TABLE OF CONTENTS Chapter 1: An Introduction to Assurance and Financial Statement Auditing Chapter 2: The Financial Statement Auditing Environment Chapter 3: Audit Planning, Types of Audit Tests, and Materiality Chapter 4: Risk Assessment Chapter 5: Evidence and Documentation Chapter 6: Internal Control in a Financial Statement Audit Chapter 7: Auditing Internal Control over Financial Reporting Chapter 8: Audit Sampling: An Overview and Application to Tests of Controls Chapter 9: Audit Sampling: An Application to Substantive Tests of Account Balances Chapter 10: Auditing the Revenue Process Chapter 11: Auditing the Purchasing Process Chapter 12: Auditing the Human Resource Management Process Chapter 13: Auditing the Inventory Management Process Chapter 14: Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment Chapter 15: Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income Statement Accounts Chapter 16: Auditing the Financing/Investing Process: Cash and Investments Chapter 17: Completing the Audit Engagement Chapter 18: Reports on Audited Financial Statements Chapter 19: Professional Conduct, Independence, and Quality Management Chapter 20: Legal Liability Chapter 21: Assurance, Attestation, and Internal Auditing Services
Student name:__________ 1)
Why do auditors often use a sampling approach to evidence gathering?
A) Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. B) Auditors must balance the cost of the audit with the need for precision and for some types of evidence, computer data analytic approaches can’t be used. C) Auditors must limit their exposure to their auditee to maintain independence. D) The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.
2) Which of the following statements best describes a relationship between sample size and other elements of auditing? A) If materiality increases, so will the sample size. B) If the desired level of assurance increases, sample sizes can be smaller. C) If materiality decreases, sample size will need to increase. D) There is no relationship between sample size and materiality or the desired level of assurance.
3)
Which of the following statements about the study of auditing is NOT true?
A) The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors. B) The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information. C) The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements for making investment recommendations. D) The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others’ assertions.
4)
The basic definition of auditing essentially indicates that, overall, auditing is a process to:
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A) detect fraud. B) examine individual transactions so that the auditor may certify as to their validity. C) objectively obtain and evaluate evidence regarding assertions made by another party. D) assure the consistent application of correct accounting procedures.
5)
Assurance services may improve all of the following except: A) relevance. B) credibility. C) periodicity. D) reliability.
6)
Evidence is reliable if it: A) signals the true state of a management assertion. B) applies to the period being audited. C) relates to the audit assertion being tested. D) is sufficient to justify a conclusion.
7)
Which of the following best describes the concept of audit risk?
A) The risk of the auditor being sued because of association with an auditee. B) The risk that the auditor will provide an inappropriate opinion on financial statements that are, in fact, materially misstated. C) The overall risk that a material misstatement exists in the financial statements. D) The risk that auditors use audit procedures that are inappropriate.
8) An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity’s industry at that point, should:
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A) engage financial experts familiar with the nature of the business entity. B) obtain a knowledge of matters that relate to the nature of the entity’s business and the industry in which it operates. C) refer a substantial portion of the audit to another CPA, who will act as the principal auditor. D) first inform management that an unqualified opinion cannot be issued.
9) For publicly-held companies, which of the following is integrated with the audit of financial statements? A) budgetary information audit B) the audit of internal controls C) audit of management forecasts D) audit of interim financial statements
10)
During the first phase of an audit, a CPA most likely would:
A) identify specific internal control activities that are likely to prevent fraud. B) evaluate the reasonableness of the company’s accounting estimates. C) evaluate the integrity of management. D) inquire of the company's attorney as to whether any unrecorded claims are probable or asserted.
11)
In the context of agency theory, information asymmetry refers to the idea that:
A) information can vary in its reliability. B) information can vary in its relevance. C) management has more information about the entity’s true financial results and position than do the absentee owners (i.e. stockholders). D) management likely will not act in the best interests of the absentee owners.
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12) Which of the following best describes why an independent auditor is engaged to express an opinion on the fair presentation of financial statements? A) It is difficult to prepare financial statements that fairly present a company’s financial position and changes in cash flows without the expertise of an independent auditor. B) It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C) The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. D) It is a customary courtesy that all stockholders of a company receive an independent report on management’s stewardship in managing the affairs of the business.
13) Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements? A) A management fraud may exist and it is more likely to be detected by auditors if they are independent. B) Different interests may exist between the company preparing the statements and the parties using the statements. C) A misstatement of account balances may exist and it is the independent auditor’s responsibility to ensure that financial statements are not misstated. D) A poorly designed internal control system may be in place.
14) Which of the following best describes why publicly-traded companies follow the practice of having the external auditor appointed by the audit committee and ratified by the stockholders? A) to promote an adversarial relationship between the auditor and the corporation’s management B) to comply with requirements set forth by the Sarbanes-Oxley Act of 2002 and to enhance auditor independence from the management of the corporation C) to encourage a policy of rotation of the independent auditors D) to give management more leverage over the auditor’s decisions
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15) Auditing can be defined as a “systematic process of objectively obtaining and evaluating evidence regarding assertions...” What is meant by “systematic process” in this definition? A) All audits involve obtaining the same evidence. B) All audits involve evaluating evidence in the same manner. C) There should be a well-planned approach for obtaining and evaluating evidence that is relevant and reliable for each particular audit engagement. D) All assertions are equally important for all audits.
16)
Which of the following would best be described as an assurance service?
A) preparing a report representing a client’s position during an IRS audit B) working with a company to develop a more efficient method of processing financial transactions C) offering an opinion concerning the validity of statements made on an entity’s website relating to its online privacy policies D) assisting a company in identifying potential sources of capital for potential acquisitions
17) Which of the following statements is not true with respect to assurance, attest, and audit services? A) These services are applied only to financial statements and financial statement accounts. B) These services all involve obtaining and evaluating evidence. C) These services all involve determining the correspondence of some information to a set of criteria. D) These services all involve issuing a report.
18)
Auditors are most likely to use the most rigorous audit procedures to examine:
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A) routine transactions. B) management assertions that are deemed to be of low risk in a particular engagement. C) only the rights and obligations assertion. D) management assertions that are deemed to be of high risk in a particular engagement.
19) When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to: A) identify areas of relatively high risk of misstatement and plan the audit accordingly. B) provide suggestions for improvement to the company. C) serve as a basis for setting audit risk and materiality. D) decide whether to perform an audit for the company.
20)
Which one of the following statements best describes the concept of materiality?
A) Materiality is determined by reference to specific quantitative guidelines established by the AICPA. B) Materiality depends only on the dollar amount of an item relative to other items in the financial statements. C) Materiality depends on the nature of an item but not on the dollar amount of the item. D) Materiality is largely a matter of professional judgment and reflects both quantitative and qualitative considerations.
21)
Before accepting an engagement to audit a new entity, an auditor is required to:
A) make inquiries of the predecessor auditor. B) tell the company whether or not the auditor is willing to issue a “clean” opinion. C) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D) become a member of the entity’s board of directors.
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22) An investor is reading the financial statements of the Peres Corporation and observes that the statements are accompanied by an auditor’s unqualified report. From this, the investor may conclude that: A) any disputes over whether Peres’ financial statements are fairly stated in accordance with GAAP have been settled to the auditor's satisfaction. B) the auditor is satisfied that Peres will be highly profitable in the future. C) the auditor is certain that Peres’ financial statements have been prepared accurately and that all account balances are precisely correct. D) the auditor has determined that Peres’ management is not qualified to lead the company.
23)
Preliminary engagement activities include: A) evaluating internal controls. B) assessing audit risk at the account balance level. C) setting materiality. D) performing background checks on top management.
24)
The auditor's report is generally addressed to the: A) chief operating officer. B) securities and exchange commission. C) stockholders of the company. D) chief financial officer.
25)
An auditor would issue an adverse opinion if:
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A) the auditor encounters adverse attitudes toward the auditor on the part of company management. B) a qualified opinion cannot be given because the auditor is not qualified to do so. C) an immaterial misstatement is present. D) the financial statements taken as a whole do not fairly present the financial condition and results of operations of the company.
26)
Which of the following is true with respect to the auditor’s report?
