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business
auditing

Questions and Answers of Auditing

When a public accounting firm audits FUND- A in a mutual fund complex that has sister funds FUND- B and FUND- C, independence for the audit of FUND- A is not impaired when a. Managerial- level
Which of the following is considered a close relative (but not an immediate family member) as defined by the AICPA? a. Spouse. b. Spousal equivalent. c. Parent. d. Uncle.
Which of the following is true if an auditor performs non-audit services for a government entity? a. The scope of the audit must be reduced so that the auditor does not audit the area for which the
Which of the following is true? a. Members of an audit engagement team cannot speak with audit client officers about matters outside the scope of the audit while the audit engagement is in progress.
Which of the following “bodies designated by Council” have been authorized to promulgate general standards enforceable under Rule 201 of the AICPA Code of Professional Conduct? a. AICPA Division
Which of the following “bodies designated by Council” have been authorized to promulgate accounting principles enforceable under Rule 203 of the AICPA Code of Professional Conduct? a. Auditing
Phil Greb has a thriving practice in which he assists attorneys in preparing litigation dealing with accounting and auditing matters. He is “practicing public accounting” if he a. Uses his CPA
The AICPA removed its general prohibition of CPAs taking commissions and contingent fees because a. CPAs prefer more price competition to less. b. Commissions and contingent fees enhance audit
CPA Kara Rambo is the auditor of Ajax Corporation. Her audit independence will not be considered impaired if she a. Owns $ 1,000 worth of Ajax stock. b. Has a husband who owns $ 1,000 worth of Ajax
When a client’s financial statements contain a material departure from an FASB Statement on Accounting Standards and the public accounting firm believes the departure is necessary to ensure that
Which of the following would not be considered confidential information obtained in the course of an engagement for which the client’s consent would be needed for disclosure? a. Information about
Which of the following would probably not be considered an “act discreditable to the profession”? a. Numerous moving traffic violations. b. Failing to file the CPA’s own tax return. c. Filing a
According to the AICPA Code of Conduct, which of the following acts is generally forbid-den to CPAs in public practice? a. Purchasing bookkeeping software from a high- tech development company and
A CPA’s legal license to practice public accounting can be revoked by the a. American Institute of Certified Public Accountants. b. State society of CPAs. c. Auditing Standard Board. d. State board
According to Rule 501, which of the following is not a “discreditable act”? a. Withholding a client’s sales records. b. Failing to file or remit tax payments. c. Failing to follow requirements
An auditor’s independence would not be considered impaired if she or he had a. Owned common stock of the audit client but sold it before the company became a client. b. Sold short the common stock
When a CPA knows that a tax client has skimmed cash receipts and not reported the income in the federal income tax return but signs the return as a CPA who prepared the return, the CPA has violated
An accountant recommends a local computer company to a client that is trying to upgrade its computerized sales records. The client purchases $ 25,000 worth of equipment and sends a check to the
Which of the following ownership situations is permissible for a public accounting firm? a. A partner of the firm is responsible for fraud issues related to audits and audit clients. He owns 20
Is independence impaired for the individual or the public accounting firm on these SEC filing audits according to SEC independence rules? a. CPA Yolanda is the Best & Co engagement partner on the
Is independence impaired on these SEC filing audits according to SEC independence rules regarding non-audit services? a. CPA Dakota Tidrick is a staff assistant II auditor on the Section Co. audit.
Cases. Read the following cases. Required: For each case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct, explain why if it does, and cite the
Cases. Read the following cases. Required: For each separate case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct; if so, explain why and cite the
Read the following cases. For each, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct; if so, explain why and cite the relevant rule or interpretation.
Read the following cases. For each case, state whether the action or situation shows a violation or potential for violation of the AICPA Code of Professional Conduct, explain why, and cite the
Read the following cases. For each, state whether the action or situation shows a violation or potential for violation of the AICPA Code of Professional Conduct; if so, explain why, and cite the
AICPA Interpretation 101- 3 (Performance of Other Services: www.aicpa.org) cites several “ other services” that do and do not impair audit independence.Required:Go to the AICPA website and find
Is there any moral difference between a disapproved action in which you are caught and the same action that never becomes known to anyone else? Do many persons in business and professional society
Accounting firms are often asked to present “proposals” to companies’ boards of directors. These proposals are comprehensive booklets, accompanied by oral presentations, telling about the
A time budget is always prepared for audit engagements. Numbers of hours are estimated for various segments of the work, for example, internal control evaluation, cash, inventory, and report review.
The performance evaluation of all accountants is based in part on their ability to do audit work efficiently and within the time budget planned for the engagement. New staff accountants, in
Jon Williams, CPA, is in the middle of the real- life soap opera, “Taxing Days of Our Lives.” The Cast of Characters Oneway Corporation is Williams’s audit and tax client. The three directors
Reread the Module B introduction about Scott London, CPA. Required: a. What code violation(s) have occurred in this case? b. What is the range of penalties that the PCAOB could levy against London?
