Problems 2-16, 2-17, 2-19, 2-20

2-16 (Objective 2-6) The following questions deal with auditing standards. Choose the best
response.

a. International Standards on Auditing are established by the

o (1) International Accounting Standards Board.
o (2) International Auditing and Assurance Standards Board.
o (3) Auditing Standards Board.
o (4) Global Auditing Standards Board.

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

c. The general group of U.S. generally accepted auditing standards includes a requirement
that
o (1) field work be adequately planned and supervised.
o (2) the auditors report state whether or not the financial statements conform to
generally accepted accounting principles.
o (3) due professional care be exercised by the auditor.
o (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?
o (1) The competence, independence, and professional care of persons performing
the audit.

o (2) Criteria for the content of the auditors report on financial statements and
related footnote disclosures.
o (3) The criteria of audit planning and evidence gathering.
o (4) The need to maintain an independence in mental attitude in all matters
pertaining to the audit.
2-17 (Objective 2-7) The following questions concern quality control standards. Choose the best
response.

a. A CPA firm is reasonably assured of meeting its responsibility to provide services that
conform with professional standards by
o (1) adhering to generally accepted auditing standards.
o (2) having an appropriate system of quality control.
o (3) joining professional societies that enforce ethical conduct.
o (4) maintaining an attitude of independence in its engagements.

b. The nature and extent of a CPA firms quality control policies and procedures depend
on
The CPA Firms
Size

The Nature of the CPA Firms

Practice

Cost-benefit Considerations

(1) Yes

Yes

Yes

(2) Yes

Yes

No

(3) Yes

No

Yes

(4) No

Yes

Yes

c. Which of the following are elements of a CPA firms quality control that should be
considered in establishing its quality control policies and procedures?
Human Resources

Monitoring

Engagement Performance

(1)

Yes

Yes

No

(2)

Yes

Yes

Yes

(3)

No

Yes

Yes

(4)

Yes

No

Yes

d. One purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
o (1) enable the CPA firm to attest to the reliability of the client.
o (2) satisfy the CPA firms duty to the public concerning the acceptance of new
clients.
o (3) provide reasonable assurance that the integrity of the client is considered.
o (4) anticipate before performing any field work whether an unqualified opinion
can be issued.

2-19 (Objective 2-7) For each of the following procedures taken from the quality control manual
of a CPA firm, identify the applicable element of quality control from Table 2-4 on page 38.

a. Appropriate accounting and auditing research requires adequate technical reference

materials. Each firm professional has online password access through the firms Internet
Web site to electronic reference materials on accounting, auditing, tax, SEC, and other
technical information, including industry data. ENGAGEMENT PERFOMANCE

b. Each office of the firm shall be visited at least annually by review persons selected by
the director of accounting and auditing. Procedures to be undertaken by the reviewers are
illustrated by the office review program. MONITORING

c. All potential new clients are reviewed before acceptance. The review includes
consultation with predecessor auditors, and background checks. All new clients are
approved by the firm management committee, including assessing whether the firm has
the technical competence to complete the engagement. ACCEPTANCE AND
CONTINUATION OF CLIENTS AND ENGAGEMENTS

d. Each audit engagement must include a concurring partner review of critical audit
decisions. ENGAGEMENT PERFORMANCE

e. Audit engagement team members enter their electronic signatures in the firms
engagement management software to indicate the completion of specific audit program
steps. At the end of the audit engagement, the engagement management software will not
allow archiving of the engagement file until all audit program steps have been
electronically signed. ENGAGEMENT PEFORMANCE

f. At all stages of any engagement, an effort is made to involve professional staff at

appropriate levels in the accounting and auditing decisions. Various approvals of the
manager or senior accountant are obtained throughout the audit. ENGAGEMENT
PERFORMANCE

g. No employee will have any direct or indirect financial interest, association, or

relationship (for example, a close relative serving a client in a decision-making capacity)
not otherwise disclosed that might be adverse to the firms best interest. RELEVANT
ETHICAL REQUIREMENT

h. Individual partners submit the nominations of those persons whom they wish to be
considered for partner. To become a partner, an individual must have exhibited a high
degree of technical competence; must possess integrity, motivation, and judgment; and
must have a desire to help the firm progress through the efficient dispatch of the job
responsibilities to which he or she is assigned. HUMAN RESOURCES

i. Through our continuing employee evaluation and counseling program and through the
quality control review procedures as established by the firm, educational needs are
reviewed and formal staff training programs modified to accommodate changing needs.
At the conclusion of practice office reviews, apparent accounting and auditing
deficiencies are summarized and reported to the firms director of personnel. HUMAN
RESOURCES

j. The firms mission statement indicates its commitment to quality, and this commitment
is emphasized in all staff training programs. LEADERSHIP RESPONSIBIITIES

2-20 (Objectives 2-2, 2-3, 2-6) The Howard Mobile Home Manufacturing Company is audited
by Olson and Riley, CPAs. Howard Mobile Home has decided to issue stock to the public and
wants Olson and Riley to perform all the audit work necessary to satisfy the requirements for
filing with the SEC. Olson and Riley has never had a client go public before.

