ACCT 5200 Mathews Test 1 || All Questions Answered Correctly.
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ACCT 5200 Mathews
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ACCT 5200 Mathews
Assurance Service correct answers -independent professional service that improves the quality of information for decision makers
-Can be by CPAs or non-CPAs
-Expresses a written or oral conclusion on reliability and relevance of information
Committee of Sponsoring Organizations of the Treadwa...
ACCT 5200 Mathews Test 1 || All Questions Answered
Correctly.
Assurance Service correct answers -independent professional service that improves the quality of
information for decision makers
-Can be by CPAs or non-CPAs
-Expresses a written or oral conclusion on reliability and relevance of information
Committee of Sponsoring Organizations of the Treadway Commission (COSO) correct answers
Committee that issues framework for auditing internal controls, called the "Internal Control-
Integrated Framework"
information asymmetry correct answers those who issue the information know more about it than
those who use it, so we have audits to give users of the information more confidence
Information Risk correct answers the probability that the information we use to make a decision
was incorrect
Causes of Information Risk correct answers 1. Remoteness of information. (how far you are from
the source of the info)
2. Biases and motives of the provider. (inconsistent goals among providers and users of
information)
3. Voluminous data. (more data means more likelihood than information is improperly recorded)
4. Complex exchange transactions. (accounting becomes more complex to match the
transactions, making the information more complex to discern)
Attestation Services correct answers A type of assurance service provided by CPAs which issues
a written report about a written subject matter or assertion that is made by another party
Examples of attestation services correct answers 1. audits of F/S
2. Reviews of F/S
3. attestation over internal controls
4. others like IT or forecasted F/S attestations
Auditing correct answers A specific type of attestation service, including the accumulation and
evaluation of evidence about information to determine and report on the degree of
correspondence between the information and established criteria. Auditing should be done by a
competent, independent person. The evidence must be sufficient in quantity and quality. The
service ends in a written report.
4 assertions related to cash accounts: correct answers 1. it exists
2. it is complete
3. client has the rights to it
4. it is accurate
,Audits' part in capital markets correct answers "The strength of the U.S. capital markets depends
on investors knowing that they can rely on the financial information that is available to them
when they make investment decisions."
Types of Auditors and Audit Firms correct answers 1. CPAs - external and internal auditors
2. Gov't Accountability Office Auditor - reports to congress and audits gov't operations
3. Internal Revenue Agents - IRS tax auditors
4. Internal Auditors - work for specific companies to audit compliance, efficiency, F/S, etc.
Signaling correct answers Producers get assurance for their products to prove it is a high quality
so they can command a higher price.
Monitoring (Principal-Agent Model) correct answers Management will get attesters to attest to
the quality of their work so that the owners will pay them more.
Reduce Information Risk correct answers Companies want to reduce information risk so they can
secure lower interest rates on borrowed money. So they get their F/S audited to accomplish this.
insurance hypothesis correct answers The assumption that an audit provides "insurance" if
something goes wrong. This allows shareholders or politicians to blame auditors whenever
companies fail.
4 non-legal reasons for auditing correct answers 1. Signaling
2. Monitoring
3. Reducing information risk
4. Insurance Hypothesis
Which of the following is an assurance service?
a. Bookkeeping
b. Preparation
c. Compilation
d. Audit correct answers d. Audit
In a financial statement audit, the auditor obtains a reasonable level of assurance about whether
the financial statements are free of material misstatement in order to express an opinion. In order
to obtain reasonable assurance, the auditor must
a. Have prior experience in the industry in which the audit client operates
b. Examine all documents available that support the financial statements
c. Obtain sufficient audit evidence
d. Test controls around significant transaction cycles correct answers c. Obtain sufficient audit
evidence
Independence requires correct answers "independence in fact" and "independence in appearance"
(reasonable investor rule)
,reasonable investor rule correct answers Independence violated if in light of all relevant facts &
circumstances, a reasonable investor would conclude that the auditor would not be capable of
acting without bias
An accountant and his firm are NOT independent when: correct answers 1. there is mutual or
conflicting interest with an audit client
2. he audits his own work
3. he functions as management or an employee of an audit client
4. he acts as advocate for the audit client
Attest engagement team correct answers Individuals (from audit, tax, consulting, and clerical)
participating in the attest engagement including those performing concurring and 2nd partner
review
Immediate Family correct answers A spouse, spousal equivalent, or dependent (whether or not
related).
Close Relative correct answers immediate family, plus parents, siblings or nondependent
children
Covered members include correct answers ¢ Individual on the engagement team
¢ Individual in position to influence the engagement team (see below)
¢ Partner or manager who provides > 10 hours non-attest services
¢ Partner in the office of the lead engagement partner
¢ The firm, including the firm's employee benefit plans
Individual in position to influence engagement team includes anyone who: correct answers ¢
Evaluates performance or recommends compensation of engagement partner
¢ Directly supervises/manages engagement partner (all the successively senior people in firm)
¢ Consults with engagement team on technical or industry-related matter
¢ Participates in quality control activities
Key position correct answers an individual at a client who has primary responsibility for:
1. significant accounting functions
2. Prep of F/S
3. Ability to influence prep of F/S (CEO, COO, CFO, President, etc.)
Direct financial interest correct answers when the auditor owns equity or debt instruments of a
client directly
Two Rules for Direct Investments: correct answers 1. Covered Persons and their Immediate
Families prohibited from ANY direct investment in clients
2. Direct investment of >5% of equity of audit client/affiliates prohibited by all Audit Firm
Professionals, their Immediate Family and Close Relatives
, Indirect financial interest correct answers when a person owns shares of a client through another
entity or has a mutual interest with a client
Firm, covered persons, and immediate family prohibited from material indirect investments
including: correct answers - Owning >5% of entity that owns interest in audit client
- Owning >5% of entity of which audit client owns an interest
Other situations where independence is impaired: correct answers ¢ Loans to/from audit client
prohibited except consumer loans (mortgages & car loans)
¢ Bank, brokerage accounts > insured amounts prohibited
¢ Credit card balances >$10k prohibited
¢ Holding insurance policies and firm's professional liability policies prohibited
Independence-related rules for employment: correct answers ¢ Covered Person and their Close
Relatives prohibited from Key Positions in audit client
¢ Former partner or professional employee prohibited from Key Positions - one year cooling off
period required by SOX
¢ Former audit client employees prohibited from becoming partner in audit firm and being
involved in audit
Independence rules for contingent fees: correct answers Members in public practice shall not:
¢ Perform any professional services for a contingent fee
¢ Prepare an original or amended tax return for a contingent fee
**You can offer contingent fees for other services unless it is for an audit client
Exceptions for independence violations: correct answers - Individual did not know the
circumstances giving rise to violation
- Violation was corrected promptly once the violation became apparent
- Firm has quality controls in place that provide reasonable assurance that the firm and its
employees maintain independence
Independence related disclosure requirements: correct answers ¢ Disclose fees paid to auditor for
audit, audit-related, tax and all other services provided
¢ State whether audit committee has considered whether provision of non-audit services is
compatible with maintaining independence
Sarbanes-Oxley Act of 2002 Timeline correct answers -Enron problems came to light October
2001
-Andersen indicted 3-14-02; convicted 6-15-02
-WorldCom fraud exposed 6-27-02
-Congress passed 7-25-02; -Pres. Bush signed 7-30-02
SOX created the _____ which must: correct answers -PCAOB
-propose rules, adopt interim or transitional auditing rules and professional standards within 270
days (adopted ASB standards for an interim basis)
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