Accounting 630 (Audit) Exam 1 Questions And Correct Verified Answers

Audits provide independent assurance on: - correct answers - reliability of financial statements - internal control effectiveness Audit quality drivers - correct answers - audit firm culture - skills/personal qualities of audit staff - effectiveness of audit process - reliability and usefulness of audit reporting - factors outside control AICPA - correct answers - used to be self-regulator of accounting profession - responsible for private company auditors Threats to independence - correct answers 1. self-review threat 2. advocacy threat 3. adverse interest threat 4. familiarity threat 5. undue influence threat 6. self-interest threat 7. management participation threat SEC / PCAOB independence requirements - correct answers - audits for public companies - preapproval of services - fee disclosures - audit partner rotation - not performing prohibited services professional skepticism - correct answers a state of mind that is characterized by appropriate questioning and a critical assessment of audit evidence utilitarian theory - correct answers Greatest good for the greatest number of people rights theory - correct answers An ethical theory that identifies a hierarchy of rights that should be considered in solving ethical dilemmas. - highest order = right to life - second-order = rights granted by gov't - third-order = social rights - fourth-order = preferences Longtop Financial case - correct answers Chinese company that falsified revenues and interfered with Deloitte's audit process. * relates to Holding Foreign Companies Accountable Act Susan Birkert / Thomas Flanagan - correct answers Susan: had someone else invest in a company she was auditing and didn't disclose it Thomas: personally invested in audit companies & directed his son to do so as well; insider trading & threat to independence Fraud - correct answers intentional act involving the use of deception that results in a misstatement of the financial statements Types of fraud - correct answers - misappropriation of assets - fraudulent financial reporting misappropriation of assets - correct answers embezzle cash receipts, stealing assets, paying for goods/services that didn't happen fraudulent financial reporting - correct answers intentional manipulation of reported financial results - seek gain or try to "help" avoid bankruptcy fraud triangle - correct answers -incentive -opportunity -rationalization Enron - correct answers widespread fraud, management involved, need tone at the top SOX - correct answers response to Enron - section 201: no consulting services to audit clients - section 204/301/407: audit committees - section 404: management & audit attest to internal control SOX titles - correct answers title 1: PCAOB title 2: auditor independence title 3: corporate responsibility title 4: enhanced financial disclosure effective corporate governance - correct answers - long term sustainable growth in shareholder value - successful management - integration with company's business strategy - transparency - independence / objectivity Audit committee requirements - correct answers minimum three independent members written charter produce report annual performance evaluation needed Koss fraud - correct answers Sue Sachdeva misappropriated Koss's assets for multiple years for her own personal use. Issues include tone at the top (no questioning) and internal controls components of internal control - correct answers CRIME control activities risk assessment information/communication monitoring control environment types of controls - correct answers entity-wide & transaction controls control environment - COSO principles - correct answers - commitment to integrity - BoD exercises oversight - mgmt establishes structure/authority - org. demonstrates commitment to competence - org. enforces accountability risk assessment - COSO principles - correct answers - mgmt. specifies objectives - org. identifies & analyzes risk - org. assesses fraud risk - org. identifies and analyzes significant change control activities - COSO principles - correct answers - org. selects/develops control activities - mgmt. selects/develops general controls over technology - org. deploys control activities through policies/procedures info/communication - COSO principles - correct answers - org. uses relevant information - org. communicates internally & externally monitoring - COSO principles - correct answers - org. conducts ongoing or separate evaluations - mgmt. evaluates & communicates deficiencies mgmt's responsibilities for internal control - correct answers - responsible for designing, implementing, and maintaining effective internal control