A change in the financial statement thatcauses a reasonable person to change a

decision is

material

A company files for bankruptcy after it becomes known that the CFO stole millions of dollars andfraudulently manipulated the financial statements to cover theft. The theft had been going on foryears, and the the auditor had consistently issued unqualified audit reports on the financialstatements during the period of fraud. In a fed court the CFO was found guild of fraud, and CEOand CFO guilty of lesser charges. The damage settlement was assessed 80% against the CFO and10% each against the CEO and audit firm. Even though the CFO has no assets to pay the damageaward, the audit firm only has to pay 10%. This is an example of:

separate and proportionate liabilitytheory

A CPA should be concerned about violatingAICPA Rule 301 on Confidential Client

Information when

disclosing information gained about the client duringthe audit without the client's permission and whennone of the exceptions to disclosure are met

A CPA who performs audits will likelyhave to adhere to

the code of conduct in the state wherehe is licensed

A non-PCAOB audit is performed ona

nonpublic company

A specialist who assists on an auditcan be

an employee of the audit firm, client,or neither

A walk through is combination of inquiry, observation, inspection, andreperformance used for understanding thesystem and assessing design effectiveness

Accountants who are employees ofcorporations can have job descriptions

thatinclude audit functions

After the auditor has determined materiality at thefinancial statement level, he evaluates the amount ofmisstatement that would be material at the accountbalance level. The term for this threshold amount is

tolerable misstatement

AICPA membership is voluntary

AICPA still sets standards that govern theaudits of... and designs the...

nonpublic companies and nonauditengagements in the US and designs and

administers the CPA examination

All of the 10 generally acceptedauditing standards apply to

a financial statement audit

Among the things that a plaintiff must provefor an auditor to be liable for damages under10b-5 of the 1934 Securities Exchange Act is:

the financial statements werematerially misstated

An audit firm's knowledge andexperience must be considered by the

audit firm in client acceptance decisions to determinewhether the firm has the competence to provide theprofessional services requested

An audit of internal control over financialreporting (ICFR) is integrated with

a financial statement audit

An auditor investigates a potentialclient's business activities because

one needs to confirm that the company'sbusiness activities are compatible with thatthe audit firm wants in its client portfolio

An auditor issues a going concernopinion when

there is uncertainty about whether the company willhave or be able to obtain sufficient resources to meetits obligations in the upcoming year

An auditor will only enter into negotiationor arbitration related to a lawsuit if

the auditor is guilty, the auditor is not guilty but isconcerned that the plaintiff may prevail, or theauditor believes it will cost less to settle a case thanpursue defending against the allegations.

An auditor's report at the completion ofan engagement includes a reference to

the audit standards used for the audit

An engagement letter distinguishes those responsibilities that aremanagements vs. those that are the

auditors

An engagement letter does what? documents the understanding of theengagement between the auditor and

client

An engagement letter is drafted and agreed upon at thebeginning of the audit

An integrated audit is composed of: financial statement audit and an audit ofinternal control over financial reporting

An integrated audit is what type ofprocess?

systematic: audit has a plan of action andspecific steps to achieve and outcome

An RFP contains information about the proposalprocess and engagement

Analytical procedures are used during the planning staged, throughoutthe audit of the financial statements, and

designed to consider relationshipsAssume a CPA conducts an audit in accordance with GAAS andissued unqualified audition opinions that contain misstatementsthat are immaterial both individually and on an aggregated basis.The CPA is sued under common law by shareholders, what could bea defense of the CPA?

