Chapter 01

The Role of the Public Accountant in the American Economy

 

True / False Questions

 

1. Independent audits of today place more emphasis on sampling than did the
audits of the 19th century. 
True    False

2. The American Institute of Certified Public Accountants issues CPA certificates

and permits CPAs to practice. 
True    False

3. A company is either audited by the GAO or internal auditors, but not both. 
True    False

4. The SEC does not pass on the merits of the securities that are registered with
the agency. 
True    False

5. The American Institute of Certified Public Accountants has the primary authority
to establish accounting standards. 
True    False

 
6. An annual peer review is a requirement of the AICPA. 
True    False

7. Many small companies elect to have their financial statements reviewed by a

CPA firm, rather than incur the cost of an audit. 
True    False

 
8. Staff assistants in CPA firms generally are responsible for planning and
coordinating audit engagements. 
True    False

9. The Sarbanes-Oxley Act requires that auditors of certain publicly traded

companies in the United States perform an integrated audit that includes
providing assurance on both the financial statements and on compliance with laws
and regulations. 
True    False

10. Auditing is frequently only a small part of the practice of local CPA firms. 
True    False

 
 

Multiple Choice Questions

 

11. A summary of findings rather than assurance is most likely to be included in

a(n): 
A. Agreed-upon procedures report.
B. Compilation report.
C. Examination report.
D. Review report.

 
12. The Statements on Auditing Standards have been issued by the: 
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Securities and Exchange Commission.
D. Federal Bureau of Investigation.

13. The risk associated with a company's survival and profitability is referred to

as: 
A. Business Risk.
B. Information Risk.
C. Detection Risk.
D. Control Risk.

 
14. Historically, which of the following has the AICPA been most concerned with
providing? 
A. Professional standards for CPAs.
B. Professional guidance for regulating financial markets.
C. Standards guiding the conduct of internal auditors.
D. Staff support to Congress.

15. The organization charged with protecting investors and the public by requiring
full disclosure of financial information by companies offering securities to the
public is the: 
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Government Accounting Standards Boards.
D. Securities and Exchange Commission.

16. An engagement in which a CPA firm arranges for a critical review of its
practices by another CPA firm is referred to as a(n): 
A. Peer Review Engagement.
B. Quality Control Engagement.
C. Quality Assurance Engagement.
D. Attestation Engagement.

17. The serially-numbered pronouncements issued by the Auditing Standards

Board over a period of years are known as: 
A. Auditing Statements of Position (ASPs).
B. Accounting Series Releases (ASRs).
C. Statements on Auditing Standards (SASs).
D. Statements on Auditing Principles (SAPs).

 
18. The Government Accountability Office (GAO): 
A. Is primarily concerned with rapid processing of all accounts payable incurred by
the federal government.
B. Conducts operational audits and reports the results to Congress.
C. Is a multinational organization of professional accountants.
D. Is primarily concerned with budgets and forecasts approved by the SEC.

 
19. The risk that information is misstated is referred to as: 
A. Information risk.
B. Inherent risk.
C. Relative risk.
D. Business risk.

20. The risk that a company will not be able to meet its obligations when they
become due is an aspect of: 
A. Information risk.
B. Inherent risk.
C. Relative risk.
D. Business risk.

21. Which of the following attributes most clearly differentiates a CPA who audits
management's financial statements as contrasted to management? 
A. Integrity.
B. Competence.
C. Independence.
D. Keeping informed on current professional developments.

22. The attest function: 

A. Is an essential part of every engagement by the CPA, whether performing
auditing, tax work, or other services.
B. Includes the preparation of a report of the CPA's findings.
C. Requires a consideration of internal control.
D. Requires a complete review of all transactions during the period under
examination.

 
23. Attestation risk is limited to a low level in which of the following
engagement(s)? 
A. Both examinations and reviews.
B. Examinations, but not reviews.
C. Reviews, but not examinations.
D. Neither examinations nor reviews.

 
24. When compared to an audit performed prior to 1900, an audit today: 
A. Is more likely to include tests of compliance with laws and regulations.
B. Is less likely to include consideration of the effectiveness of internal control.
C. Has bank loan officers as the primary financial statement user group.
D. Includes a more detailed examination of all individual transactions.

25. Which of the following are issued by the Securities and Exchange

Commission? 
A. Accounting Research Studies.
B. Accounting Trends and Techniques.
C. Industry Audit Guides.
D. Financial Reporting Releases.

