulus .. Evaluation C. Accurac" #" Compliance

AACSB: Communications AICPA BB: Industr AICPA FN: Le%eraging -ec.nolog Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &+ Learning "#$ecti%e: &,

2-2*

Chapter 02 - The Financial Statement Auditing Environment

'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
AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: &,

'1. 8hich is not an attribute of an e!ternal auditor9 A. 6ndependence $" Client advocac" C. b<ectivit" 7. Concern for the public interest

AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &,

'2. 8hat is the general character of the %or: conducted in performing a forensic audit for a compan"9 A. -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" management 7. 6dentif"ing the causes of an entit"&s financial difficulties

AACSB: Communications AICPA BB: Industr AICPA FN: Le%eraging -ec.nolog Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: &,

2-2+

Chapter 02 - The Financial Statement Auditing Environment

''. 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<ect to inspection b" the -CA . #" A certain number of hours3 %hich is based on the si(e of the compan" being audited3 must be spent on each audit engagement

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: & Learning "#$ecti%e: &/

'). A C-A is most li:el" to refer to one or more of the three general auditing standards in determining A. The nature of the C-A&s report ;ualification .. The scope of the C-A&s auditing procedures C. @e;uirements for the revie% of the entit" and its environment #" 8hether the C-A should underta:e an audit engagement

AACSB: Communications AICPA BB: Legal AICPA FN: Decision Ma'ing Bloom's: A**lication Difficult : Moderate Learning "#$ecti%e: ( Learning "#$ecti%e: 1

2-2,

Chapter 02 - The Financial Statement Auditing Environment

'*. 8ho bears ultimate responsibilit" for the financial statements9 A. 5anagement of the organi(ation3 e;uall" %ith the e!ternal auditor that audits the statements. .. 5anagement and the shareholders of the organi(ation. C. The e!ternal auditor that audits the statements. #" 5anagement of the organi(ation.

AACSB: Anal tic AICPA BB: Legal AICPA FN: Measurement Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: &&

'+. The three general standards are concerned %ith4 A. Ade;uate training and proficienc" of the auditor3 proper planning and supervision3 and due professional care. .. Ade;uate training and independence. C. 7ue professional care. #" .oth b and c.

AACSB: Communications AICPA BB: Legal AICPA FN: Measurement Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: 1

',. 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 proper A. .usiness and finance courses .. Aualit" control and peer revie% C" Education and e!perience in auditing 7. Supervision and revie% s:ills

AACSB: Di%ersit AICPA BB: Mar'eting AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: 1

2-20

Chapter 02 - The Financial Statement Auditing Environment

'0. 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/ are organi(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 1AA-.

AACSB: Communications AICPA BB: )esource Management AICPA FN: Decision Ma'ing Bloom's: Anal sis Difficult : Moderate Learning "#$ecti%e: 3

'2. The A6C-A&s Statements on Auditing Standards can be described as A. -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

AACSB: Communications AICPA BB: Legal AICPA FN: Measurement Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: 3

2-22

Chapter 02 - The Financial Statement Auditing Environment

)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 financial statements $" -rovide reasonable assurance that the financial statements are not materiall" misstated because of fraud C. 6ssue an un;ualified opinion onl" %hen the auditor is satisfied that no instances of fraud have occurred 7. 7esign the audit program to meet financial statement users& e!pectations concerning fraud

AACSB: Communications AICPA BB: Legal AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: &&

)1. The ob<ective of the second Standard of @eporting is to provide assurance that A. There are no variations in the format and presentation of financial statements .. Substantiall" different transactions and events are not accounted for on an identical basis C. The auditor is consulted before material changes are made in the application of accounting principles #" The comparabilit" of financial statements bet%een periods is not materiall" affected b" changes in accounting principles that are not disclosed

AACSB: Anal tic AICPA BB: Legal AICPA FN: Measurement Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: 1

2-'0

Chapter 02 - The Financial Statement Auditing Environment

)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 operations 7. 6nternal control
-age *)
AACSB: Anal tic AICPA BB: Industr AICPA FN: )is' Anal sis Bloom's: A**lication Difficult : Moderate Learning "#$ecti%e: &+ Learning "#$ecti%e: &,

)'. 8hich of the follo%ing is not included in the broad categor" of assurance services9 A. operational audit .. reporting on internal control C" accounting or revie% services 7. evaluation of the client&s ris: management frame%or:

AACSB: Communications AICPA BB: Industr AICPA FN: )e*orting Bloom's: A**lication Difficult : Moderate Learning "#$ecti%e: &+

)). 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<ective assurance activit" .. 6nternal auditing is a consulting activit" C. 6nternal auditing should help an organi(ation accomplish its ob<ectives #" 6nternal auditors should help e!ternal auditors complete the annual financial statement audit
-age *)
AACSB: Communications AICPA BB: Industr AICPA FN: )esearc. Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: &,

