Chapter 2

Multiple-Choice Questions

1. Which one of the following is not one of the three General Standards?
easy a. Proper planning and supervision.
a b. Independence of mental attitude.
c. Adequate training and proficiency.
d. Due professional care.

2. Which one of the following is not a Field Work Standard?

easy a. Adequate planning and supervision.
b b. Due professional care.
c. Understand the entity and its environment including internal control.
d. Sufficient appropriate audit evidence.

3. The General Standards stress the importance of:

easy a. evidence accumulation.
b b. personal qualities the auditor should possess.
c. communicating the auditor’s findings to the reader.
d. general supervision of the audit.

4. The generally accepted auditing standard that requires “Adequate technical

easy training and proficiency” is normally interpreted as requiring the auditor to
have:
a a. formal education in auditing and accounting.
b. worked for an entity similar to the entity being audited.
c. independence in mental attitude
d. a graduate degree in a business field.

5. (SOX) Members of the Public Company Accounting Oversight Board are appointed
easy and overseen
a. by:Congress.
the U.S.
d b. the American Institute of Certified Public Accountants.
c. the Auditing Standards Board.
d. the Securities and Exchange Commission.

6. Statements on Auditing Standards provide auditors of privately held companies

easy with ______ guidance regarding the conduct of financial statement audits.
b a. fairly extensive
b. some limited
c. practically no
d. specific and detailed
7. Which of the following statements most accurately captures the intent of the
easy standards of field work?
c a. Field work standards are primarily concerned with personal attributes
necessary during the conduct of the audit.
b. Field work standards provide extensive guidance regarding the conduct
of an audit.
c. Field work standards are primarily directed at the auditor’s planning,
understanding of internal control, and evidence accumulation.
d. Field work standards are primarily concerned with the conduct of
substantive testing as opposed to testing of internal controls.

8. (SOX) Prior to the passage of the Sarbanes-Oxley Act, which of the following was
easy responsible for establishing auditing standards?
c a. Securities and Exchange Commission
b. Public Company Accounting Oversight Board
c. Auditing Standards Board
d. National Association of Accounting

9. (SOX) Standards issued by the Public Company Accounting Oversight Board must be
medium followed by CPAs who audit:
b a. both private and public companies.
b. public companies only.
c. private companies, public companies, and nonprofit entities.
d. private companies only.

10. Which of the following is the least likely form of business for a CPA firm?
medium a. General partnership
b b. General corporation
c. Limited liability company
d. Limited liability partnership

11. The Statements on Auditing Standards issued by the Auditing Standards Board:
medium a. are interpretations of generally accepted auditing standards.
a b. are the equivalent of laws for audit practitioners.
c. must be followed in all situations.
d. are optional guidelines which an auditor may choose to follow or
not follow when conducting an audit.

12. An auditor need not abide by a particular auditing standard if the auditor
believes that:
medium a. the issue in question is immaterial in amount.
a b. more expertise is needed to fulfill the requirement.
c. the requirement of the standard has not been addressed by the PCAOB.
d. any of the above three are correct.
13. (SOX) The Public Company Accounting Oversight Board does not:
medium a. perform inspections of the quality controls at audit firms that audit
public companies.
b b. establish auditing standards that must be followed by CPAs on all
audits.
c. oversee auditors of public companies.
d. perform any of the above functions.

14. The form that must be completed and filed with the Securities and Exchange
medium Commission whenever a company experiences a significant event that is of
interest to public investors is the:
b a. Form S-1.
b. Form 8-K.
c. Form 10-K.
d. Form 10-Q.

15. The form that must be filed with the Securities and Exchange Commission
medium whenever a company plans to issue new securities to the public is the:
a a. Form S-1.
b. Form 8-K.
c. Form 10-K.
d. Form 10-Q.

16. The third general standard states that due care is to be exercised in the
medium performance of an audit. This standard is generally interpreted to require:
c a. objective review of the adequacy of the technical training of firm
personnel.
b. thorough review of the existing internal control structure.
c. critical review of work done at every level of supervision.
d. periodic review of a CPA firm’s quality control procedures.

17. (SOX) Assume the Public Company Accounting Oversight Board (PCAOB) identifies
medium a violation during its inspection of a registered accounting firm.
d a. The PCAOB may not enforce some disciplinary action against the
accounting firm.
b. The PCAOB may not report the matter to the Securities and Exchange
Commission.
c. The PCAOB may not report the matter to the appropriate state
accountancy board
d. The PCAOB may not suspend the license to practice of the CPA guilty
of the violation.

