1

Test Bank for Auditing A Business Risk Approach 8th Edition by Larry E. Rittenberg, Karla Johnstone, Audrey Gramling Test Bank Link full download: http://testbankcollection.com/download/auditing-a-business-risk-approach-8th-edition-by-rittenberg-johnstone-gramling-test-bank/

Chapter 2: Corporate Governance and Audits

Student:

1. The objective of financial reporting is to provide useful information to interested users.

True False

2. Financial transparency relates to how well resources are protected and managed by the company and its management.

True False

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

True False

4. Management can influence who sits on the board and the audit committee as well as other governance controls that might be put into place.

True False

5. A commission sponsored by the New York Stock Exchange issued a report in 2010 indicating that successful governance depends heavily upon honest, competent, and industrious managers.

True False

6. The board’s fundamental objective should be to build a system of internal controls that will ensure the financial statements are free from all error.

True False

7. An important aspect of governance is the independentjudgment of boards about what is in the best interests of the company and its shareholders.

True False

8. The external auditor has the primary responsibility for creating a culture of performance with integrity and ethical behavior within the client’s organization.

True False

9. Since the board is responsible to protect the interest of the shareholders, independence is not a necessary attribute for board members.

True False

2

10. Companies must strike the right balance in the appointment of independent and non-independent directors to ensure an appropriate range and mix of expertise, diversity, and knowledge on the board.

True False

11. It is effective for a board to take a “check the box” mentality when implementing and complying with governance mandates and best practices.

True False

12. The first decade of the twenty-first century has seen more changes in corporate governance than at any time since the Great Depression.

True False

13. Governance failures over the past decade were primarily limited to the United States.

True False

14. Board of directors that did not spend sufficient time or have sufficient expertise to perform duties led to corporate governance failures.

True False

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

True False

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

True False

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

True False

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

True False

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

True False

3

20. The Public Company Accounting Oversight Board (PCAOB) set standards for audits of private and public companies.

True False

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

True False

22. Audit committees are motivated to make sure the auditors do their job, because poor performance on the part of the auditors will directly reflect on the performance of the audit committee members.

True False

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

True False

24. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 replaces the requirements of the Sarbanes-Oxley Act of 2002 for financial sector companies.

True False

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

True False

26. The Public Company Accounting Oversight Board has the power of performing inspection of public accounting firms to determine their performance and check for improvements if any.

True False

27. 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.

True False

28. The Sarbanes-Oxley Act includes provisions requiring the auditor and the management to certify the financial statements and its disclosures and quality of internal controls.

True False

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

True False

4

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

True False

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

True False

32. The nominating committee is a standing committee of the board of directors whose purpose is to oversee the accounting and financial reporting processes of the company and the financial statement audits.

True False

33. When operating effectively the audit committee may replace the processes performed by the external auditors.

True False

34. The audit committee will receive feedback from both the internal and external auditors on a number of issues including the quality of internal controls over financial reporting.

True False

35. For public companies, the audit committee must be composed of outside directors who are also all financial experts.

True False

36. The audit committee relies on the internal and external auditors to develop and communicate objective information needed by the audit committee to effectively perform its oversight functions.

True False

37. The audit committee typically would not review the Management Discussion and Analysis section of the annual report filed with the SEC since that section of the report is the responsibility of management and includes forward looking statements.

True False

38. A survey of audit committee members conducted by KPMG in 2010 indicated that, on average, companies hold 12 audit committee meetings annually.

True False

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

True False

5

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

True False

41. The purpose of the audit committee is to oversee all aspects of the financial reporting process, including preparation and filing of financial statements, internal control over financial reporting, and related risks.

True False

42. At least half of the members of an audit committee should be composed of independent directors.

True False

43. The audit committee is responsible for ensuring that management designs and implements sound internal control, which is essential for reliable financial reporting for any organization.

True False

44. The chief (internal) audit executive should have direct reporting access to the audit committee, and the committee should oversee the activities and budget of the internal audit function.

True False

45. The audit committee should meet in separate executive sessions with management, the external auditor, the internal auditor, legal counsel, and other advisors.

