Pearson Homework 1

1. What is meant by determining the degree of correspondence between

information and established criteria? What are the criteria for an audit
of a company's financial statements?

Select the choice that best explain what is meant by determining the
degree of correspondence between information and established
criteria.

Determining the degree of correspondence between information and

established criteria is determining whether:

- A given set of information is accurate

- A given set of information is in accordance with the
established criteria
- The established criteria is accurate
- A given set of information is not in accordance with the
established criteria

What are the criteria for an audit of a company's financial statements?

For an audit of a company's financial statements the information

is the criteria are the U.S. generally accepted accounting
principles or International Financial Reporting Standards.

2. What are the major causes of information risk? How can information
risk can be reduced?

First, identify the major causes of information risks. (select all that
apply)

- Low risk financing options

- Decrease in governmental regulations
- Complex exchange transactions
- Voluminous data
- Biases and motives of the provider
- Remoteness of information

Now, identify the ways to reduce information risks. (If an input field is
not used in the table, leave the input field empty; do not select
a label.)

- Audited financial statements are provided

- User shares information risk with management
- User verifies information
3. What are the similarities and differences among the three main types
of audits.

Begin by identifying the three main types of audits in the table. Then
select an X in the box for each item that describes the purpose and
nature of each type of audit. (If an input field is not used in the table or
an item does not apply, leave the input field empty.
Abbreviations used: CPA = Certified Public Accountant, GAO Auditors =
Government Accountability Office Auditor, IRS Auditors = Internal
Revenue Service Auditors.)

3 main types of audits are: Financial Operationa Compliance

statement l
Purpose:
To determine whether the x
client is following specific
procedures set by a higher
authority
To determine whether the x
overall financial
statements are presented
in accordance with
specified criteria (usually
GAAP)
To evaluate whether x
operating procedures are
efficient and effective
Users of audit report:
Different groups for x
different purposes—many
outside entities
Management of x
organization
Authority that established x
rules, regulations, and
procedures, either internal
or external
Nature:
Highly nonstandard; often x
subjective
Highly standardized X
Not standardized, but x
specific and usually
objective
 Frequency of audits
performed by:
CPAs Almost Frequently Occasionall
always y
GAO auditors Occasionall Frequently Frequently
y
IRS auditors Never Never Almost
always
Internal auditors Frequently Frequently Frequently

4. What are the information and established criteria for the audit of
Jones Company's tax return by an internal revenue agent? What are
they for the audit of Jones Company's financial statements by a
CPA firm?

What are the information and established criteria for the audit of
Jones Company's tax return by an internal revenue agent?

The information for Jones Company's tax return is the federal tax
returns filed by the company. The established criteria are found
in the Internal Revenue Code and all interpretations.

What are they for the audit of Jones Company's financial statements by
a CPA firm?

For the audit of Jones Company's financial statements the

information is the audited financial statements. The established
criteria are the U.S. generally accepted accounting principles or
International Financial Reporting Standards.

5. In the conduct of audits of financial statements, it would be a serious

breach of responsibility if the auditor did not thoroughly understand
accounting. However, many competent accountants do not have an
understanding of the auditing process. What causes this difference?

- The accounting function is an engagement in which the

accountant reports on the effectiveness of internal control
over financial reporting.
- The accounting function is the accumulation and evaluation of
evidence about information to determine and report on the
degree of correspondence between the information and
established criteria.
- The accounting function is the recording, classifying and
summarizing of economic events to provide relevant
information to decision makers.
 - The accounting function is the review of any part of
an organization's operating procedures and methods for the
purpose of evaluating efficiency and effectiveness.

The rules of accounting are the criteria used by the auditor for
evaluating the presentation of economic events for financial
statements and he or she must therefore have an understanding
of accounting standards, as well as auditing standards. The
accountant does not need to understand what auditors do,
unless he or she is involved in doing audits, or has been trained
as an auditor.

6. Discuss changes in accounting and business operations over the last

decade that have increased the need for independent audits.

First, select the choice that best describes the need an independent
audit satisfies.

- An independent audit is a means of satisfying the need for

reliable information on the part of the decision makers.
- An independent audit is a means of satisfying the need for
favorable financial ratios.
- An independent audit ensures financing at the lowest rate.
- An independent audit ensures that the projected cash flows is
accurate.