18. Which of the following statements best describes the primary purpose of
medium Statements on Auditing Standards?
d a. They are guides intended to set forth auditing procedures that are
applicable to a variety of situations.
 b. They are procedural outlines that are intended to narrow the areas of
inconsistency and divergence of auditor opinion.
c. They are authoritative statements, enforced through the Code of
Professional Conduct, and are intended to limit the degree of auditor judgment.
d. They are interpretations that are intended to clarify the meaning of
“generally accepted auditing standards.”

19. Statements on Standards for Accounting and Review Services are issued by the:
medium a. Accounting and Review Services Committee.
a b. Professional Ethics Executive Committee.
c. Securities and Exchange Commission.
d. Financial Accounting Standards Board.

20. Consulting Standards are issued by the:

medium a. Accounting and Review Services Committee.
c b. Securities and Exchange Commission.
c. Management Consulting Services Executive Committee.
d. Financial Accounting Standards Board.

21. The auditor’s judgment concerning the overall fairness of presentation of

medium financial position, results of operations, and changes in cash flow is applied
within the framework of:
d a. quality control.
b. generally accepted auditing standards which include the concept of
materiality.
c. the auditor’s evaluation of the audited company’s internal control.
d. generally accepted accounting principles.

22. A basic objective of a CPA firm is to provide professional services to conform

medium to professional standards. Reasonable assurance of achieving this basic
objective is provided through:
c a. continuing professional education.
b. compliance with generally accepted reporting standards.
c. a system of quality control.
d. a system of peer review.

23. Within the context of quality control, the primary purpose of continuing
medium professional education and training activities is to enable a CPA firm to provide
its personnel with:
c a. technical training that assures proficiency as a valuation expert.
b. professional education that is required in order to perform with due
professional care.
c. knowledge required to fulfill assigned responsibilities.
d. knowledge required to perform a peer review.

24. Williams & Co., a member of the Private Companies Practice Section, is to
medium have a “peer review.” The peer review can be performed by:
d a. a CPA firm selected by Williams & Co.
b. a review team selected by the state society.
c. internal auditors.
d. either a or b.

25. Hansen Corporation’s stock is listed on a national stock exchange and

medium registered with the Securities and Exchange Commission. Hansen’s
a management hires a CPA to perform an independent audit of Hansen’s financial
statements. The primary objective of this audit is to provide assurance to the:
a. investors in Hansen Corporation’s stock.
b. stock exchange.
c. Securities and Exchange Commission.
d. management of Hansen Corporation.

26. Which of the following is not an essential component of quality control?

medium a. Policies and procedures to ensure that firm personnel are actively
a engaged in marketing strategies.
b. Policies and procedures to ensure that the work performed by
firm personnel meet applicable professional standards.
c. Policies to ensure that personnel maintain their independence in fact and
in appearance.
d. Policies that ensure that monitoring activities are effectively applied.

27. Which of the following is true regarding the AICPA-approved practice

monitoring programs?
challenging a. The Center for Public Company Audit Firms does not offer a peer
review program.
c b. Firms registered with the PCAOB must not enroll in an AICPA-
approved practice monitoring program.
c. Public accounting firms must be enrolled in an AICPA-approved
practice monitoring program for members in the firm to be eligible for
membership in the AICPA.
d. The AICPA peer review program is administered through the SEC.

28. Which of the following statements is true as it relates to limited liability

challenging partnerships?
c a. Only senior partners are liable for the partnership’s debts.
b. Partners have no liability in a limited liability partnership arrangement.
c. Partners are personally liable for the acts of those under their
supervision.
d. All partners must be AICPA members.

29. (SOX) If an auditor of a public company cannot find guidance issued by the PCAOB
challenging on a particular audit matter, the auditor should generally seek guidance from
which of the following sources?
a a. Statements on Auditing Standards.
b. Statements on Standards for Accounting and Review Services.
c. Regulations issued by the Securities and Exchange Commission.
d. The AICPA Code of Professional Conduct.

30. The SEC requirements of greatest interest to CPAs are set forth in the SEC’s:
challenging a. Regulation S-X and Accounting Series Releases.
a b. S-1 through S-16 forms.
c. Director’s newsletter.
d. Forms 8-K, 10-K, and 10-Q.

