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Auditing standards audit reports practice exam

1. Who is responsible for establishing auditing standards for audits of public companies? Who is responsible for establishing auditing standards for private companies? Explain.

2. Generally accepted auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable practitioners to improve the quality of their performance. As the standards are now stated, some critics believe that they provide little more than an excuse to conduct inadequate audits. Evaluate this criticism of the 10 generally accepted auditing standards.

3. The following questions deal with generally accepted auditing standards. Choose the best response.
a. The first general standard, which states in part that the audit must be performed by a person or persons having adequate technical training, requires that an auditor have
(1) education and experience in the field of auditing.
(2) ability in the planning and supervision of the audit work.
(3) proficiency in business and financial matters.
(4) knowledge in the areas of financial accounting.

b. Which of the following best describes what is meant by generally accepted auditing standards?
(1) Acts to be performed by the auditor.
(2) Measures of the quality of the auditor's performance.
(3) Procedures to be used to gather evidence to support financial statements.
(4) Audit objectives generally determined on audit engagements.

c. The general group of the generally accepted auditing standards includes a requirement that
(1) field work be adequately planned and supervised.
(2) the auditor's report state whether or not the financial statements conform to generally accepted accounting principles.
(3) due professional care be exercised by the auditor.
(4) informative disclosures in the financial statements be reasonably adequate.

d. What is the general character of the three generally accepted auditing standards classified as standards of field work?
(1) The competence, independence, and professional care of persons performing the audit.
(2) Criteria for the content of the auditor's report on financial statements and related footnote disclosures.
(3) The criteria of audit planning and evidence gathering.
(4) The need to maintain an independence in mental attitude in all matters pertaining to the audit.

4. The Mobile Home Manufacturing Company is audited by Rossi and Montgomery, CPAs. Mobile Home has decided to issue stock to the public and wants Rossi and Montgomery to perform all the audit work necessary to satisfy the requirements for filing with the SEC. The CPA firm has never had a client go public before.

Required
a. What are the ethical implications of Rossi and Montgomery's accepting the engagement?
b. List the additional problems confronting the auditors when they file with the SEC as compared to dealing with a regular audit client.

5. The following questions concern unqualified audit reports. Choose the best response.
a. Which of the following statements about a combined report on the financial statements and internal control over financial reporting is correct?
(1) The auditor's opinion on internal control is for the same period of time as the opinion on the financial statements.
(2) The report includes additional paragraphs for the definition and limitations of internal control.
(3) The introductory, scope, and opinion paragraphs are unchanged from a report for an audit of the financial statements only.
(4) GAAP is the framework used to evaluate internal control.

b. The date of the CPA's opinion on the financial statements of the client should be the date of the
(1) closing of the client's books.
(2) receipt of the client's letter of representation.
(3) completion of all important audit procedures.
(4) submission of the report to the client.

c. If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the
(1) name of the other auditor.
(2) nature of the inquiry into the other auditor's professional standing and extent of the review of the other auditor's work.
(3) portion of the financial statements audited by the other auditor.
(4) reasons for being unwilling to assume responsibility for the other auditor's work.

6. The following questions concern audit reports other than unqualified audit reports with standard wording. Choose the best response.
a. A CPA will issue an adverse auditor's opinion if
(1) the scope of the audit is limited by the client.
(2) the exception to the fairness of presentation is so material that an "except for" opinion is not justified.
(3) the auditor did not perform sufficient auditing procedures to form an opinion on the financial statements taken as a whole.
(4) major uncertainties exist concerning the company's future.

b. An auditor will most likely disclaim an opinion because of
(1) the client's failure to present supplementary information required by the Financial Accounting Standards Board (FASB).
(2) inadequate disclosure of material information.
(3) a client-imposed scope limitation.
(4) the qualification of an opinion by the other auditor of a subsidiary when responsibility has been divided.

c. The opinion paragraph of a CPA's report states: "In our opinion, except for the effects of not capitalizing certain lease obligations, as discussed in the preceding paragraph, the financial statements present fairly," in all material respects, ... This paragraph expresses a(an)
(1) Unqualified opinion.
(2) Unqualified opinion with explanatory paragraph.
(3) Qualified opinion.
(4) Adverse opinion.

7. A careful reading of an unqualified report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided:
a. "The financial statements referred to above present fairly in all material respects the financial position" rather than "The financial statements mentioned above are correctly stated."
b. "In conformity with accounting principles generally accepted in the United States of America" rather than "are properly stated to represent the true economic conditions."
c. "In our opinion, the financial statements present fairly" rather than "The financial statements present fairly."
d. "Brown & Phillips, CPAs (firm name)," rather than "James E. Brown, CPA (individual partner's name)."
e. "We conducted our audit in accordance with auditing standards generally accepted in the United States of America" rather than "Our audit was performed to detect material misstatements in the financial statements."

Solution Preview

1. Who is responsible for establishing auditing standards for audits of public companies? Who is responsible for establishing auditing standards for private companies? Explain.

PCAOB establishes auditing standards for publicly traded companies. The Auditing Standards Board (ASB) of the AICPA creates auditing standards for private companies. Prior to Sarbanes-Oxley Act of 2002, the ASB created auditing standards for all companies. The change in law required a higher standard for public firms. The PCAOB was created to ensure that the higher standard is met and is charged with creating auditing standards that set the world standard for high quality audits.

http://www.ehow.com/facts_7225410_comparison-private-company-audit-standards.html
http://www.business.uconn.edu/users/adunbar/ACCT_382/content_modules/accounting_auditing_literature/html/AICPA-PCAOB-audit-standards.htm

2. Generally accepted auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable practitioners to improve the quality of their performance. As the standards are now stated, some critics believe that they provide little more than an excuse to conduct inadequate audits. Evaluate this criticism of the 10 generally accepted auditing standards.

The 10 standards are general goals, such as having the auditor be independent, qualified, and careful ("due care"). The audit must be planned, supervised, review controls, and gather sufficient evidence. The reports must include certain things. And, yes, they are not enough to ensure quality audits. Why not?

These are general goals, not "to-do" lists such as confirm accounts receivable for all balances over 10% of AR balance. What is "adequate" requires professional judgment because the risk assessments, types of evidence, and business transactions are unique with each client. Each audit is different, even with the same client, because the transactions change, the risks change, the economy changes, financial experts leave and are hired, and systems update. So, it is not possible to "specify enough" to make sure that audit are all high quality. Audits are tailored. And they should be. If you came up with a generic audit, clients that wished to mislead, would know just how to do it to avoid detection. So, the element of surprise is important.

However, with that said, we still need a framework for understanding the key elements that must be in place for all quality audits. And the standards give us that: independents, expertise, due care, control review, adequate evidence, planning, supervision and so forth.

3. The following questions deal with generally accepted auditing standards. Choose the best response.
a. The first general ...

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Your tutorial is 678 words plus 3 references to assist you in understanding the auditing standards.

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