Select a change in accounting and business operations over the last

decade that has increased the need for independent audits.

- Increase in gas prices.

- Internal auditors are requiring independent audits.
- Increased global activities of many businesses.
- Generally Accepted Accounting Standards.

Identify the reason(s) why the factor you selected in the preceding step
is important. (Select all that apply.)

- Multiple product lines and transaction locations.

- Possibly millions of transactions processed daily via
sophisticated computerized systems.
- Foreign exchange effects on transactions.
- Owners also managing the daily activities of the company.
- New accounting standards are issued on a regular basis.
- Directors not involved in day-to-day operations or decisions.
 Select another change in accounting and business operations over the
last decade that has increased the need for independent audits.

- Intercompany transactions.
- Historical transactions.
- Complex accounting and exchange transactions.
- Decrease in governmental regulations.

Identify the reason(s) why the factor you selected in the preceding step
is important. (Select all that apply.)

- Less disclosures is required now than was needed a decade

ago.
- Owners also managing the daily activities of the company.
- Low risk financing option.
- Changes in taxes regulations.
- Increasing use of derivatives and hedging activities.
- Increasingly complex accounting standards in areas such as
revenue recognition.

Select another change in accounting and business operations over the

last decade that has increased the need for independent audits.

- Low transactions amount.

- Data transmitted electronically.
- Low risk financing option.
- More complex information systems.

Identify the reason(s) why the factor you selected in the preceding step
is important. (Select all that apply.)

- New and changing business relationships lead to innovative

accounting and reporting problems.
- Possibly millions of transactions processed daily through
online and traditional sales channels.
- Voluminous data requires interpretation.
- Foreign companies are a higher risk investment.
- New financing options available.
- Reductions in the interest rate.

7. The following questions deal with assurance services and types of

audits. Choose the best response.

Which of the following is considered an assurance engagement?

- Compilation
 - Preparation
- Bookkeeping
- Audit

Which of the following engagements is most likely to be considered an

operational audit?

- The auditor evaluates the organization's efficiency in

processing payments.
- The auditor assists the client in preparation of financial
statements.
- The auditor determines whether the organization is following
provisions of laws and regulations.
- The auditor examines information presented in an entity's
financial statements to determine whether the financial
statements are presented fairly in accordance with the
applicable financial reporting framework.

In a financial statement audit, the auditor obtains a reasonable level of

assurance about whether the financial statements are free of material
misstatement in order to express an opinion. In order to obtain
reasonable assurance, the auditor must

- examine all documents available that support the financial

statements.
- obtain sufficient audit evidence.
- test controls around significant transaction cycles.
- have prior experience in the industry in which the audit client
operates.

8. The following questions deal with assurance services and types of

audits. Choose the best response.

Which of the following is considered an assurance engagement?

- Bookkeeping
- Preparation
- Compilation
- Audit

Which of the following engagements is most likely to be considered an

operational audit?

- The auditor determines whether the organization is following

provisions of laws and regulations.
 - The auditor examines information presented in an entity's
financial statements to determine whether the financial
statements are presented fairly in accordance with the
applicable financial reporting framework.
- The auditor evaluates the organization's efficiency in
processing payments.
- The auditor assists the client in preparation of financial
statements.

In a financial statement audit, the auditor obtains a reasonable level of

assurance about whether the financial statements are free of material
misstatement in order to express an opinion. In order to obtain
reasonable assurance, the auditor must

- have prior experience in the industry in which the audit client

operates.
- examine all documents available that support the financial
statements.
- obtain sufficient audit evidence.
- test controls around significant transaction cycles.

9. The list below indicates various audit, attestation, and other

engagements involving auditors.

Requirement a. Explain the relationships among audit services,

attestation services, and other assurance and non-assurance services
provided by CPA's.

Audit services are a form of attestation service, and attestation

services are a form of assurance service. In a diagram, audit
services are located within the attestation service area, and
attestation services are located within the assurance service
area.

Requirement b. For each of the services listed, indicate the type of

service (1. An audit of historical financial statements; 2. An attestation
service other than an audit service; 3. An assurance or non-assurance
service that is not an attestation service).

