Chapter 02 - Professional Standards

Chapter 02 Professional Standards

True / False Questions

1. The generally accepted auditing standards of field work include a requirement that the
auditors otain sufficient appropriate audit e!idence.
TRUE

Difficulty: Easy

2. The auditors" report on a corporation"s financial statements usually is addressed to the
president of the company.
FALSE

Difficulty: Easy

#. The auditors are primarily responsile for preparing the financial statements and e$pressing
an opinion on whether they follow generally accepted auditing standards.
FALSE

Difficulty: Medium

%. Partners in CP& firms usually ha!e the responsiility for signing the audit report.
TRUE

Difficulty: Medium

'. &n audit is more likely to detect ta$ e!asion than !iolations of antitrust laws.
TRUE

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Chapter 02 - Professional Standards
Difficulty: Hard

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Chapter 02 - Professional Standards
(. The attestation standards do not supersede any of the generally accepted auditing
standards.
TRUE

Difficulty: Medium

). & peer re!iew is generally performed y employees of the &*CP&.
FALSE

Difficulty: Medium

+. *f the auditors disco!er illegal acts y a client, they ordinarily must immediately resign
from the engagement.
FALSE

Difficulty: Medium

-. &n audit should e designed to pro!ide reasonale assurance of detecting all illegal acts.
FALSE

Difficulty: Medium

10. The pronouncements of the *nternational &uditing &ssurance Standards .oard do not
o!erride the national auditing standards of its memers, e!en when financial statements are
issued y a multinational company.
TRUE

Difficulty: Medium


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Chapter 02 - Professional Standards
Multiple Choice Questions

11. &udits of financial statements are designed to otain reasonale assurance of detecting
misstatement due to/

A. 0ption &
.. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Hard

12. 2hich of the following has the highest le!el of accounting authority within the 34&&P
5ierarchy36
A. &uthoritati!e ody pronouncements.
.. Pronouncements of odies composed of e$pert accountants e$posed for pulic comment.
C. Pronouncements of odies composed of e$pert accountants, not e$posed for pulic
comment.
1. Pronouncements of the 7ederal &ccounting 8eser!e .oard.

Difficulty: Easy

1#. &n attestation engagement/
&. 5as as its primary source of standards the assurance standards.
B. *ncludes a report on su9ect matter, or on an assertion aout su9ect matter.
C. *ncludes search and !erification procedures for all ma9or accounts.
1. *s ordinarily an e$amination, re!iew or compilation engagement.

Difficulty: Hard

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Chapter 02 - Professional Standards
1%. &n audit pro!ides reasonale assurance of detecting which of the following types of
important illegal acts6

&. 0ption &
B. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Medium

1'. 2hich of the following is not a type of auditors" opinion6
&. &d!erse.
B. 0rdinary.
C. :ualified.
1. ;nqualified.

Difficulty: Medium

1(. 2hich of the following is one of the elements of &*CP& quality control6
&. &ssurance of proper le!els of association.
.. 1ue professional care.
C. <ngagement performance.
1. Super!ision.

Difficulty: Hard

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Chapter 02 - Professional Standards
1). & procedure in which a quality control partner periodically tests the application of quality
control procedures is most directly related to which quality control element6
&. <ngagement performance.
.. 5uman resources.
C. =eadership responsiilities for quality with the firm.
D. >onitoring

Difficulty: Hard

1+. 8equirements for training, independence and due professional care are included in which
group of the generally accepted auditing standards6
&. 7ieldwork.
B. 4eneral.
C. 8eporting.
1. :uality control.

Difficulty: Medium

1-. 2hich of the following is considered an interpreti!e pulication in the 4&&S 5ierarchy6
A. &ppendices to Statements on &uditing Standards.
.. Statements on &uditing Standards.
C. *nterpretations of 7&S. Standards.
1. &uditing articles e$plaining Statements on &uditing Standards in the Journal of
Accountancy.

Difficulty: Hard

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Chapter 02 - Professional Standards
20. *n which paragraph of an audit report are auditing standards generally accepted in the
;nited States e$plicitly mentioned in an audit report of a nonpulic company6

&. 0ption &
B. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Medium

21. &n audit should e designed to achie!e reasonale assurance of detecting material
misstatements due to/
&. <rrors.
.. <rrors and fraud.
C. <rrors, fraud, and those illegal acts with a direct effect on financial statement amounts.
1. <rrors, fraud and illegal acts.