31. The AICPA has authority to establish standards and rules in all but which of the
challenging following areas?
d a. Auditing standards applicable to financial statements of private
companies.
b. Compilation and review standards.
c. Professional conduct.
d. Auditing standards applicable to financial statements of private and
public companies.

32. Generally Accepted Auditing Standards (GAAS) and Statements on Auditing

challenging Standards (SAS) should be looked upon by practitioners as:
c a. ideals to work towards, but which are not achievable.
b. maximum standards that denote excellent work.
c. minimum standards of performance that must be achieved on each audit
engagement.
d. benchmarks to be used on all audits, reviews, and compilations.

33. Which one of the following is not a requirement for belonging to the Private
challenging Companies Practice Section of the American Institute of Certified Public
Accountants?
c a. Adherence to quality control standards.
b. Mandatory peer review.
c. Partner rotation after a period of ten consecutive years.
d. Continuing education.

34. Statements on Auditing Standards issued by the AICPA’s Auditing Standards

Board are:
challenging a. part of the generally accepted auditing standards under the AICPA Code
b of Professional Conduct.
b. interpretations of generally accepted auditing standards and departures
from such statements must be justified.
c. interpretations of generally accepted auditing standards and such
standards must be followed in every engagement.
d. generally accepted auditing procedures that are not covered by the
AICPA Code of Professional Conduct.
Essay Questions

35. Distinguish between generally accepted auditing standards (GAAS) and

easy generally accepted accounting principles (GAAP). What professional
organization establishes GAAS? What professional organization establishes
GAAP?

Answer:
Generally accepted auditing standards are general guidelines to help auditors
meet their professional responsibilities in the audit of historical financial
statements. They are considered to be the minimum standards of performance
for auditors to follow and are established by the Auditing Standards Board of
the American Institute of Certified Public Accountants for private companies
and by the Public Company Accounting Oversight Board for public companies.
Generally accepted accounting principles are the guidelines which an entity’s
management normally follows when preparing historical financial statements.
GAAP is established by the Financial Accounting Standards Board.

36. Discuss the relationship between quality control and generally accepted
easy auditing standards.

Answer:
For a CPA firm, quality control encompasses the methods used to make sure
that the firm meets its professional responsibilities to clients. Quality control is
closely related to, but distinct from, GAAS. A CPA firm must make sure that
GAAS are followed on every audit. Quality controls are the procedures used by
the CPA firm that help it meet requirements demanded by GAAS on every
engagement in a consistent manner.

37. Describe the various staff levels and responsibilities of a typical public
easy accounting firm.

Answer:
Staff assistant - Staff assistants, or staff accountants, perform most of the
detailed audit work.
Senior or In-charge auditor - Seniors coordinate and are responsible for the
audit field work, including the supervision and review of staff assistants’ work.
Manager - Managers assist the senior plan and manage the audit, review the
senior’s work, and manages relations with the client. A manager may be
responsible for multiple engagements at the same time.
Partner - Partners review the overall audit work and they are involved in all
significant audit decisions. As owners of the firm, partners are ultimately
 responsible for conducting the audit and serving the client.

38. Discuss the five elements of quality control. Who establishes the standards for
medium quality control?

Answer:
Independence, integrity and objectivity - Personnel on engagement should
maintain independence in fact and in appearance, perform all professional
responsibilities with integrity and maintain objectivity in performing their
professional responsibilities.
Personnel management - Policies and procedures should be established to
provide the firm with reasonable assurance that all new personnel are qualified
to perform their work, work is assigned to personnel who have adequate
training, and personnel should participate in continuing professional education.
Acceptance and continuation of clients and engagements - Policies and
procedures should be established for deciding whether to accept or continue a
client relationship. These policies should minimize the risk of associating with a
client whose management lacks integrity.
Engagement performance - Policies and procedures should exist to ensure that
engagement personnel perform work that meets applicable professional
standards and the firm’s standards of quality.
Monitoring - Policies and procedures should exist to ensure that the other four
quality control elements are being effectively applied.

Quality control standards are established by the Auditing Standards Board for
auditors of private companies and by the Public Company Accounting
Oversight Board for auditors of public companies.

