The auditor
should prepare and maintain working papers, the form and content of which should be designed to meet the circumstances of a particular engagement. fn 2 The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning
significant matters. fn 3 Working papers serve mainly to— Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers are audit programs, analyses,
memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films, or other media. Factors affecting the auditor's judgment about the quantity, type, and content of the working papers for a particular engagement include (a) the nature of the engagement, (b) the nature of the auditor's report,
(c) the nature of the financial statements, schedules, or other information on which the auditor is reporting, (d) the nature and condition of the client's records, (e) the assessed level of control risk, and (f) the needs in the particular circumstances for supervision and review of the work. The quantity,
type, and content of working papers vary with the circumstances (see paragraph .04), but they should be sufficient to show that the accounting records agree or reconcile with the financial statements or other information reported on and that the applicable standards of field work have been observed. Working papers ordinarily should include documentation showing that— Working papers are the property of the auditor, and some states have statutes that designate the auditor as the owner of the working papers. The auditor's rights of ownership, however, are subject to ethical limitations relating to the confidential relationship with clients. Certain of the auditor's working papers may sometimes serve as a
useful reference source for his client, but the working papers should not be regarded as a part of, or a substitute for, the client's accounting records. The auditor should adopt reasonable procedures for safe custody of his working papers and should retain them for a period sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of records retention. This section is effective for engagements beginning after May 31, 1982. 1. The Private Securities Litigation Reform Act of 1995 provides that an auditor can be held liable in a private action for any finding, conclusion, or statement expressed in the report the Act requires the auditor to make to the SEC. b. False 2. Section 1 of the 1934 Securities Act imposes liability upon an accountant for negligence in the conduct of an audit. False 3. Accountants' liability under the 1933 and 1934 Securities Acts is more extensive and has fewer limitations than liability under the common law. True 4. An accountant has no liability to parties other than the client. False 5. Accountants are subject to civil liability under the Securities Act of 1933 if the financial statements they prepare or certify for inclusion in a registration statement contain any untrue statement or omit any material fact, but only if reliance on the financial statements is proven. False 6. The Public Company Accounting Oversight Board can impose sanctions in its disciplinary proceedings, including the permanent revocation of an accounting firm's registration, a permanent ban on a person's associating with any registered firm, and civil monetary penalties. a. True 7. An accountant who substantially performs his contractual duties is generally entitled to be compensated for the contractually agreed-upon fee, less any damages caused to the client. True 8. An accountant is negligent if she does not exercise the degree of care a reasonably competent accountant would exercise under the circumstances. True 9. In recent years, accountants have been subject to civil lawsuits based on the Racketeering Influenced and Corrupt Organizations Act. True 10. An accountant who willfully violates Section 11 of the 1933 Securities Act is subject only to civil liability. False 11. An accountant is subject to potential civil liability arising from the professional services he provides to his clients and third parties. True 12. An accountant who willfully violates Section 11 of the Securities Act of 1933 is subject to fines of up to $100,000 or imprisonment of not more than three years, or both. b. False 13. Both the common law and federal law recognize an accountant-client privilege. False 14. An implied agreement in the contractual relationship is the agreement by the accountant to act in a competent and professional manner. True 15. The lead audit partner having primary responsibility for an audit and the partner responsible for reviewing the audit must rotate at least every 3 years. False 16. An accountant-client privilege is statutorily recognized in all states, permitting the accountant to refuse to disclose confidential information gleaned from his client. False 17. Historically, an accountant's liability for negligence extended only to the client and third party beneficiaries. True 18. Martin agrees to perform an audit within 30 days, knowing that time is of the essence. After the 30 days, Martin has only performed 60% of the audit. Martin has materially breached his contract. a. True 19. Under the Securities Exchange Act of 1934, an accountant's liability for false or misleading statements is based on a good faith negligence standard. True 20. Angela tells her accountant, "I must have this year's audit completed by March 10, and time is of the essence." The accountant agrees to complete the audit by March 10. Under general contract law, if the audit is not completed by March 10, Angela does not have to pay the accountant for the audit. True 21. An accountant may not disclose the contents of his working papers under any circumstances. False 22. Protected