Difficulty: Hard

22. *n an audit opinion on financial statements, the e$pression 3accounting principles
generally accepted in the ;nited States of &merica3/
&. &ppears in oth the scope paragraph and the opinion paragraph of the auditors" report.
.. &ppears in the introductory paragraph of the auditors" report.
C. &ppears in the opinion paragraph of the auditors" report.
1. 1oes not appear in the auditors" report.

Difficulty: Medium

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Chapter 02 - Professional Standards
2#. To qualify as 3generally accepted,3 an accounting principle must/
A. 5a!e sustantial authoritati!e support.
.. .e co!ered in one or more of the S&Ss issued y the &*CP&.
C. .e set forth in a 7inancial 8eporting 8elease issued y the S<C.
1. 5a!e recei!ed the appro!al of the 7&S..

Difficulty: Medium

2%. The generally accepted auditing standards adopted y the &*CP& include a requirement
that the CP&s/
&. &ssume responsiility for any losses to the client from fraud which e$isted during the audit
ut was not detected y the auditors.
.. 7ollow accounting principles adopted y the S<C.
C. ?ot accept as audit clients companies which compete directly with one another.
D. <$ercise due professional care in the performance of the e$amination and the preparation
of the report.

Difficulty: Easy

2'. 2hen a Statement Auditing Standards uses the word 3should3 relating to a requirement, it
means that the auditor/
&. >ust fulfill the responsiilities under all circumstances.
B. >ust comply with requirements unless the auditor demonstrates and documents that
alternati!e actions were sufficient to achie!e the o9ecti!es of the standards.
C. Should consider whether to follow the ad!ice ased on the e$ercise of professional
9udgment in the circumstances.
1. >ay choose to change responsiilities relating to !arious professional standards that
remain under consideration.

Difficulty: Hard

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Chapter 02 - Professional Standards
2(. &n unconditional responsiility to follow an &*CP& professional standard e$ists when the
professional standard uses the term@sA

&. 0ption &
B. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Medium

2). 2hich of the following est descries a portion of the auditors" responsiility regarding
illegal acts y clients6
&. The auditors ha!e a responsiility to disco!er all material illegal acts.
B. *f audit procedures re!eal illegal acts, the auditors should take appropriate actions.
C. *f the auditors suspect illegal acts ha!e een performed, they should conduct a legal audit
of the company.
1. The auditors" responsiility for the detection of all illegal acts is the same as their
responsiility regarding material misstatements due to errors and fraud.

Difficulty: Medium

2+. The auditors who find that the client has committed an illegal act would e most likely to
withdraw from the engagement when the/
A. >anagement fails to take appropriate correcti!e action.
.. *llegal act has material financial statement implications.
C. *llegal act has recei!ed widespread pulicity.
1. &uditors cannot reasonaly estimate the effect of the illegal act on the financial statements.

Difficulty: Medium

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Chapter 02 - Professional Standards
2-. The first paragraph of the standard unqualified audit report is referred to as the/
A. *ntroductory paragraph.
.. 0pening paragraph.
C. 0pinion paragraph.
1. Scope paragraph.

Difficulty: Easy

#0. Primary responsiility for the financial statements lies with/

&. 0ption &
.. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Medium

#1. 2hen a conflict e$ists etween an accounting principle supported y a pronouncement of
an authoritati!e ody and an accounting principle supported y widely recogniBed practice,
which standard pre!ails6
A. The authoritati!e ody pronouncement.
.. The widely recogniBed pronouncement.
C. .oth are of equal authority and the form of the transaction pre!ails o!er its sustance.
1. ?either, other accounting literature must e consulted to determine the appropriate
accounting treatment.

Difficulty: Medium

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Chapter 02 - Professional Standards
#2. The auditors" report for a nonpulic company should indicate/
A. That the audit was made in accordance with auditing standards generally accepted in the
;nited States of &merica.
.. &ny weakness in internal control oser!ed y the auditors.
C. That accounting principles ha!e een consistently applied.
1. That no illegal acts ha!e een identified.

