CHAPTER 1

MULTIPLE CHOICE
b 1. To become a Certified Public Accountant (CPA), an individual must pass the Uniform CPA
Examination and
a. emonstrate his or her independence.
b. Comply with state educatio ad e!pe"iece "e#ui"emets.
c. !btain emplo"ment #ith a public accountin$ firm.
d. %ecome a member of the A&CPA.
b '. (hich of the follo#in$ statements is an example of an assertion made b" mana$ement in an
entit")s financial statements*
a. The financial statements #ere prepared in an unbiased manner.
b. Repo"ted i$eto"y balaces "e%lect all "elated t"asactios %o" the pe"iod.
c. +eported accounts receivable does not include an" uncollectible accounts.
d. The scope of the auditors) investi$ation #as not limited in an" #a" b" mana$ement.
d ,. -tatements on Auditin$ -tandards
a. +elate to the filin$ re.uirements and enforcement activities of the -EC.
b. escribe procedures to be applied in specific areas of audit activit" to eliminate inconsistencies in
audit practice.
c. Are intended to limit the de$ree of auditor /ud$ment needed to fulfill the attest function.
d. Ite"p"et stada"ds that p"o$ide &uidelies o" measu"es o% #uality %o" a idepedet audit.
d 0. The primar" purpose of an independent financial statement audit is to
a. Provide a basis for assessin$ mana$ement)s performance.
b. Compl" #ith state and federal re$ulator" re.uirements.
c. Assure mana$ement that the financial statements are unbiased and free from material error.
d. P"o$ide use"s with a ubiased opiio about the %ai"ess o% i%o"matio "epo"ted i the
%iacial statemets.
b 1. &ndependent auditin$ can best be described as a
a. %ranch of accountin$.
b. 'isciplie that attests to the "esults o% accouti& ad othe" ope"atios ad data.
c. Professional activit" that measures and communicates financial and business data.
d. +e$ulator" function that prevents the issuance of improper financial information.
(A&CPA AAPTE)
b 2. An independent audit aids in the communication of economic data because the audit
a. Confirms the accurac" of mana$ement)s financial representations.
b. Leds c"edibility to the %iacial statemets.
c. 3uarantees that financial data are fairl" presented.
d. Assures the readers of financial statements that an" fraudulent activit" has been corrected.
(A&CPA
AAPTE)
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c 4. (hich of the follo#in$ t"pes of audits are most similar*
a. !perational audits and compliance audits.
b. &ndependent financial statement audits and operational audits.
c. Compliace audits ad idepedet %iacial statemet audits.
d. &nternal audits and independent financial statement audits.
c 5. The Auditin$ -tandards %oard
a. -ets rules and re$ulations that $overn public accountin$ firms.
b. &s an arm of the 6inancial Accountin$ -tandard %oard.
c. Is a seio" techical body o% the AICPA desi&ated to issue autho"itati$e auditi&
p"ooucemets.
d. +eports directl" to the -ecurities and Exchan$e Commission.
c 7. The essence of the attest function is to
a. etect fraud.
b. Examine individual transactions so that the auditor can certif" as to their validit".
c. 'ete"mie whethe" the cliet(s %iacial statemets a"e %ai"ly stated.
d. Ensure the consistent application of correct accountin$ procedures.
(A&CPA AAPTE)
d 18. (hich of the follo#in$ criteria is uni.ue to the independent auditor)s attest function*
a. 3eneral competence.
b. 6amiliarit" #ith the particular industr" of each client.
c. ue professional care.
d. Idepedece. (A&CPA AAPTE)
c 11. The definition of auditin$ contained #ithin A Statement of Basic Auditing Concepts reco$ni9es
that auditin$ includes both a(an)
a. ocumentation process and an evaluation process.
b. Evaluation process and a reportin$ process.
c. I$esti&ati$e p"ocess ad a "epo"ti& p"ocess.
d. ocumentation process and a reportin$ process.
a 1'. An operational audit is desi$ned to
a. Assess the e%%iciecy ad e%%ecti$eess o% maa&emet(s ope"ati& p"ocedu"es.
b. Assess the presentation of mana$ement)s financial statements in accordance #ith $enerall"
accepted accountin$ principles.
c. etermine #hether mana$ement has complied #ith applicable la#s and re$ulations.
d. etermine #hether the audit committee of the board of directors is effectivel" dischar$in$ its
responsibilit" to oversee mana$ement)s operations.
b 1,. The mar:et for auditin$ services is driven b"
a. The re$ulator" authorit" of the -ecurities and Exchan$e Commission.
b. A demad by e!te"al use"s o% %iacial statemets.
c. Pronouncements issued b" the Auditin$ -tandards %oard.
d. Con$ress at the federal level and elected le$islative bodies at the state level.