True False

46. The board should not consider limiting the number of years an individual can serve on the audit committee since the more an audit committee member understands the company the more effective that member will be able to perform the required duties.

True False

47. Recent academic research shows that companies with good corporate governance have higher return on equity than other companies.

True False

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

True False

49. The audit committee must be assured that the auditor is free of any restrictions and has not been influenced by management during the course of the audit.

True False

6

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

True False

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

True False

52. 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.

53. Stockholders require accountability from management for:

A. financial performance B. financial transparency C. quality of internal controls D. all of the above

54. The responsibility for operating an enterprise is delegated to the:

A. auditor. B. audit committee. C. management. D. board of directors.

55. Section 304 of the Sarbanes-Oxley Act requires executives to forfeit any bonus or incentive-based pay or profits (including stock options) from the sale of stock received in the twelve months prior to an earnings restatement. This is often referred to as:

A. claw back provision B. give back provision C. restatement provision D. fraud provision

56. Governance demands accountability back through the system to the:

A. shareholders B. audit committee C. management D. all of the above

7

57. The audit client of the CPA firm is:

A. management. B. the SEC. C. the audit committee. D. the stockholders.

58. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted in response to the financial crisis of 2008 and 2009 and included the following corporate governance requirement(s):

A. Mandates enhanced stock exchange listing standards on compensation committee independence B. Requires the external auditors report to the audit committee C. Mandates that at least one member of the audit committee be a financial expert D. All of the above

59. The audit committee has oversight responsibilities for:

A. outside reporting. B. internal auditing. C. external auditing. D. all of the above.

60. Which of the following should be communicated by the auditor to the audit committee?

A. auditor's responsibilities under GAAP. B. all significant audit adjustments. C. significant accounting policies. D. all are required communications.

61. Which one of the following will provide auditing standards of public companies?

A. GAO B. AICPA C. GAAP D. PCAOB

62. The PCAOB has the authority to do all of the following except:

A. perform peer reviews on public accounting firms B. establish quality control standards for auditors of public companies C. take responsibility for an organization's financial statements D. set audit standards

63. Management of an organization has the responsibility for all of the following except:

A. accounting principles used in financial reporting B. engagement of a qualified auditor C. internal control over financial reporting D. financial statements and disclosures

8

64. A commission sponsored by the New York Stock Exchange issued a report in 2010 indicating that successful governance depends heavily upon:

A. honest managers B. competent managers C. industrious managers D. all of the above

65. The board’s fundamental objective should be to:

A. ensure the financial statements are free from all error B. ensure management’s interests are properly reflected in the strategy of the company C. build long-term sustainable growth in shareholder value for the corporation D. none of the above

66. The corporate governance responsibilities of management include:

A. establishing risk management processes B. establishing proper internal controls C. requiring high ethical standards D. all of the above

67. The Sarbanes-Oxley Act of 2002 requires management of public companies to:

A. certify the accuracy of financial statements. B. establish a corporate code of conduct. C. take accountability for restated earnings. D. all of the above

68. All of the following groups have responsibility for ensuring proper corporate governance except:

A. stockholders B. board of directors C. regulatory agencies D. all of the above have responsibility

69. Governance failures over the past decade related to the stockholders included all of the following except:

A. focus on short-term prices B. failure to perform long-term growth analysis C. abdication of most responsibilities to management and analysts as long as stock price increased D. all of the above are failures

9

70. Governance failures over the past decade related to the external auditor included all of the following except:

A. failure of the external audio to implement proper internal controls in the financial systems of their clients

B. promotion of personnel based on ability to sell non-audit products C. replacement of direct tests of accounting balances with inquiries, risk analysis, and analytics D. all of the above are failures

71. Which group is responsible for ensuring that the organization is run according to the organization’s charter and that there is proper accountability?

