Questions and Answers of Principles Of External Auditing

Which of the following is not a major threat to an auditor's independence?a. Audit partner's compensation based on obtaining and retaining clientsb. Becoming too friendly with the client's
The Sarbanes-Oxley Act prohibits public accounting firms from providing cer- tain services to audit clients that are public companies. Which of the following services is not prohibited?a. Internal
According to the AICPA's ethical standards, an auditor would be considered in- dependent in which of the following instances?a. The auditor has an automobile loan from a client bank.b. The auditor is
A violation of the profession's ethical standards would most likely have occurred when a CPA:a. Purchased a bookkeeping firm's practice of monthly write-ups for a percent- agc of fees received over a
A CPA is permitted to disclose confidential client information without the con- sent of the client to:I: Another CPA who has purchased the CPA's tax practice.II. Another CPA firm if the information
Manny Tallents is a CPA and a lawyer. In which of the following situations is Tal- lents violating the AICPA's Rules of Conduct?a. He uses his legal training to help determine the legality of an
CPA firms performing management consulting services can accept contingent fee contracts when:a. The amounts are not material in relationship to the audit billings.b. The consulting services are for
Applying utilitarianism as a concept in addressing ethical situations requires the auditor to perform all of the following except:a. Identify the potential stakeholders that will be affected by the
The following are situations in which auditors may find themselves.Situations: 1. Spencer is the partner in charge of the audit of Flip Company. He has half in- terest in a joint venture with Flip's
Following is a list of potential viola- tions of the AICPA's Code of Professional Conduct.Auditor Situations:1. T.O. Busy is unable to perform a service requested by a client. Therefore, Busy refers
Two CPAs visiting at a recent meeting of the state CPA society were talking about accepting commissions and performing work on a contingent fee basis. The first one said he did not accept commissions
In analyzing the reported income of General Motors Corporation, Abraham Briloff reported that General Motors made only $22.8 million from the sale of cars:General Motors reported only $22.8 million
What are the eight elements of the COSO ERM model? Explain each component and its importance to effective enterprise risk management.
What are the major advantages to a company of implementing an effective enterprise risk management process?
How might an organization go about sharing or transferring risk?
Explain why it may be easier for the auditor to assess environment risk as opposed to separately assessing inherent risk and control risk.
4-32 Why is it important for the auditor to use risk analysis to develop expectations about client performance? 4-33 What background information might be useful to the auditor in planning the audit
4-36 What ratios would best indicate problems with potential inventory obsolescence or collectibility of receivables? How are those ratios calculated?
Management integrity affects all of the following risks except: a. Enterprise risk. b. Financial reporting risk.c. Engagement risk. d. All of the above
A key element of the COSO ERM model is risk appetite. Risk appetite is a. Best determined by management with board of director review and concur- rence. b. An integral part of the risk culture. c.
4-41 An external auditor is interested in whether a company has implemented an ef- fective ERM because: a. It reduces the likelihood that an organization will fail. b. It provides a framework for
Which of the following would not be a source of information about risk of a po- tential new audit client? a. The previous auditor b. Management c. The Internet d. The new auditor's permanent
An engagement letter should be written before the start of an audit because: a. It may limit the auditor's legal liability by specifying the auditor's responsibili- ties. b. It specifies the
If the auditor has concerns about the integrity of management, which of the following would not be an appropriate action? a. Refuse to accept the engagement because a client does not have an
Which of the following combinations of engagement risk, audit risk, and mate- riality would lead to the most audit work? Engagement Risk a. Low b. Moderate c. Low d. High Audit Risk High Low Moderate
Which of the following would not be considered a limitation of the audit risk model?a. The model treats each risk component as a separate and independent factor when some of the factors are
Which of the following models expresses the general relationship of risks associated with the auditor's evaluation of control risk (C R), inherent risk (I R), and audit risk (A R) that would lead the
Comparing client data with industry data and with its own results for the previous year, the auditor finds that the number of days' sales in accounts receivable for this year is 66 for the client, 42
An auditor suspects that fictitious sales may have been recorded during the year. Which of the following analytical review results would most likely indicate that fictitious sales were recorded? a.