- A report on the effectiveness of internal control over financial

reporting as required by Section 404 of the Sarbanes-Oxley
Act.
o 2. An attestation service other than an audit service
- An examination report on whether a company's statement of
greenhouse gas emissions is presented in conformity with
 standards issued by the World Business Council for
Sustainable Development and the World Resources Institute.
o 2. An attestation service other than an audit service
- An auditor's report on whether the financial statements are
fairly presented in accordance with International Financial
Reporting Standards.
o 1. An audit of historical financial statements
- An engagement to help a company structure a merger
transaction to minimize the taxes of the combined entities.
o 3. An assurance or non-assurance service that is not an
attestation service
- A report stating whether the company has complied with
restrictive covenants related to officer compensation and
payment of dividends contained in a bank loan agreement.
o 2. An attestation service other than an audit service
- A report on the effectiveness of internal controls at a company
that provides payroll processing for other companies.
o 2. An attestation service other than an audit service
- A review report that provides limited assurance about whether
financial statements are fairly stated in accordance with U.S.
GAAP.
o 2. An attestation service other than an audit service
- An evaluation of the voting process and certification of the
outcome for Rolling Stone Magazine's "Greatest Singer of All
Time" poll.
o 2. An attestation service other than an audit service
- A report indicating whether a governmental entity has
complied with certain government regulations.
o 2. An attestation service other than an audit service
- A report about management's assertion on the effectiveness
of controls over the availability, reliability, integrity, and
maintainability of its accounting information system.
o 2. An attestation service other than an audit service
- An evaluation of the effectiveness of key measures used to
assess an entity's success in achieving specific targets linked
to an entity's strategic plan and vision.
o 3. An assurance or non-assurance service that is not an
attestation service

10. Identify the six organizational structures available to CPA firms.

Why are most CPA firms not organized as general partnerships?

Identify the six organizational structures available to CPA firms. (Select

six items from the list below.)
- General Partnership
 - Professional Corporation
- Full Liability Corporation
- General Corporation
- Proprietorship
- Limited Liability Partnership
- Limited Proprietorship
- Limited Liability Company
- Limited Corporation
- Full Liability Partnership

Why are most CPA firms not organized as general partnerships?

CPA firms are typically not organized as a general partnership

because a general partnership offers less protection from legal
liability relative to other structures such as a limited liability
partnership.

11. What is the role of the Public Company Accounting

Oversight Board?

- The PCAOB is tasked with overseeing auditors of

public companies, including establishing standards and
reports to ensure compliance with SEC requirements.
- The PCAOB provides oversight for auditors of
public companies, including establishing auditing and quality
control standards for public company audits, and performing
inspections of the quality controls at audit firms performing
those audits.
- The PCAOB provides oversight for auditors of
private companies, including establishing auditing and quality
control standards for private company audits, and performing
inspections of the quality controls at audit firms performing
those audits.
- The PCAOB is responsible for ensuring that public companies
comply with generally accepted accounting principles (GAAP).

12. What roles are played by the American Institute of Certified

Public Accountants for its members?

- The AICPA is the organization that sets professional

requirements for CPAs.
- The AICPA conducts research and publishes materials on
many different subjects related to accounting, auditing,
management consulting and advisory services, and taxes.
- The AICPA administers the Uniform CPA examination, provides
continuing education to its members, and develops specialty
 designations to help market and assure the quality of services
in specialized practice areas.
- All of the above.
- None of the above.

13. Describe the relations among international auditing standards,

AICPA auditing standards, and PCAOB auditing standards.

International Standards on Auditing (ISAs) are issued by the

International Auditing and Assurance Standards Board and are
designed to improve the uniformity of auditing practices and
related services throughout the world.

AICPA Statements on Auditing Standards (SASs) are established

by the Auditing Standards Board of the AICPA and are applicable
to private companies and other entities within the United States
other than public companies and broker dealers. As a result of
efforts by the Auditing Standards Board of the AICPA to converge
U.S. standards with international standards, AICPA auditing
standards and International Standards on Auditing are similar in
most respects.

PCAOB Auditing Standards apply only to U.S. publicly traded

companies and other SEC registrants, including broker-dealers.
Because the PCAOB initially adopted existing standards
established by the Auditing Standards Board of the AICPA as
interim auditing standards and the PCAOB also considers
international standards when setting standards, standards for
audits of U.S. public and private companies are mostly similar.

