AUD Chapter 1

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Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

The attestation standards provide a framework for the attest function beyond historical financial statements. (Two principal conceptual differences exist between the attestation standards and GAAS. First, the attestation standards provide a framework for the attest function beyond historical financial statements. Second, the attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit (an opinion).)

Which of the following is not an attestation standard?

A sufficient understanding of internal control shall be obtained to plan the engagement. (No attestation standard mentions internal control. However, the audit standards state, "The auditor should obtain an understanding of internal control relevant to the audit" (AU-C 315).)

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAEs) when

Testifying as an expert witness in accounting and auditing matters given stipulated facts: No, Examining a client’s financial projection that presents a hypothetical course of action: Yes (The SSAEs apply to attest engagements. An attestation engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Litigation support services are transaction services, a category of consulting services. The Statement on Standards for Consulting Services applies.)

In performing an attest engagement, a CPA typically

Expresses a conclusion about a written assertion. (When a CPA in the practice of public accounting performs an attest engagement, the engagement is subject to the attestation standards. An attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, according to the second attestation standard of reporting, the report shall state the practitioner’s conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated. However, the conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter.)

Which of the following professional services is considered an attest engagement?

An engagement to report on compliance with statutory requirements. (In an attest engagement, a practitioner issues an examination, a review, or an agreed-upon procedures report on subject matter (or an assertion about subject matter) that is the responsibility of another party (AT 101). (But the attestation standards provide for a compilation of prospective financial statements). Thus, attest engagements are not limited to traditional financial statement audits. For example, attest services may extend to management’s compliance with specified requirements or the effectiveness of internal control over compliance.)

Which of the following statements is true concerning an auditor’s responsibilities regarding financial statements?

An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion. (GAAS require the audit report to state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.)

In connection with the element of monitoring, a CPA firm’s system of quality control ordinarily should provide for the maintenance of

Documentation to demonstrate compliance with its policies and procedures. (Monitoring is concerned with providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued. Documentation of monitoring includes procedures, evaluations, deficiencies, and the bases for taking or not taking further action. Documentation of all elements of quality control should be retained for a period of time sufficient to enable those performing monitoring procedures and a peer review to evaluate the extent of the firm’s compliance with its quality control standards, or for a longer period if required by law or regulation (QC 10).)

An attest engagement is one in which a CPA is engaged to

Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party. (According to AT 101, Attestation Standards, an attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party. The conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter.)

Which of the following professional services would be considered an attestation engagement?

Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions. (Statements on Standards for Attestation Engagements (SSAEs) apply generally to performance of an examination, review, or agreed-upon procedures engagement to report on subject matter, or an assertion about it, that is the responsibility of another party. Accordingly, the SSAEs apply to engagements to assemble or report on prospective financial statements (PFSs) that reasonably might be expected to be used by third parties. PFSs present expected financial position, results of operations, and cash flows. They include forecasts and projections. A forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take. Furthermore, a review is not permitted to be performed with regard to a forecast or projection. However, a practitioner may compile, examine, or apply agreed-upon procedures to a partial presentation, that is, a presentation of prospective financial information that omits one or more items required by the minimum presentation guidelines for PFSs. Failure to present significant cash flows is such an omission, although a statement of cash flows is not required. Thus, preparing the income statement and balance sheet for one year in the future based on client expectations and predictions is an attestation engagement to assemble a partial presentation of a forecast. The presentation is not partial if the omitted information may be derived from the presentation (AT 101 and AT 301).)

Which of the following procedures would be most effective in reducing attestation risk?

Examination of evidence. (To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.)

A CPA is engaged to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of

Statements on Standards for Attestation Engagements (SSAEs). (The AICPA’s Statements on Standards for Attestation Engagements (SSAEs) cover attest engagements. Examining management’s assertion that the entity’s schedule of investment returns is an example of an examination engagement that falls under the guidelines of the SSAEs.)

Auditing Interpretations are issued by the Audit Issues Task Force of the Auditing Standards Board (ASB) to provide timely guidance on the application of pronouncements of the ASB. They are

Not auditing standards. (Auditing Interpretations of the SASs are numbered in the AU-C 9000 series and immediately follow the related sections in the codification of professional standards. They are interpretive publications and therefore are not auditing standards. Interpretive publications are recommendations for applying GAAS in specific situations. Other interpretive publications include AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position.)

