Chapter 2 Corporate Governance, Audit Standards


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Chapter 2 - Corporate Governance, Audit Standards

TRUE/FALSE

1. The OBJ:ective of financial reporting is to provide useful information to interested users.

ANS: T PTS: 1 OBJ: Expectations of Auditors

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

2. Corporate governance is a process by which the owners, but not the creditors, exert control over the resources of the enterprise.

ANS: F PTS: 1 OBJ: Corporate Governance

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

3. The development of strategic plans for a business entity is the responsibility of the board of directors.

ANS: F PTS: 1 OBJ: Corporate Governance

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

4. The audit committee is a subcommittee of the board of directors comprised of independent outside directors.

ANS: T PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

5. The auditor must communicate significant audit adjustments to the audit committee.

ANS: T PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

6. Any major disagreement the auditor has with management should be discussed with the audit committee.

ANS: T PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

7. An audit must be performed by persons who can make sound judgment relating to complex accounting issues.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

8. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control.

ANS: T PTS: 1 OBJ: Corporate Governance

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

9. The auditor must, at a minimum, follow Generally Accepted Auditing Standards to perform an audit with due professional care.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

10. Generally Accepted Auditing Standards encompass three broad categories including: general standards, fieldwork standards and reporting standards.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

11. The general auditing standards are designed to guide the profession in the selection and training of its professionals, performance of duties, and in maintaining an adequate separation from the client to meet the public trust.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

12. GAAS requires technical knowledge in auditing but not in the knowledge of a client's business.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

13. Generally accepted auditing standards are the cornerstone for the interpretation of financial accounting.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

14. The reporting standard of GAAS includes consistency, disclosure, and due professional care.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

15. An auditor must be independent in fact and in appearance.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

16. An auditor must be independent in fact and in appearance.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

17. Due professional care is defined as following Generally Accepted Accounting Standards.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

18. Public accounting firms use close supervision and review of audit work to ensure that audits are conducted with due professional care.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

19. The process of planning the audit includes the preparation of the audit program.

ANS: T PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

20. Part of the planning process of an audit is identifying factors that may require extension or modification of the audit tests, such as potential related-party transactions or the possibility of material errors or potential fraud.

ANS: T PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

21. Evidence is required to be sufficient, reliable and relevant in order to provide a reasonable basis for audit conclusions.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

22. Fieldwork standards include planning and supervision, understanding the internal control structure, and sufficient, competent evidential matter.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

23. Developing an understanding of the client's business and industry is essential to proficiency as discussed in the general standards of GAAS.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

24. The Sarbanes-Oxley Act completely prohibits auditors from performing consulting services for their audit clients.

ANS: F PTS: 1 OBJ: Key Provisions of Sarbanes

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

25. The Public Company Accounting Oversight Board (PCAOB) does not set standards for audits of public companies.

ANS: F PTS: 1 OBJ: Key Provisions of Sarbanes

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

26. Independence is a facet of the General Standards of Fieldwork.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

27. An auditor is required to communicate new accounting principles adopted by the organization to the audit committee.

ANS: T PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

28. The Sarbanes-Oxley Act makes the audit committee the client of the audit firm.

ANS: T PTS: 1 OBJ: Key Provisions of Sarbanes

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

29. The Public Company Accounting Oversight Board has five members, all of which must be CPAs.

ANS: F PTS: 1 OBJ: Key Provisions of Sarbanes

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

30. The Public CompanyAccounting Oversight Board has the ability to perform quality reviews of firms performing public audits.

ANS: T PTS: 1 OBJ: Key Provisions of Sarbanes

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

31. In order to safeguard independence of the firm, partners and managers of public accounting firms must go through a cooling off period prior to taking a high level position of employment with a public client company.

ANS: T PTS: 1 OBJ: Sarbanes-Oxley Overview

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

32. The Sarbanes-Oxley Act includes provisions requiring the auditor and the chairman of the board of directors to certify the financial statements and the disclosures.

ANS: F PTS: 1 OBJ: Sarbanes-Oxley Overview

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

33. The Sarbanes-Oxley Act requires that companies report on internal financial controls.

ANS: T PTS: 1 OBJ: Sarbanes-Oxley Overview

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

34. The Sarbanes-Oxley Act requires partners or managers significantly participating in audits to roll off the engagement every five years.

ANS: T PTS: 1 OBJ: Sarbanes-Oxley Overview

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

35. The audit committee must be composed of outsiders such as the organization's attorney and audit partner.

ANS: F PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

36. Management of companies should have the ability to hire and fire the external auditor.

ANS: F PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

37. The audit committee should have the authority to hire and fire the external auditors.

ANS: T PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

38. According to SAS 61, auditors are required to inform the audit committee of any significant audit adjustments discovered during the engagement.

ANS: T PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

39. Audit adjustments reflect upon the stewardship of the auditor over the financial statements of the client and the auditor's responsibility over the related disclosures.

ANS: F PTS: 1 OBJ: Role of Audit Committees

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

40. The standards of fieldwork include the responsibility of the auditor to exercise due professional care..

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

41. The purpose of the audit program is to discover material misstatements in the client's financial statements.

ANS: T PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

42. Planning is not required in an audit as long as an audit program has been developed.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

43. A component of the reporting standards is the requirement that an opinion always be rendered on the subject matter.

ANS: F PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

44. An auditor must obtain an adequate amount of evidence and the evidence must be of the appropriate quality.

ANS: T PTS: 1 OBJ: Generally Accepted Auditing Standards

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

45. An auditor conducts a planning meeting in order to develop an understanding of internal controls.

ANS: F PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

46. Materiality involves the degree of misstatement or omission that would affect the decision making process of the users of financial information.

ANS: T PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

47. Materiality is not usually considered by the external auditor, rather, it is a component of internal auditing.

ANS: F PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

48. An auditor of financial statements gathers evidence for review purposes and does not test it.

ANS: F PTS: 1 OBJ: Overview of the Audit Process

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

49. The Public Company Accounting Oversight Board obtains its authority to set audit standards for public companies from the U.S. Congress.

ANS: T PTS: 1 OBJ: Public vs Nonpublic Auditing

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

50. The American Institute of Certified Public Accountants no longer retains the right to set audit standards for any engagements as the Securities Exchange Commission has relinquished such power.

ANS: F PTS: 1 OBJ: Public vs Nonpublic Auditing

NAT: AACSB-Analytical thinking | AICPA BB-Critical thinking

MULTIPLE CHOICE

1. Corporate governance is a process by which the owners and creditors of an organization

a.

exert control.

b.

require accountability.

c.

exert control and require accountability.

d.

neither exert control nor require accountability.


ANS: C PTS: 1 OBJ: Corporate Governance

NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

2. The responsibility for operating an enterprise is delegated to the

a.

auditor.

b.

audit committee.

c.

management.

d.

board of directors.


ANS: C PTS: 1 OBJ: Corporate Governance

NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

3. The audit client of the CPA firm is

a.

management.

b.

the SEC.

c.

the audit committee.

d.

the stockholders.


ANS: C PTS: 1 OBJ: Corporate Governance

NAT: AACSB-Analytical skills | AICPA BB-Critical thinking

4. The audit committee has oversight responsibilities for

a.

outside reporting.

b.

internal auditing.

c.

external auditing.

d.

all of the above.
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