The problems in the financial statementsdid not make them materially misstated

Audit planning is revisited throughout the audit asmore information is obtained

Auditing and accounting are highlyrelated because

to be a good auditor you have to be agood accountant

Auditors obtain information aboutpotential clients from all the following..

and not from...

prior auditors, published documents, andbusiness documents... not from

shareholders

Auditors of public companies mustfollow

PCAOB Auditing Standards whenperforming integrating audits

Auditors review the financialinformation of potential clients to

look for information about relatedparties

Audits are of value because whenfinancial statements are audited...

investors have more confidence intheir fairness and reliability

Audits are performed because (2reasons)

required and contribute value

Based on AICPA guidance, an auditor'sindependence is impaired by

owning any of audit client's stock, any materialamount of the stock of the parent company, orhis/her spouse owning any of an audit client's stock

Based only on the original outcome of theUltramares case, to which of the following partieswill an accountant be liable for negligence

parties in privity: status of someone who isparty to a contract that carries with it rights

and flow from the agreement

Being found guilty of criminal fraudresults from

a charge made by the governement

Client acceptance and continuanceprocedures may inform the auditor about

what type of risk of a client?

engagement risk

Client cannot sue if CPAs issue an auditreport with unqualified opinions if

allegation was not for grossnegligence or constructive fraud

CPAs constitute a profession because there are standards for entry and membership, thereis some self discipline and regulation as well asgovernance with other organizations, and CPAs arerecognize a commitment to the public interest

Design effectiveness of ICFR isevaluated to determine

which controls to test for operatingeffectiveness

Doll, CPA performed an integrated audit for Show Corp and, though unintentionally, failed tofollow PCAOB Audit Standards. Doll issued unqualified opinions on ICFR and the financialstatements weren't qualified. Doll knew Show was trying to obtain financing with the auditreports, and they were successful in negotiations and received a loan from Urban Bank. Showexperienced business down turn and failed to repay the loan and Urban sued Doll. Based onapplication of Restatement of Torts extension what is most likely outcome?

Urban Bank will win because Doll knew that Showwas presenting the financial statement and auditreports to banks that would rely on the financialstatements

During audit planning the auditor finds that gross profit is muchgreater in the current year than in prior years and decides toincrease the audit emphasis on sales and inventories. The auditormost likely discovered the change in gross profit by

analytical procedures

Economic events and actions arerepresented in

fairly presented financial statements

Entity level controls can affect the audit plan for tests of programcontrols

evidence is composed of various items including underlyingrecords of accounts and documents

Evidence that is sufficient is relevant

Financial statement restatements are important consideration for an auditor investigating apotential client, may be needed to correct an error,may be an indicator of the possibility of materialweaknesses in ICFR

For the accounts receivable account, considermanagement's assertion about "valuation" The auditobjective for this assertion would be

to determine that the allowance fordoubtful accounts is fair

For the audit of a public company anaudit firm's independence is impaired if

a partner involved with the engagement leaves theCPA firm and takes a job with the audit client in theposition of CEO within six months of when the firmstarted the audit engagement

For the ICFR audit of an integratedaudit, outsourced operations may be

material to the audit client's ICFR and inthat case audit evidence must be obtained

and evaluated

For the purposes of an integratedaudit, materiality is

assessed within the context of userswith certain qualifications

If a CPa is sued using the 1934 Act, 10b-5,what does a shareholder need to prove the

prevail in the suit?

Intentional misleading conduct intendedto damage the shareholders by the

auditor

In order for evidence to be sufficientit must be

persuasive

In the Arthur Andersen case, the SupremeCourt did not uphold the finding of the

lower court because

only the individuals within ArthurAndersen could be charged with

obstruction of justice

Independence in fact is the ideal standard for auditors, and auditor'sstate of mind, with no bias toward or againsta client related to an audit engagement

Independence issues that would stop anaudit firm from proposing on a potential

client may result from

financial and business interest in thepotential company

Information for developing the auditstrategy comes from all the follow sources

client acceptance and continuance procedures,auditors experience, and client deadlines ondeliverables documented in the engagement letter

Inquiry of the predecessor auditor is helpful even if the predecessor responds witha statement indicating that no informationor only a limited response can be made

