Chapter 2-Defining Professional Responsibility: Quality Standards and Ethics

1. Which of the following did not result at least partially due to the alleged audit failures of the 1980s and 1990s?
a. The Treadway Report.
b. An SAS further defining the auditor's responsibility for fraud detection.
c. Formation of the AICPA Fraud Commission.
d. Formation of the Independence Standards Board.

2. Competence as a certified public accountant includes all of the following except
a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed.

3. Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards?
a. Possession by the auditor of adequate technical training.
b. Use of analytical review on audit engagements.
c. Use of statistical sampling whenever feasible on an audit engagement.
d. Confirmation by the auditor of material accounts receivable balances.

4. As a guidance for measuring the quality of the performance of an auditor, the auditor should refer to
a. Statements of the Financial Accounting Standards Board.
b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing Standards.
d. Statements on Quality Control Standards.

5. In addition to auditing, CPAs perform other services for their clients. Standards governing the quality of these services are covered in the attestation standards generally, and performance requirements are more explicitly defined in sets of statements relating to each type of service. Which of the following is not such a set?
a. Statements on Standards for Consulting Services.
b. Statements on Responsibilities in University Audits.
c. Statements on Standards for Accounting and Review Services.
d. Statements on Responsibilities in Tax Practice.

6. Which of the following is a violation of Rule 301 (Confidential Client Information) of the Code of Professional Conduct?
a. The CPA, in response to a court subpoena, submits auditor-prepared workpapers as evidence of possible illegal acts perpetrated by the client A. The CPA discloses to the board of directors a scheme concocted by top management to intentionally inflate earnings.
b. The CPA warns Client B as to the inadvisability of acquiring Client
c. The CPA bases this warning on knowledge of Client A's financial condition and a belief that the management of Client A lacks integrity. This knowledge was obtained by the CPA as a result of auditing Client A during the past several years.
d. The CPA, when questioned in court, admits to knowledge of certain illegal acts perpetrated by the client.

7. Which of the following statements best describes why the CPA profession has deemed it essential to promulgate ethical standards and to establish means for ensuring their observance?
a. A requirement for a profession is the establishment of ethical standards that stress primarily a responsibility to clients and colleagues.
b. A requirement of most state laws calls for the profession to establish a code of ethics.
c. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.
d. A distinguishing mark of a profession is its acceptance of responsibility to the public.

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

9. Which of the following best describes what is meant by generally accepted auditing standards?
a. Pronouncements issued by the Auditing Standards Board.
b. Procedures to be used to gather evidence to support financial statements.
c. Rules acknowledged by the accounting profession because of their universal compliance.
d. Measures of the quality of the auditor's performance.

10. Under which of the following circumstances may a CPA agree with a departure from an accounting principle promulgated by that body designated by AICPA Council to formulate such principles?
a. When the principle was one formulated by the Accounting Principles Board inasmuch as the APB is no longer the body so designated by Council.
b. When the CPA can demonstrate that application of the principle in question would make the financial statements materially misleading.
c. When the disputed principle is contrary to industry practice.
d. When adoption of the principle would cause the financial statements to be inconsistent with prior years.

11. Pursuant to the AICPA rules of conduct, the auditor's responsibility to the profession is defined by
a. The AICPA Code of Professional Conduct.
b. Federal laws governing licensed professionals who are involved in interstate commerce.
c. Statements on Auditing Standards.
d. The Bylaws of the AICPA.

12. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should
a. Engage financial experts familiar with the nature of the business entity.
b. Obtain a knowledge of matters that relate to the nature of the entity's business.
c. Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
d. First inform management that an unqualified opinion cannot be issued.

13. Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles.
b. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements.
c. The possibility that management fraud, defalcations, and misappropriation of assets may indicate the existence of illegal acts.
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

14. The standard of due audit care requires the auditor to
a. Apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a decision.
b. Ensure that the financial statements are free from error.
c. Make perfect judgment decisions in all cases.
d. Possess skills clearly above the average for the profession.

15. The exercise of due professional care requires that an auditor
a. Examine all available corroborating evidence.
b. Critically review the judgment exercised at every level of supervision.
c. Reduce control risk below the maximum.
d. Attain the proper balance of professional experience and formal education.

16. A CPA who has never audited a commercial bank
a. May not accept such an engagement.
b. May accept the engagement only if the accounting firm specializes in the audit of commercial banks.
c. May accept the engagement after attaining a suitable level of understanding of the transactions and accounting practices unique to commercial banking.
d. May accept the engagement because training as a CPA transcends unique industry characteristics.

17. The first general standard requires that a person or persons have adequate technical training and proficiency as an auditor. This standard is met by
a. An understanding of the field of business and finance.
b. Education and experience in the field of auditing.
c. Continuing professional education.
d. A thorough knowledge of the Statements on Auditing Standards.

18. The first general standard recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper
a. Business and finance courses.
b. Quality control and peer review.
c. Education and experience in auditing.
d. Supervision and review skills.

19. In determining estimates of fees, an auditor may take into account each of the following, except the
a. Value of the service to the client.
b. Degree of responsibility assumed by undertaking the engagement.
c. Skills required to perform the service.
d. Attainment of specific findings.

20. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of field work.
c. Become independent in fact.
d. Maintain public confidence in the profession.

21. Which of the following best describes why publicly traded corporations follow the practice of having the outside auditor appointed by the board of directors or elected by the stockholders?
a. To comply with the regulations of the Financial Accounting Standards Board.
b. To emphasize auditor independence from the management of the corporation.
c. To encourage a policy of rotation of the independent auditors.
d. To provide the corporate owners with an opportunity to voice their opinion concerning the quality of the auditing firm selected by the directors.

22. Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the examination?
a. Observance of the standards of field work and reporting.
b. Critical review of the audit work performed at every level of supervision.
c. Degree of skill commonly possessed by others in the profession.
d. Responsibility for losses because of errors of judgment.

23. The third general standard states that due care is to be exercised in the performance of the examination. This standard means that a CPA who undertakes an engagement assumes a duty to perform each audit
a. As a professional possessing the degree of skill commonly possessed by others in the field.
b. In conformity with generally accepted accounting principles.
c. With reasonable diligence and without fault or error.
d. To the satisfaction of governmental agencies and investors who rely upon the audit.