Required

a. What factors should Olson and Riley consider before accepting the engagement?
Olson and Riley should evaluate whether they have the professional competence to
perform all of the audit work for filing with the SEC. They should also decide
whether they wish to accept the risk associated with such an engagement. Also, if
Olson and Riley have performed bookkeeping services or certain consulting services
for Howard Mobile Home they will not be independent under PCAOB and SEC
independence requirements.

b. List additional issues confronting auditors of companies that file with the SEC as
compared to dealing with a private company audit client.
The filing with the SEC is going to require completion and registration with
the SEC of form S-1 which includes an audited summary of operations for
the last five fiscal years. Each quarter subsequent to the filing, form 10-Q
must be filed; and within 90 days of the end of each fiscal year form 10-K
must be filed with the SEC. Also, form 8-K must be filed whenever
significant events have occurred which are of interest to public investors.

Problems 3-23, 3-25, 3-26

3-23 (Objectives 3-1, 3-2, 3-3, 3-4, 3-8) 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?
o (1) The auditors opinion on internal control is for the same period of time as the
opinion on the financial statements.
o (2) The report includes additional paragraphs for the definition and
limitations of internal control.
o (3) The introductory, scope, and opinion paragraphs are unchanged from a report
for an audit of the financial statements only.
o (4) GAAP is the framework used to evaluate internal control.

b. The date of the CPAs opinion on the financial statements of the client should be the
date of the

o (1) closing of the clients books.

o (2) finalization of the terms of the audit engagement.
o (3) completion of all important audit procedures.
o (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
o (1) name of the other auditor.
o (2) nature of the inquiry into the other auditors professional standing and extent
of the review of the other auditors work.
o (3) portion of the financial statements audited by the other auditor.
o (4) reasons for being unwilling to assume responsibility for the other auditors
work.

3-25 (Objectives 3-5, 3-7, 3-8) The following questions concern audit reports other than
unqualified audit reports with standard wording. Choose the best response.

a. The annual audit of Midwestern Manufacturing revealed that sales were accidentally
being recorded as revenue when the goods were ordered, instead of when they were
shipped. Assuming the amount in question is material and the client is unwilling to
correct the error, the CPA should issue:
o (1) an unqualified opinion or adverse opinion.
o (2) a qualified except for opinion or disclaimer of opinion.
o (3) a qualified except for opinion or adverse opinion.
o (4) an unqualified opinion with an explanatory paragraph

b. Under which of the following circumstances would a disclaimer of opinion not be

appropriate?

o (1) The auditor is unable to determine the amounts associated with an employee
fraud scheme.
o (2) Management does not provide reasonable justification for a change in
accounting principles.
o (3) The client refuses the auditor permission to confirm certain accounts
receivable or apply alternative procedures to verify their balances.
o (4) The chief executive officer is unwilling to sign the management representation
letter.

c. The opinion paragraph of a CPAs 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)
o (1) Unqualified opinion.
o (2) Unqualified opinion with explanatory paragraph.
o (3) Qualified opinion.
o (4) Adverse opinion.

3-26 (Objective 3-1) 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. In all material respects allows for small errors and correctly stated allows no
errors

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. In
conformity with means in the accepted business manner and are properly means the
way it really is

c. In our opinion, the financial statements present fairly rather than The financial
statements present fairly. The main difference between these two statements is the
word opinion. Without this word the statement sounds like its stating a fact and
not an opinion. Since the auditor cannot guarantee the accuracy of the financial
statement an opinion is better accepted.

d. Brown & Phillips, CPAs (firm name), rather than James E. Brown, CPA (individual
partners name). The name of the CPA firm should appear in the audit report
because it is the entire firm that is responsible in the report issued rather than the
individual auditor.

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. The purpose of the audit is to make sure
that it complies with auditing standards based on the accumulated evidence and
reporting requirements. The second statement doesnt recognize the audit
standards.