26. Which of the following is not correct relating to the Sarbanes-Oxley Act? 

A. It toughens penalties for corporate fraud.
B. It restricts the types of consulting CPAs may perform for audit clients.
C. It created the Public Company Accounting Oversight Board (PCAOB) as a
replacement for the Financial Accounting Standards Board.
D. It eliminates a significant portion of the accounting profession's system of self-
regulation.

 
27. An operational audit differs in many ways from an audit of financial
statements. Which of the following is the best example of one of these
differences? 
A. The usual audit of financial statements covers the four basic statements,
whereas the operational audit is usually limited to either the balance sheet or the
income statement.
B. The boundaries of an operational audit are often drawn from an organization
chart and are not limited to a single accounting period.
C. Operational audits do not ordinarily result in the preparation of a report.
D. The operational audit deals with pre-tax income.

28. The review of a company's financial statements by a CPA firm: 

A. Is substantially less in scope of procedures than an audit.
B. Requires detailed analysis of the major accounts.
C. Is of similar scope as an audit and adds similar credibility to the statements.
D. Culminates in issuance of a report expressing the CPA's opinion as to the
fairness of the statements.

 
29. Which statement is correct with respect to continuing professional education
(CPE) requirements of members of the AICPA? 
A. Only members employed by the AICPA are required to take such courses.
B. Only members in public practice are required to take such courses.
C. Members, regardless of whether they are in public practice, are required to
meet such requirements.
D. There is no requirement for members to participate in CPE.

30. The FDIC Improvement Act requires that management of large financial

institutions engage auditors to attest to assertions by management about the
effectiveness of the institution's internal controls over: 
A. Compliance with laws and regulations.
B. Financial reporting.
C. Effectiveness of operations.
D. Efficiency of operations.

31. Passage of the Sarbanes-Oxley Act led to the establishment of the: 

A. Auditing Standards Board.
B. Accounting Enforcement Releases Board.
C. Public Company Accounting Oversight Board.
D. Securities and Exchange Commission.

32. Which of the following professionals has primary responsibility for the

performance of an audit? 
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

 
33. Which of the following types of services is generally provided only by CPA
firms? 
A. Tax audits.
B. Financial statement audits.
C. Compliance audits.
D. Operational audits.

 
34. The right to practice as a CPA is given by which of the following organizations? 
A. State Boards of Accountancy.
B. The AICPA.
C. The SEC.
D. The General Accounting Office.

35. Which of the following terms best describes the audit of a taxpayer's tax
return by an IRS auditor? 
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.

36. Inquiries and analytical procedures ordinarily form the basis for which type of
engagement? 
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.

37. Which of the following best describes the reason why independent auditors
report on financial statements? 
A. A management fraud may exist and it is more likely to be detected by
independent auditors.
B. Different interests may exist between the company preparing the statements
and the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditors' work.
D. Poorly designed internal control may be in existence.

 
38. Governmental auditing often extends beyond examinations leading to the
expression of opinion on the fairness of financial presentation and includes audits
of efficiency, economy, effectiveness, and also: 
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

39. Operational auditing is primarily oriented toward: 

A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management's financial records.
C. The verification that a company's financial statements are fairly presented.
D. Past protection provided by existing internal control.

40. A typical objective of an operational audit is for the auditor to: 

A. Determine whether the financial statements fairly present the entity's
operations.
B. Evaluate the feasibility of attaining the entity's operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity's relative success in attaining profit maximization.

 
41. An integrated audit performed under the Sarbanes-Oxley Act requires that
auditors report on:

    
A. Option A
B. Option B
C. Option C
D. Option D

 
Matching Questions
 

42. Accountants are regulated by a variety of organizations. Match the following

statements with the most directly related organizations. Organizations may be
used once or not at all. 

     Financial Accounting
1. Issue CPA certificates  Standards Board.   ____ 
2. Formed to improve standards of
financial accounting for state and local      Federal Accounting
government entities  Standards Advisory Board.   ____ 
     Government Accounting
3. Prepares the CPA exam  Standards Board.   ____ 
     Public Company
4. Develop accounting standards for Accounting Oversight
public and nonpublic companies  Board.   ____ 
5. Develop accounting standards for      State Boards of
the U.S. Government  Accountancy.   ____ 
     American Institute of
6. Issue auditing standards for public Certified Public
companies  Accountants.   ____ 
 
 

Essay Questions
 
43. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies
and their auditors.

a. Describe the events that led up to the passage of the Act.

b. Describe the major changes made by the Act. 

 
 
44. Many people confuse the responsibilities of the independent auditors and the
client's management with respect to audited financial statements.

a. Describe management's responsibility regarding audited financial statements.

b. Describe the independent auditors' responsibility regarding audited financial
statements.
c. Evaluate the following statement: "If the auditors disagree with management
regarding an accounting principle used in the financial statements the auditors
should express their views in the notes to the financial statements." 