A. regulatory agencies such as the SEC B. external auditors C. board of directors D. internal auditors

72. Specific activities performed by regulatory agencies such as the SEC include the following except:

A. reviewing of filings B. interacting with the FASB in setting accounting standards C. auditing the financial statements to express an opinion D. all of the above are performed

73. Specific activities performed by external auditors include(s):

A. preparation of client financial statements in conformity with GAAP B. services such as audit, tax or consulting C. creating and specifying independence standards D. all of the above are performed

74. Specific activities performed by management include the following except:

A. formulating strategy and risk management B. implementing effective internal controls C. hiring of the external auditors D. all of the above are performed

75. The Public Oversight Board issued a report citing concerns with the audit process. These concerns included all of the following except:

A. analytical procedures were being used inappropriately to replace direct tests of account balances B. audit documentation, especially related to the planning of the audit, was not in compliance with

professional standards C. auditors were ignoring warning signals of fraud and other problems D. all of the above were cited

10

76. An audit committee must be comprised of outside directors and at least one outside financial expert. Which of the following is considered an outside director?

A. A director who is not a member of management and has no other relationship to the organization. B. A consultant to the organization who works as an honorary member of the board. C. A director who is also a member of management and has no other relationship to the company. D. A director who is a CPA and CIO of an affiliated organization.

77. Which of the following members of the board of directors of McKeever Corporation is most qualified serve on McKeever's audit committee?

A. Jon Adams, internal auditor of McKeever Corporation B. Megan Wiley, attorney to McKeever Corporation C. Karen Jones, consultant to McKeever Corporation D. None of the above should serve on the audit committee of McKeever Corporation

78. The audit committee’s primary responsibilities related to the financial reporting process include:

A. providing oversight of the accounting and financial reporting processes B. appointing, compensating, and overseeing the external auditor C. ensuring that the board establishes a whistleblower program D. all of the above

79. It is expected that the external auditor report the following to the audit committee except:

A. critical accounting policies and practices used by management B. materiality methodology and thresholds used by the auditor C. material alternative GAAP treatments that have been discussed with management D. material written communications between the auditor and management

80. Which of the following board of directors of Robbins Corporation should not serve on the audit committee?

A. John Williams, professor at the University of Kalamazoo B. Tyrone Marks, treasurer of Robbins Corporation C. Stacy Bobbitt, member of the board of directors of the First National Bank and Trust D. Jill Cemoss, chairman of the board of Big Brothers and Sisters, a non-profit organization

81. The audit committee’s major areas of responsibility include all of the following except:

A. oversight of the internal control system B. oversight of the internal audit function and external auditor C. preparation of financial statements D. establishment and oversight of a whistleblower process

11

82. The audit committee should have:

A. at least one financial expert B. members with very similar backgrounds and perspectives to avoid conflict C. at least one independent director D. all of the above

83. External auditors should expect the audit committees at their clients to ask them relevant and probing questions. Some of the relevant questions that audit committee members should ask the external auditor include all of the following except:

A. What are the most significant risks to financial reporting at this company? B. What level of assurance do your procedures provide with respect to the annual financial statements? C. How do you calculate materiality and what is your materiality threshold for the engagement? D. How do you assess the competence of company personnel engaged in financial reporting and related

processes?

84. The audit committee should perform the following in relation to the management of the external auditor except:

A. hiring B. firing (if appropriate) C. determining the audit fee D. all of the above should be performed

85. The audit committee should disclose the processes it uses in discharging its responsibilities, including all of the following except:

A. the number of meetings each year B. how the committee oversees the internal audit function C. committee activities performed to assess the risk of fraudulent financial reporting D. the committee’s role in its direct implementation of internal controls

86. The Sarbanes-Oxley Act of 2002 requires which of the following?

A. Only the largest four accounting firms may audit public companies. B. Smaller public companies that cannot afford to become compliant with the act must delist and

become pink sheet companies. C. All publicly held companies will provide a report on internal control over financial reporting. D. Chief financial officers of public companies must be CPAs.

87. The PCAOB has broad powers affecting the audit profession, including:

A. Requiring all public accounting firms that audit any U.S. company to register with the PCAOB B. Setting auditing standards for auditors of public companies C. Performing inspections of all public accounting firms in the AICPA to determine their performance D. all of the above

12

88. The Public Company Accounting Oversight Board was established by:

A. an act of Congress. B. the Securities and Exchange Commission. C. the Public Oversight Board. D. the self-governing association of certified public accountants.