Intentionally helping the client's CEO and CFO toredraft the company's financial statements to includematerial fraudulent information would cause anauditor to be vulnerable to

a criminal lawsuit under theSecurities Act

Management and the auditor both provide reports on ICFR

Misstated financial statementsshould be

detected regardless of whether theyare a result of error or fraud

Moral development theory describes theconventional level as a belief that

obeying the law and acting out of concernfor what others think is behaving in a

moral manner

Obtaining an understanding of ICFR andassessing its design effectiveness

contribute to the auditor accomplishingselecting the controls to test, and

developing the audit strategy

Old CPA is sued by Young Corp using 10b-5. If young Corp prevails in the suit, it will

be entitled to recover

the amount of any loss caused byfraud

Out of all risks, what might be the greatestconcern for a large international audit firmconsidering accepting a new client?

Management authority is concentrated inone or two people, even thought the client

company is very large

PCAOB is a... the PCAOB is a nonprofit corporation established by Congress tooversee the audits of public companies in order to protect theinterests of investors and further the public interest in thepreparation of informative, accurate and independent audit reports.

Professional guidance useful to the clientacceptance and continuance process is

found in

Quality Control Standards and Auditing Standards onfraud, COSO Enterprise Risk management andinternal control frameworks, Auditing Standards onrisk and Auditing Standards on ICFR

Professional standards related to clientacceptance are legally required by

SOX

Quality control standards arerequired by

Sarbanes-Oxley Act

Reasonable assurance means a high level assurance

Related party transactions must be disclosed

Rule 102 of the AICPA Code of Conduct discussesintegrity and objectivity, and includes a prohibitionon subordinating judgment to others. This means that

the CPa should not let others make adecision that is his responsibility

Rulings and Interpretations of the AICPACode of Conduct require justification if

a member departs from them

Scoping decisions include consideration of multiple client locations, notdirection of individual auditors, nor number ofprofessional staff at audit firm, nor audit fee

Shareholders of large multinationalcompanies need audits to

have assurance regarding the fairnessof financial statements

State governance over CPAs haveultimate control over

the ability of an individual to belicensed as a CPA

Tests of controls can be combinedwith

substantive procedures, substantive procedures arethose activities performed by the auditor to detectmaterial misstatement at the assertion level.

The AICPA Code of Conduct appliesto

all members

The AICPA rule on contingent feesprohibits

audit fees that vary based on the typeof audit opinion issued

The amount of supervision requiredfor a staff auditor

will depend on the difficulty of the taskand the skills and experience of the

individual

The audit committee is a subset of the board of directors, requires at leastone "professional" with experience

The audit planning meeting provides an opportunity to instruct assistants on the need tocommunicate accounting and auditing matters theyfeel are significant to the financial statements to theauditor responsible

The audit strategy for an integratedaudit documents

the big picture issues of an audit

The auditor can respond to the financialstatements and management's reports by

changing the audit report

The auditor in charge of engagement thatrequires the skills of an auditor particularlytrained to deal with the impacts of IT

must be sufficiently knowledgeable towork with IT auditor

The COSO Internal ControlFramework is a set of criteria used by

the auditor to assess whether internalcontrols over financial reporting (ICFR)

are effective

The definition of materiality includes: prudent officials, reasonable persons, andindividual or aggregated matters

The ethical orientation known asethic of care is applicable to

the team setting used in publicaccounting firms

The nature timing the extent of auditprocedures may be influenced by

information obtained on prior year auditsof a recurring audit engagement once the

information has been updated

The PCAOB adopted the AICPA Statements on Auditing Standardson an interim basis and has replaced

some of them with its Auditing Standards

The PCAOB is granted by SOX thepower to

issue subpoenas

The PCAOB top down approach to anintegrated audit considers

entity level controls because they mayreduce risk

The responsibility of a CPA whenperforming an audit is to

behave as a reasonably prudent CPAwould in performing the audit

The risk that an auditor may unknowinglyfail to modify his opinion on financialstatements that are materially misstated is