A) The report indicates that the company’s financial statements were audited in accordance with generally accepted accounting standards. B) The report indicates that the company’s financial statements were audited in accordance with applicable auditing standards. C) The report indicates that the company’s financial statements were audited in accordance with the auditor's best judgment. D) The report indicates that the company’s financial statements were audited in accordance with statements issued by the FASB.
27) Which of the following is not a concept that is included in the audit report in the paragraph on the auditor’s responsibilities? A) The conformance of the financial statements with generally accepted accounting principles. B) The audit was conducted in accordance with applicable auditing standards. C) The audit was planned and performed to obtain reasonable, rather than absolute, assurance. D) A description of when misstatements are considered material.
28)
Which of the following is not a benefit of emerging audit technologies?
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A) automate much of the more tedious work that auditors perform B) the potential to dramatically enhance the effectiveness and the value of the external audit C) leave more time for auditors to better understand the businesses they are auditing and the underlying risks related to financial reporting D) remove the challenge of junior auditor work and make that work less interesting
29)
Information Risk is defined as:
A) the risk that information conveyed by a company’s management will be false, inaccurate, or misleading. B) the risk that an assertion contains a misstatement, before considering internal controls. C) the risk that the auditor has followed appropriate auditing standards and issued a standard unqualified opinion, and the financial statements contain a material misstatement. D) the risk that the internal controls will not prevent or detect a misstatement in the financial statements.
30) The accounting processes of a business involve, among other things, individual transactions, internal controls, and account balances. Required:A.Describe the relationship between internal controls, individual transactions, and account balances presented in the financial statements. B.Discuss how evidence regarding each of these three areas can help an auditor determine if the financial statements are fairly stated.
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31) Sally Thompson’s company, Sally’s Shoes, is a successful shoe retail business with one store. Sally would like to expand to two locations, but the bank has asked for an independent audit before it will provide financing. Sally hires her brother-in-law, George Thompson, to perform the audit. George has experience in auditing non-profit organizations, and he decides to perform the audit the same way as his other audits. After completing all the steps of the audit process, George issues an unqualified opinion indicating that he is certain that the company’s financial statements contain no misstatements. Comment on any potential problems with George’s audit of Sally’s Shoes.
32)
Explain the relationship between audit, attest and assurance services.
33) Define “information asymmetry” and discuss how it plays a role in companies in the context of the principal-agent model. Include in your discussion how information asymmetry can be reduced.
34) The textbook presents the concept of auditing using an analogy that involves buying a house and hiring a house inspector. Name three desirable qualities of a house inspector and discuss how those qualities apply to an auditor and why those qualities are important for an auditor to possess.
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35) Provide a brief overview of the financial statement audit process using the terms “assertion,” “evidence,” and “report.”
36) You are a new employee at the accounting firm Murray & Murray, CPAs. Before you are assigned to your first audit, your supervisor tests your knowledge and asks you to explain the term “scope” in the context of a financial statement audit. Required:A.Provide a definition of scope. B.Describe what influences an auditor's determination of scope.
37)
Why must an auditor assess materiality as part of planning an audit engagement?
38) You are a new staff auditor, and you are auditing a company’s inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.
39)
Name and discuss the seven phases of the audit process.
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40) A standard, unqualified auditor’s report for a public company contains three sections. Provide a brief (one or two sentences) description for each section.
41) Explain the relationship between sample size and materiality, and between sample size and desired level of assurance.
42) Other than a financial statement audit, give examples of two other assurance services? How do these assurance services differ from a financial statement audit?
43) The cost of capital can be generally defined as the rate of return expected by a party that provides capital to a company (e.g. an investor or a creditor). How can a financial statement audit reduce the cost of capital for a company?
44) Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information. ⊚ true ⊚ false
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45) Decision makers demand reliable information that is provided by accountants and accounting information systems. ⊚ true ⊚ false
46)
Information asymmetry seldom occurs. ⊚ true ⊚ false
47) Conflicts of interest often occur between absentee owners (principals) and managers (agents). ⊚ true ⊚ false
48)
Auditing services and attestation services are exactly the same thing. ⊚ true ⊚ false
49)
Auditing is a type of attest service. ⊚ true ⊚ false
50) Testing all transactions that occurred during the period is cost prohibitive in the absence of computer data analytic approaches. ⊚ true ⊚ false
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Answer Key Test name: ch 1 1) B 2) C 3) C 4) C 5) C 6) A 7) B 8) B 9) B 10) C 11) C 12) C 13) B 14) B 15) C 16) C 17) A 18) D 19) A 20) D 21) A 22) A 23) D 24) C 25) D 26) B Version 1
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27) A 28) D 29) A 44) FALSE 45) TRUE 46) FALSE 47) TRUE 48) FALSE 49) TRUE 50) TRUE
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Student name:__________ 1)
The Audit Committee consists of: A) members of management. B) a subcommittee of the AICPA who establish the SAS. C) members of the Board of Directors. D) appointed government overseers.
