Chapter 01 - The Role of the Public Accountant in the American Economy

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
1
th
century.
TRUE

Difficulty: Medium

!. The American Institute of Certified Public Accountants issues CPA certificates and permits
CPAs to practice.
FALSE

Difficulty: Medium

". A company is either audited by the #A$ or internal auditors% but not both.
FALSE

Difficulty: Easy

&. The 'EC does not pass on the merits of the securities that are registered (ith the agency.
TRUE

Difficulty: Medium

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Chapter 01 - The Role of the Public Accountant in the American Economy
). The American Institute of Certified Public Accountants has the primary authority to
establish accounting standards.
FALSE

Difficulty: Easy

*. An annual peer re+ie( is a re,uirement of the AICPA.
FALSE

Difficulty: Medium

-. .any small companies elect to ha+e their financial statements re+ie(ed by a CPA firm%
rather than incur the cost of an audit.
TRUE

Difficulty: Easy

/. 'taff assistants in CPA firms generally are responsible for planning and coordinating audit
engagements.
FALSE

Difficulty: Easy

. The 'arbanes-$0ley Act re,uires that auditors of publicly traded companies in the 1nited
'tates perform an integrated audit that includes pro+iding assurance on both the financial
statements and on compliance (ith la(s and regulations.
FALSE

Difficulty: Medium

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Chapter 01 - The Role of the Public Accountant in the American Economy
10. Auditing is fre,uently only a small part of the practice of local CPA firms.
TRUE

Difficulty: Medium


Multiple Choice Questions

11. A summary of findings rather than assurance is most li2ely to be included in a3n45
A. Agreed-upon procedures report.
6. Compilation report.
C. E0amination report.
7. Re+ie( report.

Difficulty: Medium

1!. The 'tatements on Auditing 'tandards ha+e been issued by the5
A. Auditing 'tandards 6oard.
6. 8inancial Accounting 'tandards 6oard.
C. 'ecurities and E0change Commission.
7. 8ederal 6ureau of In+estigation.

Difficulty: Easy

1". The ris2 associated (ith a company9s sur+i+al and profitability is referred to as5
A. 6usiness Ris2.
6. Information Ris2.
C. 7etection Ris2.
7. Control Ris2.

Difficulty: Easy

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Chapter 01 - The Role of the Public Accountant in the American Economy
1&. :istorically% (hich of the follo(ing has the AICPA been most concerned (ith pro+iding;
A. Professional standards for CPAs.
6. Professional guidance for regulating financial mar2ets.
C. 'tandards guiding the conduct of internal auditors.
7. 'taff support to Congress.

Difficulty: Medium

1). The organi<ation charged (ith protecting in+estors and the public by re,uiring full
disclosure of financial information by companies offering securities to the public is the5
A. Auditing 'tandards 6oard.
6. 8inancial Accounting 'tandards 6oard.
C. #o+ernment Accounting 'tandards 6oards.
D. 'ecurities and E0change Commission.

Difficulty: Medium

1*. An engagement in (hich a CPA firm arranges for a critical re+ie( of its practices by
another CPA firm is referred to as a3n45
A. Peer Re+ie( Engagement.
6. =uality Control Engagement.
C. =uality Assurance Engagement.
7. Attestation Engagement.

Difficulty: Easy

1-. The serially-numbered pronouncements issued by the Auditing 'tandards 6oard o+er a
period of years are 2no(n as5
A. Auditing 'tatements of Position 3A'Ps4.
6. Accounting 'eries Releases 3A'Rs4.
C. 'tatements on Auditing 'tandards 3'A's4.
7. 'tatements on Auditing Principles 3'APs4.

Difficulty: Easy

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Chapter 01 - The Role of the Public Accountant in the American Economy
1/. The #o+ernment Accountability $ffice 3#A$45
A. Is primarily concerned (ith rapid processing of all accounts payable incurred by the
federal go+ernment.
B. Conducts operational audits and reports the results to Congress.
C. Is a multinational organi<ation of professional accountants.
7. Is primarily concerned (ith budgets and forecasts appro+ed by the 'EC.

Difficulty: Easy

1. The ris2 that information is misstated is referred to as5
A. Information ris2.
6. Inherent ris2.
C. Relati+e ris2.
7. 6usiness ris2.

Difficulty: Easy

!0. The ris2 that a company (ill not be able to meet its obligations (hen they become due is
referred to as5
A. Information ris2.
6. Inherent ris2.
C. Relati+e ris2.
D. 6usiness ris2.

Difficulty: Easy

!1. >hich of the follo(ing attributes most clearly differentiates a CPA (ho audits
management9s financial statements as contrasted to management;
A. Integrity.
6. Competence.
C. Independence.
7. ?eeping informed on current professional de+elopments.

Difficulty: Easy

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Chapter 01 - The Role of the Public Accountant in the American Economy
!!. The attest function5
A. Is an essential part of e+ery engagement by the CPA% (hether performing auditing% ta0
(or2% or other ser+ices.
B. Includes the preparation of a report of the CPA9s findings.
C. Re,uires a consideration of internal control.
7. Re,uires a complete re+ie( of all transactions during the period under e0amination.