'
a 10. The first contemporar" audit related le$islation #as the
a. )ecu"ities Act o% 1*++.
b. -ecurities Exchan$e Act of 17,0.
c. %ritish ;oint -toc: Companies Act of 1500.
d. Companies Act of 1704.
a 11. The first authoritative auditin$ pronouncement in the U.-. #as
a. )tatemet o Auditi& P"ocedu"es ,o. 1- .E!tesios o% Auditi& P"ocedu"es..
b. -tatement on Auditin$ -tandards <o. 1, =Codification of -A-s.=
c. =Uniform Accountin$> A Tentative Proposal -ubmitted b" the 6ederal +eserve %oard (1714).=
d. =Examination of 6inancial -tatements b" &ndependent Public Accountants (17,2).=
a 12. The first authoritative audit standards?settin$ bod" empo#ered to issue auditin$ pronouncements
in the U.-. #as the
a. The Committee o Auditi& P"ocedu"e.
b. The Auditin$ -tandards Executive Committee.
c. The Auditin$ -tandards %oard.
d. The Accountin$ and +evie# -ervices Committee.
c 14. (hich of the follo#in$ incorrectl" matches the authoritative bod" #ith its authoritative
pronouncements*
a. Accountin$ and +evie# -ervices Committee> =-tatements on -tandards for Accountin$ and
+evie# -ervices=
b. Auditin$ -tandards %oard> =-tatements on Auditin$ -tandards=
c. Auditi& )tada"ds E!ecuti$e Committee/ .)tatemets o Auditi& P"ocedu"e.
d. -ecurities and Exchan$e Commission> =6inancial +eportin$ +eleases=
a 15. A license to practice as a certified public accountant is $ranted b"
a. )tate boa"ds o% accoutacy.
b. The A&CPA.
c. -tate societies of CPAs.
d. The -EC.
b 17. The purpose of a compliance audit for a $overnmental entit" is to determine #hether
a. 6inancial statements compl" #ith 3AAP and #hether the entit" is operatin$ efficientl".
b. 0iacial statemets comply with 1AAP ad the etity has complied with applicable laws
ad "e&ulatios.
c. The entit" has complied #ith applicable la#s and re$ulations.
d. 6inancial statements compl" #ith 3AAP.
a '8. The audit process is
a. A special applicatio o% the scieti%ic method o% i#ui"y.
b. +e$ulated b" the A&CPA.
c. The onl" service a CPA is allo#ed to perform b" la#.
d. Performed onl" b" CPAs.
,
d '1. (hich of the follo#in$ has historicall" had the least influence on the practice of public
accountin$*
a. The 3overnmental Accountin$ -tandards %oard.
b. The &nstitute of &nternal Auditors.
c. The -ecurities and Exchan$e Commission.
d. The U.). Co&"ess.
b ''. &ndependent auditin$ can best be described as
a. A subset of accountin$.
b. A p"o%essioal acti$ity that attests to the %ai" p"esetatio o% %iacial statemets.
c. A professional activit" that measures and communicates financial accountin$ data.
d. A re$ulator" activit" that prevents the issuance of improper financial information.
(A&CPA AAPTE)
c ',. An independent audit is important to readers of financial statements because it
a. Provides a measure of mana$ement)s ste#ardship function.
b. @easures and communicates the financial data included in financial statements.
c. Ob2ecti$ely e!amies ad "epo"ts o maa&emet(s %iacial statemets.
d. +eports on the accurac" of information in the financial statements.
(A&CPA AAPTE)
a '0. The reason an independent auditor $athers evidence is to
a. 0o"m a opiio o the %iacial statemets.
b. etect fraud.
c. Evaluate mana$ement.
d. Evaluate internal controls. (A&CPA AAPTE)
)HORT A,)3ER
1. (hat measure of self?re$ulation is in place to monitor the performance of the public
accountin$ profession in the area of assurance services*
Aswe">
The Public !versi$ht %oard (P!%) is an autonomous bod" that monitors the performance of the
public accountin$ firms that audit publicl" traded U.-. companies. The P!% is comprised of five
members #hich meets ei$ht times a "ear and oversees peer revie#s, and issues status reports that
recommend improvements in the self?re$ulation process.
'. escribe t#o attestation services that are common performed b" public accountin$ firms.
Aswe"/
(1) A&"eed4upo p"ocedu"es> An en$a$ement #here the attestor (or auditin$ firm) is en$a$ed to
examine an item usin$ procedures a$reed upon b" the contractin$ parties.
(') Re$iews> An attestation service for financial statements #here the public accountin$ firm
$ives limited assurance about #hether an entit"As financial statements conform to $enerall"
accept accountin$ principles.
0
,. (hat is the economic value of a financial statement audit*
Aswe"/
6inancial statement audits reduce the information ris: (the ris: that information in financial
statements is misstated materiall"), and reductions in information ris: #hich in turn reduce a
compan"As cost of capital (the cost a compan" endures to issue e.uit" or incur debt).