2) What organization is responsible for setting auditing standards for audits of publicly traded companies in the U.S.? A) AICPA B) FASB C) GASB D) PCAOB
3)
The Public Company Accounting Oversight Board’s role is to: A) conduct the final review of auditors’ work before the auditor’s opinion is issued. B) oversee the auditors of public companies in order to protect the interests of investors. C) conduct audits of governmental entities. D) sanction auditors who fail to follow GAAS.
4) The authoritative body empowered to promulgate standards concerning a CPA’s association with audited financial statements of an entity that is required to file financial statements with the SEC is the: A) financial accounting standards board. B) government accountability office. C) public company accounting oversight board. D) auditing standards board.
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5)
The auditor must be independent of the auditee unless: A) the lack of independence does not influence his or her professional judgment. B) both parties agree that the independence issue is not a problem. C) the lack of independence is insignificant. D) none of the above—the auditor cannot lack independence.
6) Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants? A) purpose of an Audit and Premise upon which an Audit is Conducted B) performance C) reporting D) responsibilities
7) Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS? A) the purpose and value of a financial statement audit and lays out the responsibilities of management for an effective audit to be possible B) the fundamental responsibilities and characteristics of an auditor C) auditors’ responsibilities in performing an effective audit D) auditors provide a written report that expresses their opinion about the financial statements
8) The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS states that auditors are responsible for having appropriate competence and:
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A) independence with respect to the financial statements and supplementary disclosures. B) exercising professional care as judged by peer reviewers. C) capabilities to perform the audit. D) objectivity as an auditor as verified by proper supervision.
9) The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS requires that the report, “states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.” This passage requires: A) a statement of fact by the auditor. B) an opinion by the auditor. C) an implied measure of fairness. D) an objective measure of compliance.
10) Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of: A) objective cynicism. B) independent differentialism. C) professional skepticism. D) impartial conservatism.
11) The accuracy of information included in notes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of:
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A) the stock exchange officials. B) the independent auditor. C) the company’s management. D) the Securities and Exchange Commission.
12) The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the: A) partner assigned to the audit engagement. B) management of the company. C) auditor in charge of the fieldwork. D) securities and exchange commission.
13)
The largest public accounting firms typically are structured as: A) subchapter S corporations. B) professional corporations. C) limited liability partnerships or limited liability companies. D) limited liability corporations.
14)
Typically, an external auditor first gets supervisory experience at what level of authority? A) associate B) senior C) manager D) partner
15)
An “in-charge” auditor typically holds the rank of:
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A) associate. B) senior. C) manager. D) partner.
16) Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance? A) the risk that financial statements are misstated because of fraud B) the risk that financial statements are misstated because of error or fraud C) whether management has systems in place to identify, evaluate, and effectively manage the entity’s business risks D) developing client acceptance and continuance practices that minimize the likelihood of lawsuits against the auditor
17)
Fraud audits include all of the following except: A) criminal investigations. B) manufacturers’ assertions about product quality. C) employee fraud. D) management fraud.
18)
A typical objective of an operational audit is for the auditor to: A) determine whether the financial statements present fairly the entity’s operations. B) evaluate the feasibility of attaining the entity’s operational objectives. C) make recommendations for improving performance. D) report on the entity’s relative success in attaining profit maximization.
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19) Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and: A) monetary stimulus. B) evaluation. C) accuracy. D) compliance.
20)
External auditors are referred to as “external” because: A) they report to users outside of the audited entity. B) they are paid by parties outside of the audited entity. C) they are not employees of the entity being audited. D) their offices are not at the entity’s place of business.