39. Describe the six organizational structures available to CPA firms.

medium
Answer:
CPA firms can take one of six organizational forms:
Proprietorship. This form is limited to firms with only one owner.
General partnership. This form is similar to a proprietorship, except that it
applies to multiple owners.
General corporation. Unlike a general partnership, shareholders in a general
corporation are liable only to the extent of their investment in the corporation.
Professional corporation. Professional corporations can have one or more
shareholders. Personal liability protection for shareholders in professional
corporations varies widely from state to state.
Limited liability company. This form combines the most favorable attributes of
a general corporation and a general partnership. LLCs are taxed like a general
partnership, but its owners have limited personal liability like shareholders of a
general corporation.
Limited liability partnership. An LLP is structured and taxed like a general
partnership. However, the personal liability protection of an LLP is less than
 that of a general corporation or an LLC, but it is greater than a general
partnership. Many accounting firms now operate as LLPs.

40. There are ten generally accepted auditing standards, divided into three
medium categories. List, by category, each of these ten standards.

Answer:
General Standards
Adequate technical training and proficiency.
Independence in mental attitude.
Due professional care.

Standards of Fieldwork
Adequate planning and supervision.
Understand the entity and its environment including internal control.
Sufficient appropriate audit evidence.

Standards of Reporting
Whether statements were prepared in accordance with GAAP.
Circumstances when GAAP was not consistently followed.
Adequacy of informative disclosures.
Expression of opinion on financial statements as a whole.

41. In the context of auditing, explain what is meant by an independent mental

medium attitude. Discuss how internal auditors can have an independent mental attitude
when they are employed by the company they audit.

Answer:
Independent mental attitude refers to a state of mind in which the CPA is totally
unbiased with respect to the client and the financial information under audit.
Although internal auditors are employees of the organization for which their
audits are performed, internal auditors should be independent of the function
being examined and should report their findings to a level high enough in the
organization to allow the auditor to be free from influence by the party, or
parties, being examined.

42. (SOX) The Sarbanes-Oxley Act established the Public Company Accounting Oversight
medium Board (PCAOB). What are the PCAOB’s primary functions? Who performed
these functions prior to the PCAOB?

Answer:
The PCAOB has responsibility for providing oversight auditors of public
companies, establishing auditing and quality control standards for public
 company audits and performing inspections of the quality controls at audit firms
performing those audits. These functions were formerly the responsibility of the
American Institute of Certified Public Accountants.

43. What are four of the major functions of the AICPA?

challenging
Answer:
Major functions of the AICPA include:
Establishing standards and rules that practicing CPAs must follow. These
standards consist of auditing standards for auditors of private companies,
compilation and review standards, other attestation standards, and the Code of
Professional Conduct.
Research and publication. AICPA publications include the Journal of
Accountancy, industry audit guides, periodic updates of the Codification of
Statements on Auditing Standards, and the Code of Professional Conduct.
Promoting the accounting profession.
Developing specialist certifications.
Writing and grading the uniform CPA examination.
Providing continuing education seminars for its members.

44. Discuss the purpose of the Securities and Exchange Commission and its
challenging influence on setting generally accepted accounting principles.

Answer:
The overall purpose of the SEC is to assist in providing investors with reliable
information upon which to make investment decisions. As a result of its
authority for specifying financial reporting requirements, the SEC has
considerable influence in setting generally accepted accounting principles.
Although the SEC has taken the position that accounting principles should be
set by the profession (FASB), the SEC’s opinion is generally considered in any
major change in GAAP proposed by the FASB.

45. The purpose of the AICPA’s CPA Vision Project is to help CPAs make sense of
challenging our changing and complex world. The Project has identified core values that
CPAs must be aware of in the future. What are the top five core values?

Answer:
Continuing education and lifelong learning
Competence
Integrity
Attuned to broad business issues
 Objectivity

Other Objective Answer Format Questions

46. Membership in the AICPA is restricted to CPAs who are currently practicing as
easy independent auditors.
b a. True
b. False

47. Membership in the AICPA is mandatory for all licensed practicing CPAs.
easy a. True
b b. False

48. Any public accounting firm can be a member of the AICPA if the firm meets
easy the membership requirements.
a a. True
b. False

49. Statements on Auditing Standards (SASs) are issued by the Public Company
easy Accounting Oversight Board.
b a. True
b. False

50. (SOX) Auditors of public companies should, in the absence of guidance issued by the
easy PCAOB, follow auditing standards issued by the SEC.
b a. True
b. False

51. (SOX) The U.S. Congress has oversight responsibility for the PCAOB.
medium a. True
b b. False

52. Form 10-K must be filed with the SEC whenever a public company experiences
medium a significant event.
b a. True
b. False

53. In a limited liability partnership, partners are personally liable for liabilities
medium arising from negligent acts of other partners, but not for liabilities arising from
b acts of other employees.
a. True
b. False

