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auditing

Questions and Answers of Auditing

The following comments summarize the beliefs of some practitioners about the Sarbanes-Oxley Act and the PCAOB.The Sarbanes-Oxley Act is unnecessary regulation of the profession. The costs of
For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-4.a. Appropriate accounting and auditing
The Howard Mobile Home Manufacturing Company is audited by Olson and Riley, CPAs. Howard Mobile Home has decided to issue stock to the public and wants Olson and Riley to perform all the audit work
Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company's records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements
For each engagement described below, indicate whether the engagement is likely to be conducted under international auditing standards, U.S. generally accepted auditing standards, or PCAOB auditing
International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance Standards Board (IAASB). Use the IAASB web site (www.ifac.org/IAASB/) to learn more about the IAASB
Explain why auditors' reports are important to users of financial statements and why it is desirable to have standard wording.
List the seven parts of a standard unqualified audit report and explain the meaning of each part. How do the parts compare with those found in a qualified report?
What are the purposes of the scope paragraph in the auditor's report? Identify the most important information included in the scope paragraph.
What are the purposes of the opinion paragraph in the auditor's report? Identify the most important information included in the opinion paragraph.
What five circumstances are required for a standard unqualified report to be issued?
Describe the information included in the introductory, scope, and opinion paragraphs in a separate audit report on the effectiveness of internal control over financial reporting. What is the nature
What type of opinion should an auditor issue when the financial statements are not in accordance with GAAP because such adherence would result in misleading statements?
Distinguish between an unqualified report with an explanatory paragraph or modified wording and a qualified report. Give examples when an explanatory paragraph or modified wording should be used in
Describe what is meant by reports involving the use of other auditors. What are the three options available to the principal auditor and when should each be used?
The client has restated the prior-year statements because of a change from LIFO to FIFO. How should this be reflected in the auditor's report?
Distinguish between changes that affect consistency and those that may affect comparability but not consistency. Give an example of each.
List the three conditions that require a departure from an unqualified opinion and give one specific example of each of those conditions.
Distinguish between a qualified opinion, an adverse opinion, and a disclaimer of opinion, and explain the circumstances under which each is appropriate.
Define materiality as it is used in audit reporting. What conditions will affect the auditor's determination of materiality?
Explain how materiality differs for failure to follow GAAP and for lack of independence.
How does the auditor's opinion differ between scope limitations caused by client restrictions and limitations resulting from conditions beyond the client's control? Under which of these two will the
Distinguish between a report qualified as to opinion only and one with both a scope and opinion qualification.
Identify the three alternative opinions that may be appropriate when the client's financial statements are not in accordance with GAAP. Under what circumstance is each appropriate?
When an auditor discovers more than one condition that requires departure from or modification of the standard unqualified report, what should the auditor's report include?
The ISAs allow an auditor to include either of the following phrases in the auditor's opinion paragraph: (1) "The financial statements present fairly in all material respects . . ." (2) "The
Discuss why the adoption of international accounting and auditing standards might be beneficial to investors and auditors.
Multiple Choice QuestionsThe following questions concern unqualified audit reports. Choose the best response.a. Which of the following statements about a combined report on the financial statements
Multiple Choice QuestionsThe following questions concern unqualified audit reports with an explanatory paragraph or modified wording. Choose the best response.a. An entity changed from the
Multiple Choice QuestionsThe following questions concern audit reports other than unqualified audit reports with standard wording. Choose the best response.a. The annual audit of Midwestern
A careful reading of an unqualified report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided:Requireda. "The
Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2011. Patel also audited and reported on the Bellamy financial
For the following independent situations, assume that you are the audit partner on the engagement:1. During your audit of Raceway.com, Inc., you conclude that there is a possibility that inventory is
For the following independent situations, assume that you are the audit partner on the engagement:1. In the last 3 months of the current year, Oil Refining Company decided to change direction and go
Several types of opinions are described in a. through i. below. For each opinion, select the appropriate description of that opinion from the list numbered 1 through 9 below that corresponds with the
Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards. This standard reads, "The auditor must identify in the auditor's report
The following tentative auditor's report was drafted by a staff accountant and submitted to a partner in the accounting firm of Better & Best, CPAs:AUDIT REPORTTo the Audit Committee of American
The following is an auditor's report prepared in accordance with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB):INDEPENDENT
The U.S. Securities and Exchange Commission (SEC) is an independent, nonpartisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. Publicly traded
What are the six core ethical values described by the Josephson Institute? What are some other sources of ethical values?
Describe an ethical dilemma. How does a person resolve an ethical dilemma?
Why is there a special need for ethical behavior by professionals? Why do the ethical requirements of the CPA profession differ from those of other professions?
List the four parts of the Code of Professional Conduct, and state the purpose of each.
What organization is responsible for developing ethics standards at the international level? What are the fundamental principles of the international ethics standards?
Distinguish between independence of mind and independence in appearance. State three activities that may not affect independence of mind but are likely to affect independence in appearance.
Why is an auditor's independence so essential?
What consulting or nonaudit services are prohibited for auditors of public companies? What other restrictions and requirements apply to auditors when providing nonaudit services to public companies?
Explain how the rules concerning stock ownership apply to partners and professional staff. Give an example of when stock ownership would be prohibited for each.
Many people believe that a CPA cannot be truly independent when payment of fees is dependent on the management of the client. Explain two approaches that could reduce this appearance of lack of
After accepting an engagement, a CPA discovers that the client's industry is more technical than he realized and that he is not competent in certain areas of the operation. What are the CPA's options?