A practitioner is engaged to express an opinion on management’s assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

Statements on Standards for Attestation Engagements. (Statements on Standards for Attestation Engagements relate to services that practitioners provide beyond those on traditional historical financial statements. Thus, an engagement to express an opinion on management’s assertion that the square footage of a warehouse offered for sale is 150,000 square feet falls into the category of services beyond those on traditional historical financial statements.)

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to

Provide assurance on investment performance statistics prepared by an investment company on established criteria. (SSAEs apply only to attest engagements for which no specific standards (e.g., SASs or SSARSs) apply. In an attest engagement, a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, the practitioner must state a conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated in the report. Attest services traditionally have been limited to expressing an opinion on historical financial statements on the basis of an audit in accordance with U.S. GAAP. But CPAs increasingly provide assurance on representations other than historical statements and in forms other than an opinion.)

Which of the following statements is true concerning an auditor’s responsibilities regarding financial statements?

An auditor may draft an entity’s financial statements based on information from management’s accounting system. (The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management’s accounting system. However, the auditor’s responsibility for the financial statements (s)he has audited is confined to the expression of his or her opinion on them.)

Who establishes generally accepted auditing standards?

Auditing Standards Board and the Public Company Accounting Oversight Board. (AICPA Conduct Rule 202, Compliance with Standards, requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opinions on internal control for public companies.)

In testing the existence assertion for an asset, an auditor ordinarily works from the

Accounting records to the supporting evidence. (The existence assertion concerns whether assets, liabilities, or equity interests of the entity exist at a given time. The direction of testing is ordinarily from the accounting records to the supporting evidence, often including direct observation of the asset. Thus, the auditor selects from items contained in a financial statement amount and searches for appropriate (relevant and reliable) evidence that is sufficient.)

An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertion(s) of

Classification and understandability: No, Existence: Yes (The existence assertion relates to whether the related balance exists at the balance sheet date. Observation of the mailing of monthly statements as well as observing the correction of reported errors provides evidence that controls may be effective in ensuring that client customers are genuine.)

According to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards, "presumptively mandatory requirements" in the auditing standards use which word?

Should (The auditor must comply with a presumptively mandatory requirement in all cases in which the requirement is relevant except in rare cases. The standards use the word "should" to indicate this requirement.)

Which of the following best describes the reason an independent auditor reports on financial statements?

The company preparing the statements and the persons using the statements may have different interests. (Management and financial statement users may have an adversary relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.)

The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley’s financial statements. The primary objective of this audit is to provide assurance to the

Investors in Donley securities. (An audit’s primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.)

Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)?

They are generally accepted auditing standards. (Generally accepted auditing standards are defined as SASs. Conduct Rule 202 requires members who perform professional services to comply with standards promulgated by bodies designated by the AICPA Council. Thus, an AICPA member who performs an audit of a nonissuer must comply with SASs promulgated by the Auditing Standards Board (ASB).)

During the course of an audit, an auditor required additional research and consultation with others. This additional research and consultation is considered to be

An appropriate part of the professional conduct of the engagement. (An Interpretation of Conduct Rule 201 states that in many cases additional research and consultation with others may be necessary during an engagement. The auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence.)

One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to

Provide reasonable assurance that the integrity of the client is considered. (CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with applicable requirements (QC 10).)

The SEC has strengthened auditor independence by requiring that management

Report the nature of disagreements with former auditors. (The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing Form 8-K. Such disclosure inhibits management from changing auditors to gain acceptance of a questionable accounting principle. Also, a potential auditor must inquire of the predecessor auditor before accepting an engagement (AU-C 210). Thus, the inquiry provides an opportunity to confirm the information given in the 8-K report. However, confidential client information may only be communicated with the client’s consent.)

Which of the following is a professional engagement that a CPA may perform to provide assurance on a system’s reliability?

CPA SysTrust. (The objective of SysTrust is an attestation report on management’s assertion about the reliability of an information system that supports a business or a given activity. A CPA may also report directly on the reliability of the system. This assurance service is designed to increase the stakeholders’ comfort relative to the system’s satisfaction of the SysTrust principles. Although SysTrust and WebTrust share the same principles of security, availability, processing integrity, online privacy, and confidentiality, SysTrust can be applied to any system environment. WebTrust relates to websites. The service is modular, and the practitioner can be engaged to report on any one or more of the five principles.)