 
 

45. An investor is considering investing in one of two companies. The companies

have very similar reported financial position and results of operations. However,
only one of the companies has its financial statements audited.

a. Describe what creates the demand for an audit in this situation. Include a
discussion of how audited financial statements facilitate this investment
transaction, and the effect of the audit on business risk and information risk.
b. Identify the potential consequences to the company of not having its financial
statements audited. 

 
 
Chapter 01 The Role of the Public Accountant in the American Economy Answer
Key
 
 

True / False Questions

 

1. Independent audits of today place more emphasis on sampling than did the
audits of the 19th century. 
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits
 

2. The American Institute of Certified Public Accountants issues CPA certificates

and permits CPAs to practice. 
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
3. A company is either audited by the GAO or internal auditors, but not both. 
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
4. The SEC does not pass on the merits of the securities that are registered with
the agency. 
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 

5. The American Institute of Certified Public Accountants has the primary authority
to establish accounting standards. 
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
6. An annual peer review is a requirement of the AICPA. 
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
7. Many small companies elect to have their financial statements reviewed by a
CPA firm, rather than incur the cost of an audit. 
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 

8. Staff assistants in CPA firms generally are responsible for planning and
coordinating audit engagements. 
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-08 Describe how public accounting firms are typically
organized and the responsibilities of auditors at the various levels in the
organization.
Topic: Public Accounting Profession
 
9. The Sarbanes-Oxley Act requires that auditors of certain publicly traded
companies in the United States perform an integrated audit that includes
providing assurance on both the financial statements and on compliance with laws
and regulations. 
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
10. Auditing is frequently only a small part of the practice of local CPA firms. 
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-08 Describe how public accounting firms are typically
organized and the responsibilities of auditors at the various levels in the
organization.
Topic: Public Accounting Profession
 
 

Multiple Choice Questions

 

11. A summary of findings rather than assurance is most likely to be included in

a(n): 
A. Agreed-upon procedures report.
B. Compilation report.
C. Examination report.
D. Review report.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 
12. The Statements on Auditing Standards have been issued by the: 
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Securities and Exchange Commission.
D. Federal Bureau of Investigation.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
13. The risk associated with a company's survival and profitability is referred to
as: 
A. Business Risk.
B. Information Risk.
C. Detection Risk.
D. Control Risk.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits
 

14. Historically, which of the following has the AICPA been most concerned with
providing? 
A. Professional standards for CPAs.
B. Professional guidance for regulating financial markets.
C. Standards guiding the conduct of internal auditors.
D. Staff support to Congress.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
15. The organization charged with protecting investors and the public by requiring
full disclosure of financial information by companies offering securities to the
public is the: 
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Government Accounting Standards Boards.
D. Securities and Exchange Commission.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
16. An engagement in which a CPA firm arranges for a critical review of its
practices by another CPA firm is referred to as a(n): 
A. Peer Review Engagement.
B. Quality Control Engagement.
C. Quality Assurance Engagement.
D. Attestation Engagement.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 

17. The serially-numbered pronouncements issued by the Auditing Standards

Board over a period of years are known as: 
A. Auditing Statements of Position (ASPs).
B. Accounting Series Releases (ASRs).
C. Statements on Auditing Standards (SASs).
D. Statements on Auditing Principles (SAPs).

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
18. The Government Accountability Office (GAO): 
A. Is primarily concerned with rapid processing of all accounts payable incurred by
the federal government.
B. Conducts operational audits and reports the results to Congress.
C. Is a multinational organization of professional accountants.
D. Is primarily concerned with budgets and forecasts approved by the SEC.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
19. The risk that information is misstated is referred to as: 
A. Information risk.
B. Inherent risk.
C. Relative risk.
D. Business risk.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits
 

20. The risk that a company will not be able to meet its obligations when they
become due is an aspect of: 
A. Information risk.
B. Inherent risk.
C. Relative risk.
D. Business risk.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits
 
21. Which of the following attributes most clearly differentiates a CPA who audits
management's financial statements as contrasted to management? 
A. Integrity.
B. Competence.
C. Independence.
D. Keeping informed on current professional developments.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-01 Describe the nature of assurance services.
Topic: Assurance Services
 
22. The attest function: 
A. Is an essential part of every engagement by the CPA, whether performing
auditing, tax work, or other services.
B. Includes the preparation of a report of the CPA's findings.
C. Requires a consideration of internal control.
D. Requires a complete review of all transactions during the period under
examination.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 

