TEST BANK For Auditing & Assurance Services: A Systematic Approach, 12th Edition Chapters 1 - 21 Complete

A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards. -

ANSWER: audit

Distinguish between what is meant by business failure and audit failure - ANSWER: : Business failure occurs when a business is unable to repay its lenders or meet expectations of its investors because of economic or business conditions, such as recession, poor management decisions, or unexpected competition in the industry. Audit failure occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards.

Audit risk is the risk there will be an audit failure for a given audit

engagement. - ANSWER: False

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's

financial statements are materially misstated. - ANSWER: false

In the performance of an audit, a CPA:

• is legally liable for not detecting client fraud.
• must strictly follow GAAS for privately held clients.
• must strictly follow PCAOB auditing standards for publicly held clients.
• must exercise due professional care in the performance of their audit

responsibilities. - ANSWER: D

Auditors who fail to exercise due care in their performance of professional

services may be liable for:

• punitive liability.
• breach of contract.
• excess liability.

D) criminal charges - ANSWER: B

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description

is the legal term for:

• ordinary negligence.
• gross negligence.
• constructive fraud.

D) fraud. - ANSWER: C

The standard of due care to which the auditor is expected to adhere to in

the performance of the audit is referred to as the:

• prudent person concept.
• common law doctrine.
• due care concept.

D) vigilant person concept. - ANSWER: A

Auditors may be liable to their clients for:

A) Punitive damages Compensatory damages Yes Yes

B) Punitive damages Compensatory damages No No

C) Punitive damages Compensatory damages Yes No

D) Punitive damages Compensatory damages

No Yes - ANSWER: A

Under the laws of agency, partners of a CPA firm may be liable for the

work of others on whom they rely. This would not include:

• employees of the CPA firm.
• employees of the audit client.
• other CPA firms engaged to do part of the audit work.
• specialists employed by the CPA firm to provide technical advice on the

audit. - ANSWER: B

"Absence of reasonable care that can be expected of a person in a set of

circumstances" defines:

• pecuniary negligence.
• gross negligence.
• extreme negligence.

D) ordinary negligence. - ANSWER: D