Go to the PCAOB website and find settled disciplinary orders. Review the cases and the penalties indicated for each case. Required: What did Susan Birkert do to get in trouble and what was her
Sandy Sally is a sole proprietor CPA who runs a successful practice with five employees. Several years ago, Sally purchased an office building and relocated the practice in about 20 percent of the
In your room there are things such as tables, chairs, other people, and so forth. Which of these things has a temperature (1) lower than, (2) greater than, and (3) equal to the temperature of the air?
Mini- Case: Non-audit Services and Independence. Refer to the mini- case “How Many Firms?” shown on page C17 and respond to questions 1, 2, and 3.1. What steps does an auditor ordinarily take
Mini- Case: Nonaudit Services and Independence. Refer to the mini- case “How Much Are Auditors Paid?” shown on page C23 and respond to questions 1 and 2. 1. From a conceptual standpoint, how
Mini- Case: Effect of Sarbanes- Oxley on Fees. Refer to the mini- case “How Much Are Auditors Paid?” shown on page C23 and respond to questions 3 and 4.On page C231. Compare General Electric’s
How do utilitarian ethics differ from imperative ethics?
What do the SEC disclosure rules and PCAOB Rule 3526 have in common with auditors’ relations with an audit client’s board of directors and its audit committee?
Given what you have learned about independence, do you believe that there would be a perceived independence problem concerning members of an audit engagement team entertaining employment offers from
What ethical responsibilities do members of the AICPA have for acts of nonmembers who are under their supervision (e. g., recent college graduates who are not yet CPAs)?
What is the primary difference between commissions and referrals?
Identify the general responsibilities auditors owe to clients and third parties.
Distinguish between common law liability and statutory law liability. Which parties generally bring suit against auditors under common law and under statutory law liability?
For what type of actions can clients bring suit against auditors under common law? What must clients prove prior to bringing suit in each case?
What must third parties prove in a common law action seeking recovery of damages from auditors?
What legal theory is derived from the Ultramares decision? Can auditors rely on the Ultramares decision today?
Define and explain privity, primary beneficiary, foreseen party, and foreseeable party in terms of the degree of failure to exercise the appropriate level of professional care on the part of auditors
What defenses are available to auditors against suits brought by clients under common law? Against suits brought by third parties under common law?
What is a registration statement? How does the registration statement introduce potential liability to auditors under the Securities Act?
How is section 11 of the Securities Act different from the legal environment that exists under common law?
What must the plaintiff prove in a suit under section 11 of the Securities Act seeking recovery of damages from auditors? What defenses are available to auditors in this situation?
Identify the contents of Form 10- K, Form 10- Q, and Form 8- K. How are auditors involved with the information in these filings?
What are (a) Regulation S- X, (b) Regulation S- K, (c) Financial Reporting Releases, and (d) Staff Accounting Bulletins?
Who may bring suit against auditors under the Securities Exchange Act? What must these parties demonstrate in order to bring suit?
What is scienter? How do the findings in Ernst & Ernst v. Hochfelder and Denise L. Nappier et al. v. PricewaterhouseCoopers relate to scienter?
What are the major differences in auditors’ liability under the Securities Act of 1933 and the Securities Exchange Act of 1934?
List some of the major changes in auditors’ liability provided by Sarbanes- Oxley.
What major changes did the Private Securities Litigation Reform Act provide? What major changes did the Class Action Fairness Act provide?
A lack of reasonable care that may be characterized by the failure of auditors to follow GAAS in the conduct of the audit is known as a. Constructive fraud. b. Fraud. c. Gross negligence. d. Ordinary
From the auditors’ point of view, which of the following is a preferable provision for imposition of civil liability in a lawsuit for financial damages? a. Joint and several liability. b.
Users of financial statements have a different perception concerning the nature of auditors’ services than the actual objectives of an audit. This difference is known as.a. Diverse liability
Individuals who believe they relied on misstated financial statements to make a decision and have suffered losses as a result will issue an action known as a a. Breach of contract. b. Tort. c.
Assume that auditors lost a civil lawsuit for damages and the court found total losses of $ 5 million. If the auditors were determined to be 30 percent at fault and were the only solvent defendants,
Suppose that the auditors in the preceding question participated knowingly in commission of violations of securities laws (with managers and directors of the audit client). What is the auditors’
When a client sues an accountant for failure to perform consulting work properly, the accountants’ best defense is probably based on the doctrine of a. Lack of privity of contract. b. Contributory
When creditors who relied on an entity’s audited financial statements suffer monetary losses after a customer (the auditors’ client) goes bankrupt, what must the plaintiff creditors in a lawsuit
When accountants agree to perform a compilation or review of unaudited financial statements, the best way to avoid client’s misunderstanding the nature of the work is to describe it completely in
Entities desiring to issue equity or debt must provide a set of financial statements to any prospective purchaser. This set of financial statements and other information for prospective purchasers
The Securities Act of 1933 and Securities Exchange Act of 1934 contain a. Civil liability provisions applicable to auditors. b. Criminal liability provisions applicable to auditors. c. Neither a nor
Which of the following third parties is known by name to auditors as the audit is conducted? a. Foreseeable third party. b. Foreseen third party. c. General third party. d. Primary beneficiary.