The COSO organization has issued a document describing a com- prehensive approach to Enterprise Risk Management (ERM). Required a. What are the major elements contained in the definition of
Access the SEC home page at http://www.sec.gov. a. Identify the most recent Staff Accounting Bulletin that provides guidance to the profession. b. Identify the guidance given.
What role did the widespread use of stock options contribute to corporate fail- ures?
What is the PCAOB and what is its mandate?
What studies were conducted by the GAO as part of the Sarbanes-Oxley Act?
Sarbanes-Oxley contains certification requirements of management. What are they and how do they differ from the responsibilities that management previously had?
What are the whistleblowing provisions of the Sarbanes-Oxley Act? What is the organization's responsibility for establishing and monitoring a Corporate Code of Conduct?
What does it mean to have management certify that the financial statements are correct? How does this certification differ from the previously acknowledged re- sponsibility for the fairness of the
The audit committee is supposed to be the external auditor's client. Explain what this means and how it is implemented.
What responsibility does the audit committee of a public company have regard- ing the selection of a chief audit executive for its internal audit activity? What role does the audit committee play in
Does the audit committee need to separately approve nonaudit services to: (a) the company, (b) management, or (c) members of the board of directors? Explain.
Explain the difference between the proposed standard for understanding the en- tity and its environment (including internal control) from the previous standard focusing on internal control.
What is the base of authority for each of the audit standard setters identified in question 2-33?
All of the following are parts of corporate governance except:a. Oversight of management by the board of directors.b. Established processes to provide accountability back to stockholders.c.
Which of the following would not be a correct statement about a partial cause of corporate governance failures?a. Boards of directors approved stock option plans that did not align management and
Which of the following is not a Sarbanes-Oxley requirement for audit commit- tees?a. The audit committee must be chaired by the chair of the board of directors.b. Audit committee members must be
In which way did the public accounting profession bring about the problems that resulted in Congress passing the Sarbanes-Oxley Act of 2002?a. Failed to detect material financial statement fraudsb.
Which of the following is an inappropriate description of management's role in preparing financial statements and reports on internal control over financial re- porting? Management has the primary
An audit committee should do all of the following except:a. Decide whether to retain or dismiss the outside auditors.b. Determine whether material fraud ought to be reported in the company's fi-
Which of the following would not be required to be communicated to the audit committee by the outside auditor?a. Significant audit adjustments made during the course of the auditb. Significant
The application of due professional care means that the auditor's work conforms with all of the following except:a. Current auditing standards as defined by Statements on Auditing Standards.b. The
The second standard of fieldwork requires the auditor to do all of the following except:a. Understand the business and its environment.b. Understand the risks related to financial reporting.c.
The auditor uses the following audit procedure as part of the audit of fixed assets:Take a statistical sample of all additions to property, plant, and equipment and trace to invoices received from
Public accounting serves an im- portant role in corporate governance.Requireda. Describe the role that external auditing fills in promoting good corporate gov- ernance.b. What were the major
The audit committee is required to evaluate the independence of both the internal and external audit function.Requireda. What factors would you suggest that an audit committee look at in evaluating
The PCAOB has the authority to set audit standards for all audits of public companies. The AICPA suspended the activities of the Auditing Standards Board in 2002 pending further developments.
The Sarbanes-Oxley Act required numer- ous studies of the accounting profession to be made by the GAO and reported to the SEC within one year of its enactment.Required In consultation with your
The Sarbanes-Oxley Act of 2002 created the PCAOB and gave it the responsibility for setting auditing standards for public companies. However, it was silent on auditing standards for nonpublic
Identify five users of audited financial statements. Briefly indicate why independ- ently audited financial statements are important to each user.
What is corporate governance and why is it important? What role does the audi- tor play in improving corporate governance?
What is the primary rationale for Congress to require mandatory reporting on internal accounting controls?
How has the public's expectations of the auditor's role differed from that which the audit function provided?
What are ElderCare Plus services?
In determining the primary responsibility of the external auditor for a company's financial statements, the auditor owes primary allegiance to: a. The management of the company being audited because
Which of the following would not represent one of the primary problems that would lead to the demand for independent audits of a company's financial state- ments? a. Management bias in preparing
Assurance services involve all the following except: a. Improving the quality of information for decision purposes. b. Improving the quality of the decision model used. c. Improving the relevance
Internal auditing is viewed as an integral part of all of the following organizational functions except: a. Risk management. b. Governance. c. Control. d. Operations.