A financial statement audit is designed to

Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. (The auditor’s overall objectives include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on whether the statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.)

An independent auditor must have which of the following?

The ability to exercise sound professional judgment. (Professional judgment is essential for planning and performing an audit. It is exercised based on competencies necessary for reasonable judgments. These competencies are developed through relevant training, knowledge, and experience (AU-C 200).)

Independent auditing can best be described as

A discipline that enhances the degree of confidence that users can place in financial statements. (The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework (e.g., GAAP, cash basis, etc.). An auditor’s opinion enhances the degree of confidence that users can place in financial statements.)

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures?

The relationship between financial statement assertions and audit procedures should be one-to-one. (Some auditing procedures may relate to more than one assertion. But a combination of auditing procedures may be needed to test a single relevant assertion because audit evidence from different sources or of a different nature may be relevant to the same assertion. For example, when relating controls to assertions, the auditor may determine that multiple controls are needed to address a risk and the related assertion.)

The primary reason for an audit by an independent, external audit firm is to

Provide increased assurance to users as to the fairness of the financial statements. (The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP). An audit performed by an independent, external audit firm provides assurance of the objectivity of the auditor’s opinion.)

Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as

A discipline that attests to financial information presented by management. (The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP).)

Users of an issuer’s financial statements demand independent audits because

Management may not be objective in reporting. (Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.)

An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to

Express an opinion as to the fairness of Camden’s financial statements. (Auditing standards require the auditor to express an opinion regarding the financial statements as a whole or to assert that an opinion cannot be expressed. An opinion states whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.)

Notes that are included with financial statements are the responsibility of the

Company’s management. (The notes are considered part of the basic financial statements. Because management has the primary responsibility for the financial statements, it also has the primary responsibility for the fairness of information included in notes.)

An auditor must obtain professional experience primarily to

Exercise professional judgment. (Professional judgment is essential to perform an audit properly. An auditor must interpret relevant ethical requirements and GAAS and make informed decisions during the audit. Such interpretations and decisions require competencies developed through relevant training, knowledge, and experience (AU-C 200).)

The Sarbanes-Oxley Act limits the nonaudit services that an audit firm can provide to issuer audit clients. Which of the following services is still an allowable service that an auditor may provide to an issuer client?

Tax compliance services. (The Sarbanes-Oxley Act prohibits audit firms from providing consulting, legal, internal auditing, and other specified services to issuer audit clients. Moreover, any other service may be prohibited by the PCAOB. Audit firms may provide other nonaudit services, such as conventional tax planning and compliance services, to issuer audit clients. However, the audit committee must preapprove these other nonaudit services to be provided by the auditor.)

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?

The procedures to be applied on a particular engagement are a matter of the auditor’s professional judgment. (According to GAAS, the auditor should exercise professional judgment and maintain professional skepticism during the planning and performance of the audit. Professional judgment applies training, knowledge, and experience to making informed decisions about the actions that are appropriate in an audit. Such decisions are required to be made about (1) materiality; (2) audit risk; (3) the nature, timing, and extent of audit procedures; (4) the evaluation of whether evidence is sufficient and appropriate; (5) the evaluation of management’s judgments in applying the applicable reporting framework; and (6) the conclusions to be drawn from the evidence (AU-C 200).)

Which of the following is a management assertion regarding account balances at the period end?

The entity holds or controls the rights to assets, and liabilities are obligations of the entity. (Assertions about account balances reported in the balance sheet at period end include those related to (1) rights and obligations, (2) existence, (3) completeness, and (4) valuation and allocation. The assertions about rights and obligations are that the entity holds or controls the rights to assets, and liabilities are its obligations (AU-C 315).)

When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

By exercising professional judgment in the circumstances. (Word such as "must" and "should" indicate unconditional responsibilities and presumptively mandatory responsibilities, respectively. Words such as "might" and "could" indicate that the auditor has a responsibility to consider a matter. Thus, (s)he is expected to use professional judgment.)

North Co., a nonissuer, asked its tax accountant, King, a CPA in public practice, to generate North’s interim financial statements on King’s personal computer when King prepared North’s quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of

Statements on Standards for Accounting and Review Services. (The Statements on Standards for Accounting and Review Services apply to compilations and reviews performed by practitioners. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.)