individuals under the Restatement view of tort liability for an accountant include potential investors and the general public. False 23. For an accountant to be civilly liable under Rule 10b-5, the accountant must have acted with scienter. True 24. To lessen his tax liability, a client asks his accountant to misstate information on his tax return. If the accountant does so, she may be subject to fines and up to three years in prison. True 25. In the Ernst & Ernst v. Hochfelder case, the Supreme Court stated that Section 10(b) of the 1934 Act and SEC Rule 10b-5 apply only to intentional conduct and not to negligence. True 26. An accountant is generally held to be the owner of the working papers he uses in performing an audit. True 27. In recent years, more and more courts have followed the Ultramares doctrine in deciding cases. b. False 28. A five-member Public Company Accounting Oversight Board oversees the audit of public companies, and the SEC oversees the Board. True 29. An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a contractual obligation to provide an expanded audit beyond generally accepted auditing standards. True 30. Most courts allow an accountant to raise the defense of the plaintiff's contributory or comparative negligence. False 31. An accounting firm may perform both bookkeeping services and audits for the same client. b. False 32. The Sarbanes-Oxley Act establishes a new regulatory body to oversee public company auditors, makes auditors more closely connected to their clients, and places direct responsibility for the audit relationship on the auditor himself. False 33. Criminal sanctions for accountants are limited to punitive fines. False 34. Shirley, who is a CPA, fails to discover a fairly obvious error in the books of her client, Banana Computers. If Ben relies on Shirley's certification of the financial statement in deciding to accept the position of president of the company, Shirley will: a. in most states be liable to Ben as a
third party beneficiary of her contract with Banana. a. in most states be liable to Ben as a third party beneficiary of her contract with Banana. 35. Which of the following is correct with regard to an accountant's contractual liability? a. An accountant is bound to perform all the duties she explicitly agrees to perform. d. All of these are correct. 36. In which of the following situations would an accountant be subject to criminal liability? a. Where the accountant negligently performed an audit. b. Where the accountant willfully omitted a material fact on a securities registration statement. 37. To whom does an accountant have potential liability? a. To his client only. d. An accountant may be liable to all of these. 38. In which of the following types of cases can issues of accountant-client confidentiality arise? a. Civil litigation. d. All of these are situations where it can arise. 39. Anna has a contract to perform accounting services for Intercend Corporation. She breaches her contract in a nonmaterial way. Which of the following is correct with respect to Anna's liability? a. Anna is not entitled to any compensation for her services. c. Anna is entitled to the contractually agreed upon fee less any damages or loss her breach has caused her clients. 40. Audit working papers would include which of the following? a. Records of accounting and auditing procedures and tests performed. a. Records of accounting and auditing procedures and tests performed.
41. The group responsible for registering public accounting firms that prepare audit reports for issuers; overseeing the audit of public companies; establishing audit report standards and rules; and inspecting, investigating, and enforcing compliance on the part of registered public accounting firms is the: a. Federal Trade Commission. b. Public Company Accounting Oversight Board. 42. Pam certified a statement prepared by John, her employee, without checking John's work. He was never known to be anything but diligent and his integrity had never been questioned. The audit contained gross misstatements. Pam defends a suit against her claiming "due diligence." She will: a. succeed, since she had no reason to believe her
employee would lie. c. fail, because due diligence requires reasonable investigation. 43. When can an accountant release audit working papers? a. Only when a client consents. d. Either when a client consents or when a court orders disclosure. 44. Sara holds 1,000 shares of stock in Starr, Inc., which she purchased based upon financial statements that Travis had prepared. She now realizes that the statements were false and wants to sue Travis for common law fraud. What is Travis's best defense? a. Sara lacks privity of contract. c. The false statements were immaterial. 45. Matty is an employee of ValCom but doe not own any ValCom stock. At her five year employment anniversary, she decides to buy 50 shares of a new issue of company stock as a savings plan and afterward receives the signed registration statement. Because of her employment at ValCom, she recognizes that the statement contains an untrue material fact. Can she sue the auditor? a. Yes, under Section 11, proof of reliance is usually not required. a. Yes, under Section 11, proof of reliance is usually not required. 46. Which of the following is correct with respect to the accountant-client privilege? a. The common law recognizes such a privilege. c. Some states statutorily recognize such a privilege. 47. The failure by an accountant to use the care of a reasonably competent accountant under the circumstances is: a. negligence. a. negligence 48. In what situations is the accountant-client privilege recognized? a.
