Chapter 2

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

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

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

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

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

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

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

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

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

The general auditing standards are designed to guide the profession in the selection and training of its professionals, performance of dutie

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

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

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

An auditor must be independent in fact and in appearance.

Without independence, the value of the auditor’s attestation function would be nil.

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

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

The process of understanding the client includes the preparation of the audit program.

Part of the understanding the client process of an audit is identifying factors that may require extension or modification of the audit test

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

Fieldwork standards include planning and supervision, understanding the entity and its internal control structure, and obtaining sufficient

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

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

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

Independence is a facet of the General Standards of Fieldwork.

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

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

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

The Public Company Accounting Oversight Board has the power of performing inspection of public accounting firms to determine their performan

In order to safeguard independence of the firm, partners and managers of public accounting firms must go through a cooling off period prior

The Sarbanes-Oxley Act includes provisions requiring the auditor and the management to certify the financial statements and its disclosures

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

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

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

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

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

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

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

Audit adjustments reflect upon the stewardship of the auditor over the financial statements of the client and the auditor's responsibility o

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

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

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

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

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

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

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

Materiality usually involve applying percentage to some base such as total assets, total revenue or pretax income.

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

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

The American Institute of Certified Public Accountants no longer retains the right to set audit standards for any engagements as the Securit