14. What is the role of the Public Company Accounting Oversight

Board (PCAOB)? How does the PCAOB provide oversight of audit firms?

- The Public Company Accounting Oversight Board (PCAOB) was

established within the Securities Act of 1934 in order to
provide investors with reliable information upon which to
make investment decisions. The PCAOB requires public
companies and others to file detailed annual reports with the
SEC for review before the companies are permitted to sell
securities through the securities exchanges.
- PCAOB provides oversight for auditors and consultants of
private companies, which includes issuing pronouncements on
a variety of audit and attest functions, including establishing
auditing and quality control standards for private company
audits.
 - The Public Company Accounting Oversight Board (PCAOB)
provides oversight for auditors of public companies, including
establishing auditing and quality control standards for public
company audits, and performing inspections of the quality
controls at audit firms performing those audits.
- The Public Company Accounting Oversight Board (PCAOB) was
established within the Securities Act of 1933 in order to
provide investors with reliable information upon which to
make investment decisions. The PCAOB requires companies
planning to issue new securities to the public to submit a
registration statement to the SEC for approval.

15. Describe the role of the SEC in society and discuss its
relationship with and influence on the practice of auditing.

The purpose of the Securities and Exchange Commission (SEC) is

to assist in providing investors with reliable information upon
which to make investment decisions. Since most reasonably
large CPA firms have clients that must file reports with the SEC
each year (all companies filing registration statements under the
securities acts of 1933 and 1934 must file audited financial
statements and other reports with the SEC at least once each
year)the profession is highly involved with the SEC requirements.

The SEC has considerable influence in setting generally accepted

accounting principles and disclosure requirements for financial
statements because of its authority for specifying reporting
requirements considered necessary for fair disclosure to
investors. In addition, the SEC has power to establish rules for
any CPA associated with audited financial statements submitted
to the Commission.

16. Who is responsible for establishing auditing standards for audits

of U.S. public companies? Who is responsible for establishing auditing
standards for U.S. private companies? Explain.

Currently, the PCAOB has responsibility for establishing auditing

standards for U.S. public companies, while the ASB of the AICPA
establishes auditing standards for U.S. private companies. Prior
to the creation of the PCAOB, the ASB had responsibility for
establishing auditing standards for both public and private
companies.

17. Describe the role of International Standards on Auditing. What is

the relationship between International Standards on Auditing and U.S.
auditing standards?
 Describe the role of International Standards on Auditing. International

Standards on Auditing (ISAs) are issued by the International

Auditing and Assurance Standards Board and are designed to
improve the uniformity of auditing practices and related services
throughout the world.

What is the relationship between International Standards on Auditing

and U.S. auditing standards?

As a result of efforts by the ASB to converge U.S. GAAS with

international standards, AICPA auditing standards and
International Standards on Auditing are similar in most respects.

18. The Responsibilities principle requires that auditors be

responsible for having appropriate competence and capabilities to
perform the audit. What are the various ways in which auditors can
fulfill this principle?

- Auditors develop their competency and capabilities for

performing an audit through formal education in auditing
and accounting, adequate practical experience, and
continuing professional education.
- Auditors can demonstrate their proficiency by becoming
licensed to practice as CPAs, which requires successful
completion of the Uniform CPA Examination. Auditors have to
follow specific requirements for licensure which vary from
state to state.
- Auditors must be technically qualified and experienced in
those industries in which their clients are engaged. If an
auditor is not qualified to perform any work, the only
professional obligation exists is to decline the engagement.
- All of the above.
- A and B only
- A and C only.

19. Auditing standards have been criticized by different sources for

failing to provide useful guidelines for conducting an audit. The critics
believe the standards should be more specific to enable practitioners
to improve the quality of their performance. Evaluate this criticism of
auditing standards.

- For the most part, auditing standards, including SASs, are

general rather than specific. Many practitioners along with
critics of the profession believe the standards should provide
 more clearly defined guidelines as an aid in determining the
extent of evidence to be accumulated.
- More clearly defined guidelines would eliminate some of the
difficult audit decisions and provide a source of defense if the
CPA is charged with conducting an inadequate audit.
- Highly specific requirements could turn auditing into
mechanical evidence gathering, void of professional
judgment. From the point of view of both the profession and
the users of auditing services, there is probably a greater
harm from defining authoritative guidelines too specifically
than too broadly.
- All of the above.
- A and B only.
- A and C only.

