ACC 521 Study Guide - Final Guide: Financial Statement, Write-Off

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10 Feb 2016

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*the essentials of auditors" ethical and legal responsibilities. Audits cannot be effective unless they are performed ethically. The essence of information risk is the possibility that reporting will be done unethically , for example to conceal fraud or provide a deceptive and misleading impression of the financial performance and condition of a company. The essential role and responsibility of an auditor is to establish and communicate assurance to users that f/s are fairly presented", implying that unethical reporting has not occurred. In this role an auditor cannot have any conflict of interest. This requirement is explicitly stated in the accountants" professional ethics code. When you start to read the actual wording of the professional ethics code, you will probably find it all very general and vague, and it may not be easy to imagine how anyone could actually apply it. Professional practice in a three- party accountability situations gives rise to many conflicts and dilemmas.

Related Questions

1. Fred, employee of ABC Company, notices the company has poorinternal controls and lack of segregation of duties. He realizes hecould take some cash and record it against miscellaneous expensewithout anyone catching it if he wanted. Which part of the fraudtriangle does Fred's thought relate to?

A. Opportunity

B. Rationalization

C. Pressure

D. None of the Above

2. Auditors must provide _______ assurance that the financialstatements are presented ________ in all material respects.

A. Reasonable; Fairly

B. Fairly; Reasonable

C. Complete; Justly

D. Justly; Complete

3. ____are items that management has full control over and isable to delay or eliminate.

A. Nondiscretionary accruals

B. Discretionary accruals

C. Defining Materiality

D. Revenue Recognition

4. ___Requires the auditor to perform professional services withdue care.

A. Legal Liability

B. Stat utory Law Liability

C. Common-Law Liability

D. Liability to Clients

5. Which is one of the UKs six principles on what constitutesadequate procedures?

A. Risk Assessment

B. Due diligence

C. Monitoring and Reporting

D. All of the Above

E. None of the above

6. The Fraud Triangle consists of:

Rationalization
Incentives & Pressures
Opportunities

D. All of the Above

7. A standard auditorâs report must include which of thefollowing:

What was audited
Management & auditorâs responsibilities
Scope of the audit
The auditorâs opinion
All of the Above

8. What does privity relationship mean?

A partyâs financial liability is limited
A party can sue if fraud has taken place
A party has a contractual obligation
A party may be a user of the financial statements

9. When an auditor acts careless in the application ofprofessional standards that it implies a reckless disregard for thestandards of due care is referred to as?

A. Negligence
B. Due Care
C. Fraud
D. Constructive Fraud

10. What is the legal term for the intent to deceive, manipulateor defraud?

A. Constructive Fraud
B. Due Care
C. Misfeasance
D. Scienter

11. From an accounting perspective, _____ implies a tendency todefer the recognition of assets and items that increase net incomewhile reserving for possible future declines in earnings:

A. High secrecy
B. High professionalism
C. High conservatism
D. High flexibility

12. According to CIMA code of ethics, âWhen you become sosympathetic to the interests of others as a result of a closerelationship that your professional judgment becomes compromisedâ,is considered:

A. Self-interest threat
B. Intimidation threat
C. Advocacy threat
D. Familiarity threat

13. To be appropriate audit evidence must be both:

A. Relevant and reliable
B. Significant and documented
C. Material and quantitative
D. Objective and reasonable

14. Common law liability does not include:

A. Breach of contract
B. Legislation passed a state or federal level
C. Tort actions
D. Legal opinions issued by judges

15. All of the following EXCEPT_______ is part of "The FraudTriangle"

A. Incentives/Pressures
B. Opportunity
C. Rationalization
D. All of the Above

16. A law suit against an accountant for failing to live up tothe terms of a contract is what type of legal liability?

Common-Law liability
Foreseeable Legal liability
Liability to Third Party
Liability to Clients

17. Audit Risk consist of 3 components:

Inherent, detection, material misstatement
Professional judgment, material misstatement, materialityjudgments
Inherent, detection, control

All the above

18. CIMAâs code identifies five common threats:

A. Integrity, Self-review, Objectivity, Intimidation,professional behavior

B. Integrity, self-review, self- interest, Intimidation,professional behavior

C. Self-review, self-interest, Intimidation, Familiarity,Advocacy

D. Integrity, Intimidation, Familiarity, self-interest,Advocacy

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2â30. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following organizations can revoke the right of an individual to practice as a
CPA?
(1) The Public Company Accounting Oversight Board.
(2) The American Institute of Certifi ed Public Accountants.
(3) The Securities and Exchange Commission.
(4) The applicable state board of accountancy.
b. The AICPA over time has played an important role in standards setting. Which of the following
standards are currently established by the AICPA?
(1) Accounting standards applicable to nonpublic companies.
(2) Auditing standards applicable to audits of nonpublic companies.
(3) Quality control standards applicable to audits of public companies.
(4) Standards for reviews of the interim fi nancial information issued by public companies.
c. Which of the following does the FASB consider a source of nonauthoritative guidance for
use when there is no authoritative guidance available?
(1) The FASB Codifi cation.
(2) FASB Concepts Statements.
(3) SEC Rules.
(4) SEC Interpretive Releases
d. Financial statement audits performed under PCAOB requirements are designed to provide
which type(s) of assurance with respect to the detection of material misstatements due to
errors or fraud?
LO 2-1
LO 2-2
LO 2-2
LO 2-1
Objective
Questions
Reasonable Absolute
(1) Yes Yes
(2) Yes No
(3) No Yes
(4) No No

