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aud ch 2

QuestionAnswer
Which organization is responsible for issuing Statements on Auditing Standards (SAS) for audits of nonpublic entities? The AICPA Auditing Standards Board (ASB).
The _____ was created by the Sarbanes-Oxley Act (SOX) to oversee and discipline CPAs who audit public companies. Public Company Accounting Oversight Board (PCAOB)
Prior to April 2003, existing standards issued by the ASB were adopted by the PCAOB as _____. Interim Standards
What is the primary purpose of Generally Accepted Auditing Standards (GAAS)? To identify necessary auditor qualifications and guide the conduct of an audit examination.
Which component of GAAS is considered the most authoritative and guides the general conduct of audit engagements? Fundamental Principles
What are the three categories of the 10 basic auditing standards? General Standards, Standards of Fieldwork, and Standards of Reporting.
The Responsibilities Principle in the fundamental principles corresponds to which set of the 10 basic standards? General Standards
Which specific fundamental principle maps to the 10 basic Standards of Fieldwork? Performance Principle
Under the Responsibilities Principle, what three things are auditors responsible for? Competence and capabilities; ethical requirements; and professional skepticism/judgment.
Independence in Fact The auditor's actual state of mind, characterized by an impartial and unbiased mental attitude.
Independence in Appearance The perception by financial statement users that the auditor is independent and has no conflicting relationships.
What is the definition of 'Due Care' according to the Responsibilities Principle? The level of diligence expected of a prudent auditor in similar circumstances.
The mental attitude of maintaining a questioning mind and critically assessing audit evidence is known as _____. Professional Skepticism
Why must an auditor maintain professional skepticism regarding management? Because a potential conflict of interest always exists as managers want to portray the company in the best light.
Professional judgment is defined as the application of _____, knowledge, and experience in making informed decisions during an audit. training
What is the primary goal of the Performance Principle? To provide reasonable assurance that the financial statements do not contain material misstatements.
Why can an audit provide only 'reasonable assurance' rather than an absolute guarantee? Due to the nature of financial reporting (estimates), the nature of auditing (sampling), and time/cost constraints.
In the Performance Principle, the concept of _____ refers to information that would impact the decisions of financial statement users. materiality
What are the two primary characteristics of audit evidence? Appropriateness (quality) and sufficiency (quantity).
The two components of 'Appropriate' audit evidence are relevance and _____. reliability
Which source of audit evidence is generally considered the most reliable? Direct personal knowledge obtained through the auditor's own physical observation.
How does the effectiveness of a client's internal controls typically affect the 'sufficiency' of audit evidence required? Effective internal controls lead to lower control risk, allowing the auditor to evaluate less evidence.
The risk that the audit team's procedures will fail to detect an existing material misstatement is called _____. detection risk
What is the primary requirement of the Reporting Principle? To express a written opinion (or indicate that an opinion cannot be expressed) regarding the financial statements.
Which audit opinion is issued when the financial statements are in conformity with GAAP in all material respects? Unmodified (or Unqualified) opinion.
What does a 'Qualified' audit opinion indicate? The financial statements are in conformity with GAAP except for a limited, specific item.
When an auditor concludes that the financial statements are NOT in conformity with GAAP, which opinion must be issued? Adverse opinion.
Under what condition would an auditor issue a 'Disclaimer' of opinion? When the auditor is unable to express an opinion, often due to a significant limitation in the scope of the audit.
What is the terminology difference for a 'clean' opinion between public and nonpublic entity audits? Public entities use the term 'unqualified,' while nonpublic entities use the term 'unmodified.'
What are the three major sections required in a standard audit report for a public company? Opinion on the Financial Statements, Basis for Opinion, and Critical Audit Matters (CAMs).
According to the PCAOB report structure, which section contains the description of the auditor's and management's responsibilities? The Basis for Opinion section.
What is defined as a 'Critical Audit Matter' (CAM)? A matter communicated to the audit committee that relates to material accounts and involved especially challenging or complex auditor judgment.