2-'1

Chapter 02 - The Financial Statement Auditing Environment

)*. 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 A6C-A

AACSB: Communications AICPA BB: Legal AICPA FN: Decision Ma'ing 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 <udgment 7. A stud" and revie% of internal controls that includes tests of controls

AACSB: !t.ics AICPA BB: Critical -.in'ing AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : !as Learning "#$ecti%e: ( Learning "#$ecti%e: 1

),. 8hich of the follo%ing best describes the role of corporate governance9 A. 5anagement decides %hich accounting principles are the most appropriate. .. Shareholders vote to decide %ho should be members of the board of directors. C" Colding the management team accountable to shareholders and other constituents for the utili(ation of the entit"&s resources. 7. 5anagement often is compensated based on the compan"&s profitabilit".

AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : 4ard Learning "#$ecti%e: +

2-'2

Chapter 02 - The Financial Statement Auditing Environment

)0. The four standards of reporting are concerned %ith all of the follo%ing e!cept4 A" The presentation of the financial statements based on 1AAS. .. The presentation of the financial statements based on 1AA-. 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: Anal tic AICPA BB: Legal AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: 1

)2. 8hich of the follo%ing best describes %hat is meant b" generall" accepted auditing standards9 A. 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: Anal tic AICPA BB: Legal AICPA FN: Measurement Bloom's: Com*re.ension Difficult : 4ard Learning "#$ecti%e: 1

2-''

Chapter 02 - The Financial Statement Auditing Environment

*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 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" assumed b" the auditor C. 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 have been applied consistentl" in the period under e!amination

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Com*re.ension Difficult : 4ard Learning "#$ecti%e: 1

*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.

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : 4ard Learning "#$ecti%e: 1

2-')

Chapter 02 - The Financial Statement Auditing Environment

*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 that an opinion cannot be e!pressed. The ob<ective of the fourth standard is to prevent A. An auditor from reporting on one basic financial statement and not the others .. An auditor from e!pressing different opinions on each of the basic financial statements C. 5anagement from reducing its final responsibilit" for the basic financial statements #" 5isinterpretations regarding the degree of responsibilit" the auditor is assuming

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Com*re.ension Difficult : 4ard Learning "#$ecti%e: 1

*'. 8hich assertions ma" be tested for the >account balances> categor" of management assertions9 A. 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 allocation 7. ccurrence3 accurac"3 rights and obligations3 completeness

AACSB: Communications AICPA BB: Legal AICPA FN: )is' Anal sis Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: /

*). 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

AACSB: Communications AICPA BB: Legal AICPA FN: )is' Anal sis Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: /

2-'*

Chapter 02 - The Financial Statement Auditing Environment

**. 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" and valuation .. ccurrence3 rights and obligations3 e!istence3 accurac" and valuation3 cutoff and classification C. ccurrence3 completeness3 classification and understandabilit"3 cutoff and classification #" ccurrence3 rights and obligations3 completeness3 classification and understandabilit"3 accurac" and valuation

AACSB: Communications AICPA BB: Legal AICPA FN: )is' Anal sis Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: /

Short Answer Questions

2-'+

Chapter 02 - The Financial Statement Auditing Environment

*+. 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 for its 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 or services 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". Cuman @esource 5anagement4 .usiness organi(ations hire personnel to perform various functions 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 allocate proper 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". Co%ever3 the revenue c"cle includes cash receipts and credit card transactions.

AACSB: Anal tic AICPA BB: Industr AICPA FN: Measurement Bloom's: A**lication Difficult : 4ard Learning "#$ecti%e: + Learning "#$ecti%e: ,

2-',

Chapter 02 - The Financial Statement Auditing Environment

*,. =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 of its 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 the appearance 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 been recorded. This event ma" occur %ith fault" internal controls3 so auditors should be a%are of this possibilit".

AACSB: Anal tic AICPA BB: Critical -.in'ing AICPA FN: Measurement Bloom's: A**lication Difficult : Moderate Learning "#$ecti%e: /

2-'0

Chapter 02 - The Financial Statement Auditing Environment

*0. 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: Anal tic AICPA BB: Critical -.in'ing AICPA FN: Measurement Bloom's: Com*re.ension Difficult : Moderate Learning "#$ecti%e: +

*2. 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. Co%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 .$3 %hich is overseen b" the Securities and E!change Commission #SEC$. Co%ever3 the -CA . adopted the AS.&s auditing standards on an interim basis. C-As must still abide b" the A6C-A&s Code of -rofessional Conduct at all times. The" must also follo% auditing standards set b" the AS. %hen performing audits of private companies and other entities that are not public companies.