89. Brooklyn Mercantile, Inc., a public company, receives audit services from Gregory and Elder, LLC. Brooklyn may engage Gregory and Elder to perform corporate tax returns only if:

A. Gregory and Elder is registered with the PCAOB. B. Gregory and Elder is independent of Brooklyn for tax purposes. C. tax services by Gregory and Elder are approved by Brooklyn's audit committee. D. the PCAOB approves such "non-audit" services in writing.

90. Audit committees are required to have what person in its composition?

A. A CPA B. A public regulator C. A financial expert D. An attorney-at-law

91. According to the Sarbanes-Oxley Act of 2002, how often must audit managers and partners rotate off an engagement of a public company?

A. Each busy season B. When independence is in question C. Every five years D. Managers and partners are not required to rotate off of public client engagements

92. Which of the following are the CEO and CFO of a public company prohibited from performing under the Sarbanes-Oxley Act of 2002?

A. Certification of financial statements B. Disclosure of off-balance sheet transactions C. Reporting on internal control over financial reporting D. Selecting the external auditors

93. The organization that will continue to set auditing standards for firms auditing private companies is the

A. FASB B. GAO C. SEC D. AICPA

13

94. The AICPA is an organization that is

A. historically self-regulated. B. regulated by the federal government. C. regulated the state governments. D. a new organization established by an act of congress in 2002.

95. A proper system of corporate governance is one that demands

A. decision making by auditors in place of management. B. accountability back through the system to the shareholders. C. internal audit representation on the board of directors. D. audit planning to obtain competent and sufficient audit evidence.

96. The auditor may properly address the risk associated with an organization that does not demonstrate a commitment to good governance in the all of the following ways except:

A. not accepting the client B. performing more audit work to better manage the financial risk to the auditor C. charging a higher audit fee without performing increased audit work to compensate the auditor for the

risk D. all of the above are proper are proper

97. Companies with good governance generally have the following characteristic(s):

A. are less likely to engage in “financial engineering” B. take the requirements of good internal control over financial reporting seriously C. make a commitment to financial competencies needed D. all of the above

98. The role of the auditor and the audit committee

Describe the relationship between the external auditor and the audit committee of the company receiving audit services.

14

99. Characteristics of an effective audit committee

List and discuss at least four attributes of an effective audit committee that provides important oversight functions.

100. Discuss what corporate governance is and briefly describe an overview of the corporate

governance process.

101. Discuss some of the more significant provisions of the Sarbanes-Oxley Act of 2002.

1

Chapter 2: Corporate Governance and Audits Key

1. The objective of financial reporting is to provide useful information to interested users.

TRUE

2. Financial transparency relates to how well resources are protected and managed by the company and its management.

FALSE

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

FALSE

4. Management can influence who sits on the board and the audit committee as well as other governance controls that might be put into place.

TRUE

5. A commission sponsored by the New York Stock Exchange issued a report in 2010 indicating that successful governance depends heavily upon honest, competent, and industrious managers.

TRUE

6. The board’s fundamental objective should be to build a system of internal controls that will ensure the financial statements are free from all error.

FALSE

7. An important aspect of governance is the independentjudgment of boards about what is in the best interests of the company and its shareholders.

TRUE

8. The external auditor has the primary responsibility for creating a culture of performance with integrity and ethical behavior within the client’s organization.

FALSE

9. Since the board is responsible to protect the interest of the shareholders, independence is not a necessary attribute for board members.

FALSE

2

10. Companies must strike the right balance in the appointment of independent and non-independent directors to ensure an appropriate range and mix of expertise, diversity, and knowledge on the board.

TRUE

11. It is effective for a board to take a “check the box” mentality when implementing and complying with governance mandates and best practices.

FALSE

12. The first decade of the twenty-first century has seen more changes in corporate governance than at any time since the Great Depression.

TRUE

13. Governance failures over the past decade were primarily limited to the United States.

FALSE

14. Board of directors that did not spend sufficient time or have sufficient expertise to perform duties led to corporate governance failures.