Difficulty: Medium

!". Attestation ris2 is limited to a lo( le+el in (hich of the follo(ing engagement3s4;
A. 6oth e0aminations and re+ie(s.
B. E0aminations% but not re+ie(s.
C. Re+ie(s% but not e0aminations.
7. @either e0aminations nor re+ie(s.

Difficulty: Easy

!&. >hen compared to an audit performed prior to 100% an audit today5
A. Is more li2ely to include tests of compliance (ith la(s and regulations.
6. Is less li2ely to include consideration of the effecti+eness of internal control.
C. :as ban2 loan officers as the primary financial statement user group.
7. Includes a more detailed e0amination of all indi+idual transactions.

Difficulty: Medium

!). >hich of the follo(ing are issued by the 'ecurities and E0change Commission;
A. Accounting Research 'tudies.
6. Accounting Trends and Techni,ues.
C. Industry Audit #uides.
D. 8inancial Reporting Releases.

Difficulty: Medium

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Chapter 01 - The Role of the Public Accountant in the American Economy
!*. >hich of the follo(ing is not correct relating to the 'arbanes-$0ley Act;
A. It toughens penalties for corporate fraud.
6. It restricts the types of consulting CPAs may perform for audit clients.
C. It created the Public Company Accounting $+ersight 6oard 3PCA$64 as a replacement for
the 8inancial Accounting 'tandards 6oard.
7. It eliminates a significant portion of the accounting profession9s system of self-regulation.

Difficulty: Medium

!-. An operational audit differs in many (ays from an audit of financial statements. >hich of
the follo(ing is the best e0ample of one of these differences;
A. The usual audit of financial statements co+ers the four basic statements% (hereas the
operational audit is usually limited to either the balance sheet or the income statement.
B. The boundaries of an operational audit are often dra(n from an organi<ation chart and are
not limited to a single accounting period.
C. $perational audits do not ordinarily result in the preparation of a report.
7. The operational audit deals (ith pre-ta0 income.

Difficulty: Medium

!/. The re+ie( of a company9s financial statements by a CPA firm5
A. Is substantially less in scope of procedures than an audit.
6. Re,uires detailed analysis of the maAor accounts.
C. Is of similar scope as an audit and adds similar credibility to the statements.
7. Culminates in issuance of a report e0pressing the CPA9s opinion as to the fairness of the
statements.

Difficulty: Easy

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Chapter 01 - The Role of the Public Accountant in the American Economy
!. >hich statement is correct (ith respect to continuing professional education 3CPE4
re,uirements of members of the AICPA;
A. $nly members employed by the AICPA are re,uired to ta2e such courses.
6. $nly members in public practice are re,uired to ta2e such courses.
C. .embers% regardless of (hether they are in public practice% are re,uired to meet such
re,uirements.
7. There is no re,uirement for members to participate in CPE.

Difficulty: Medium

"0. The 87IC Impro+ement Act re,uires that management of large financial institutions
engage auditors to attest to assertions by management about the effecti+eness of the
institution9s internal controls o+er
A. Compliance (ith la(s and regulations.
B. 8inancial reporting.
C. Effecti+eness of operations.
7. Efficiency of operations.

Difficulty: Medium

"1. Passage of the 'arbanes-$0ley Act led to the establishment of the5
A. Auditing 'tandards 6oard.
6. Accounting Enforcement Releases 6oard.
C. Public Company Accounting $+ersight 6oard.
7. 'ecurities and E0change Commission.

Difficulty: Medium

"!. >hich of the follo(ing professionals has primary responsibility for the performance of an
audit;
A. The managing partner of the firm.
6. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

Difficulty: Medium

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Chapter 01 - The Role of the Public Accountant in the American Economy
"". >hich of the follo(ing types of ser+ices is generally pro+ided only by CPA firms;
A. Ta0 audits.
B. 8inancial statement audits.
C. Compliance audits.
7. $perational audits.

Difficulty: Medium

"&. The right to practice as a CPA is gi+en by (hich of the follo(ing organi<ations;
A. 'tate 6oards of Accountancy.
6. The AICPA.
C. The 'EC.
7. The #eneral Accounting $ffice.

Difficulty: Medium

"). >hich of the follo(ing terms best describes the audit of a ta0payer9s ta0 return by an IR'
auditor;
A. $perational audit.
6. Internal audit.
C. Compliance audit.
7. #o+ernment audit.

Difficulty: Medium

"*. In,uiries and analytical procedures ordinarily form the basis for (hich type of
engagement;
A. Agreed-upon procedures.
6. Audit.
C. E0amination.
D. Re+ie(.