Which of the following would be the auditors’ most likely defense in an action brought under the Securities Exchange Act of 1934? a. The investor did not have privity with auditors. b. The investor
Which of the following statements regarding auditors’ liability under the Securities Act of 1933 is not true? a. The act relates to the initial issuance of securities to the public, normally
Under the Securities Exchange Act of 1934, entities are required to report to the public about changing auditors on a. Form 10- K. b. Form S- 1. c. Form 10- Q. d. Form 8- K.
Section 11(b) of the Securities Act of 1933 provides that individuals can be sued and may be liable for investors’ losses in connection with a public securities offering under which of these
In comparison to the burden of proof required of plaintiffs in civil lawsuits against independent auditors under common law, section 10(b) of the Securities Exchange Act of 1934 a. Is the same
Which of the following cases provides auditors the broadest exposure for liability to third parties for ordinary negligence under common law? a. Credit Alliance v. Arthur Andersen. b. Fleet National
Which of the following is a major difference in auditors’ liability under the Securities Act of 1933 and the Securities Exchange Act of 1934? a. The burden of proving reliance on misstated
When an entity registers a security offering under the Securities Act of 1933, the law provides an investor a. An SEC guarantee that the information in the registration statement is true. b.
A group of investors sued Anderson, Olds, and Watershed, CPAs (AOW) for alleged dam-ages suffered when the entity in which they held common stock went bankrupt. To avoid liability under the common
The Securities and Exchange Commission document that governs accounting in financial statements filed with the SEC is a. Regulation D. b. Form 8- K. c. Form SB- l. d. Regulation S- X.
Which of the following cases upheld the requirement that plaintiffs demonstrate scienter when bringing action under the Securities Exchange Act of 1934? a. Ernst & Ernst v. Hochfelder. b. Escott
A public entity subject to the periodic reporting requirements of the Securities Exchange Act of 1934 must file an annual report with the SEC known as the a. Form 10- K. b. Form 10- Q. c. Form 8- K.
When investors sue auditors for damages under section 11 of the Securities Act of 1933, they must allege and prove a. Scienter on the part of auditors. b. The audited financial statements contained
Which of the following is not part of Sarbanes- Oxley? a. An increased duty on the part of auditors to identify financial statement fraud. b. A requirement that the CEO and CFO certify the financial
If a CPA firm is being sued for common law fraud by a third party based upon materially false financial statements, which of the following is the best defense the auditors could assert? a. Lack of
Locke, CPA, was engaged by Hall Inc. to audit Willow Company. Hall purchased Willow after receiving Willow€™s audited financial statements, which included Locke€™s unmodified
An investor seeking to recover stock market losses from a CPA firm associated with an initial offering of securities based on an unmodified opinion on financial statements that accompanied a
Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities Inc. to the Securities and Exchange Commission. The audit was improper in
Which of the following elements must Hex prove to hold West liable? a. West rendered its opinion with knowledge of material misstatements. b. West performed the audit negligently. c. Hex relied on
Which of the following defenses would be least helpful to West in avoiding liability to Hex? a. West was not in privity of contract with Hex. b. West conducted the audit in accordance with GAAS. c.
Although large- dollar lawsuits brought by shareholders grab the headlines, auditors are most often sued by the client for breach of contract. Required: a. How can auditors be in breach of contract
Thomas, CPA, is a regional firm that provides a variety of services to its clients. The following summarizes some issues that it has encountered with three of its audit clients during the most recent
Huffman & Whitman (H& W), a large regional accounting firm, was engaged by Ritter Tire Wholesale Company to audit its financial statements for the year ended January 31. H& W had a busy audit
Herbert McCoy is the president of McCoy Forging Corporation. For the past several years, Donovan & Company, CPAs, has performed the company’s compilation and some other accounting and tax work.
Auditors may be liable to third parties for fraud in several ways. Required: a. Identify auditors’ liability for fraud to third parties. b. Distinguish between fraud and constructive fraud. c. What
During the audit of the Health Management’s 1995 financial statements, $ 1.8 million of inventory in transit was included on the entity’s balance sheet. The auditors never obtained evidence of
An accounting firm was engaged to examine the financial statements of Martin Manufacturing Corporation for the year ending December 31. Martin needed cash to continue its operations and agreed to

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