AACSB: !t.ics AICPA BB: Legal AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : 4ard Learning "#$ecti%e: & Learning "#$ecti%e: &/ Learning "#$ecti%e: 0

2-'2

Chapter 02 - The Financial Statement Auditing Environment

+0. 8hat are the three general auditing standards found %ithin the 10 1AAS #= T the three main categories of 1AAS$ 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 and e!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<ectivit". The third standard focuses on due professional care3 %hich means that the auditor plans and performs his or her duties %ith a degree of s:ill commonl" possessed b" others in the profession. 6t is important that an"one %ho practices as a C-A is able to offer a certain level of service.

AACSB: Communications AICPA BB: Legal AICPA FN: Measurement Bloom's: A**lication Difficult : !as Learning "#$ecti%e: 1

2-)0

Chapter 02 - The Financial Statement Auditing Environment

+1. Eane 1oodperson performed an audit on the Auagmire Corporation and issued an un;ualified opinion. Eane performed the audit %ith due professional care and in accordance %ith generall" accepted auditing standards. T%o months after the report is issued3 Eane discovers on the ne%s that the CE of Auagmire3 Eohnn" .est had been stealing small amounts of inventor". The amount3 ho%ever3 is immaterial compared to the overall inventor" of the corporation. Eane soon receives a call from Auagmire&s CF 3 5ar: .eastl". 5ar: %ants Eane to refund her audit fees. 5ar: thin:s Eane did not properl" perform the audit3 as she did not discover this fraud. Further3 he feels that no% Auagmire&s financial statements are not fairl" stated because of Eane. Co% should Eane respond to this claim9 Eane should tell 5ar: that her responsibilit" %as to plan and perform the audit to obtain reasonable 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 not material to the financial statements %ill be detected. Auagmire&s management3 not Eane3 has responsibilit" for the financial statements. 6n fact3 because of the Sarbanes- !le" Act of 20023 5ar: had to ta:e e!plicit responsibilit" for the financial statements b" >certif"ing> that he as CF 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.

AACSB: Communications AICPA BB: Legal AICPA FN: )is' Anal sis Bloom's: A**lication Difficult : Moderate Learning "#$ecti%e: &&

2-)1

Chapter 02 - The Financial Statement Auditing Environment

+2. 5i:e has <ust graduated from State /niversit" %ith a bachelor&s degree in accounting. Ce %ould li:e to pursue a career in auditing. 8hat options does 5i:e have9 7escribe three auditing career options3 including a description of the organi(ation 5i:e %ould %or: for. Answer could include an' three o% the %ollowing& E!ternal4 5i:e could become an e!ternal auditor. Ce %ould %or: for a C-A firm providing independent audits to nonpublic or public companies. 5i:e %ould need to pass the /niform C-A E!amination monitored b" the American 6nstitute of Certified -ublic Accountants. Cis state ma" have other re;uirements3 such as 1*0 credit hours and e!perience. 6nternal4 5i:e could also be an internal auditor. Ce %ould be directl" emplo"ed b" the entit" on %hich he is performing audits. 6nternal auditors ma" conduct financial3 internal control3 compliance3 operational3 and forensic audits %ithin their organi(ation. 6nternal auditors are supported b" the 6nstitute of 6nternal Auditors. 1overnmental4 Another option for 5i:e is governmental auditing. This is essentiall" a form of internal auditing and 5i:e could be emplo"ed b" federal #such as the 1overnment Accountabilit" ffice or the 6nternal @evenue Service$3 state3 or local agencies. Forensic4 5i:e could also be a forensic auditor. Forensic auditors are emplo"ed b" corporations3 government agencies3 public accounting firms3 and consulting and investigative services firms. The" are trained in detecting3 investigating3 and deterring fraud and %hitecollar crime and are supported b" the Association of Certified Fraud E!aminers.

AACSB: Communications AICPA BB: Industr AICPA FN: Decision Ma'ing Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: &,

+'. 8ith respect to an entit"&s financial statements3 describe both the responsibilit" of management and of the auditor. The financial statements are the responsibilit" of management. The auditor&s responsibilit" is to e!press an opinion on the financial statements based on the audit.

AACSB: Communications AICPA BB: Critical -.in'ing AICPA FN: Decision Ma'ing Bloom's: Com*re.ension Difficult : !as Learning "#$ecti%e: &&

2-)2

Chapter 02 - The Financial Statement Auditing Environment

+). 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-traded corporation9 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 audit for a privatel"-held corporation or other entities that are not public companies. This includes the ten generall" accepted auditing standards #1AAS$ and the Statements on Auditing Standards #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.

AACSB: Communications AICPA BB: Legal AICPA FN: )e*orting Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: 0

+*. 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 correcting misstatements 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.

AACSB: Communications AICPA BB: Industr AICPA FN: )e*orting Bloom's: Knowledge Difficult : Moderate Learning "#$ecti%e: &+

2-)'