Which of the following services, if any, may an accountant who is not independent provide?

Compilations but not reviews. (Attest services provide assurance and require the accountant to be independent. However, a compilation provides no assurance. Thus, the accountant need not be independent. The report describes the compilation service and disclaims an opinion or any other form of assurance on the financial statements. The accountant also states in the report that (s)he is not independent.)

Which of the following components is appropriate in a practitioner’s report on the results of applying agreed-upon procedures?

A list of the procedures performed, as agreed to by the specified parties identified in the report. (In an agreed-upon procedures engagement, the practitioner is engaged to report on the results of performing specific procedures agreed upon with specified parties. The report lists the procedures performed and provides the results of those procedures but provides no form of positive or negative assurance.)

The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the

Accounting and Review Services Committee. (The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.)

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to

Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC. (An attest engagement is one in which the practitioner is engaged to issue or does issue an examination, review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. The SSAEs cover attest engagements, including the 11 attestation standards; agreed-upon procedures engagements; financial forecasts and projections; reporting on pro forma financial information; reporting on an entity’s internal control over financial reporting; compliance attestation; and management’s discussion and analysis.)

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when

Assisting in Adjusting the Books of Account: No, Consulting on Accounting Matters: No (SSARSs apply to the professional responsibilities of accountants who compile or review the unaudited financial statements or financial information of a nonpublic entity. The objective of a compilation is to assist management in presenting financial information in the form of financial statements. But the accountant does not undertake to obtain or provide any assurance that no material modifications should be made for the statements to conform with the applicable financial reporting framework. The objective of a review is to obtain limited assurance that no material modifications should be made for the statement to conform with the applicable financial reporting framework (AR 60). Neither assisting in adjusting the books of account nor consulting on accounting matters is a compilation or review.)

The party responsible for assumptions identified in the preparation of prospective financial statements is usually

The client’s management. (Management is usually the responsible party, that is, the person(s) responsible for the assumptions underlying prospective financial statements. However, the responsible party may be a party outside the entity, such as a possible acquirer.)

A financial forecast consists of prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows. A forecast

Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken. (According to AT 301, a financial forecast consists of prospective financial statements "that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows." A forecast is based on "the responsible party’s assumptions reflecting conditions it expects to exist and the course of action it expects to take.")

Which of the following presents what the effects on historical financial data might have been if a consummated transaction had occurred at an earlier date?

Pro forma financial information. (Pro forma information shows what the significant effects on historical financial information would have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples of these transactions include a business combination, disposal of a segment, a change in the form or status of an entity, and a change in capitalization.)

In an engagement to examine management’s discussion and analysis (MD&A), which of the following best defines control risk?

The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner. (Control risk is the risk that material misstatements that could occur in an assertion included in MD&A will not be prevented or detected on a timely basis by the entity’s internal control (AT 701).)

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when

Advising a client regarding the selection of computer software: No, Advocating a client’s position before the IRS: No (SSARSs apply to services in connection with the unaudited statements or other unaudited information of a nonpublic entity. Advising a client regarding the selection of computer software is a consulting service (CS 100) and is outside the scope of SSARSs. Advocating a client’s position before the IRS is subject to ethics requirements (Interpretation 302-1 and Interpretation 102-6) but also is a service outside the scope of SSARSs.)

Which of the following services may a CPA perform in carrying out a consulting service for a client? I. Analysis of the client’s accounting system, II. Review of the client’s prepared business plan, III. Preparation of information for obtaining financing

I, II, and III. (Each of the three services may be performed as a consulting service. AICPA standards describe (1) analysis of an accounting system as an advisory service, (2) review of a client’s prepared business plan as a consultation, and (3) preparation of information for obtaining financing as a transaction service. Other possible services are implementation services, staff and other support services, and product services.)

Assurance services are best described as

Independent professional services that improve the quality of information, or its context, for decision makers. (The AICPA defines assurance services as "independent professional services that improve the quality of information, or its context, for decision makers." Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.)

The objective of assurance services is to

Enhance decision making. (The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.)

Assurance services differ from consulting services in that they

Focus on Providing Advice: No, Involve Monitoring of One Party by Another: Yes (Assurance services encompass attestation services but not consulting services. Assurance services differ from consulting services in two ways: (1) They focus on improving information rather than providing advice, and (2) they usually involve situations in which one party wants to monitor another rather than the two-party arrangements common in consulting engagements.)

