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TEST BANK For Auditing & Assurance Services:
A Systematic Approach, 11th Edition
Chapters 1 - 21 Complete
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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
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Chapter 01
An Introduction to Assurance and Financial Statement Auditing
True / False Questions
1.
Independence standards are required for audits of public companies, but not for audits
of private companies.
True
2.
Decision makers demand reliable information that is provided by accountants.
True
3.
False
Auditing is a type of attest service.
True
7.
False
Auditing services and attestation services are the same.
True
6.
False
Conflicts of interest often occur between absentee owners and managers.
True
5.
False
Information asymmetry seldom occurs.
True
4.
False
False
Testing all transactions that occurred during the period is cost prohibitive.
True
False
Multiple Choice Questions
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8.
Why do auditors generally 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.
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.
9.
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.
10. 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.
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.
11. The basic purpose of a financial statement audit is to
A. Detect
fraud.
B. Examine individual transactions so that the auditor may certify as to
their validity.
C. Provide assurance regarding whether the auditee's financial statements are
fairly stated.
D. Assure the consistent application of correct accounting
procedures.
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12. Assurance services may improve all of the following except
A. Relevanc
e.
B. Credibilit
y.
C. Periodicit
y.
D. Reliabilit
y.
13. 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 consistent with management's
assertions.
14. 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 a "clean" 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.
15. An auditor who accepts an audit engagement and does not possess expertise with
respect to the business entity's industry, should
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.
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.
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16. For publicly-held companies, which of the following is integrated into 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.
17. 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.
18. 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 position than do
the absentee owners (i.e. stockholders).
D. Management likely will not act in the best interests of the
absentee owners.
19. Which of the following best describes why an independent auditor is asked 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.
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20. 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.
21. Which of the following best describes why publicly-traded corporations follow the
practice of having the external auditor appointed by the board of directors or elected by
the stockholders?
A. To promote an adversarial relationship between the auditor and the corporation's
management.
B. 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.
22. Auditing is defined as a "systematic process of objectively obtaining and evaluating
evidence regarding assertions..." What is meant by "systematic process"?
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.
D. All assertions are equally important for all
audits.
23. 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 accuracy 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.
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24. 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.
25. Auditors are most likely to use the most rigorous audit procedures to examine
A. Routine
transactions.
B. Management assertions that are deemed to be of
low risk.
C. Only the rights and obligations
assertion.
D. Management assertions that are deemed to be of
high risk.
26. 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.
27. 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.
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28. 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.
29. An investor is reading the financial statements of the Stankey 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 significant accounting issues have been settled to the auditor's
satisfaction.
B. The auditor is satisfied that Stankey will be highly profitable in
the future.
C. The auditor is certain that Stankey's financial statements have been prepared
accurately and that all account balances are precisely correct.
D. The auditor has determined that Stankey's management is not qualified to lead
the company.
30. 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.
31. 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.
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32. An auditor would issue an adverse opinion if
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 statements taken as a whole do not fairly present the financial condition and
results of operations of the company.
33. 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.
34. Which of the following is not a concept that is included in the scope paragraph of the
auditor's report?
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. An audit involves examining items on a test (i.e.
sampling) basis.
Short Answer Questions
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35. On a high level, the accounting processes of a business consist of internal controls,
individual transactions, and account balances.
Required:
A. Describe the relationship between internal controls, individual transactions, and
account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor
determine if the financial statements are fairly stated.
36. 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.
37. Explain the relationship between audit, attest and assurance services.
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38. Define "information asymmetry" and discuss it in the context of the financial markets.
Include in your discussion how information asymmetry is reduced.
39. The textbook presented the concept of auditing through an analogy that involved buying
a house and hiring a house inspector. Name three desirable qualities of a house
inspector or an auditor and discuss how those qualities apply to an auditor and why
those qualities are important for an auditor to possess.
40. Discuss an overview of the financial statement audit process using the terms "assertion,"
"evidence," and "report."
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41. 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.
42. Why must an auditor assess materiality?
43. 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.
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44. Name and discuss the seven phases of the audit process.
45. A standard, unqualified auditor's report contains three paragraphs, plus a fourth
explanatory paragraph in some circumstances. Provide a brief (one sentence)
description for each paragraph.
46. Explain the relationship between sample size, materiality, and desired level of
assurance.
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Chapter 01 An Introduction to Assurance and Financial Statement
Auditing Answer Key
True / False Questions
1.
Independence standards are required for audits of public companies, but not for
audits of private companies.
FALSE
AACSB: Communication
AICPA: BB Legal
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-01 Understand why studying auditing can be valuable to you whether or not you plan to
become an auditor; and why it is different from studying accounting.
Topic: The Importance for Studying Auditing
2.
Decision makers demand reliable information that is provided by accountants.
TRUE
AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
3.
Information asymmetry seldom occurs.
FALSE
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
4.
Conflicts of interest often occur between absentee owners and managers.
TRUE
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Full download please email me stoneklopp@gmail.com
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
5.