21)
Which is not an attribute of an external auditor? A) independence B) auditee advocacy C) objectivity D) concern for the public interest
22) What is the general character of the work conducted in performing a fraud audit for a company? A) providing assurance that the financial statements are not materially misstated B) detecting or deterring fraudulent activity C) offering an opinion on the reliability of the specific assertions made by management D) identifying the causes of an entity's financial difficulties
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23)
Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
A) Audit firms cannot provide most types of nonaudit services to their public company auditees. B) Audit firms are required to rotate audit partners off audit engagements every five years for public company audits. C) Firms that audit public companies are subject to inspection by the PCAOB. D) A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.
24) A CPA is most likely to refer to one or more of the items listed in the Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS in determining: A) the nature of the CPA's report qualification. B) the scope of the CPA's auditing procedures. C) requirements for the review of the entity and its environment. D) whether the CPA should undertake an audit engagement.
25)
Who bears ultimate responsibility for the financial statements?
A) management of the organization, equally with the external auditor that audits the statements B) management and the shareholders of the organization C) the external auditor that audits the statements D) management of the organization
26) The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with:
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A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) an audit opinion in accordance with the auditor’s findings, whether the financial statements are presented fairly, and whether the financial statements are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirements, possessing appropriate competence to perform the audit, and maintaining professional skepticism.
27) The Responsibilities section of Principles Underlying an Audit Conducted in Accordance with GAAS recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper: A) business and finance courses. B) quality control and peer review. C) competence in auditing and ability to exercise professional skepticism. D) supervision and review skills.
28)
The main difference between SAS and AU-C is:
A) they are the same except that SAS are organized chronologically and the AU-C are organized by topical area. B) SAS are issued by the ASB and AU-C are issued by the PCAOB. C) SAS are issued by the PCAOB and AU-C are issued by the ASB. D) SAS define minimum standards of performance for auditors while AU-C define financial accounting principles that must be followed according to GAAP.
29)
The AICPA's Statements on Auditing Standards can be described as:
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A) providing very specific guidance about the specific activities an auditor must perform on each engagement. B) similar to financial accounting standards in that they are developed by the government. C) tend to be general in nature and require a great deal of professional judgment. D) providing assurance that an auditor will not issue an incorrect opinion.
30)
Due professional care requires auditors to:
A) obtain independent, third party (non-auditee) documentation as evidence for all information presented in the financial statements. B) exercise professional skepticism during the audit. C) disregard any evidence generated by the auditee during the audit. D) find every error contained in the financial statements prepared by management.
31) The objectives of the Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS are to provide assurance and include all of the following except for: A) an opinion statement of whether the financial statements present fairly. B) an opinion statement of whether the financials are free of material misstatements. C) an opinion statement of whether the financials are in accordance with an applicable financial reporting framework. D) an opinion statement of whether internal controls over financial reporting are effective.
32) An internal auditor is likely to be more concerned with __________ than the external auditor.
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A) internal administrative procedures affecting the control environment B) financial accounting procedures C) the efficiency of operations D) internal control effectiveness
33)
Which of the following is not included in the broad category of assurance services? A) operational audit B) reporting on internal control C) accounting or review services D) evaluation of the auditee's risk management framework
34)
Which of the following is not explicitly a part of the IIA's definition of internal auditing? A) Internal auditing is an objective assurance activity. B) Internal auditing is a consulting activity. C) Internal auditing should help an organization accomplish its objectives. D) Internal auditors should help external auditors complete the annual financial statement
audit.
35)
Which of the following statements regarding the PCAOB is incorrect? A) It is a public-sector, nonprofit corporation. B) It is overseen by the SEC. C) It sets standards for public company audits. D) It has delegated all of its standard-setting authority to the AICPA.
36)
Due professional care requires:
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A) auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence. B) the examination of all available corroborating evidence. C) the exercise of error-free judgment. D) a study and review of internal controls that includes tests of controls.
37)
Which of the following best describes the role of corporate governance?
A) Management decides which accounting principles are the most appropriate. B) Shareholders vote to decide who should be members of the board of directors. C) Management is accountable to shareholders and other constituents for the utilization of the entity’s resources. D) Management often is compensated based on the company's profitability.