Assume that an auditor makes an agreement with a client that the audit fee will be contingent upon the number of days required to complete the engagement. Is this a violation of the Code of
The auditor's audit files usually can be provided to someone else only with the permission of the client. Give three exceptions to this general rule.
Identify and explain factors that should keep the quality of audits high even though advertising and competitive bidding are allowed.
Summarize the restrictions on advertising by CPA firms in the rules of conduct and interpretations.
What is the purpose of the AICPA's Code of Professional Conduct restriction on commissions as stated in Rule 503?
State the allowable forms of organization a CPA firm may assume.
Multiple Choice QuestionsThe following questions concern independence and the Code of Professional Conduct or GAAS. Choose the best response.a. What is the meaning of the generally accepted auditing
Multiple Choice QuestionsThe following questions concern possible violations of the AICPA Code of Professional Conduct. Choose the best response.a. In which one of the following situations would a
The following situations involve the provision of nonaudit services. Indicate whether providing the service is a violation of AICPA rules or SEC rules including Sarbanes-Oxley requirements on
Each of the following situations involves a possible violation of the AICPA's Code of Professional Conduct. For each situation, state the applicable section of the rules of conduct and whether it is
Each of the following situations involves possible violations of the AICPA's Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it
The national stock exchanges require listed companies to have an independent audit committee.Requireda. Describe an audit committee.b. What are the typical functions performed by an audit
The following relate to auditors' independence:Required a. Why is independence so essential for auditors?b. Compare the importance of independence of CPAs with that of other professionals, such as
Marie Janes encounters the following situations in doing the audit of a large auto dealership. Janes is not a partner.1. The sales manager tells her that there is a sale (at a substantial discount)
Ann Archer serves on the audit committee of JKB Communications, Inc., a telecommunications start-up company. The company is currently a private company.One of the audit committee's responsibilities
The following are situations that may violate the Code of Professional Conduct. Assume, in each case, that the CPA is a partner.1. Contel, CPA, advertises in the local paper that his firm does the
Barbara Whitley had great expectations about her future as she sat in her graduation ceremony in May 2010. She was about to receive her Master of Accountancy degree, and next week she would begin her
In 2006, Arnold Diaz was a bright, upcoming audit manager in the South Florida office of a national public accounting firm. He was an excellent technician and a good "people person." Arnold also was
Frank Dorrance, a senior audit manager for Bright and Lorren, CPAs, has recently been informed that the firm plans to promote him to partner within the next year or two if he continues to perform at
The International Ethics Standards Board for Accountants (IESBA) Handbook of the Code of Ethics for Professional Accountants is available for free download from the IFAC website (www.ifac.org).
State several factors that have affected the incidence of lawsuits against CPAs in recent years.
Lawsuits against CPA firms continue to increase. State your opinion of the positive and negative effects of the increased litigation on CPAs and on society as a whole.
Distinguish between business failure and audit risk. Why is business failure a concern to auditors?
How does the prudent person concept affect the liability of the auditor?
Distinguish between "fraud" and "constructive fraud."
Discuss why many CPA firms have willingly settled lawsuits out of court. What are the implications to the profession?
A common type of lawsuit against CPAs is for the failure to detect a fraud. State the auditor's responsibility for such discovery. Give authoritative support for your answer.
What is meant by contributory negligence? Under what conditions will this likely be a successful defense?
Explain how an engagement letter might affect an auditor's liability to clients under common law.
Compare and contrast traditional auditors' legal responsibilities to clients and third-party users under common law. How has that law changed in recent years?
Is the auditor's liability affected if the third party was unknown rather than known? Explain.
Contrast the auditor's liability under the Securities Act of 1933 with that under the Securities Exchange Act of 1934.
Distinguish between the auditor's potential liability to the client, liability to third parties under common law, civil liability under the securities laws, and criminal liability. Describe one
What potential sanctions does the SEC have against a CPA firm?
In what ways can the profession positively respond to and reduce liability in auditing?
Multiple Choice QuestionsThe following questions concern CPA firms' liability under common law. Choose the best response.a. Sharp, CPA, was engaged by Peters & Sons, a partnership, to give an opinion
Multiple Choice QuestionsThe following questions deal with liability under the 1933 and 1934 securities acts. Choose the best response.a. Major, Major, & Sharpe, CPAs, are the auditors of MacLain
Following are 8 statements with missing terms involving auditor legal liability.1. Under the Ultramares Doctrine, an auditor is generally not liability for _____ to third parties lacking _____.2. The
Lauren Yost & Co., a medium-sized CPA firm, was engaged to audit Stuart Supply Company. Several staff were involved in the audit, all of whom had attended the firm's in-house training program on
The CPA firm of Bigelow, Barton, and Brown was expanding rapidly. Consequently, it hired several junior accountants, including a man named Small. The partners of the firm eventually became
Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with 20
In order to expand its operations, Barton Corp. raised $5 million in a public offering of common stock, and also negotiated a $2 million loan from First National Bank. In connection with this
Chen, CPA, is the auditor for Greenleaf Manufacturing Corporation, a privately owned company that has a June 30 fiscal year. Greenleaf arranged for a substantial bank loan that was dependent on the
Under Section 11 of the Securities Act of 1933 and Section 10(b), Rule 10b-5, of the Securities Exchange Act of 1934, a CPA may be sued by a purchaser of registered securities. The following items
Groton, CPAs, were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were
Sarah Robertson, CPA, had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2010, Herb Majestic told her that he needed a
Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934. The act requires such a brokerage firm to file audited financial statements with the SEC annually.
Jackson is a sophisticated investor. As such, she was initially a member of a small group that was going to participate in a private placement of $1 million of common stock of Clarion Corporation.
The SEC Enforcement Division investigates possible violations of securities laws, recommends SEC action when appropriate, either in a federal court or before an administrative law judge, and
State the objective of the audit of financial statements. In general terms, how do auditors meet that objective?

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