Chapter 2: The CPA Profession

Question 1

The legal right to perform audits is granted to a CPA firm by regulation of

A) each state.

B) the Financial Accounting Standards Board (FASB).

C) the American Institute of Certified Public Accountants (AICPA).

D) the Auditing Standards Board.

Answer 1

A) each state.

Question 2

Which of the following is nota characteristic of a small firm?

A) Most small firms have fewer than 25 professionals.

B) Small firms perform audits on small and not-for-profit businesses.

C) Tax services are more important than auditing services to the small firm.

D) Small firms are prohibited by the SEC from auditing publicly traded companies.

Answer 2

D) Small firms are prohibited by the SEC from auditing publicly traded companies.

Question 3

Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. Which of the following is true for auditors of publicly traded companies?

I. They are restricted from providing consulting services to privately held companies.

II. There is no restriction on providing consulting services to non-audit clients.

A) I only

B) II only

C) I and II

D) Neither I nor II

Answer 3

B) II only

Although the Sarbanes–Oxley Act and Securities and Exchange Commission (SEC) restrict auditors from providing many consulting services to public company audit clients, some services are allowed, and audit firms are not restricted from pro- viding consulting to private companies and public companies that are not audit clients.

Question 4

Which of the following does not describe a size category for a CPA firm?

A) Big Four national firms

B) Big Four international firms

C) local firms

D) national and regional firms

Answer 4

A) Big Four national firms

Question 5

________ is one of the Big Four international CPA firms.

A) Deloitte

B) KPMG

C) Ernst & Young

D) All of the above are classified as Big Four international CPA firms.

Answer 5

D) All of the above are classified as Big Four international CPA firms.

Question 6

In which type of service does the CPA assemble the financial statements but provide no assurance to third parties?

A) audit

B) compilation

C) review

D) bookkeeping

Answer 6

B) compilation

In many cases in which the financial statements are to be given to a third party, the client may engage the CPA to compile financial statements that are accompanied by a compilation report, which indicates the CPA assembled the statements but provides no assurance to third parties.

Question 7

In addition to attestation and assurance services, CPA firms provide other services to their clients. List three of these services.

Answer 7

• accounting and bookkeeping services
• tax services
• management consulting and risk advisory services.

Question 8

Many small, local accounting firms perform audits as their primary service to their clients.

TRUE OR FALSE

Answer 8

FALSE

Question 9

Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

TRUE OR FALSE

Answer 9

TRUE

Question 10

Which of the following statements is true as it relates to limited liability partnerships?

A) Only senior partners are liable for the partnerships debts.

B) Partners have no liability in a limited liability partnership arrangement.

C) Partners are personally liable for the acts of those under their supervision.

D) All partners must be AICPA members.

Answer 10

C) Partners are personally liable for the acts of those under their supervision.

Partners of an LLP are personally liable for the partnership’s debts and obligations, their own acts, and acts of others under their supervision. Partners are not personally liable for liabilities arising from negligent acts of other partners and employees not under their supervision.

Question 11

Which staff level in a CPA firm performs most of the detailed audit work?

A) partner

B) staff assistant

C) senior auditor

D) senior manager

Answer 11

B) staff assistant

Question 12

All of the Big Four accounting firms and many of the smaller CPA firms now operate as limited liability partnerships.

TRUE OR FALSE

Answer 12

TRUE

Question 13

Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation.

TRUE OR FALSE

Answer 13

TRUE

Question 14

In a CPA firm, the audit partner coordinates the performance of audit procedures.

TRUE OR FALSE

Answer 14

FALSE

Senior or in-charge auditor coordinates the performance of audit procedures.

Question 15

The organization that is responsible for providing oversight for auditors of public companies is called the

A) Auditing Standards Board.

B) American Institute of Certified Public Accountants.

C) Public Oversight Board.

D) Public Company Accounting Oversight Board.

Answer 15

D) Public Company Accounting Oversight Board.

Question 16

Members of the Public Company Accounting Oversight Board are appointed and overseen by the

A) U.S. Congress.

B) American Institute of Certified Public Accountants.

C) Auditing Standards Board.

D) Securities and Exchange Commission.

Answer 16

D) Securities and Exchange Commission.

Question 17

The Public Company Accounting Oversight Board

A) performs inspections of the quality controls of firms that audit public companies.

B) establishes auditing standards that must be followed by CPAs on all audits.

C) oversees auditors of private companies.

D) performs all of the above functions.

Answer 17

A) performs inspections of the quality controls of firms that audit public companies.

The PCAOB provides oversight for auditors of public companies; establishes auditing, attestation, and quality control standards for public company audits; and performs inspections of audit engagements as well as the quality controls at audit firms performing those audits.

Question 18

The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publicly traded and private companies.

