Copyright 2014 Pearson Education, Inc.

1 Copyright © 2014 Pearson Education, Inc.Auditing and Assurance Services, 15e (Arens) Chapter 2 The CPA Profession

Learning Objective 2-1

1) The legal right to perform audits is granted to a CPA firm by regulation of:

• each state.
• the Financial Accounting Standards Board (FASB).
• the American Institute of Certified Public Accountants (AICPA).
• the Audit Standards Board.

Answer: A

Terms: Legal rights to perform audits

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking skills

2) The four categories for describing the size of audit firms include: the Big Four international firms; national firms; regional and local firms; and small firms. Which of the following is not a characteristic of a small firm?

• Most have fewer than 25 professionals.
• They perform audits on small and not-for-profit businesses.
• Tax services are more important to their practice than auditing.
• They do not audit publicly traded companies.

Answer: D

Terms: Four categories for describing size of audit firms

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking skills

3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. Which of the following is true for auditors of publicly traded companies?

• They are restricted from providing consulting services to privately held companies.

II. There is no restriction on providing consulting services to non-audit clients.

• I only
• II only
• I and II
• Neither I or II

Answer: B

Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking skills

Topic: SOX

Auditing and Assurance Services 15th Edition Arens Test Bank Visit TestBankDeal.com to get complete for all chapters

2 Copyright © 2014 Pearson Education, Inc.4) Which of the following statements is true as it relates to limited liability partnerships?

• Only senior partners are liable for the partnership's debts.
• Partners have no liability in a limited liability partnership arrangement.
• Partners are personally liable for the acts of those under their supervision.
• All partners must be AICPA members.

Answer: C

Terms: Limited liability partnerships

Diff: Challenging

Objective: LO 2-1

AACSB: Reflective thinking skills

5) List and describe the three factors that influence the organizational structure of all CPA firms.What are the most common forms of CPA firm organization?Answer: The three factors that influence the organization of a CPA firm include:

• Independence from clients. Independence is important as it allows the auditors to remain

unbiased in drawing conclusions on client financial statements.

• Auditor Competency. Competency allows auditors to conduct audits and perform services

effectively and efficiently.

• Litigation. The increased litigation risk faced by auditors increases audit firm business risk.

Certain organizational structures allow a degree of personal protection to individual firm members.

Common forms of audit firm organization include:

• Limited Liability Partnerships • Limited Liability Companies • Professional Corporations • General Corporations • General Partnerships • Sole Proprietorship Terms: Factors that influence that influence the organizational structure of CPA firms

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking skills

3 Copyright © 2014 Pearson Education, Inc.6) List and describe the six organizational structures available to CPA firms.Answer: CPA firms can take one of six organizational forms: • Proprietorship. This form is limited to firms with only one owner.• General partnership. This form is similar to a proprietorship, except that it applies to multiple owners.• General corporation. Unlike a general partnership, shareholders in a general corporation are liable only to the extent of their investment in the corporation. Many states prohibit CPA firms from organizing as a general corporation.• Professional corporation. Professional corporations can have one or more shareholders.Personal liability protection for shareholders in professional corporations varies widely from state to state.• Limited liability company. This form combines the most favorable attributes of a general corporation and a general partnership. LLCs are taxed like a general partnership, but its owners have limited personal liability similar to that of a general corporation.• Limited liability partnership. An LLP is structured and taxed like a general partnership.However, the personal liability protection of an LLP is less than that of a general corporation or an LLC, but it is greater than a general partnership. Many accounting firms now operate as LLPs.

Terms: Organizational structures available to CPA firms

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking skills

7) Many small, local accounting firms do not perform audits as their primary services to their clients include accounting and tax.

• True
• False

Answer: A

Terms: Small accounting firms do not perform audits

Diff: Easy

Objective: LO 2-1

AACSB: Reflective thinking skills

8) All of the Big Four accounting firms and many of the smaller CPA firms now operate as Limited Liability Partnerships.

• True
• False

Answer: A

Terms: Limited liability partnerships

Diff: Easy

Objective: LO 2-1

AACSB: Reflective thinking skills

4 Copyright © 2014 Pearson Education, Inc.9) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

• True
• False

Answer: A

Terms: Sarbanes-Oxley and Securities Exchange Commission restrict auditors

Diff: Easy

Objective: LO 2-1

AACSB: Reflective thinking skills

Topic: SOX

10) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation.

• True
• False

Answer: A

Terms: Limited liability companies

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking skills

Learning Objective 2-2

1) The organization that is responsible for providing oversight for auditors of public companies is called the ________.

• Auditing Standards Board
• American Institute of Certified Public Accountants
• Public Oversight Board
• Public Company Accounting Oversight Board

Answer: D

Terms: Organization responsible for providing oversight for auditors of public companies

Diff: Easy

Objective: LO 2-2

AACSB: Reflective thinking skills

Topic: SOX

2) Members of the Public Company Accounting Oversight Board are appointed and overseen by:

• the U.S. Congress.
• the American Institute of Certified Public Accountants.
• the Auditing Standards Board.
• the Securities and Exchange Commission.

Answer: D

Terms: Members of Public Company Accounting Oversight Board

Diff: Easy

Objective: LO 2-2

AACSB: Reflective thinking skills

Topic: SOX