The AICPA committee on assurance services has identified a professional service called ElderCare (PrimePlus) services. One fundamental purpose of this assurance service is to assist the elderly and their families by

Reporting whether specified objectives are being met by caregivers. (The AICPA committee on assurance services has developed business plans for a number of assurance services, one of which involves elder care. The fundamental purpose of ElderCare services is to gather evidence and report to concerned parties (e.g., adult children of an elderly parent) as to whether agreed-upon objectives have been met with regard to care delivery, such as medical, household, and financial services. Related services provided directly to the elderly person or to the other concerned parties may include oversight of investment of funds (but not making an investment of funds), assistance in the choice of caregivers, accounting for the elderly person’s income and expenses, and arranging for care and services, such as transportation, meal delivery, or placement in a retirement facility.)

SysTrust is an assurance service designed to

Increase the comfort of management and other stakeholders relative to an information system. (The objective of SysTrust is an attestation report on management’s assertion about the reliability of an information system that supports a business or a given activity. The CPA also may report directly on the reliability of the system. This assurance service is designed to increase the stakeholders’ comfort relative to the system’s satisfaction of the SysTrust principles: online privacy, security, processing integrity, availability, and confidentiality. The practitioner may provide assurance about any or all of these principles.)

The client of the practitioner providing ElderCare (PrimePlus) services may be

The Elderly Person: Yes, The Elderly Person’s Attorney: Yes, A Family Member: Yes (The client varies with the engagement. The practitioner must understand who the client is and who has final authority to resolve issues during the engagement. If the client is a family member or some third party, that person must have power of attorney over the elderly person involved.)

The AICPA assurance service, called CPA Performance Review, attempts to provide users with

An evaluation of whether an entity has reliable measures of performance beyond the traditional financial statements. (CPA Performance Review evaluates whether an entity’s performance measurement system contains relevant and reliable measures for assessing the degree to which the entity’s goals and objectives are achieved. It attempts to provide a more balanced scorecard than just the traditional financial statements.)

Which of the following is a term for an attest engagement in which a CPA assesses a client’s commercial Internet site for compliance with principles, such as online privacy, security, and confidentiality?

WebTrust. (The WebTrust seal provides assurance about compliance with the principles of online privacy, security, processing integrity, availability, and confidentiality. It is a modular service that allows the practitioner to express an opinion about compliance with individual principles or combinations of principles. Online privacy is the protection of the collection, use, disclosure, and retention of personal information. Security is the protection against unauthorized access to the system (both physical and logical). Processing integrity is the assurance that system processing is complete, accurate, timely, and authorized. Availability is the assertion that the system is available for operation and used as agreed. Confidentiality is the protection of information from being viewed by unauthorized parties.)

An entity engaged a CPA to determine whether the client’s web sites comply with defined WebTrust principles and criteria. In performing this engagement, the CPA should apply the provisions of

Statements on Standards for Attestation Engagements. (An attest engagement involves reporting on subject matter, or an assurance about subject matter, that is the responsibility of another party. When providing WebTrust assurance, the accountant must address written assertions by management. Thus, Statements on Standards for Attestation Engagements are applicable.)

A WebTrust engagement on processing integrity requires from client management a

Written assertion. (WebTrust was developed from the attestation standards and requires a written assertion by management for each principle reported on. When the assertion about a website complies with WebTrust principles, it is granted the CPA WebTrust seal to be displayed on the entity’s web page. Consumers may access the examination report and CPA WebTrust principles and criteria through the entity’s web page.)

Under the assurance service WebTrust, the broad principles relating to websites are security, availability, confidentiality, processing integrity, and

Online privacy. (WebTrust provides assurance about compliance with the principles of online privacy, security, processing integrity, availability, and confidentiality. It is a modular service that allows the practitioner to express an opinion and grant the corresponding seal with respect to individual principles or combinations of principles.)

The examination report issued under the WebTrust service includes all of the following except

The CPA’s opinion on the value of the products offered at the web site. (The CPA expresses an opinion relating to one or more of the following principles: security, privacy, availability, processing integrity, and confidentiality.)