54. Limited liability companies are structured and taxed like a general partnership,
medium but their owners have limited personal liability similar to that of a general
a corporation.
a. True
b. False

55. (SOX) All CPA firms registered with the PCAOB are required to undergo a peer
medium review at least once every two years.
b a. True
b. False

56. Statements on Auditing Standards (SASs) are considered to be interpretations of

medium the ten generally accepted auditing standards.
a a. True
b. False

57. (SOX) Any CPA firm that audits more than 100 public companies is required to have
medium an annual inspection by the PCAOB.
a a. True
b. False

58. The overall purpose of the Securities and Exchange Commission is to assist in
medium providing investors with reliable information upon which to make investment
a decisions.
a. True
b. False

59. International Standards on Auditing are issued by the International Auditing

medium Practices Committee.
a a. True
b. False
Part I- Multiple Choice Questions

1. The third general standard states that due care is to be exercised in the performance of an
audit. This standard is generally interpreted to require:
A. objective review of the adequacy of the technical training of firm personnel.
B. thorough review of the existing internal control structure.
C. critical review of work done at every level of supervision.
D. periodic review of a CPA firm’s quality control procedures.
2. Which one of the following is not one of the three General Standards?
A. Proper planning and supervision.
B. Independence of mental attitude.
C. Adequate training and proficiency.
D. Due professional care.
3. Which of the following is not an essential component of quality control?
A. Policies and procedures to ensure that firm personnel are actively
engaged in marketing strategies.
B. Policies and procedures to ensure that the work performed by firm
personnel meet applicable professional standards.
C. Policies to ensure that personnel maintain their independence in fact and
in appearance.
D. Policies that ensure that monitoring activities are effectively applied.
4. Which one of the following is not a Field Work Standard?
A. Adequate planning and supervision.
B. Due professional care.
C. Understand the entity and its environment including internal control.
D. Sufficient appropriate audit evidence.

5. The General Standards stress the importance of:

A. evidence accumulation.
B. personal qualities the auditor should possess.
C. communicating the auditor’s findings to the reader.
D. general supervision of the audit.

6. The generally accepted auditing standard that requires “Adequate

technical training and proficiency” is normally interpreted as requiring
the auditor to have:
A. formal education in auditing and accounting.
B. worked for an entity similar to the entity being audited.
C. independence in mental attitude
D. a graduate degree in a business field.

7. Within the context of quality control, the primary purpose of continuing professional
education and training activities is to enable a CPA firm to provide its personnel with:
A. technical training that assures proficiency as a valuation expert.
B. professional education that is required in order to perform with due professional care.
 C. knowledge required to fulfill assigned responsibilities.
D. knowledge required to perform a peer review.
8. Which of the following statements most accurately captures the intent of the standards of
field work?
A. Field work standards are primarily concerned with personal attributes necessary during
the conduct of the audit.
B. Field work standards provide extensive guidance regarding the conduct of an audit.
C. Field work standards are primarily directed at the auditor’s planning, understanding of
internal control, and evidence accumulation.
D. Field work standards are primarily concerned with the conduct of substantive testing as
opposed to testing of internal controls.
9. A listing of all the things which the auditor will do to gather sufficient, competent
evidence is the:
A. audit strategy.
B. audit program.
C. audit procedure.
D. audit risk model.

10. The most important consideration in developing the audit plan and audit program is the:
A. client’s size.
B. client’s industry.
C. audit firm’s available personnel.
D. the audit risk model used in its planning form.
[Link] procedures are defined in the auditing standards as:
A. compliance tests.
B. substantive tests.
C. tests of controls.
D. helpful procedures not possessing the validity of other tests available to the auditor.
12. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?
A. The audit program.
B. The auditor’s judgment.
C. Generally accepted auditing standards.
D. The auditor’s working papers.
13. Many auditors perform extensive analytical procedures on audits because:
A. they are required by GAAS.
B. they pinpoint errors in accounts.
C. they indicate areas of potential risk and misstatement.
D. they are required for tests of controls.
14. Collectively, procedures performed to obtain an understanding of the entity
and its environment, including internal controls, represent the auditor’s:
A. audit strategy.
B. tests of controls.
C. risk assessment procedures.
D. tests of transactions.
15. Which of the following is not a direct result of performing analytical
procedures?
A. Identify areas of potential misstatements.
B. Reduce detailed audit tests.
C. Understand the client’s business.
D. Identify specific errors in the accounts.