Difficulty: Easy

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Chapter 01 - The Role of the Public Accountant in the American Economy
"-. >hich of the follo(ing best describes the reason (hy independent auditors report on
financial statements;
A. A management fraud may e0ist and it is more li2ely to be detected by independent
auditors.
B. 7ifferent interests may e0ist bet(een the company preparing the statements and the
persons using the statements.
C. A misstatement of account balances may e0ist and is generally corrected as the result of the
independent auditors9 (or2.
7. Poorly designed internal control may be in e0istence.

Difficulty: Medium
Source: AICPA

"/. #o+ernmental auditing often e0tends beyond e0aminations leading to the e0pression of
opinion on the fairness of financial presentation and includes audits of efficiency% economy%
effecti+eness% and also5
A. Accuracy.
6. E+aluation.
C. Compliance.
7. Internal control.

Difficulty: Hard
Source: AICPA

". $perational auditing is primarily oriented to(ard5
A. 8uture impro+ements to accomplish the goals of management.
6. The accuracy of data reflected in management9s financial records.
C. The +erification that a company9s financial statements are fairly presented.
7. Past protection pro+ided by e0isting internal control.

Difficulty: Hard
Source: AICPA

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Chapter 01 - The Role of the Public Accountant in the American Economy
&0. A typical obAecti+e of an operational audit is for the auditor to5
A. 7etermine (hether the financial statements fairly present the entity9s operations.
6. E+aluate the feasibility of attaining the entity9s operational obAecti+es.
C. .a2e recommendations for impro+ing performance.
7. Report on the entity9s relati+e success in attaining profit ma0imi<ation.

Difficulty: Hard
Source: AICPA

&1. An integrated audit performed under the 'arbanes-$0ley Act re,uires that auditors report
on5

A. $ption A
6. $ption 6
C. $ption C
7. $ption 7

Difficulty: Medium


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Chapter 01 - The Role of the Public Accountant in the American Economy
Essay Questions

&!. The 'arbanes-$0ley Act of !00! made significant reforms for public companies and their
auditors.
a. 7escribe the e+ents that led up to the passage of the Act.
b. 7escribe the maAor changes made by the Act.
a. The e+ents leading up to the passage of the 'arbanes-$0ley Act include5
A large number of misstatements of financial statements% many of (hich resulted from
fraudulent financial reporting. @otably including >orldCom and Enron.
The con+iction of the 6ig ) accounting firm of Arthur Andersen on charges of destroying
e+idence.
b. The maAor reforms made the Act include5
Tougher penalties for fraud.
Restrictions on the types of consulting ser+ices that may be pro+ided by auditors to their
public audit clients.
The creation of the Public Company Accounting $+ersight 6oard to create auditing
standards and o+ersee accounting firms that audit public companies.
Re,uirements for management to ma2e a assertion about the effecti+eness of internal
control.
Re,uirements for auditors of public companies to audit and report on internal control.

Difficulty: Hard

&". .any people confuse the responsibilities of the independent auditors and the client9s
management (ith respect to audited financial statements.
a. 7escribe management9s responsibility regarding audited financial statements.
b. 7escribe the independent auditors9 responsibility regarding audited financial statements.
c. E+aluate the follo(ing statement5 BIf the auditors disagree (ith management regarding an
accounting principle used in the financial statements the auditors should e0press their +ie(s in
the notes to the financial statements.B
a. .anagement has primary responsibility for the fairness of the financial statements.
b. The auditors are responsible for performing an independent audit of the financial
statements and issuing a report on them in accordance (ith generally accepted auditing
standards.
c. The statement if false. The notes to the financial statements should contain only
representations of management. The auditors should e0press their reser+ations in their report.

Difficulty: Medium

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Chapter 01 - The Role of the Public Accountant in the American Economy
&&. An in+estor is considering in+esting in one of t(o companies. The companies ha+e +ery
similar reported financial position and results of operations. :o(e+er% only one of the
companies has its financial statements audited.
a. 7escribe (hat creates the demand for an audit in this situation. Include a discussion of ho(
audited financial statements facilitate this in+estment transaction% and the effect of the audit
on business ris2 and information ris2.
b. Identify the potential conse,uences to the company of not ha+ing its financial statements
audited.
a. Audits add credibility to the financial statements of the company. The indi+idual can in+est
in the company 2no(ing that there is a lo( probability that the financial statements depart
materially from generally accepted accounting principles. Audited financial statements
facilitate this transaction by reducing ris2 related to the in+estment. 'pecifically% audits reduce
information ris2--the ris2 that information used to ma2e the in+estment decision is misstated--
related to the financial statements. Audited financial statements do not directly affect business
ris2% (hich is the ris2 that the company (ill not be able to meet its financial obligations.
b. The potential conse,uences of not ha+ing an audit are5
If the in+estor is particularly ris2 a+erse% he or she may not in+est in the company at all.
If the in+estor decides to in+est in the company% he or she (ill not be (illing to pay as high
a price because the in+estor (ill (ant to be compensated for the additional ris2 that is
in+ol+ed in relying upon unaudited financial statements.

Difficulty: Medium

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