Auditing Chapter 2 Essay Practice

Front 1

Distinguish between generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP). What professional organization establishes GAAS? What professional organization establishes GAAP?

Back 1

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.

Front 2

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

Back 2

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.

Front 3

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

Back 3

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.

Front 4

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

Back 4

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.

Front 5

Describe the six organizational structures available to CPA firms.

Back 5

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.

Front 6

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

Back 6

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.

Front 7

In the context of auditing, explain what is meant by an independent mental attitude. Discuss how internal auditors can have an independent mental attitude when they are employed by the company they audit.

Back 7

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.

Front 8

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

Back 8

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.

Front 9

What are four of the major functions of the AICPA?

Back 9

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.

Front 10

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

Back 10

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.

Front 11

The purpose of the AICPA’s CPA Vision Project is to help CPAs make sense of 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?

Back 11

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