TRUE OR FALSE

Answer 18

FALSE

Question 19

The PCAOB requires annual inspections of accounting firms that audit more than ten public companies.

TRUE OR FALSE

Answer 19

FALSE

The PCAOB requires annual inspections of accounting firms that audit more than 100 issuers (public companies) and inspections of other registered firms at least once every three years.

Question 20

The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the

A) Form S-1.

B) Form 8-K.

C) Form 10-K.

D) Form 10-Q.

Answer 20

B) Form 8-K.

Question 21

The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the

A) Form S-1.

B) Form 8-K.

C) Form 10-K.

D) Form 10-Q.

Answer 21

A) Form S-1.

Question 22

Which of the following is a correct statement regarding the SEC?

A) The Securities Act of 1934 requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.

B) All public companies must file monthly statements with the SEC.

C) The Form 10-K must be filed within 30 days after the close of the fiscal year.

D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission.

Answer 22

D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission.

The Securities Act of 1933 requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval. The Securities Exchange Act of 1934 provides additional pro- tection by requiring public companies and others to file detailed annual reports with the commission.

Question 23

With respect to the SEC,

A) the attitude of the SEC is generally considered in any major change proposed by the FASB.

B) the SEC is the sole agency responsible for setting generally accepted accounting principles.

C) the SEC requirements of greatest interest to CPAs are set forth in the their enforcement regulations.

D) the SEC has the power to establish rules for all CPAs.

Answer 23

A) the attitude of the SEC is generally considered in any major change proposed by the FASB.

The SEC has power to establish rules for any CPA associated with audited financial statements submitted to the commission.

Question 24

The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements.

TRUE OR FALSE

Answer 24

FALSE

Although the SEC requires considerable information that is not of direct interest to CPAs, the securities acts of 1933 and 1934 require financial statements, accompanied by the opinion of an independent public accountant, as part of a registration statement and subsequent reports.

Question 25

Form 10-K must be filed with the SEC whenever a public company experiences a significant event.

TRUE OR FALSE

Answer 25

FALSE

Question 26

The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.

TRUE OR FALSE

Answer 26

TRUE

Question 27

Statements on Standards for Accounting and Review Services (SSARS) are issued by the

A) Accounting and Review Services Committee.

B) Professional Ethics Executive Committee.

C) Securities and Exchange Commission.

D) Financial Accounting Standards Board.

Answer 27

A) Accounting and Review Services Committee.

Question 28

The American Institute of Certified Public Accountants (AICPA)

A) is responsible for issuing licenses to new CPAs.

B) restricts its membership to CPAs who are independent auditors.

C) sets auditing standards for both public and private companies.

D) sets rules of conduct that CPAs are required to meet.

Answer 28

D) sets rules of conduct that CPAs are required to meet.

The Auditing Standards Board (ASB) of the AICPA is respon- sible for issuing pronouncements on auditing matters in the U.S. for all entities other than publicly traded companies and broker-dealers registered with the SEC.

Question 29

Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors.

TRUE OR FALSE

Answer 29

FALSE

Question 30

Membership in the AICPA is mandatory for all licensed practicing CPAs.

TRUE OR FALSE

Answer 30

FALSE

Question 31

A CPA must meet continuing education requirements to maintain their license to practice.

TRUE OR FALSE

Answer 31

TRUE

Question 32

Who is responsible for establishing auditing standards for privately held companies?

A) Securities and Exchange Commission

B) Public Company Accounting Oversight Board

C) Auditing Standards Board

D) National Association of Accounting

Answer 32

C) Auditing Standards Board

Question 33

Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit

A) both private and public companies.

B) public companies only.

C) private companies, public companies, and nonprofit entities.

D) private companies only.

Answer 33

B) public companies only.

Question 34

) The International Standards on Auditing (ISA)

A) are issued by the AICPA.

B) override a country’s regulations governing the audit of a company.

C) has many of the same standards as the Auditing Standards Board (ASB).

D) must be followed by companies whose stock is traded in the U.S.

Answer 34

C) has many of the same standards as the Auditing Standards Board (ASB).

Question 35

________ are referred to as U.S. generally accepted auditing standards (GAAS).

A) AICPA auditing standards

B) SEC auditing standards

C) PCAOB auditing standards

D) Sarbanes-Oxley standards

Answer 35

A) AICPA auditing standards

Question 36

Which of the following is a true statement regarding auditing standards?

A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies.

B) PCAOB auditing standards are applicable to entities outside the U.S.

C) There are no similarities between PCAOB standards and International Standards on Auditing.

D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

Answer 36

D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

Question 37

Which of the following is true with regards to the various auditing standards?

A) Statements on Auditing Standards (SASs) are issued by the PCAOB.

B) The ASB Clarity Project was intended to make the U.S. auditing standards easier to read, understand, and apply.