Assurance services differ from consulting services because

Assurance services usually involve situations in which one party wants to monitor another and focus on improving information. (Assurance services do not encompass consulting services. There are often similarities between assurance and consulting services because they are delivered using a similar body of knowledge and skills. However, assurance services differ subtly from consulting services because assurance services focus on improving information, whereas consulting services strive to provide advice. Also, assurance services often involve monitoring of one party by another (often within the same company) rather than the two-party arrangements common in consulting engagements.)

WebTrust is an example of a(n)

Assurance service. (The AICPA has established the Assurance Services Committee to identify, develop, and communicate new assurance opportunities for CPAs. The WebTrust service is designed to help overcome the obstacles to electronic commerce by assuring consumers that businesses engaging in electronic commerce adhere to standard business practices and controls.)

WebTrust requires from client management a

Written assertion. (WebTrust was developed from the attestation standards and requires a written assertion by management. The written assertion relates to one or more of the principles of security, privacy, availability, processing integrity, and confidentiality. Consumers may access the examination report and CPA WebTrust principles and criteria through the entity’s web page.)

According to the AICPA, the CPA WebTrust seal may relate to the principles and criteria of

Confidentiality: Yes, Availability: Yes, Internal Controls: No (WebTrust principles relate to security, privacy, availability, processing integrity, and confidentiality. Confidentiality criteria include providing for proper protection, e.g., encryption over transmission and encryption of storage of data. Availability criteria relate to assurance that electronic systems and data are available to meet the objectives of the entity and those depending on it. WebTrust is designed to help overcome the obstacles to mainstream consumer acceptance of electronic commerce.)

Which of the following assertions would not be tested when performing the SysTrust assurance service?

Completeness. (SysTrust is designed to increase the comfort of management, customers, creditors, bankers, and business partners with the systems that support a business or a particular activity. The CPA tests and expresses an opinion on management’s assertions or directly on the system concerning any or all of the following: online privacy, availability, security, processing integrity, and confidentiality.)

Which of the following is true regarding the SysTrust assurance service?

System reliability is dynamic, not static. Thus, the report should be based on a span of time. (System reliability is dynamic, not static. Thus, the report should be based on a span of time.)

Engagement letters for ElderCare (PrimePlus) services should

Be tailored to fit each situation. (Engagement letters for ElderCare (PrimePlus) services should be tailored to the situation and contain many details including the form and frequency of financial reporting.)

Which of the following is true regarding CPA training for ElderCare (PrimePlus) services?

Financial oriented support staff may not require specific ElderCare (PrimePlus) training. (Because support staff are primarily involved in the financial aspects of the engagement, they may not need specific ElderCare (PrimePlus) training.)

Which of the following qualifications is least likely required to provide CPA ElderCare (PrimePlus) services?

Prior experience. (Prior experience is not required because ElderCare (PrimePlus) services are relatively new to the CPA market. Personal skills and knowledge of issues are fundamental to providing this service to the elderly.)

One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through

A system of quality control. (A CPA firm must have a system of quality control that ensures that its personnel comply with professional standards applicable to its audit and accounting practice. However, a deficiency in an engagement, by itself, does not necessarily indicate that the firm’s system of quality control is not sufficient. GAAS apply to individual engagements, and Statements on Quality Control Standards (SQCSs) apply to the firm’s practice as a whole.)

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to

Minimize the likelihood of associating with clients whose management lacks integrity. (The procedures pertaining to client acceptance or continuation should provide reasonable assurance that the likelihood of association with a client whose management lacks integrity is minimized. They include consideration of the business reputation of the client’s principal owners, key management, related parties, and those charged with governance.)

A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include

Consideration of the business reputation of the client’s principal owners, key management, related parties, and those charged with governance. (CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with the applicable requirements (QC 10).)

Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?

Managing human resources. (The quality control element of human resources requires establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work.)

Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures?

Human Resources: Yes, Monitoring: Yes, Engagement Performance: Yes (The quality control element of human resources relates to providing reasonable assurance that the firm has sufficient personnel with the necessary capabilities, competence, and commitment to ethics. The quality control element of monitoring relates to providing reasonable assurance that the firm has a quality control system that is relevant, adequate, effective, and complied with. The quality control element of engagement performance relates to providing reasonable assurance that (1) engagements are consistently performed in accordance with applicable requirements and (2) issued reports are appropriate (QC 10).)