20. The following is an example of a CPA firm's quality control

procedure requirement: "Any person being considered for employment
by the firm must have completed a basic auditing course and have
been interviewed and approved by an audit partner of the firm before
he or she can be hired for the audit staff." Which element of quality
control does this procedure affect and what is the purpose of
the requirement?

- The element of quality control is engagement performance.

The purpose of the requirement is to help assure CPA firms
that work is assigned to personnel selected for employment
have the qualifications necessary for the fulfillment of their
assigned responsibilities. A CPA firm must have competent
employees conducting the audits if quality audits are to occur.
- The element of quality control is personnel management. The
purpose of the requirement is to help assure CPA firms that all
new personnel are qualified to perform their work
competently. A CPA firm must have competent employees
conducting the audits if quality audits are to occur.
- The element of quality control is monitoring. The purpose of
the requirement is to help assure CPA firms that work is
assigned to personnel who have adequate technical training
and proficiency. A CPA firm must have competent employees
conducting the audits if quality audits are to occur.
- The element of quality control is leadership responsibilities.
The purpose of the requirement is to help assure CPA firms
that all new personnel are qualified to perform their work
competently A CPA firm must have competent employees
conducting the audits if quality audits are to occur.
21. State what is meant by the term peer review. What are the
implications of peer review for the profession?

- Peer review is a review, by the AICPA, of a CPA firm's

compliance with its quality control system.
- Peer review is a review, by CPAs, of a CPA firm's compliance
with its quality control system.
- Peer review is a review, by the AICPA, of a CPA firm's
compliance with its continuing education requirements.
- Peer review is a review, by CPAs, of a CPA firm's compliance
with its continuing education requirements.

What are the implications of peer review for the profession?

A(n) mandatory peer review means that such a review is required

periodically. AICPA member firms are required to have a peer
review every three years. Peer reviews can be beneficial and
costly to the profession and to individual firms.

By helping firms meet quality control standards, the profession

gains if reviews result in practitioners doing higher quality audits.
A firm having a peer review can also gain if it improves the firm's
practices and thereby enhances its reputation and effectiveness.
The trade-off is that peer reviews can be expensive.

22. The following questions deal with auditing standards. Choose the
best response.

a. Which of the following best describes what is meant by U.S.

auditing standards?

- Acts to be performed by the auditor

- Procedures to be used to gather evidence to support financial
statements
- Audit objectives generally determined on audit engagements
- Measures of the quality of the auditor's performance

b. The Responsibilities principle underlying AICPA auditing standards

includes a requirement that

- the auditor's report state whether or not the financial

statements conform to generally accepted accounting
principles.
- informative disclosures in the financial statements be
reasonably adequate.
- the audit be adequately planned and supervised.
 - professional judgment be exercised by the auditor.

c. Who establishes auditing standards applicable to private companies

and other non-public entities in the U.S.?

- The Public Company Accounting Oversight Board

- The Auditing Standards Board of the AICPA
- The Financial Accounting Standards Board
- The Private Company Audit Standards Board

23. The following questions address CPA firms and entities that
regulate them. Choose the best response.

a. An auditor of an entity subject to the rules of the SEC must conduct

the financial statement audit in accordance with

- International Auditing Standards.

- Generally Accepted Government Auditing Standards.
- Statements on Standards for Accounting and Review Services.
- PCAOB standards.

b. Which of the following provides authoritative guidance for the

auditor of a nonpublic company?

- Publication from state CPA societies that provides questions

and answers on frequently asked audit questions
- Statements on Auditing Standards
- An article in the Journal of Accountancy that discusses new
audit requirements
- Information obtained from continuing professional education
programs

c. The Public Company Accounting Oversight Board (PCAOB) has the

duty to

- establish rules related to the preparation of audit reports for

non-issuers.
- select the public accounting firm for the issuer's annual audit.
- conduct disciplinary proceedings for nonpublic accounting
firms.
- conduct investigations concerning registered public
accounting firms.