TRUE

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

TRUE

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

TRUE

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

TRUE

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

TRUE

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

TRUE

3

20. The Public Company Accounting Oversight Board (PCAOB) set standards for audits of private and public companies.

FALSE

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

TRUE

22. Audit committees are motivated to make sure the auditors do their job, because poor performance on the part of the auditors will directly reflect on the performance of the audit committee members.

TRUE

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

TRUE

24. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 replaces the requirements of the Sarbanes-Oxley Act of 2002 for financial sector companies.

FALSE

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

FALSE

26. The Public Company Accounting Oversight Board has the power of performing inspection of public accounting firms to determine their performance and check for improvements if any.

TRUE

27. 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.

TRUE

28. The Sarbanes-Oxley Act includes provisions requiring the auditor and the management to certify the financial statements and its disclosures and quality of internal controls.

TRUE

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

TRUE

4

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

TRUE

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

FALSE

32. The nominating committee is a standing committee of the board of directors whose purpose is to oversee the accounting and financial reporting processes of the company and the financial statement audits.

FALSE

33. When operating effectively the audit committee may replace the processes performed by the external auditors.

FALSE

34. The audit committee will receive feedback from both the internal and external auditors on a number of issues including the quality of internal controls over financial reporting.

TRUE

35. For public companies, the audit committee must be composed of outside directors who are also all financial experts.

FALSE

36. The audit committee relies on the internal and external auditors to develop and communicate objective information needed by the audit committee to effectively perform its oversight functions.

TRUE

37. The audit committee typically would not review the Management Discussion and Analysis section of the annual report filed with the SEC since that section of the report is the responsibility of management and includes forward looking statements.

FALSE

38. A survey of audit committee members conducted by KPMG in 2010 indicated that, on average, companies hold 12 audit committee meetings annually.

FALSE

5

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

FALSE

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

TRUE

41. The purpose of the audit committee is to oversee all aspects of the financial reporting process, including preparation and filing of financial statements, internal control over financial reporting, and related risks.

TRUE

42. At least half of the members of an audit committee should be composed of independent directors.

FALSE

43. The audit committee is responsible for ensuring that management designs and implements sound internal control, which is essential for reliable financial reporting for any organization.

TRUE

44. The chief (internal) audit executive should have direct reporting access to the audit committee, and the committee should oversee the activities and budget of the internal audit function.

TRUE

45. The audit committee should meet in separate executive sessions with management, the external auditor, the internal auditor, legal counsel, and other advisors.

TRUE

46. The board should not consider limiting the number of years an individual can serve on the audit committee since the more an audit committee member understands the company the more effective that member will be able to perform the required duties.

FALSE

47. Recent academic research shows that companies with good corporate governance have higher return on equity than other companies.

TRUE

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

TRUE

6

49. The audit committee must be assured that the auditor is free of any restrictions and has not been influenced by management during the course of the audit.

TRUE

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

TRUE

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

FALSE

52. 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.

53. Stockholders require accountability from management for:

A. financial performance B. financial transparency C. quality of internal controls D. all of the above

54. The responsibility for operating an enterprise is delegated to the:

A. auditor. B. audit committee. C. management. D. board of directors.

55. Section 304 of the Sarbanes-Oxley Act requires executives to forfeit any bonus or incentive-based pay or profits (including stock options) from the sale of stock received in the twelve months prior to an earnings restatement. This is often referred to as:

A. claw back provision B. give back provision C. restatement provision D. fraud provision

7

56. Governance demands accountability back through the system to the:

A. shareholders B. audit committee C. management D. all of the above

57. The audit client of the CPA firm is:

A. management. B. the SEC. C. the audit committee. D. the stockholders.

58. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted in response to the financial crisis of 2008 and 2009 and included the following corporate governance requirement(s):

A. Mandates enhanced stock exchange listing standards on compensation committee independence B. Requires the external auditors report to the audit committee C. Mandates that at least one member of the audit committee be a financial expert D. All of the above

59. The audit committee has oversight responsibilities for:

A. outside reporting. B. internal auditing. C. external auditing. D. all of the above.

60. Which of the following should be communicated by the auditor to the audit committee?

A. auditor's responsibilities under GAAP. B. all significant audit adjustments. C. significant accounting policies. D. all are required communications.