Difficulty: Medium

##. 2hich of the following is not one of the si$ elements of &*CP& quality control6
&. <ngagement performance.
.. >onitoring.
C. 8ele!ant ethical requirements.
D. 8e!iew.

Difficulty: Medium

#%. & requirement that working papers e re!iewed y the super!isor, and any deficiencies e
discussed with the preparer is an e$ample of a quality control procedure in the area of/
&. &cceptance and continuance of client relationships and specific engagements.
B. <ngagement performance.
C. 5uman resources.
1. 8ele!ant ethical requirements.

Difficulty: Hard

#'. & requirement to design recruitment processes and procedures to help the firm select
indi!iduals meeting minimum academic requirements estalished y the firm is an e$ample of
a quality control procedure in the area of/
&. &cceptance and continuance of client relationships and specific engagements.
.. <ngagement performance.
C. 5uman resources.
1. 8ele!ant ethical requirements.

Difficulty: Hard

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Chapter 02 - Professional Standards
#(. The ody that issues international pronouncements pro!iding auditing procedural and
reporting guidance is the/
&. *nternational 7ederation of &uditors.
.. >ultinational 8eporting Commission.
C. *nternational &uditing and &ssurance Standards .oard.
1. &uditing Standards .oard.

Difficulty: Medium

#). To present fairly in conformity with generally accepted accounting principles the financial
statements must/
&. .e consistently applied.
.. *nform users of all matters that could materially affect a decision.
C. 8eflect transactions and e!ents within a range of reasonale limits.
1. .e considered preferale to the users of those financial statements.

Difficulty: Medium

#+. 2hat is the general character of the three generally accepted auditing standards classified
as general standards6
A. Criteria for competence, independence, and professional care of indi!iduals performing the
audit.
.. Criteria for the content of the financial statements and related footnote disclosures.
C. Criteria for the content of the auditors" report on financial statements and related footnote
disclosures.
1. The requirements for the planning of the audit and super!ision of assistants, if any.

Difficulty: Medium
Source: AICPA

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Chapter 02 - Professional Standards
#-. &n audit performed in accordance with generally accepted auditing standards generally
should/
&. .e e$pected to pro!ide asolute assurance that illegal acts will e detected where internal
control is effecti!e.
.. .e relied upon to disclose !iolations of truth in lending laws.
C. <ncompass a plan to acti!ely search for all illegalities which relate to operating aspects.
D. ?ot e relied upon to pro!ide asolute assurance that all illegal acts will e detected.

Difficulty: Medium
Source: AICPA

%0. 2hen the auditors e$press an opinion on financial statements their responsiilities e$tend
to/
&. The underlying wisdom of their client"s management decisions.
B. 2hether the results of their client"s operating decisions are fairly presented in the financial
statements.
C. &cti!e participation in the implementation of the ad!ice gi!en to their client.
1. &n ongoing responsiility for their client"s sol!ency.

Difficulty: Medium
Source: AICPA

%1. The standard auditors" report for the audit of a nonpulic company generally includes an
introductory paragraph, a scope paragraph, and an opinion paragraph. *n the report the
auditors refer to oth accounting principles generally accepted in the ;.S. and auditing
standards generally accepted in the ;.S. *n which of the paragraphs are these terms used6
&. 4&&P in the scope paragraph and 4&&S in the opinion paragraph.
B. 4&&S in the scope paragraph and 4&&P in the opinion paragraph.
C. 4&&S in all paragraphs and 4&&P in the scope paragraph.
1. 4&&P in all paragraphs and 4&&S in the opinion paragraph.

Difficulty: Medium
Source: AICPA

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Chapter 02 - Professional Standards
%2. &n in!estor reading the financial statements of The Sundy Corporation oser!es that the
statements are accompanied y an unqualified auditors" report. 7rom this the in!estor may
conclude that/
A. &ny disputes o!er significant accounting issues ha!e een settled to the auditors"
satisfaction.
.. The auditors are satisfied that Sundy is operationally efficient.
C. The auditors ha!e ascertained that Sundy"s financial statements ha!e een prepared
accurately.
1. *nformati!e disclosures in the financial statements ut not necessarily in the footnotes are
to e regarded as reasonaly adequate.