C) The ASB redrafted existing AICPA auditing standards to align them with respective ISAs.

D) Both B and C are correct.

Answer 37

D) Both B and C are correct.

ASB pronouncements are called Statements on Auditing Standards (SASs).

Question 38

The PCAOB considers International Standards on Auditing (ISA) when developing its standards.

TRUE OR FALSE

Answer 38

TRUE

Question 39

International Standards on Auditing are issued by the International Auditing and Assurance Standards Board (IAASB).

TRUE OR FALSE

Answer 39

TRUE

Question 40

The ASB has revised its audit standards to converge with international standards.

TRUE OR FALSE

Answer 40

TRUE

Question 41

Historically, auditing standards have been organized into three categories, including

A) standards of field work.

B) purpose of an audit.

C) responsibilities of the auditor.

D) proper planning and supervision.

Answer 41

A) standards of field work.

This framework was referred to as the 10 generally accepted auditing standards (GAAS), classified into three categories: general standards, standards of field work, and reporting standards.

Question 42

The “Principles Underlying an Audit in Accordance with Generally Accepted Auditing Principles” provides a framework to help auditors

A) understand the ten GAAS standards.

B) obtain complete assurance that the financial statements are free from any error.

C) report on the financial statements.

D) prevent fraud.

Answer 42

C) report on the financial statements.

1. Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and
2. Report on the financial statements, and communicate as required by GAAS, in accordance with the auditor’s findings.

Question 43

Which of the following is notone of the responsibilities of an auditor under the principles underlying an audit?

A) possess appropriate competence and capabilities

B) comply with ethical requirements

C) plan work and supervise assistants

D) maintain professional skepticism and exercise professional judgment

Answer 43

C) plan work and supervise assistants

• Possess appropriate competence and capabilities
• Comply with ethical requirements
• Maintain professional skepticism and exercise professional judgment

Question 44

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor must fulfill several performance responsibilities, including

A) verifying that all audit work is performed by a CPA with a minimum of three years’ experience.

B) obtaining sufficient, appropriate audit evidence.

C) exercising professional judgment.

D) providing an opinion on the financial statements.

Answer 44

B) obtaining sufficient, appropriate audit evidence.

• Obtain reasonable assurance about whether financial statements are free of material misstatement
• Plan work and supervise assistants

• Determine and apply materiality level
or levels
• Identify and assess risks of material misstatement based on understanding of entity and its environment, including internal controls
• Obtain sufficient appropriate audit evidence

Question 45

The Statements on Auditing Standards issued by the Auditing Standards Board

A) are regarded as authoritative literature.

B) mandate the amount of evidence that must be obtained.

C) must be followed in all situations.

D) are optional guidelines which an auditor may choose to follow or not follow when conducting an audit.

Answer 45

A) are regarded as authoritative literature.

Question 46

An auditor need not abide by a particular auditing standard if the auditor believes that

A) the issue in question is immaterial in amount.

B) more expertise is needed to fulfill the requirement.

C) the requirement of the standard has not been addressed by the PCAOB.

D) fraud is involved.

Answer 46

A) the issue in question is immaterial in amount.

Question 47

When assessing the risk of material misstatements in the financial statements,

A) inadequate internal control procedures will mitigate client business risk.

B) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain.

C) company management is responsible for determining materiality levels.

D) the auditor must have an understanding of the client’s business and industry.

Answer 47

D) the auditor must have an understanding of the client’s business and industry.

Question 48

In order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that

A) the internal control policies and procedures are developed by the auditors.

B) the purpose of an audit is to prevent fraud.

C) management is responsible for the preparation of the financial statements.

D) management can restrict the auditor’s access to important information relevant to the financial statements.

Answer 48

C) management is responsible for the preparation of the financial statements.

Question 49

The principles underlying an audit

A) contain the procedures that must be followed during an audit.

B) carry the same authority as AICPA auditing standards.

C) only apply to the audits of public companies

D) provide structure for the clarified Codification.

Answer 49

D) provide structure for the clarified Codification.

While the principles are not requirements and do not carry any authority, they are used as a framework to provide the structure for the clarified Codification.

Question 50

The AICPA principles underlying an audit are organized around four principles. Which of the following is notone of those principles?

A) fairness

B) responsibilities

C) reporting

D) performance

Answer 50

A) fairness

Question 51

Which of the following statements about Generally Accepted Audit Standards are true?

I. They serve as broad guidelines to auditors for conducting an audit engagement.

II. They are sufficiently specific to provide any meaningful guide to practitioners.

III.They represent a framework upon which the AICPA can provide interpretations.

A) I and II

B) I and III

C) II and III

D) I, II and III

Answer 51

B) I and III

Question 52

The AICPA principles and the auditing standards should be viewed by practitioners as

A) ideals to work towards, but which are not achievable.