She proposed to give the controller, if appointed, an internal auditing staff to carry on such
continuing investigations of accounting data as appeared necessary. Evaluate this proposal.
2â28. Reed, CPA, accepted an engagement to audit the fi nancial statements of Smith Company.
Reedâs discussions with Smithâs new management and the predecessor auditor indicated the
possibility that Smithâs fi nancial statements may be misstated due to the possible occurrence
of errors, fraud, and illegal acts.
a. Identify and describe Reedâs responsibilities to detect Smithâs errors and fraud. Do not
identify specifi c audit procedures.
b. Describe Reedâs responsibilities to detect Smithâs material noncompliance with laws. Do
not identify specifi c audit procedures.
c. Identify and describe Reedâs responsibilities to report Smithâs noncompliance with laws.
(AICPA, adapted)
2â29. While the AICPA administers a peer review program for CPA fi rms, the PCAOB staff performs
practice inspections.
a. Identify the two basic types of peer review.
b. On what part of a fi rmâs practice does the PCAOB staff focus its inspections?
c. Describe a PCAOB inspection.
d. Describe how the PCAOB staff selects an audit engagement for inspection.
LO 2-3
Required:
LO 2-7
Required:
e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through:
(1) Compliance with generally accepted reporting standards.
(2) A system of quality control.
(3) A system of peer review.
(4) Continuing professional education.

f. Which of the following is not explicitly included in a standard report for a nonpublic
company?
(1) The CPAâs opinion that the fi nancial statements comply with generally accepted
accounting principles.
(2) That generally accepted auditing standards were followed during the audit.
(3) That internal control of the client was satisfactory.
(4) An identifi cation of the fi nancial statements audited.
g. The general group of the 10 PCAOB Auditing Standards requires that:
(1) The auditors maintain an independent mental attitude.
(2) The audit be conducted in conformity with generally accepted accounting
principles.
(3) Assistants, if any, be properly supervised.
(4) The auditors obtain an understanding of internal control.
h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
maintains records indicating which partners or employees of the fi rm were previously
employed by the CPA fi rmâs clients?
(1) Professional relationship.
(2) Engagement performance.
(3) Relevant ethical requirements.
(4) Monitoring.
i. An audit provides reasonable assurance of detecting material:

Fraudulent Financial Misappropriation
Reporting of Assets
(1) Yes Yes
(2) Yes No
(3) No Yes
(4) No No
j. Which of the following is not included in an integrated audit report on the fi nancial statements
of a public company?
(1) The report states that the audit was performed in accordance with AICPA standards.
(2) The report indicates that the fi nancial statements are the responsibility of management.
(3) The report indicates that the auditors have also audited the effectiveness of the companyâs
internal control.
(4) The report is signed in the name of the CPA fi rm.
k. Audit fi rms that are subject to inspections by the PCAOB staff include:
(1) All audit fi rms.
(2) Audit fi rms that are registered with the SEC.
(3) Audit fi rms that are registered with the PCAOB.
(4) Audit fi rms that are registered with a state board of accountancy.
l. Which of the following is not a difference noted when comparing the AICPA audit report
to the international audit report?
(1) The international audit report may use the phrase âtrue and fair view.â
(2) The international audit report may be signed using the personal name of the audit
partner, the audit fi rm, or both.
(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
performed the audit.
(4) The international audit report includes an opinion on internal control.
(AICPA, adapted)
2â31. Simulation
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to perform an
audit of the fi nancial statements for the current year. Howard Smythe, the partner in charge of
the audit, drafted the following unmodifi ed report:

To the Management of Casa Royale, Inc.:
We have examined the accompanying consolidated balance sheet of Casa Royale, Inc., and
its subsidiaries, as of December 31, 20X1, and the related consolidated statements of income,
retained earnings, and cash fl ows for the years then ended.
Managementâs Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
fi nancial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated fi nancial statements that are
free from material misstatement, whether due to fraud or error.
Auditorâs Responsibility
Our responsibility is to express an opinion on these fi nancial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated fi nancial statements are free of material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated fi nancial statements. The procedures selected depend on the auditorâs
judgment, including the assessment of the risks of material misstatement of the consolidated
fi nancial statements, whether due to fraud or illegal acts. In making those risk assessments, the
auditor considers internal control relevant to the entityâs preparation and fair presentation of
the consolidated fi nancial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entityâs internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of signifi cant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated fi nancial statements.
We believe that the audit evidence we have obtained is adequate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material
respects, the fi nancial position of Casa Royale, Inc., and its subsidiaries as of December 31,
20X1, and the results of their operations and their cash fl ows for the years then ended in accordance
with auditing standards generally accepted in the United States of America.
Howard Smythe , Partner
Phoenix, Arizona
February 12, 20X2
Reviewerâs Comments
Comment Is
Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have âaudited,â rather than âexamined,â
the fi nancial statements (fi rst paragraph after introduction).
c. The report should not indicate anything concerning managementâs
responsibility for internal control.
d. The report should state that the auditorsâ responsibility is to express
âreasonable assurance,â not an opinion (fi rst paragraph under âauditorâsâ
responsibility).
e. The audit is designed to assess risks of material misstatements due to
errors or fraud; the term âillegal actsâ is incorrect (second paragraph
under auditorâs responsibility).
f. The report should not refer to the auditors âevaluating the appropriateness
of accounting policies,â since those are the responsibility of management.
g. The evidence should be suffi cient and appropriate rather than âadequateâ
(third paragraph under auditorâs responsibility).