38) The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that the auditor is unable to obtain absolute assurance that the financials are free of material misstatements because of inherent limitations which arise from all of the following except: A) the presentation of the financial statements based on GAAS. B) the nature of financial reporting. C) the nature of audit procedures. D) the need for the audit to be conducted within a reasonable period of time and so as to achieve a balance between benefit and cost.
39) Which of the following best describes what is meant by generally accepted auditing standards?
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A) audit assertions generally determined on audit engagements B) acts to be performed by the auditor C) standards of quality for the auditor's performance D) procedures to be used to gather evidence to support financial statements
40) The ‘Purpose of an Audit and Premise upon which an Audit is Conducted’ section of Principles Underlying an Audit Conducted in Accordance with GAAS states that management is responsible for all the following except for: A) the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework. B) the design, implementation, and maintenance of internal control. C) providing financial statement users with an opinion on whether the financial statements present fairly. D) ensuring that the financial statements are free from material misstatement, whether due to error or fraud.
41) The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that for auditors to obtain reasonable assurance, they need to do all of the following except: A) make sure all audit team members have adequate training. B) obtain sufficient appropriate audit evidence. C) identify and assesses risks of material misstatement. D) determine and applies appropriate materiality levels.
42) The Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of this requirement is to prevent:
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A) an auditor from reporting on one basic financial statement and not the others. B) an auditor from expressing different opinions on each of the basic financial statements. C) management from reducing its final responsibility for the basic financial statements. D) misinterpretations regarding the degree of responsibility the auditor is assuming.
43) The Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) an audit opinion in accordance with the auditor's findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirement, appropriate competence and maintaining professional skepticism.
44) The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) the auditor expressing an audit opinion in accordance with the auditor’s findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirements, appropriate competence and maintaining professional skepticism.
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45) The ASB articulated the principles underlying an audit conducted in accordance with generally accepted auditing standards. These principles are grouped into four categories. What are the four categories?
46) The principles underlying an audit conducted in accordance with generally accepted auditing standards are grouped into four categories. The second category is that of “personal responsibility of the auditor.” Generally explain what is intended by this principle.
47) You are the owner of a small grocery store, Corner Marketplace. Briefly explain the five basic business processes and how they apply to your business.
48) Briefly define corporate governance, the board of directors, and the audit committee and explain how they relate to each other.
49) Describe the organizations involved in standard setting for auditors in the United States and what their respective roles are in setting current auditing standards for audits of companies in the United States.
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50) What are the four things required of an auditor to obtain reasonable assurance that are outlined in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS?
51) Jane Goodperson performed an audit on the Quagmire Corporation and issued an unqualified opinion. Jane performed the audit with due professional care and in accordance with generally accepted auditing standards. Two months after the report is issued, Jane discovers on the news that the CEO of Quagmire, Johnny Best, had been stealing small amounts of inventory. The amount, however, is immaterial compared to the overall inventory of the corporation. Jane soon receives a call from Quagmire's CFO, Mark Beastly. Mark wants Jane to refund her audit fees. Mark thinks Jane did not properly perform the audit, as she did not discover this fraud. Further, he feels that now Quagmire's financial statements are not fairly stated because of Jane. How should Jane respond to this claim?
52) Mike has just graduated from State University with a bachelor's degree in accounting. He would like to pursue a career in auditing. What options does Mike have? Describe three auditing career options, including a description of the organization Mike would work for.
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53) With respect to an entity's financial statements, describe both the responsibility of management and that of the auditor.
54) What auditing standards are used to conduct an audit for a privately held corporation? What auditing standards are used to conduct an audit for a publicly traded corporation? What organization is responsible for setting each of these sets of standards?
55) There are several types of audit services that are provided by auditors. Identify and define three of these types of audits.
56) A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002). ⊚ true ⊚ false
57) The primary audit context with which an auditor is concerned is the auditee’s industry or business. ⊚ true ⊚ false
58)
The audit committee generally includes senior executives of the organization.