0. efine the attestation service of auditin$.
Aswe"/
Auditin$ is a s"stematic process of ob/ectivel" obtainin$ and evaluatin$ evidence re$ardin$
assertions about economic actions and events to ascertain the de$ree of correspondence bet#een
those assertions and established criteria and communicatin$ the results to interested users.
PRO5LEM)
1. &n "our role of Chief 6inancial !fficer, "ou are re.uested to explain to the %oard of irectors
#h" audits of the compan" are made b" (a) internal auditors, (b) independent auditors, and (c)
$overnmental auditors. The %oard has voiced an opinion that it mi$ht be better if the compan"As
internal auditors completed all audits. (hat are the issues that "ou #ould need to explain to the
%oard*
Aswe"/
&t is important to explain the differences in the roles of the three t"pes of accountants and the
purpose of each different form of audit>
&. Ite"al audito"s are auditors emplo"ed b" the compan" to assess the efficienc" and
effectiveness of mana$ementAs operations. &nternal auditors perform ope"atioal audits.
!perational audits focus on information s"stems and operatin$ procedures, not on
recorded dollar amounts or reported financial information, and address an entit"As entire
scope of operations or selected procedures.
&&. Idepedet audito"s or &o$e"metal audito"s perform compliance audits.
Compliace audits ma" be desi$ned to determine #hether an entit"As statements are
presented fairl" in accordance #ith 3AAP and ma" also be desi$ned to determine #hether
the entit" has complied #ith applicable la#s and re$ulations that ma" have a material
effect on financial statements.
&&&. Idepedet audito"s perform financial statement audits. 0iacial statemet audits are
an attestation service in #hich an independent auditor offers assurance about
mana$ementAs #ritten financial statement assertions.
&t is imperative that the %oard of irectors understands that the different t"pes of auditors have
different areas of professional expertise and authorit". The value of each form of audit #ould be
ne$ated if completed b" the inappropriate audit professional.
'. The A&CPAAs CPA Vision Project: 2011 and Beyond, contemplates values and competencies
that improve an assurerAs abilit" to /ud$e the .ualit" of information assured. Bist and define the
elements outlined #ithin the CPA Vision Project.
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I. Co"e 6alues/
Cotiui& Educatio ad Li%elo& Lea"i& 7 CPAs believe in continuin$
education be"ond certification and believe it is important to continuall" ac.uire ne#
s:ills and :no#led$e.
Competece 7 CPAs are able to perform hi$h?.ualit" #or: in a capable, efficient,
and appropriate manner.
Ite&"ity 7 CPAs conduct themselves #ith honest" and professional ethics.
Attued to 5"oad 5usiess Issues C CPAs are in tune #ith the overall realities of
the business environment.
Ob2ecti$ity C CPAs are able to deal #ith information free of distortions, personal
bias, or conflicts of interest.
II. Co"e Competecies/
Commuicatios ad Leade"ship )8ills C Able to $ive and exchan$e information
#ithin meanin$ful context and #ith appropriate deliver" and interpersonal s:ills. Able
to influence, inspire, and motivate others to achieve results.
)t"ate&ic ad C"itical Thi8i& )8ills C Able to lin: data, :no#led$e, and insi$ht
to$ether to provide .ualit" advice for strate$ic decision ma:in$.
0ocus o the Custome"- Cliet- ad Ma"8et 7 Able to anticipate and meet the
chan$in$ needs of clients, emplo"ers, customers, and mar:ets better than competitors.
Ite"p"etatio o% Co$e"&i& I%o"matio 7 Able to interpret and provide a broader
context usin$ financial and nonfinancial information.
Techolo&ically Adapt 7 Able to utili9e and levera$e technolo$" in #a"s that add
value to clients, customers, and emplo"ees.
III. Co"e )e"$ices/
Assu"ace ad I%o"matio Ite&"ity 7 Provide a variet" of services that improve
and assure the .ualit" of information, or its context, for business decision ma:in$.
Maa&emet Cosulti& ad Pe"%o"mace Maa&emet 7 Provide advice and
insi$ht on the financial and nonfinancial performance of an or$ani9ationAs operational
and strate$ic process throu$h broad business :no#led$e and /ud$ment.
Techolo&y )e"$ices 7 Provide services that levera$e technolo$" to improve
ob/ectives and decision ma:in$, includin$ business application processes, s"stem
inte$rit", :no#led$e mana$ement, s"stem securit", and inte$ration of ne# business
processes and practices.
0iacial Plai& 7 Provide a variet" of services to or$ani9ations and individuals
that interpret and add value b" utili9in$ a #ide ran$e of financial information. These
include ever"thin$ from tax plannin$ and financial statement anal"sis to structurin$
investment portfolios and complex financial statements.
Ite"atioal )e"$ices 7 Provide services to support and facilitate commerce in the
$lobal mar:et.
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