It is only recognized in federal court proceedings. c. It is recognized only in those states that have enacted statutes creating such a privilege. 49. An accountant can ethically disclose a client's confidential information if the accountant's disclosure is complying with: a. the client's request. d. All of these. 50. What sort of liability does an accountant have under the Securities Exchange Act of 1934? a. Civil liability where there is scienter and criminal liability where there
is a willful violation. a. Civil liability where there is scienter and criminal liability where there is a willful violation. 51. The purposes of the Sarbanes-Oxley Act include all of the following except: a. requiring yearly certification refresher courses for all
public company auditors to ensure they are using the latest conventions in accounting. a. requiring yearly certification refresher courses for all public company auditors to ensure they are using the latest conventions in accounting. 52. Which of the following defenses may be raised by an accountant under Section 11 of the 1933 Securities Act? a. Privity and due diligence. c. Due diligence, but not privity. 53. Which of the following is correct with respect to an accountant's working papers? a. The client is held to be the owner of an accountant's working papers. c. An accountant may not surrender her working papers unless the client consents or a court orders the disclosure. 54. An accountant's legal responsibility under state law may be based on: a. contract law. d. All of these. 55. Which of the following could give rise to an accountant's criminal liability? a. Falsely completing a tax return. d. All of these could subject an accountant to criminal liability. 56. An accountant's records, including the data-gathering process followed and the information and conclusions drawn therefrom, are known as: a. tax returns. b. working papers. 57. While auditing the books of PureCare Co., Rizza becomes aware of information indicating an illegal act within the company. Rizza must: a. determine whether an illegal act occurred and, if it did, the possible effect on PureCare's financial statements. a. determine whether an illegal act occurred and, if it did, the possible effect on PureCare's financial statements. 58. Which of the following can be the basis for an accountant's liability under state law? a. Contract law and negligence, but not criminal law. b. Tort law, contract law, and criminal law. Which of the following is NOT true regarding the relationship of an accountant and the client? a. It is based upon mutual agreement. d. The accountant is under a contractual obligation to follow all of the client's instructions and to use the client's figures without question. 60. Matthew decides to invest in the stock of a television production company after he reads Edgar's audit, which includes a known falsity as to the value of numerous worthless securities held as corporate assets. If Matthew sues Edgar, he will be entitled to: a. nothing, in a majority of states, since the class of foreseen users of the audit contract does not include potential investors and the general public. a. nothing, in a majority of states, since the class of foreseen users of the audit contract does not include potential investors and the general public. 61. Which of the following would NOT constitute scienter? a. Negligent performance of a substandard audit. a. Negligent performance of a substandard audit. What is included in audit working papers?Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement.
Which of the following is are examples of an audit working paper?Example of Audit Working Papers
Analysis. Issues memoranda. Summaries of significant matters. Letters of confirmation and representation.
What are the 3 main types of audits?There are three main types of audits: external audits, internal audits, and Internal Revenue Service (IRS) audits. External audits are commonly performed by Certified Public Accounting (CPA) firms and result in an auditor's opinion which is included in the audit report.
Which of the following are types of working papers?While there are many different types of working papers, three of the most common are interview summaries, worksheets, and reperformance documents. Each of these working papers document a different type of audit evidence and test, but all should include some basic information.
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