Difficulty: Hard
Source: AICPA

%#. The auditors" report may e addressed to the company whose financial statements are
eing e$amined or to that company"s/
&. Chief operating officer.
.. President.
C. .oard of 1irectors.
1. Chief financial officer.

Difficulty: Medium
Source: AICPA

%%. 2hich of the following est descries what is meant y generally accepted auditing
standards6
&. &cts to e performed y the auditors.
B. >easures of the quality of the auditors" performance.
C. Procedures to e used to gather e!idence to support financial statements.
1. &udit o9ecti!es generally determined on audit engagements.

Difficulty: Medium
Source: AICPA

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Chapter 02 - Professional Standards
%'. *f an illegal act is disco!ered during the audit of a pulicly held company, the auditors
should first/
&. ?otify the regulatory authorities.
.. 1etermine who was responsile for the illegal act.
C. *ntensify the e$amination to identify all illegal acts.
D. 8eport the act to high le!el personnel within the client"s organiBation and to the audit
committee.

Difficulty: Hard
Source: AICPA

%(. 2hich of the following is not required y the generally accepted auditing standard that
states that due professional care is to e e$ercised in the performance of the audit6
&. 0ser!ance of the standards of field work and reporting.
.. Critical re!iew of the audit work performed at e!ery le!el of super!ision.
C. 1egree of skill commonly possessed y others in the profession.
D. 8esponsiility for losses ecause of errors of 9udgment.

Difficulty: Easy
Source: AICPA

%). 2hich of the following statements est descries the primary purpose of Statements on
&uditing Standards6
&. They are guides intended to set forth auditing procedures which are applicale to a !ariety
of situations.
.. They are procedural outlines which are intended to narrow the areas of inconsistency and
di!ergence of auditor opinion.
C. They are authoritati!e statements, enforced through the Code of Professional Conduct.
1. They are interpretations which may e useful guidance to auditors.

Difficulty: Medium
Source: AICPA

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Chapter 02 - Professional Standards
%+. The primary responsiility for the adequacy of disclosure in the financial statements of a
pulicly held company rests with the/
&. Partner assigned to the audit engagement.
B. >anagement of the company.
C. &uditor in charge of the fieldwork.
1. Securities and <$change Commission.

Difficulty: Easy
Source: AICPA

%-. 2ithin the conte$t of quality control, the primary purpose of continuing professional
education and training acti!ities is to enale a CP& firm to pro!ide personnel within the firm
with/
&. Technical training that assures proficiency as an auditor.
.. Professional education that is required in order to perform with due professional care.
C. Cnowledge required to fulfill assigned responsiilities and to progress within the firm.
1. Cnowledge required in order to perform a peer re!iew.

Difficulty: Hard
Source: AICPA

'0. *n pursuing a CP& firm"s quality control o9ecti!es, a CP& firm may maintain records
indicating which partners or employees of the CP& firm were pre!iously employed y the
CP& firm"s clients. 2hich quality control o9ecti!e would this e most likely to satisfy6
&. &cceptance and continuance of clients and engagements.
.. <ngagement performance.
C. Personnel management.
D. 8ele!ant ethical requirements.

Difficulty: Hard
Source: AICPA

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Chapter 02 - Professional Standards
'1. & CP& firm estalishes quality control policies and procedures for deciding whether to
accept a new client or continue to perform ser!ices for a current client. The primary purpose
for estalishing such policies and procedures is/
&. To enale the auditor to attest to the integrity or reliaility of a client.
.. To comply with the quality control standards estalished y regulatory odies.
C. To minimiBe the likelihood of association with clients whose managements lack integrity.
1. To lessen the e$posure to litigation resulting from failure to detect fraud in client financial
statements.

Difficulty: Medium
Source: AICPA

'2. 2hich of the following is not an element of quality control6
A. 1ocumentation.
.. <ngagement performance.
C. >onitoring.
1. 8ele!ant ethical requirements.

Difficulty: Medium
Source: AICPA

'#. The generally accepted auditing standards estalished y the &*CP&/
A. 5a!e een accepted as interim standards y the Pulic Company &ccounting 0!ersight
.oard.
.. Pro!ide accounting guidance for nonpulic companies.
C. 5a!e een superseded y Pulic Company &ccounting 0!ersight .oard standards for all
audits.
1. &re now de!eloped y the Securities and <$change Commission.