Which of the following statements is true regarding the provision of assurance services? I. The third party who receives the assurance generally pays for the assurance received. II. Assurance
Which of the following is the broader concept? a. Audits of financial statements b. Internal control audit c. Assurance services d. Attestation services
Which of the following statements are correct regarding the setting of auditing standards in the United States? a. The AICPA is responsible for the setting of audit standards only for audits of
Which of the following statements is correct? As a result of the Sarbanes-Oxley Act of 2002, a. Public companies must report on the quality of their internal controls. b. CPA firms cannot provide
The GAO is responsible for all of the following except: a. Developing standards for audits of federal agencies. b. Developing standards for audits of state agencies. c. Performing special
The AICPA is a private governing organization of the public accounting profes- sion that does all of the following except: a. Perform quality peer reviews of companies performing audits. b. Issue
All of the following require an audit communication to a third-party except: a. A review of financial statements of a nonpublic company. b. An attestation to the quality of a company's internal
Olson Company, a medium-size manufacturer of products marketed in the Midwest, recently was persuaded by its banker to have its annual financial statements audited. The company has been growing at a
The AICPA and the IIA have positioned the au- diting professions to become "assurance professions." Required a. What is the difference between assurance services, attestation services, and au-
You have been talking with one of your close col- leagues regarding graduate school. Your colleague has decided to go to graduate school to obtain additional training to become a bank loan officer.
The structure of CPA firms has gradually changed over the past decade with less of a pyramidal shape. Required a. Briefly explain the rationale for the pyramid organization structure of public
Briefly explain:(a) the advantage to external auditors and companies of external auditors relying (in part) on the work of internal auditors; (b) why internal auditors do not perform all of the
Give a comprehensive definition of auditing.
Under the provisions of the Companies Act 1985 an auditor's report must be attached to a company's financial statements. Is this true for all companies? Explain.
State the major changes which have occurred in auditing techniques during the last 160 years. Explain briefly how changes in technology have impacted on the changes in auditing techniques.
Outline briefly the development of corporate accountability over the past 160 years.
List reasons which help to explain why the detection of fraud and error lost its prominence as the primary audit objective during the 1920-1960s period.
(a) Distinguish between 'non-controllable' and 'controllable' risk.(b) Explain briefly the components of non-controllable and controllable risk.
List six factors that may result in an auditor's independence being compromised in fact or in appearance.
List the restrictions placed on auditors by the professional accountancy bodies which are designed to prevent auditors' independence from being impaired through: (i) financial involvement with an
List the four principles that underpin the SEC's auditor independence rules.
Outline the principal responsibilities of audit committees and explain briefly how audit committees may help strengthen auditors' independence.
List the items which the Companies Act 1985 requires auditors to include in their reports to shareholders.
Distinguish briefly between the three types of corporate fraud.
Describe briefly the changes to auditors' responsibilities in respect of detecting fraud:(i) introduced in (revised) ISA 240: Fraud and error;(ii) indicated in the APB's Consultative Papers: Fraud
Indicate the audit procedure(s) you would use to verify each of the following items. Briefly explain each procedure, indicating how it would be applied in the particular situation.(i) Value of office
Explain how an auditor might acquire evidence about each of the follow- ing transactions: (i) Equipment Cash 3,000 3,000 (ii) Equipment 4,000 Creditors 4,000 (iii) Depreciation expense 2,000
List three elements of the auditor's pre-engagement investigation.
List five topics which are usually referred to in audit engagement letters.
List five audit procedures which may be used to gain an understanding of the client, its business, and its industry.
Define the auditor's 'desired level of assurance'. Explain how this relates to the auditor's desired level of audit risk.
(a) Describe briefly what is meant by 'an audit programme".(b) State the two stages in which an audit programme is developed.
Explain the meaning of the term 'financial statement assertions' and list seven such assertions.
Describe briefly the 'stocksheet system' which may be used for a client's stocktaking.

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