B) maximum standards that denote excellent work.

C) minimum standards of performance that must be achieved on each audit engagement.

D) benchmarks to be used on all audits, reviews, and compilations.

Answer 52

C) minimum standards of performance that must be achieved on each audit engagement.

Question 53

Which of the following is an accurate statement regarding principles and auditing standards?

A) The principles underlying an audit give specific guidance to an auditor when a problem arises in an audit.

B) The principles underlying an audit state that the only objective of an audit is to provide financial statement users with an opinion.

C) All auditing standards issued by the PCAOB are given two classification numbers.

D) The SAS number identifies the order in which it was issued in relation to other SASs.

Answer 53

D) The SAS number identifies the order in which it was issued in relation to other SASs.

Question 54

________ is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence.

A) Reasonableness

B) Diligence

C) Professional skepticism

D) Competence

Answer 54

C) Professional skepticism

Question 55

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor fulfills several performance responsibilities, including

A) complying with the AICPA Code of Professional Conduct.

B) issuing a written report on the financial statements.

C) determining and applying materiality levels.

D) having the appropriate competence to perform the audit.

Answer 55

C) determining and applying materiality levels.

Question 56

List the four principles underlying an audit.

Answer 56

• Purpose of an audit
• Responsibilities
• Performance
• Reporting

Question 57

Performance is one of the principles underlying an audit. List three performance responsibilities.

Answer 57

• obtain reasonable assurance about whether financial statements are free of material misstatement
• plan work and supervise assistants
• determine and apply materiality level(s)
• identify and assess risks of material misstatements based on understanding of the entity and its environment, including internal controls
• obtain sufficient appropriate audit evidence

Question 58

Professional skepticism must be maintained only if the auditor suspects fraud.

TRUE OR FALSE

Answer 58

FALSE

Question 59

Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board.

TRUE OR FALSE

Answer 59

FALSE

Auditing standards for private companies and other entities in the United States are established by the Auditing Standards Board (ASB) of the AICPA. These standards are referred to as Statements on Auditing Standards (SASs).

Question 60

The AU-C number identifies the order in which it was issued in relation to all other codified auditing standards.

TRUE OR FALSE

Answer 60

FALSE

All SASs issued by the AICPA are given two classification numbers: an SAS and an AU-C number that indicates its location in the Codification of Auditing Standards.

Question 61

Quality control for a CPA firm

A) includes the organizational structure of the firm and the procedures it establishes.

B) is tailored to each specific audit engagement.

C) is a guarantee that auditing standards are followed.

D) is required only for firms auditing SEC companies.

Answer 61

A) includes the organizational structure of the firm and the procedures it establishes.

Question 62

The methods used by a CPA firm to ensure that the firm meets is professional responsibilities to clients and others is

A) continuing professional education.

B) compliance with generally accepted reporting standards.

C) quality control.

D) peer review.

Answer 62

C) quality control.

Question 63

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with

A) technical training that assures proficiency as a valuation expert.

B) professional education that is required in order to perform with due professional care.

C) knowledge required to fulfill assigned responsibilities.

D) knowledge required to perform a peer review.

Answer 63

C) knowledge required to fulfill assigned responsibilities.

Question 64

The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to

A) provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.

B) monitor the risk factors concerning misstatements that arise from the misappropriation of assets.

C) document objective criteria for the CPA firm’s peer review.

D) minimize the likelihood of associating with a client whose management may lack integrity.

Answer 64

D) minimize the likelihood of associating with a client whose management may lack integrity.

Question 65

Which of the following is an element of the CPA’s quality control system that should be considered in establishing its quality control policies and procedures?

A) considering audit risk and materiality

B) using statistical sampling techniques

C) assigning personnel to engagements

D) complying with laws and regulations

Answer 65

C) assigning personnel to engagements

Question 66

Which of the following is notan essential component of quality control?

A) policies and procedures to ensure that firm personnel are actively engaged in marketing strategies

B) policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards

C) policies to ensure that personnel maintain their independence in fact and in appearance

D) policies that ensure that monitoring activities are effectively applied

Answer 66

A) policies and procedures to ensure that firm personnel are actively engaged in marketing strategies

Question 67

Which one of the following is nottrue regarding the American Institute of Certified Public Accountants peer review requirement?

A) A CPA firm must develop and adhere to quality control standards.

B) Peer reviews are mandatory.

C) A CPA firm will lose AICPA eligibility if a peer review is not performed.

D) Firms required to be registered with and inspected by the PCAOB are exempt.

Answer 67

D) Firms required to be registered with and inspected by the PCAOB are exempt.

Question 68

Quality controls are established for the entire CPA firm whereas auditing standards are applicable to the individual engagement.

TRUE OR FALSE

Answer 68

TRUE