61. Which one of the following will provide auditing standards of public companies?

A. GAO B. AICPA C. GAAP D. PCAOB

8

62. The PCAOB has the authority to do all of the following except:

A. perform peer reviews on public accounting firms B. establish quality control standards for auditors of public companies C. take responsibility for an organization's financial statements D. set audit standards

63. Management of an organization has the responsibility for all of the following except:

A. accounting principles used in financial reporting B. engagement of a qualified auditor C. internal control over financial reporting D. financial statements and disclosures

64. A commission sponsored by the New York Stock Exchange issued a report in 2010 indicating that successful governance depends heavily upon:

A. honest managers B. competent managers C. industrious managers D. all of the above

65. The board’s fundamental objective should be to:

A. ensure the financial statements are free from all error B. ensure management’s interests are properly reflected in the strategy of the company C. build long-term sustainable growth in shareholder value for the corporation D. none of the above

66. The corporate governance responsibilities of management include:

A. establishing risk management processes B. establishing proper internal controls C. requiring high ethical standards D. all of the above

67. The Sarbanes-Oxley Act of 2002 requires management of public companies to:

A. certify the accuracy of financial statements. B. establish a corporate code of conduct. C. take accountability for restated earnings. D. all of the above

68. All of the following groups have responsibility for ensuring proper corporate governance except:

A. stockholders B. board of directors C. regulatory agencies D. all of the above have responsibility

9

69. Governance failures over the past decade related to the stockholders included all of the following except:

A. focus on short-term prices B. failure to perform long-term growth analysis C. abdication of most responsibilities to management and analysts as long as stock price increased D. all of the above are failures

70. Governance failures over the past decade related to the external auditor included all of the following except:

A. failure of the external audio to implement proper internal controls in the financial systems of their clients

B. promotion of personnel based on ability to sell non-audit products C. replacement of direct tests of accounting balances with inquiries, risk analysis, and analytics D. all of the above are failures

71. Which group is responsible for ensuring that the organization is run according to the organization’s charter and that there is proper accountability?

A. regulatory agencies such as the SEC B. external auditors C. board of directors D. internal auditors

72. Specific activities performed by regulatory agencies such as the SEC include the following except:

A. reviewing of filings B. interacting with the FASB in setting accounting standards C. auditing the financial statements to express an opinion D. all of the above are performed

73. Specific activities performed by external auditors include(s):

A. preparation of client financial statements in conformity with GAAP B. services such as audit, tax or consulting C. creating and specifying independence standards D. all of the above are performed

74. Specific activities performed by management include the following except:

A. formulating strategy and risk management B. implementing effective internal controls C. hiring of the external auditors D. all of the above are performed

10

75. The Public Oversight Board issued a report citing concerns with the audit process. These concerns included all of the following except:

A. analytical procedures were being used inappropriately to replace direct tests of account balances B. audit documentation, especially related to the planning of the audit, was not in compliance with

professional standards C. auditors were ignoring warning signals of fraud and other problems D. all of the above were cited

76. An audit committee must be comprised of outside directors and at least one outside financial expert. Which of the following is considered an outside director?

A. A director who is not a member of management and has no other relationship to the organization. B. A consultant to the organization who works as an honorary member of the board. C. A director who is also a member of management and has no other relationship to the company. D. A director who is a CPA and CIO of an affiliated organization.

77. Which of the following members of the board of directors of McKeever Corporation is most qualified serve on McKeever's audit committee?