List the 5 stages of an audit in sequential order. 1. Obtain (or retain) clients; 2. Engagement planning; 3. Risk management; 4. Audit evidence; 5. Reporting.
In which of the 5 stages of an audit is 'competence and capabilities' primarily evaluated? The Obtain (or retain) clients stage.
The 'Responsibility Principle' requirements (independence, skepticism, etc.) must be applied during which stages of an audit? All stages of the audit.
What is the purpose of a system of 'Quality Control' within a public accounting firm? To provide reasonable assurance that the firm complies with professional standards and issues appropriate reports.
How often does the PCAOB inspect firms that audit more than 100 public entities? Annually.
How often does the PCAOB inspect firms that audit 100 or fewer public entities? Every three years.
What is the difference between Part I and Part II of a PCAOB inspection report? Part I details audit deficiencies and is public; Part II details quality control deficiencies and is private unless not remedied within a year.
True or False: An auditor can be independent in fact but fail to be independent in appearance. True.
What is the 'auditor-client revolving door' issue? When audit firm personnel leave to take management positions at a client they recently audited, potentially compromising independence.
Under the Performance Principle, what is the 'nature' of the financial report that prevents absolute assurance? Financial reports include significant components based on management's judgments and estimates.
Evidence generated by the client is generally considered _____ reliable than evidence obtained directly from a third party. less
Which specific auditing standard (AS) is most frequently cited for deficiencies in PCAOB inspections related to integrated audits? AS 2201 (Audit of Internal Control Over Financial Reporting).
The requirement for auditors to obtain an understanding of the entity and its environment is part of which fundamental principle? Performance Principle (Risk Assessment).
According to the Responsibilities Principle, how is an auditor's competence usually gained? Through education (CPA requirements) and experience (expertise in specific industries).
Which management assertion is most closely tested when an auditor physically observes computer equipment to ensure it actually exists? Existence.
What is the 'Financial Reporting Framework'? The set of criteria (e.g., GAAP or IFRS) used to determine the recognition, measurement, and disclosure of items in financial statements.
According to SOX Section 206, how long is the 'cooling off' period before an audit team member can join a client as a CEO or CFO? One year.
The requirement that all audit documentation indicate the identity of the preparer and reviewer relates to which performance element? Adequate planning and supervision.
In terms of evidence reliability, why are bank statements obtained directly from the bank more reliable than vendor invoices provided by the client? They are obtained directly from a third party and have not passed through the hands of client personnel who could alter them.
An audit firm's 'Monitoring' activities are part of which overall system? The System of Quality Control.
Why is 'audit quality' often considered a 'black box' to the general public? Audit quality is an intangible good that is usually unobservable until a failure (like a restatement) occurs.
If an auditor is not independent, which type of audit opinion must be issued regardless of the financial statement's conformity with GAAP? A disclaimer of opinion.
In the context of the Performance Principle, 'Planning and Supervision' requires the preparation of a written _____. audit plan
What level of quantitative misstatement is generally considered 'material'? A magnitude that would impact the perceptions or decisions of a reasonable financial statement user.
Materiality depends on both quantitative factors and _____ factors, such as the presence of fraud. qualitative
Does an auditor assume management is dishonest when practicing professional skepticism? No; the auditor assumes management is neither dishonest nor perfectly honest.
Which stage of the audit involves determining the nature, timing, and extent of substantive procedures based on internal control effectiveness? Risk Management (Risk Assessment).
Which PCAOB standard addresses the requirement to obtain sufficient appropriate audit evidence? AS 1105
If an auditor lacks the necessary industry-specific expertise to audit a complex new client, they must either obtain that knowledge or _____. decline the engagement
The 'Basis for Opinion' section in a public audit report must state that the audit was conducted in accordance with the standards of the _____. PCAOB
What is 'Independence in Mental Attitude' also known as in the fundamental principles? Independence in Fact.
The three components of the 'General Standards' in the 10 basic standards are Training/Proficiency, Independence, and _____. Due Professional Care
Created by: 444ali
 

 



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