23. Attestation risk is limited to a low level in which of the following

engagement(s)? 
A. Both examinations and reviews.
B. Examinations, but not reviews.
C. Reviews, but not examinations.
D. Neither examinations nor reviews.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 
24. When compared to an audit performed prior to 1900, an audit today: 
A. Is more likely to include tests of compliance with laws and regulations.
B. Is less likely to include consideration of the effectiveness of internal control.
C. Has bank loan officers as the primary financial statement user group.
D. Includes a more detailed examination of all individual transactions.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits
 
25. Which of the following are issued by the Securities and Exchange
Commission? 
A. Accounting Research Studies.
B. Accounting Trends and Techniques.
C. Industry Audit Guides.
D. Financial Reporting Releases.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 
26. Which of the following is not correct relating to the Sarbanes-Oxley Act? 
A. It toughens penalties for corporate fraud.
B. It restricts the types of consulting CPAs may perform for audit clients.
C. It created the Public Company Accounting Oversight Board (PCAOB) as a
replacement for the Financial Accounting Standards Board.
D. It eliminates a significant portion of the accounting profession's system of self-
regulation.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-05 Describe how the credibility of the accounting profession
was affected by the large number of companies reporting accounting irregularities
in the beginning of this century.
Topic: Financial Statement Audits
 
27. An operational audit differs in many ways from an audit of financial
statements. Which of the following is the best example of one of these
differences? 
A. The usual audit of financial statements covers the four basic statements,
whereas the operational audit is usually limited to either the balance sheet or the
income statement.
B. The boundaries of an operational audit are often drawn from an organization
chart and are not limited to a single accounting period.
C. Operational audits do not ordinarily result in the preparation of a report.
D. The operational audit deals with pre-tax income.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
28. The review of a company's financial statements by a CPA firm: 
A. Is substantially less in scope of procedures than an audit.
B. Requires detailed analysis of the major accounts.
C. Is of similar scope as an audit and adds similar credibility to the statements.
D. Culminates in issuance of a report expressing the CPA's opinion as to the
fairness of the statements.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 
29. Which statement is correct with respect to continuing professional education
(CPE) requirements of members of the AICPA? 
A. Only members employed by the AICPA are required to take such courses.
B. Only members in public practice are required to take such courses.
C. Members, regardless of whether they are in public practice, are required to
meet such requirements.
D. There is no requirement for members to participate in CPE.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 

30. The FDIC Improvement Act requires that management of large financial

institutions engage auditors to attest to assertions by management about the
effectiveness of the institution's internal controls over: 
A. Compliance with laws and regulations.
B. Financial reporting.
C. Effectiveness of operations.
D. Efficiency of operations.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits
 
31. Passage of the Sarbanes-Oxley Act led to the establishment of the: 
A. Auditing Standards Board.
B. Accounting Enforcement Releases Board.
C. Public Company Accounting Oversight Board.
D. Securities and Exchange Commission.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-05 Describe how the credibility of the accounting profession
was affected by the large number of companies reporting accounting irregularities
in the beginning of this century.
Topic: Financial Statement Audits
 

32. Which of the following professionals has primary responsibility for the

performance of an audit? 
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-08 Describe how public accounting firms are typically
organized and the responsibilities of auditors at the various levels in the
organization.
Topic: Public Accounting Profession
 
33. Which of the following types of services is generally provided only by CPA
firms? 
A. Tax audits.
B. Financial statement audits.
C. Compliance audits.
D. Operational audits.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 
34. The right to practice as a CPA is given by which of the following organizations? 
A. State Boards of Accountancy.
B. The AICPA.
C. The SEC.
D. The General Accounting Office.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Public Accounting Profession
 

35. Which of the following terms best describes the audit of a taxpayer's tax
return by an IRS auditor? 
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
36. Inquiries and analytical procedures ordinarily form the basis for which type of
engagement? 
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 
37. Which of the following best describes the reason why independent auditors
report on financial statements? 
A. A management fraud may exist and it is more likely to be detected by
independent auditors.
B. Different interests may exist between the company preparing the statements
and the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditors' work.
D. Poorly designed internal control may be in existence.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-04 Explain why audits are demanded by society.
Source: AICPA
Topic: Financial Statement Audits
 
38. Governmental auditing often extends beyond examinations leading to the
expression of opinion on the fairness of financial presentation and includes audits
of efficiency, economy, effectiveness, and also: 
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Hard
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Source: AICPA
Topic: Financial Statement Audits
 