Difficulty: Medium

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Chapter 02 - Professional Standards
'%. The Pulic Company &ccounting 0!ersight .oard has authority to estalish which of the
following relating to pulic companies6

A. 0ption &
.. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Hard

''. 2hich of the following is least likely to e directly e$amined in an inspection performed
y the PC&0.6
&. &udit engagements.
.. 8e!iew engagements.
C. Compilation engagements.
1. CP& firm quality control system.

Difficulty: Medium

'(. &s compared with the ;S nonpulic company audit report, the international audit report/
&. *s shorter in length.
B. *ncludes enhanced e$planation of the audit process.
C. *ncludes the name of the partner and managers on the audit, while the ;S report includes
only the CP& firm name.
1. *s dated as of year-end, whereas the ;S report is dated as of the last date of significant
field work.

Difficulty: Hard

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Chapter 02 - Professional Standards
'). & peer re!iew in which the peer re!iewers study and appraise a CP& firm"s system of
quality control to perform accounting and auditing work is referred to as a@nA/
&. <ngagement re!iew.
.. *nspection re!iew.
C. Super!ision re!iew.
D. System re!iew.

Difficulty: Hard

'+. &n engagement re!iew form of peer re!iew is least likely to include a peer re!iewer"s
detailed analysis of/
&. Compilation reports.
.. 1ocumentation of procedures followed on a re!iew
C. 0!erall system of quality control.
1. 8e!iew reports.

Difficulty: Hard

'-. 0f the following, which are current types of peer re!iew6

A. 0ption &
.. 0ption .
C. 0ption C
1. 0ption 1

Difficulty: Medium


Essay Questions

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Chapter 02 - Professional Standards
(0. &uditors must e concerned with oth generally accepted auditing standards and generally
accepted accounting principles in performing an audit.
@aA Compare generally accepted auditing standards with generally accepted accounting
principles.
@A SummariBe two of the three generally accepted auditing standards known as the general
standards.
@aA 4enerally accepted auditing standards are authoritati!e rules for measuring the quality of
audits. The ten generally accepted auditing standards were adopted y the memership of the
&*CP&. 4enerally accepted accounting principles are principles of measurement and
presentation for financial statements that ha!e 3sustantial authoritati!e support.3
@A The general standards include @only two requiredA/
Technical training and proficiency
*ndependence
<$ercise due professional care

Difficulty: Easy

(1. The standard unqualified auditors" report for audits of nonpulic companies consists of
three paragraphs. *dentify the three paragraphs and descrie the purpose of each.
*ntroductory paragraph--descries the financial statements eing auditing and the
responsiilities of management and the auditors.
Scope paragraph--descries the nature of an audit and indicates whether the audit was
performed in accordance with generally accepted auditing standards.
0pinion paragraph--e$presses the auditors" opinion on the financial statements.

Difficulty: Easy

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Chapter 02 - Professional Standards
(2. &uditors must consider the possiility of fraud y employees or management on e!ery
audit engagement. They must also consider the possiility that the client has engaged in
illegal acts.
@aA 1istinguish etween employee and management fraud.
@A 1escrie the auditors" responsiility for the detection of fraud in an audit.
@cA 1escrie the auditors" responsiility regarding illegal acts y a client.
@aA <mployee fraud is dishonest actions y lower le!el employees that occur within a
company despite management"s efforts to pre!ent such actions. >anagement fraud occurs
when the top e$ecuti!es of a company delierately decei!e stockholders, creditors, and the
auditors y misstating the financial statements.
@A The auditors ha!e a responsiility to design the audit to pro!ide reasonale assurance of
detecting material errors and fraud and to conduct the audit with due care and skepticism.
@cA &n audit cannot e relied upon to detect all illegal acts y the client. 7or illegal acts which
ha!e a direct and material effect on the financial statement amounts, the responsiility for
detection is the same as that for errors and fraud--that is to design the audit to pro!ide
reasonale assurance of detection. 7or illegal acts ha!ing an indirect effect on the financial
statement amounts, an audit pro!ides no assurance of detection.

Difficulty: Hard

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