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⊚ ⊚
true false
59) A financial statement audit is generally organized based on the five basic business processes or cycles. ⊚ true ⊚ false
60)
One of the five basic business processes is the warehousing cycle. ⊚ true ⊚ false
61) The ASB’s auditing standards contain a preface that includes Principles Underlying an Audit Conducted in Accordance with GAAS. ⊚ true ⊚ false
62) PCAOB auditing standards must be followed on all financial statement audits performed in the U.S. ⊚ true ⊚ false
63)
A financial statement audit must be conducted in accordance with GAAP. ⊚ true ⊚ false
64) Generally, the financial statements of U.S. companies must be prepared in accordance with GAAP. Version 1
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⊚ ⊚
true false
65) PCAOB auditing standards must be followed on all audits of public companies’ financial statements. ⊚ true ⊚ false
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Answer Key Test name: ch 2 1) C 2) D 3) B 4) C 5) D 6) D 7) C 8) C 9) B 10) C 11) C 12) B 13) C 14) B 15) B 16) C 17) B 18) C 19) D 20) C 21) B 22) B 23) D 24) D 25) D 26) D Version 1
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27) C 28) A 29) C 30) B 31) D 32) C 33) C 34) D 35) D 36) A 37) C 38) A 39) C 40) C 41) A 42) D 43) A 44) B 56) TRUE 57) TRUE 58) FALSE 59) TRUE 60) FALSE 61) TRUE 62) FALSE 63) FALSE 64) TRUE 65) TRUE
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Student name:__________ 1) Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client's refusal to permit this will bear directly on Hawkins’ decision concerning the:
A) adequacy of the preplanned audit program. B) ability to establish consistency in application of accounting principles between years. C) apparent scope limitation. D) integrity of management.
2)
In assessing whether to accept a client for an audit engagement, a CPA should consider:
A) the current financial health of the prospective client. B) the integrity of management. C) the CPA's overall engagement risk. D) All of these choices are correct.
3)
Evaluating a prospective client requires which of the following steps?
A) communicate with the predecessor auditor B) preplan the audit C) establish the terms of the engagement D) none of these
4) An auditor inspects a document for proper authorization of a transaction and verifies a transaction amount that is stated within the document. The auditor has performed a(n)
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A) test of details. B) substantive analytical procedure. C) test of controls. D) dual-purpose test
5) Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
A) analysis of balance sheet accounts B) analysis of income statement accounts C) all matters of continuing accounting significance D) facts that might bear on management integrity
6) Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
A) the prospective client's unwillingness to permit inquiry of its legal counsel B) the inability to review the predecessor auditor’s documentation C) the CPA's lack of understanding of the prospective client’s operations and industry D) indications that management has not investigated employees in key positions before hiring them
7) An auditor who discovers that a client’s employees paid small bribes to municipal officials most likely would withdraw from the engagement if:
A) the payments violated the client’s policies regarding the prevention of illegal acts. B) the client receives financial assistance from a federal government agency. C) documentation that is necessary to prove that the bribes were paid does not exist. D) management fails to take the appropriate remedial action.
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8) A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s:
A) engagement letter. B) audit working papers. C) engagement letter and audit working papers. D) it would not be typical to allow a review of either the engagement letter or the audit working papers.
9)
Evaluating a prospective client requires which of the following steps?
A) communicate with the SEC B) preplan the audit C) determine if the firm is independent of the client D) communicate with the AICPA
10) Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
A) The details of most recorded transactions are not available after a specified period of time. B) Internal control activities requiring segregation of duties are subject to management override. C) It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D) Management has a reputation for consulting with several accounting firms about significant accounting issues.
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11) Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A) the CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit techniques B) management’s disregard of its responsibility to maintain an adequate control environment C) the CPA’s inability to determine whether related party transactions were consummated on terms equivalent to arm’s-length transactions D) management’s refusal to permit the CPA to perform substantive procedures before the year-end
12)
Before accepting an engagement to audit a new client, a CPA is required to obtain:
A) an understanding of the prospective client’s industry and business. B) the prospective client’s signature on the engagement letter. C) a preliminary understanding of the prospective client’s control environment. D) the prospective client’s consent to make inquiries of the predecessor auditor.
13)
Which of the following situations would most likely require special audit planning?
A) Some items of factory and office equipment do not bear identification numbers. B) Depreciation methods used on the client's tax return differ from those used on the books. C) Assets costing less than $500 are expensed even though the expected life exceeds one year. D) Inventory is comprised of precious stones.