Reviewerâs Comments
Comment Is
Correct (yes or no)
h. The opinion should not include âin all material respectsâ since the auditors
are providing an opinion on the accuracy of the fi nancial statements
(opinion paragraph).
i. The opinion should be on âaccounting principles generally accepted in the
United States of America,â not on auditing standards (opinion paragraph).
j. The signature on the report should be that of the CPA fi rm, not that of
the partner.

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2-30	2â30. Multiple Choice Questions
	Select the best answer for each of the following items and give reasons for your choice.
A	a. Which of the following organizations can revoke the right of an individual to practice as a
	CPA?
	(1) The Public Company Accounting Oversight Board.
	(2) The American Institute of Certifi ed Public Accountants.
	(3) The Securities and Exchange Commission.
	(4) The applicable state board of accountancy.
B	b. The AICPA over time has played an important role in standards setting. Which of the following
	standards are currently established by the AICPA?
	(1) Accounting standards applicable to nonpublic companies.
	(2) Auditing standards applicable to audits of nonpublic companies.
	(3) Quality control standards applicable to audits of public companies.
	(4) Standards for reviews of the interim fi nancial information issued by public companies.
C	c. Which of the following does the FASB consider a source of nonauthoritative guidance for
	use when there is no authoritative guidance available?
	(1) The FASB Codifi cation.
	(2) FASB Concepts Statements.
	(3) SEC Rules.
	(4) SEC Interpretive Releases
D	d. Financial statement audits performed under PCAOB requirements are designed to provide
	which type(s) of assurance with respect to the detection of material misstatements due to
	errors or fraud?
		Reasonable	Absolute
1		Yes	Yes
2		Yes	No
3		No	Yes
4		No	No
E	e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
	standards. Reasonable assurance of achieving this basic objective is provided through:
	(1) Compliance with generally accepted reporting standards.
	(2) A system of quality control.
	(3) A system of peer review.
	(4) Continuing professional education.
F	f. Which of the following is not explicitly included in a standard report for a nonpublic
	company?
	(1) The CPAâs opinion that the fi nancial statements comply with generally accepted
	accounting principles.
	(2) That generally accepted auditing standards were followed during the audit.
	(3) That internal control of the client was satisfactory.
	(4) An identifi cation of the fi nancial statements audited.
G	g. The general group of the 10 PCAOB Auditing Standards requires that:
	(1) The auditors maintain an independent mental attitude.
	(2) The audit be conducted in conformity with generally accepted accounting
	principles.
	(3) Assistants, if any, be properly supervised.
	(4) The auditors obtain an understanding of internal control.
H	h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
	maintains records indicating which partners or employees of the fi rm were previously
	employed by the CPA fi rmâs clients?
	(1) Professional relationship.
	(2) Engagement performance.
	(3) Relevant ethical requirements.
	(4) Monitoring.
I	i. An audit provides reasonable assurance of detecting material:
	Fraudulent Financial	Misappropriation
	Reporting	of Assets
1	Yes	Yes
2	Yes	No
3	No	Yes
4	No	No
J	j. Which of the following is not included in an integrated audit report on the fi nancial statements
	of a public company?
	(1) The report states that the audit was performed in accordance with AICPA standards.
	(2) The report indicates that the fi nancial statements are the responsibility of management.
	(3) The report indicates that the auditors have also audited the effectiveness of the companyâs
	internal control.
	(4) The report is signed in the name of the CPA fi rm.
K	k. Audit fi rms that are subject to inspections by the PCAOB staff include:
	(1) All audit fi rms.
	(2) Audit fi rms that are registered with the SEC.
	(3) Audit fi rms that are registered with the PCAOB.
	(4) Audit fi rms that are registered with a state board of accountancy.
L	l. Which of the following is not a difference noted when comparing the AICPA audit report
	to the international audit report?
	(1) The international audit report may use the phrase âtrue and fair view.â
	(2) The international audit report may be signed using the personal name of the audit
	partner, the audit fi rm, or both.
	(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
	performed the audit.
	(4) The international audit report includes an opinion on internal control.

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ACC 521 Study Guide - Final Guide: Financial Statement, Write-Off

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