A. Jon Adams, internal auditor of McKeever Corporation B. Megan Wiley, attorney to McKeever Corporation C. Karen Jones, consultant to McKeever Corporation D. None of the above should serve on the audit committee of McKeever Corporation

78. The audit committee’s primary responsibilities related to the financial reporting process include:

A. providing oversight of the accounting and financial reporting processes B. appointing, compensating, and overseeing the external auditor C. ensuring that the board establishes a whistleblower program D. all of the above

79. It is expected that the external auditor report the following to the audit committee except:

A. critical accounting policies and practices used by management B. materiality methodology and thresholds used by the auditor C. material alternative GAAP treatments that have been discussed with management D. material written communications between the auditor and management

80. Which of the following board of directors of Robbins Corporation should not serve on the audit committee?

A. John Williams, professor at the University of Kalamazoo B. Tyrone Marks, treasurer of Robbins Corporation C. Stacy Bobbitt, member of the board of directors of the First National Bank and Trust D. Jill Cemoss, chairman of the board of Big Brothers and Sisters, a non-profit organization

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81. The audit committee’s major areas of responsibility include all of the following except:

A. oversight of the internal control system B. oversight of the internal audit function and external auditor C. preparation of financial statements D. establishment and oversight of a whistleblower process

82. The audit committee should have:

A. at least one financial expert B. members with very similar backgrounds and perspectives to avoid conflict C. at least one independent director D. all of the above

83. External auditors should expect the audit committees at their clients to ask them relevant and probing questions. Some of the relevant questions that audit committee members should ask the external auditor include all of the following except:

A. What are the most significant risks to financial reporting at this company? B. What level of assurance do your procedures provide with respect to the annual financial

statements? C. How do you calculate materiality and what is your materiality threshold for the engagement? D. How do you assess the competence of company personnel engaged in financial reporting and

related processes?

84. The audit committee should perform the following in relation to the management of the external auditor except:

A. hiring B. firing (if appropriate) C. determining the audit fee D. all of the above should be performed

85. The audit committee should disclose the processes it uses in discharging its responsibilities, including all of the following except:

A. the number of meetings each year B. how the committee oversees the internal audit function C. committee activities performed to assess the risk of fraudulent financial reporting D. the committee’s role in its direct implementation of internal controls

86. The Sarbanes-Oxley Act of 2002 requires which of the following?

A. Only the largest four accounting firms may audit public companies. B. Smaller public companies that cannot afford to become compliant with the act must delist and

become pink sheet companies. C. All publicly held companies will provide a report on internal control over financial reporting. D. Chief financial officers of public companies must be CPAs.

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87. The PCAOB has broad powers affecting the audit profession, including:

A. Requiring all public accounting firms that audit any U.S. company to register with the PCAOB B. Setting auditing standards for auditors of public companies C. Performing inspections of all public accounting firms in the AICPA to determine their

performance D. all of the above

88. The Public Company Accounting Oversight Board was established by:

A. an act of Congress. B. the Securities and Exchange Commission. C. the Public Oversight Board. D. the self-governing association of certified public accountants.

89. Brooklyn Mercantile, Inc., a public company, receives audit services from Gregory and Elder, LLC. Brooklyn may engage Gregory and Elder to perform corporate tax returns only if:

A. Gregory and Elder is registered with the PCAOB. B. Gregory and Elder is independent of Brooklyn for tax purposes. C. tax services by Gregory and Elder are approved by Brooklyn's audit committee. D. the PCAOB approves such "non-audit" services in writing.

90. Audit committees are required to have what person in its composition?

A. A CPA B. A public regulator C. A financial expert D. An attorney-at-law

91. According to the Sarbanes-Oxley Act of 2002, how often must audit managers and partners rotate off an engagement of a public company?

A. Each busy season B. When independence is in question C. Every five years D. Managers and partners are not required to rotate off of public client engagements

92. Which of the following are the CEO and CFO of a public company prohibited from performing under the Sarbanes-Oxley Act of 2002?

A. Certification of financial statements B. Disclosure of off-balance sheet transactions C. Reporting on internal control over financial reporting D. Selecting the external auditors

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93. The organization that will continue to set auditing standards for firms auditing private companies is the

A. FASB B. GAO C. SEC D. AICPA

94. The AICPA is an organization that is

A. historically self-regulated. B. regulated by the federal government. C. regulated the state governments. D. a new organization established by an act of congress in 2002.

95. A proper system of corporate governance is one that demands

A. decision making by auditors in place of management. B. accountability back through the system to the shareholders. C. internal audit representation on the board of directors. D. audit planning to obtain competent and sufficient audit evidence.

