NaimExplain

An auditor must obtain professional experience primarily to Answer: Exercise professional judgment. (Professional judgment is essential to perform an audit properly. An auditor must interpret relevant ethical requirements and GAAS and make informed decisions during the audit. Such interpretations and decisions require competencies developed through relevant training, knowledge, and experience (AU-C 200).)

Notes that are included with financial statements are the responsibility of the Answer: Company's management. (The notes are considered part of the basic financial statements. Because management has the primary responsibility for the financial statements, it also has the primary responsibility for the fairness of information included in notes.)

An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to Answer: Express an opinion as to the fairness of Camden's financial statements. (Auditing standards require the auditor to express an opinion regarding the financial statements as a whole or to assert that an opinion cannot be expressed. An opinion states whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.)

Users of an issuer's financial statements demand independent audits because Answer: Management may not be objective in reporting. (Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.)

Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as Answer: A discipline that attests to financial information presented by management. (The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP).)

The primary reason for an audit by an independent, external audit firm is to Answer: Provide increased assurance to users as to the fairness of the financial statements. (The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP). An audit performed by an independent, external audit firm provides assurance of the objectivity of the auditor's opinion.)

Independent auditing can best be described as Answer: A discipline that enhances the degree of confidence that users can place in financial statements. (The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework (e.g., GAAP, cash basis, etc.). An auditor's opinion enhances the degree of confidence that users can place in financial statements.)

A financial statement audit is designed to Answer: Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. (The auditor's overall objectives include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on whether the statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.)

Which of the following is a professional engagement that a CPA may perform to provide assurance on a system's reliability? Answer: CPA SysTrust. (The objective of SysTrust is an attestation report on management's assertion about the reliability of an information system that supports a business or a given activity. A CPA may also report directly on the reliability of the system. This assurance service is designed to increase the stakeholders' comfort relative to the system's satisfaction of the SysTrust principles. Although SysTrust and WebTrust share the same principles of security, availability, processing integrity, online privacy, and confidentiality, SysTrust can be applied to any system environment. WebTrust relates to websites. The service is modular, and the practitioner can be engaged to report on any one or more of the five principles.)

The SEC has strengthened auditor independence by requiring that management Answer: Report the nature of disagreements with former auditors. (The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing Form 8-K. Such disclosure inhibits management from changing auditors to gain acceptance of a questionable accounting principle. Also, a potential auditor must inquire of the predecessor auditor before accepting an engagement (AU-C 210). Thus, the inquiry provides an opportunity to confirm the information given in the 8-K report. However, confidential client information may only be communicated with the client's consent.)

One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to Answer: Provide reasonable assurance that the integrity of the client is considered. (CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm's policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with applicable requirements (QC 10).)

During the course of an audit, an auditor required additional research and consultation with others. This additional research and consultation is considered to be Answer: An appropriate part of the professional conduct of the engagement. (An Interpretation of Conduct Rule 201 states that in many cases additional research and consultation with others may be necessary during an engagement. The auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence.)

Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)? Answer: They are generally accepted auditing standards. (Generally accepted auditing standards are defined as SASs. Conduct Rule 202 requires members who perform professional services to comply with standards promulgated by bodies designated by the AICPA Council. Thus, an AICPA member who performs an audit of a nonissuer must comply with SASs promulgated by the Auditing Standards Board (ASB).)

The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley's financial statements. The primary objective of this audit is to provide assurance to the Answer: Investors in Donley securities. (An audit's primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.)

Which of the following best describes the reason an independent auditor reports on financial statements? Answer: The company preparing the statements and the persons using the statements may have different interests. (Management and financial statement users may have an adversary relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.)

According to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards, "presumptively mandatory requirements" in the auditing standards use which word? Answer: Should (The auditor must comply with a presumptively mandatory requirement in all cases in which the requirement is relevant except in rare cases. The standards use the word "should" to indicate this requirement.)

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of Answer: Classification and understandability: No, Existence: Yes (The existence assertion relates to whether the related balance exists at the balance sheet date. Observation of the mailing of monthly statements as well as observing the correction of reported errors provides evidence that controls may be effective in ensuring that client customers are genuine.)

In testing the existence assertion for an asset, an auditor ordinarily works from the Answer: Accounting records to the supporting evidence. (The existence assertion concerns whether assets, liabilities, or equity interests of the entity exist at a given time. The direction of testing is ordinarily from the accounting records to the supporting evidence, often including direct observation of the asset. Thus, the auditor selects from items contained in a financial statement amount and searches for appropriate (relevant and reliable) evidence that is sufficient.)

Who establishes generally accepted auditing standards? Answer: Auditing Standards Board and the Public Company Accounting Oversight Board. (AICPA Conduct Rule 202, Compliance with Standards, requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opi...

Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? Answer: An auditor may draft an entity's financial statements based on information from management's accounting system. (The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management's accounting system. However, the auditor's responsibility for the financial statements (s)he has audited is confined to the expression of his or her opinion on them.)