A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm’s standards of quality. To achieve this goal, the firm most likely would establish procedures for

Reviewing documentation of the work performed and reports issued. (The engagement performance element of quality control includes policies and procedures that cover planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement. Objectives of supervision include establishing procedures for (1) planning engagements, (2) maintaining the firm’s standards of quality, and (3) reviewing documentation of the work performed and reports issued.)

All of the following are audit quality control requirements contained in the Sarbanes-Oxley Act of 2002 except

The audit report must be submitted to the Public Company Accounting Oversight Board prior to issuance. (Audit reports must be determined appropriate for issuance by the CPA firm but need not be approved by the PCAOB.)

The nature and extent of a CPA firm’s quality control policies and procedures depend on

The CPA Firm’s Size: Yes, The Nature of the CPA Firm’s Practice: Yes, Cost-Benefit Considerations: Yes (The nature and extent of a firm’s quality control policies and procedures depend on a number of factors, such as the firm’s size, the degree of operating autonomy allowed, its human resources policies, the nature of its practice and organization, and appropriate cost-benefit considerations.)

Quality control policies and procedures should be relevant, adequate, effective, and complied with. This statement is most closely associated with the quality control element of

Monitoring. (Monitoring is concerned with providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued (QC 10).)

According to PCAOB quality control standards applying to an audit, the engagement quality reviewer evaluates

The documentation. (The EQR process in an audit evaluates the significant judgments made. This involves discussions with the engagement partner and other team members and reviewing whether the documentation supports the conclusions reached and appropriate responses to significant risks.)

According to PCAOB quality control standards applying to audits, the engagement quality reviewer most likely

Must be an associated person of a registered public accounting firm. (The objective of the reviewer is to evaluate the significant judgments made and the related conclusions reached. (S)he must be an associated person of a registered public accounting firm and may be from outside the firm. Moreover, the reviewer must have the competence to serve as a partner on the engagement and have independence, integrity, and objectivity. But an engagement partner on either of the two preceding audits ordinarily may not be the reviewer.)

Within its system of quality control, the objectives of the firm’s policies and procedures related to the element of human resources include providing

Professional development activities that allow employees to fulfill assigned responsibilities. (Policies and procedures should be established to provide reasonable assurance that the firm has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform engagements in accordance with professional standards and legal and regulatory requirements as well as to issue appropriate reports.)

Quality control for a CPA firm, as referred to in Statements on Quality Control Standards (SQCS), applies to

Auditing and accounting and review services. (According to QC 10, quality control for a CPA firm applies to all audit, attest, accounting and review, and other services for which professional standards have been established by the ASB and the Accounting and Review Services Committee. The SQCS therefore do not apply to compliance with standards for consulting services and tax services, which are issued by different AICPA technical committees.)

Within the context of quality control, the primary purpose of continuing professional education (CPE) and training activities is to provide a CPA firm with reasonable assurance that personnel within the firm have

The ability to fulfill assigned responsibilities and the qualifications for advancement. (According to QC 10, the firm should adopt policies and procedures to obtain reasonable assurance that personnel at all levels participate in general and industry-specific CPE and other professional development activities that enable them to fulfill responsibilities assigned and satisfy applicable CPE requirements of the AICPA and regulatory agencies. Furthermore, personnel chosen for advancement should "have the qualifications necessary for fulfillment of the responsibilities they will be called on to assume.")

With regard to assignment of personnel to an engagement team, a CPA firm’s policies and procedures should include

Consideration of the team’s understanding of similar engagements through training and participation. (The quality control element of human resources requires assignment of appropriate personnel with the competence and capabilities to (1) perform engagements in accordance with professional standards and legal and regulatory requirements and (2) enable the firm to issue appropriate reports. The determination of team assignments and levels of supervision includes considering the team’s understanding of similar engagements through appropriate training and practical experience.)

In connection with the element of human resources, a CPA firm’s system of quality control should ordinarily provide that all personnel

Participate in professional development activities that enable them to fulfill responsibilities assigned. (The firm’s policies and procedures should provide for all personnel to receive general and industry-specific CPE and engage in other professional development activities. The purpose is to enable personnel to carry out assigned responsibilities and satisfy CPE requirements of the AICPA and regulatory agencies, such as the GAO and state boards of accountancy (QC 10).)

In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality control element is this procedure most likely to satisfy?

Relevant ethical requirements. (CPA firms should avoid situations in which third parties might question the firm’s independence. Thus, they should adhere to the independence and other principles established by the AICPA Code of Professional Conduct and the requirements of regulators and other authorities (QC 10).)