39. Operational auditing is primarily oriented toward: 
A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management's financial records.
C. The verification that a company's financial statements are fairly presented.
D. Past protection provided by existing internal control.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Hard
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Source: AICPA
Topic: Financial Statement Audits
 

40. A typical objective of an operational audit is for the auditor to: 

A. Determine whether the financial statements fairly present the entity's
operations.
B. Evaluate the feasibility of attaining the entity's operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity's relative success in attaining profit maximization.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Hard
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Source: AICPA
Topic: Financial Statement Audits
 
41. An integrated audit performed under the Sarbanes-Oxley Act requires that
auditors report on:

    
A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
 
Matching Questions
 

42. Accountants are regulated by a variety of organizations. Match the following

statements with the most directly related organizations. Organizations may be
used once or not at all. 

     Financial Accounting
1. Issue CPA certificates  Standards Board.   4 
2. Formed to improve standards of
financial accounting for state and local      Federal Accounting
government entities  Standards Advisory Board.   5 
     Government Accounting
3. Prepares the CPA exam  Standards Board.   2 
     Public Company
4. Develop accounting standards for Accounting Oversight
public and nonpublic companies  Board.   6 
5. Develop accounting standards for the      State Boards of
U.S. Government  Accountancy.   1 
     American Institute of
6. Issue auditing standards for public Certified Public
companies  Accountants.   3 
 

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Learning Objective: 01-07 Explain the regulatory process for auditors of public
companies and auditors of nonpublic companies.
Topic: Financial Statement Audits
Topic: Public Accounting Profession
 
Essay Questions
 
43. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies
and their auditors.

a. Describe the events that led up to the passage of the Act.

b. Describe the major changes made by the Act. 

a. The events leading up to the passage of the Sarbanes-Oxley Act include:

 A large number of misstatements of financial statements, many of which

resulted from fraudulent financial reporting. Notably including WorldCom and
Enron.
 The conviction of the Big 5 accounting firm of Arthur Andersen on charges of
destroying evidence.

b. The major reforms made the Act include:

 Tougher penalties for fraud.

 Restrictions on the types of consulting services that may be provided by auditors
to their public audit clients.
 The creation of the Public Company Accounting Oversight Board to create
auditing standards and oversee accounting firms that audit public companies.
 Requirements for management to make an assertion about the effectiveness of
internal control.
 Requirements for auditors of public companies to audit and report on internal
control.

 
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Hard
Learning Objective: 01-05 Describe how the credibility of the accounting profession
was affected by the large number of companies reporting accounting irregularities
in the beginning of this century.
Learning Objective: 01-06 Contrast the various types of audits and types of
auditors.
Topic: Financial Statement Audits
 
44. Many people confuse the responsibilities of the independent auditors and the
client's management with respect to audited financial statements.

a. Describe management's responsibility regarding audited financial statements.

b. Describe the independent auditors' responsibility regarding audited financial
statements.
c. Evaluate the following statement: "If the auditors disagree with management
regarding an accounting principle used in the financial statements the auditors
should express their views in the notes to the financial statements." 

a. Management has primary responsibility for the fairness of the financial

statements and internal control.
b. The auditors are responsible for performing an independent audit of the
financial statements and issuing a report on them in accordance with generally
accepted auditing standards.
c. The statement if false. The notes to the financial statements should contain only
representations of management. The auditors should express their reservations in
their report.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function
 
45. An investor is considering investing in one of two companies. The companies
have very similar reported financial position and results of operations. However,
only one of the companies has its financial statements audited.

a. Describe what creates the demand for an audit in this situation. Include a
discussion of how audited financial statements facilitate this investment
transaction, and the effect of the audit on business risk and information risk.
b. Identify the potential consequences to the company of not having its financial
statements audited. 

a. Audits add credibility to the financial statements of the company. The individual
can invest in the company knowing that there is a low probability that the
financial statements depart materially from generally accepted accounting
principles. Audited financial statements facilitate this transaction by reducing risk
related to the investment. Specifically, audits reduce information risk--the risk that
information used to make the investment decision is misstated--related to the
financial statements. Audited financial statements do not directly affect business
risk, which is the risk that the company will not be able to meet its financial
obligations.

b. The potential consequences of not having an audit are:

 If the investor is particularly risk averse, he or she may not invest in the company
at all.
 If the investor decides to invest in the company, he or she will not be willing to
pay as high a price because the investor will want to be compensated for the
additional risk that is involved in relying upon unaudited financial statements.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Medium
Learning Objective: 01-04 Explain why audits are demanded by society.
Topic: Financial Statement Audits