audit risk

The SEC and PCAOB have authorityover

the standards that affect integratedaudits

The SEC general standard of auditorindependence includes guidance that the

audit firm cannot

perform services that would result in itperforming management tasks or auditing

its own work

The SEC rules of practice can be usedto bar

an auditor or audit firm frompracticing before the SEC

The SEC will not accept the filings ofa company if

the audit is performed by a firm thatis not registered with the PCAOB

The three part test for near privity established in theCredit Alliance case make is relatively difficult forthird party financial statements users to

establish near privity because it isuncommon for them to have direct

interaction with a company's auditor

Using a moral decision makingmodel is valuable because

it helps decision makers recognize themoral components in a decision they are

making

Using the assumption that auditors areprofessionals who have a contract with

society,

auditors receive prestige and economicreward for their commitment to behave asprofessionals and protect the public interest

Using the court system as a primarycontrol for the behavior of auditors is not

effective at promoting public confidencebecause it occurs only after a problem has

been discovered

Using the terms of the fraud triangle, if managementplaces great importance on achieving the financialperformance predicted by analysts and it seems that thepredictions will not be achieved, this is an example of:

incentive for fraudulent financialreporting

What audit procedure cannot beperformed at an interim date?

tests of year end closing processes

What gives specific defenses to an auditor regardingdue diligence: hence if an auditor can prove areasonable audit examination was performed, thenthe auditor is not liable of the related damages

1933 Act, Section 11

What is important to the auditor wheninvestigating a potential new audit client

whether audit committee has financial expert,existence of a company code of ethics, extensiveamount of regulatory oversight in the company'sindustry

What is not scoping in an auditengagement vs. what is?

The general level of economic activity in the company's geographicenvironment vs. scoping is the company is a subsidiary and theparent is audited by a different firm,the company does business inmultiple locations, and there are services that the companyoutsources

What is not true based on the Restatement ofTorts, Section 522, affecting the auditor'sliability to foreseen third parties

Liability for damages will extend to those who couldhave been expected to rely on the audited financialstatements only when the auditor is found guilty of ata minimum gross negligence of constructive fraud

What is part of the risk assessment brainstorming about fraud, understandingthe client's system, and evaluating design

effectiveness of ICFR

What is the most serious indicator ofhigher risk

competition in the industry is increasing,and the company is experiencing

unexpected obsolescence of its products

What is true about significant, unusual, orhighly complex transactions, especially

close to period end

they are expected as part of the financialclosing process and represent typical risk

What might be difficult information for anauditor to obtain prior to accepting a

public company as a client

the amount and quality of informationavailable to the people within the companywho have the decision making responsibility

What must a plaintiff prove under the liability provisionsof the Securities Act of 1933 to be awarded damages froma CPA who issued an unqualified opinion on financialstatements included in a registration statement

The financial statements audited bythe CPA were materially misstated

What should not cause the auditor tobe concerned about management

Management stays fully informed aboutthe financial performance of the company

on a regular basis

What would the auditor not consider asan indicator of the need for furtherinvestigation of a potential client?

The company is highly decentralized, top managementdelegates a significant amount of decision makingauthority and spends most of its management time onoversight of those decision makers

When a CPA is found guilty of being actively involved in a fraud,and as part of the fraud issued a misleading and inappropriateunqualified opinion on a company's financial statements, to whomwill the audit probable be found liable under common law?

Anyone who suffered a loss as a resultof the fraud

When an auditor performs procedures to determinethat a company has shown all of its liabilities on ityear end financial statements, the relatedmanagement assertion is

completeness. Others include existence,rights and obligations, valuation or

allocation, and presentation and disclosure

When evaluating the dollar amount offinancial statement materiality, the

auditor's judgment mainly addresses

the amount of misstatement that would influence aneconomic decision of a reasonable person withappropriate qualifications relying on the financialstatements

When financial statements arerestated it may result from

discovery of an error in past financialstatements

When performing an audit, theauditor is objective, meaning

the auditor is not biased when evaluatingevidence supporting management's

assertions

When the auditor considers whether acompany's controls are capable ofpreventing errors, the auditor is

assessing design effectiveness