14)
During the initial planning phase of an audit, a CPA most likely would:
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A) identify specific internal control activities that are likely to prevent fraud. B) evaluate the reasonableness of the client’s accounting estimates. C) discuss the timing of the audit procedures with the client’s management. D) inquire of the client’s attorney as to any unrecorded claims.
15) An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes:
A) management’s responsibility to guarantee that there are no material misstatements due to fraud. B) the auditor’s responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud. C) management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. D) the auditor’s responsibility for the fairness of the financial statements.
16) A written understanding between the auditor and the client concerning the auditor’s responsibility for the discovery of illegal acts is usually set forth in a(n):
A) client representation letter. B) letter of audit inquiry. C) management letter. D) engagement letter.
17)
Engagement letters include all of the following except:
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A) a list of additional services, if any, that will be provided. B) a list of adjusting journal entries. C) information about the audit fee. D) arrangements involving the use of specialists.
18)
Which of the following matters generally is included in an auditor's engagement letter?
A) management’s responsibility for the entity’s compliance with laws and regulations B) the factors to be considered in setting preliminary judgments about materiality C) management’s liability for illegal acts committed by its employees D) the auditor’s responsibility to guarantee accuracy of the financial statements
19) To provide for the greatest degree of independence in performing internal audit activities, the internal audit function most likely should report to the:
A) vice-president - finance. B) corporate controller. C) audit committee of the board of directors. D) corporate stockholders.
20)
All of the following refer to the competence of the internal audit function except:
A) the party in the entity to which the internal audit function reports. B) the quality of internal audit documents and reports. C) professional certifications held by the internal auditors. D) supervision and review of internal audit activities.
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21) An independent auditor might consider the procedures performed by the internal audit function because:
A) they are employees whose work must be reviewed during substantive testing. B) they are employees whose work might be relied upon. C) their work impacts the cost/benefit tradeoff in evaluating inherent limitations. D) their degree of independence may be inferred by the nature of their work.
22) As generally conceived, the audit committee of a publicly held company should be made up of:
A) representatives of the major equity interests (preferred stock, common stock). B) the audit partner, the chief financial officer, the legal counsel, and at least one outsider. C) representatives from the client’s management, investors, suppliers, and customers. D) members of the board of directors who are not officers or employees.
23) To emphasize auditor independence from management, publicly traded corporations are required to:
A) appoint a partner of the CPA firm conducting the examination to the corporation’s audit committee. B) establish a policy of discouraging social contact between employees of the corporation and the independent auditors. C) request that a representative of the independent auditor be on hand at the annual stockholders’ meeting. D) have the independent auditor report to an audit committee of independent members of the board of directors.
24)
An auditor obtains knowledge about a new client’s business and its industry in order to:
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A) make constructive suggestions concerning improvements to the client’s internal control. B) develop an attitude of professional skepticism concerning management’s financial statement assertions. C) evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D) understand the events and transactions that may have an effect on the client’s financial statements.
25)
Which of the following is an example of a related party transaction?
A) An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A. B) A long-term agreement is made by Company A to provide merchandise or services to Company B, a long-time, friendly competitor. C) A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A. D) A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B, an unconsolidated subsidiary of Company A.
26) An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of:
A) management fraud. B) related party transactions. C) window dressing. D) weak internal control.
27)
Which of the following would not necessarily be a related party transaction?
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A) sales to another corporation with a similar name B) purchases from another corporation that is controlled by the corporation’s chief stockholder C) loan from the corporation to a major stockholder D) sale of land to the corporation by the spouse of a director
28)
The existence of a related party transaction may be indicated when another entity:
A) sells real estate to the corporation at a price that is comparable to its appraised value. B) absorbs expenses of the corporation under audit. C) borrows from the corporation at a rate of interest which equals the current market rate. D) lends to the corporation at a rate of interest which equals the current market rate.
29) In the context of an audit of financial statements, substantive procedures are audit procedures that:
A) may be eliminated under certain conditions. B) are primarily designed to discover significant subsequent events. C) may be either tests of details of transactions, tests of details of account balances, or analytical procedures. D) will increase proportionately with an increase in the auditor's reliance on internal control.
30) Which of the following is not an audit procedure that is commonly used in performing tests of controls?
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