Williams & Co. is a medium-sized CPA firm enrolled in the Private Companies Practice Section (PCPS). The firm is to have a peer review under the AICPA Peer Review program. The review will most likely be performed by

Another CPA firm. (Peer review is a necessary part of the practice-monitoring requirement for AICPA membership. A peer review of a firm enrolled in the AICPA Peer Review program may be performed by a review team organized by (1) a firm engaged by the reviewed firm or (2) a state CPA society. Also, an association of firms may be authorized to aid its members by organizing review teams (PR 100). Furthermore, a PCPS firm need not perform the peer review of a PCPS firm, and the team captain need not be a PCPS member.)

One purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to

Provide reasonable assurance that the firm has the resources to undertake new engagements. (CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with applicable requirements (QC 10).)

Which of the following is an element of a CPA firm’s quality control policies and procedures applicable to the firm’s accounting and auditing practice?

Engagement performance. (Engagement performance relates to policies and procedures implemented by a CPA firm to ensure quality performance of each engagement. Matters addressed include responsibilities for consistency of performance, supervision, and review.)

Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?

Establish policies to ensure that the audit work meets applicable professional standards. (One of the elements of a system of quality control is engagement performance. Thus, policies and procedures should be established to provide reasonable assurance that (1) engagements are consistently performed in accordance with professional standards and legal and regulatory requirements and (2) the firm issues appropriate reports. Matters addressed include responsibilities for performance, supervision, and review.)

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure. (A CPA firm must have a system of quality control to provide reasonable assurance that the firm and its personnel (1) comply with professional standards, (2) comply with applicable legal and regulatory requirements, and (3) issue appropriate reports. The nature and extent of the quality control system developed by an individual firm depends on factors such as the size and operating characteristics of the firm.)

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

Results are consistent with the conclusions to be presented in the auditor’s report. (According to AU-C 220, QC 10, and AS No. 10, a review considers whether, for example, (1) the work supports the conclusions and is properly documented, (2) the evidence is sufficient and appropriate to support the auditor’s report, and (3) the objectives of the procedures have been achieved.)

The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants

How the results of various auditing procedures performed by the assistants should be evaluated. (Assistants should be informed of their responsibilities and the objectives of the work they are to perform. They should be informed about the matters that affect the nature, timing, and extent of procedures, including how the results of tests should be evaluated (AS No. 10).)

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to

Document the details of the disagreement with the conclusion reached. (According to AU-C 220 and QC 10, difference of opinion (1) within the engagement team, (2) with a consultant, or (3) between the engagement partner and the quality control reviewer should be resolved by following the firm’s related policies and procedures. A member of the engagement team should be able to document his or her disagreement with the conclusions reached after appropriate consultation. Moreover, (1) conclusions should be documented and implemented, and (2) the report should be released only after resolution of the matter. According to AS No. 10, in applying due professional care, each engagement team member has a responsibility to bring to the attention of appropriate persons any disagreements or concerns about accounting and auditing issues that (s)he believes are significant to the statements or the report regardless of how they may have arisen. The PCAOB’s AS No. 3 requires documentation of disagreements among members of the engagement team or with consultants about final conclusions on significant accounting or auditing matters.)

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be dissociated from the resolution of the matter. The audit documentation would probably be

Expanded to detail the assistant auditor’s position and how the difference of opinion was resolved. (A public accounting firm should have policies and procedures that address differences of opinion. They should enable an engagement team member to document his or her disagreement with the conclusions reached after proper consultation. The policies and procedures should require that (1) conclusions be documented and implemented and (2) the report not be released until the matter is resolved (QC 10). For an audit of an issuer, AS No. 3, Audit Documentation, requires working papers to document significant findings issues. They include "disagreements among members of the engagement team or with others consulted on the engagement about final conclusions reached on significant accounting or auditing matters.")

A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by

Having an appropriate system of quality control. (A system of quality control should provide reasonable assurance that the firm’s personnel comply with professional standards and applicable regulatory and legal requirements. However, deficiencies in individual engagements covered by the quality control standards do not, by themselves, signify that the firm’s system of quality control is insufficient to provide it with reasonable assurance of compliance with the relevant standards. GAAS apply to individual audit engagements. Quality control standards apply to the firm’s practice as a whole.)

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