Copyright 2017 Pearson Education, Inc.

1 Copyright © 2017 Pearson Education, Inc.Auditing and Assurance Services, 16e (Arens/Elder/Beasley) Chapter 2 The CPA Profession 2.1 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 Auditing Standards Board.

Answer: A

Terms: Legal rights to perform audits

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking

2) Which of the following is not a characteristic of a small firm?

• Most small firms have fewer than 25 professionals.
• Small firms perform audits on small and not-for-profit businesses.
• Tax services are more important than auditing services to the small firm.
• Small firms are prohibited by the SEC from auditing publicly traded companies.

Answer: D

Terms: Characteristics of a small firm

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking

3) Sarbanes-Oxley and the Securities and 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 nor II

Answer: B

Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking

Topic: SOX

Auditing and Assurance Services 16th Edition Arens Test Bank Visit TestBankDeal.com to get complete for all chapters

2 Copyright © 2017 Pearson Education, Inc.4) Which of the following does not describe a size category for a CPA firm?

• Big Four national firms
• Big Four international firms
• local firms
• national and regional firms

Answer: A

Terms: Three categories for describing size of audit firms

Diff: Easy

Objective: LO 2-1

AACSB: Reflective thinking

5) ________ is one of the Big Four international CPA firms.

• Deloitte

B) KPMG

• Ernst & Young
• All of the above are classified as Big Four international CPA firms.

Answer: D

Terms: Three categories for describing size of audit firms

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking

6) In which type of service does the CPA assemble the financial statements but provide no assurance to third parties?

• audit
• compilation
• review
• bookkeeping

Answer: B

Terms: Compilation

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking

7) In addition to attestation and assurance services, CPA firms provide other services to their clients. List three of these services.Answer: Other services performed by a CPA firm include: • accounting and bookkeeping services • tax services • management consulting and risk advisory services.

Terms: Activities of CPA firms

Diff: Moderate

Objective: LO 2-1

AACSB: Reflective thinking

3 Copyright © 2017 Pearson Education, Inc.8) Many small, local accounting firms perform audits as their primary service to their clients.

Answer: FALSE

Terms: Small accounting firms do not perform audits

Diff: Easy

Objective: LO 2-1

AACSB: Reflective thinking

9) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

Answer: TRUE

Terms: Sarbanes-Oxley and Securities Exchange Commission restrictions

Diff: Easy

Objective: LO 2-1

AACSB: Reflective thinking

Topic: SOX

2.2 Learning Objective 2-2 1) Which of the following statements is true as it relates to limited liability partnerships?

• Only senior partners are liable for the partnerships 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 2-2

AACSB: Reflective thinking

2) Which staff level in a CPA firm performs most of the detailed audit work?

• partner
• staff assistant
• senior auditor
• senior manager

Answer: B

Terms: Staff levels in CPA firm

Diff: Easy

Objective: LO 2-2

AACSB: Reflective thinking

4 Copyright © 2017 Pearson Education, Inc.3) 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:

• The need for independence from clients. Independence permits auditors to remain unbiased in

drawing conclusions about the financial statements.

• The importance of a structure to encourage competence. Competency permits auditors to

conduct audits and perform other services effectively and efficiently.

• The increased litigation risk faced by auditors. Audit firms continue to experience increases in

litigation-related costs. Some organizational structures afford a degree of protection to individual firm members.

Common forms of audit firm organization include:

• Proprietorship • General Partnership • General Corporation • Professional Corporation • Limited Liability Company • Limited Liability Partnership

Terms: Factors that influence the organizational structure of CPA firms

Diff: Moderate

Objective: LO 2-2

AACSB: Reflective thinking

4) 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. 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. A professional corporation provides professional services and is owned by 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 typically structured and 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 owned by one or more partners. It 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 2-2

AACSB: Reflective thinking