96. The auditor may properly address the risk associated with an organization that does not demonstrate a commitment to good governance in the all of the following ways except:

A. not accepting the client B. performing more audit work to better manage the financial risk to the auditor C. charging a higher audit fee without performing increased audit work to compensate the auditor for

the risk D. all of the above are proper are proper

97. Companies with good governance generally have the following characteristic(s):

A. are less likely to engage in “financial engineering” B. take the requirements of good internal control over financial reporting seriously C. make a commitment to financial competencies needed D. all of the above

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98. The role of the auditor and the audit committee

Describe the relationship between the external auditor and the audit committee of the company receiving audit services.

The audit committee hires the auditor to perform audits of financial statements that are the representations and responsibilities of management. The audit committee is the literal client of the auditor. The audit committee has the responsibility to assess the quality of audit services received, including the independence of the external audit firm. The audit committee has the ultimate ability to fire the audit firm.

According to SAS 61 of the auditing standards, the auditors must communicate specific issues to the audit committee. These items of communication include:

- The firm's responsibility to audit in accordance with Generally Accepted Auditing Standards and its responsibility to review

other information contained in annual reports and public documents. - The client company's adoption of significant accounting policies and principles. - The client company management's judgments and estimates of certain accounting balances. - Significant audit adjustments proposed by the auditors.

All major accounting disagreements with management whether or not resolved.

99. Characteristics of an effective audit committee

List and discuss at least four attributes of an effective audit committee that provides important oversight functions.

Attributes of an effective audit committee includes:

1. The audit committee members should be comprised of outside directors. Outside directors are not members of

management and they do not have other relationships with the company. 2. The audit committee members should be financially literate and at least one member should have financial expertise. 3. The committee should be responsible for assessing the independence of the auditor. 4. The committee should have a discussion with the auditor about the auditor's judgments about the company's accounting

principles. 5. The committee should be apprised of significant changes in accounting information systems and the related controls. 6. The committee should receive all regulatory reports and meet periodically with regulatory auditors to discuss findings and

concerns. 7. The committee should have direct oversight over the internal audit function. It should review the budget, should review the

audit plan and discuss internal audit findings. 8. The committee should meet regularly to discuss all matters of corporate governance. 9. The committee may consider separation of the Chairman of the Board and CEO positions.

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100. Discuss what corporate governance is and briefly describe an overview of the corporate governance process.

Corporate governance is defined as “a process by which the owners and creditors of an organization exert control and require accountability for the resources entrusted to the organization. The owners (stockholders) elect a board of directors to provide oversight of the organization’s activities.”

Responsibility runs down the organization. Governance starts with the stockholders/owners delegating responsibilities through an elected board of directors to management and, in turn, to operating units with oversight and assistance from internal auditors. Accountability runs upward in the organization. Operations personnel are held responsible for their actions and decisions by management, Management has to account for their decisions and actions to the board of directors, and both the board and management are held accountable by the stockholders.

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101. Discuss some of the more significant provisions of the Sarbanes-Oxley Act of 2002.

Some of the more significant provisions of the Act include:

Establishing the PCAOB with broad powers including the power to set auditing standards for audits of public companies.

Requiring that the CEO and CFO certify quarterly and annual reports.

Requiring management of public companies to provide a comprehensive report on internal controls over financial reporting.

Requiring management forfeiture of certain compensation in instances where there is a restatements as a result of misconduct.

Empowering audit committees to be the formal audit client of the external auditor with the responsibility to hire and fire and pre-approve any non-audit services

Requiring that the audit committee have at least one person what is a financial expert and that other members be knowledgeable in financial accounting as well as internal control

Requiring partners in charge of audit engagements, as well as all other partners with a significant role in the audit, to be rotated off public company engagements every five years.

Increasing the disclosure of all off-balance sheet transactions that have a material effect.

Establishment of an effective whistle-blowing program.

Requiring a cooling-off period before audit team members can take a high-level position with an audit client.

Limiting the non-audit services that audit firms can provide to their audit clients.

Mandating analysis of audit firm competition and the potential need for audit firm rotation.