Auditing services and attestation services are the same.
FALSE
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Topic: Auditing, Attest, and Assurance Services Defined
6.
Auditing is a type of attest service.
TRUE
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Learning Objective: 01-04 Know the basic definition of a financial statement audit.
Topic: Auditing, Attest, and Assurance Services Defined
7.
Testing all transactions that occurred during the period is cost prohibitive.
TRUE
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-06 Be able to explain why on most audit engagements an auditor tests only a sample of
transactions that occurred.
Topic: The Audit Process
Multiple Choice Questions
Full download please email me stoneklopp@gmail.com
8.
Why do auditors generally 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.
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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 01-06 Be able to explain why on most audit engagements an auditor tests only a sample of
transactions that occurred.
Topic: The Audit Process
9.
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.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-06 Be able to explain why on most audit engagements an auditor tests only a sample of
transactions that occurred.
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
10.
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.
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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 01-01 Understand why studying auditing can be valuable to you whether or not you plan to
become an auditor; and why it is different from studying accounting.
Topic: The Importance for Studying Auditing
11.
The basic purpose of a financial statement audit is to
A. Detect
fraud.
B. Examine individual transactions so that the auditor may certify as to
their validity.
C. Provide assurance regarding whether the auditee's financial statements are
fairly stated.
D. Assure the consistent application of correct accounting
procedures.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Learning Objective: 01-04 Know the basic definition of a financial statement audit.
Topic: Auditing, Attest, and Assurance Services Defined
12.
Assurance services may improve all of the following except
A. Relevanc
e.
B. Credibilit
y.
C. Periodicit
y.
D. Reliabilit
y.
AACSB: Communication
Full download please email me stoneklopp@gmail.com
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Topic: Auditing, Attest, and Assurance Services Defined
13.
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 consistent with management's
assertions.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
14.
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 a "clean" 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.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
Full download please email me stoneklopp@gmail.com
15.
An auditor who accepts an audit engagement and does not possess expertise with
respect to the business entity's industry, should
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.
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.
AACSB: Ethics
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Learning Objective: 01-09 Understand why auditing demands logic; reasoning; and resourcefulness.
Topic: Auditing Demands Logic, Reasoning, Resourcefulness
Topic: The Audit Process
16.
For publicly-held companies, which of the following is integrated into 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.
AACSB: Communication
AICPA: BB Legal
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
17.
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.
AACSB: Communication
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
18.
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 position than
do the absentee owners (i.e. stockholders).
D. Management likely will not act in the best interests of the
absentee owners.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
Full download please email me stoneklopp@gmail.com
19.
Which of the following best describes why an independent auditor is asked 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.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
20.
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.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
Full download please email me stoneklopp@gmail.com
21.
Which of the following best describes why publicly-traded corporations follow the
practice of having the external auditor appointed by the board of directors or elected
by the stockholders?
A. To promote an adversarial relationship between the auditor and the corporation's
management.
B. 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.
AACSB: Ethics
AICPA: BB Legal
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
22.
Auditing is defined as a "systematic process of objectively obtaining and evaluating
evidence regarding assertions..." What is meant by "systematic process"?
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.
D. All assertions are equally important for all
audits.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Learning Objective: 01-04 Know the basic definition of a financial statement audit.
Topic: Auditing, Attest, and Assurance Services Defined
Full download please email me stoneklopp@gmail.com
23.
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 accuracy 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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Topic: Auditing, Attest, and Assurance Services Defined
24.
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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Topic: Auditing, Attest, and Assurance Services Defined
25.
Auditors are most likely to use the most rigorous audit procedures to examine
A. Routine
transactions.
B. Management assertions that are deemed to be of
low risk.
C. Only the rights and obligations
assertion.
D. Management assertions that are deemed to be of
high risk.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Full download please email me stoneklopp@gmail.com
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
26.
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.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
Topic: The Audit Process
27.
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.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
Full download please email me stoneklopp@gmail.com
28.
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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
29.
An investor is reading the financial statements of the Stankey 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 significant accounting issues have been settled to the auditor's
satisfaction.
B. The auditor is satisfied that Stankey will be highly profitable in
the future.
C. The auditor is certain that Stankey's financial statements have been prepared
accurately and that all account balances are precisely correct.
D. The auditor has determined that Stankey's management is not qualified to lead
the company.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Learning Objective: 01-08 Know what an audit report is and understand the nature of an unqualified report.
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
30.
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.
AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
31.
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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-08 Know what an audit report is and understand the nature of an unqualified report.
Topic: The Audit Process
32.
An auditor would issue an adverse opinion if
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 statements taken as a whole do not fairly present the financial condition and
results of operations of the company.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Full download please email me stoneklopp@gmail.com
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-08 Know what an audit report is and understand the nature of an unqualified report.
Topic: The Audit Process
33.
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.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-08 Know what an audit report is and understand the nature of an unqualified report.
Topic: The Audit Process
34.
Which of the following is not a concept that is included in the scope paragraph of the
auditor's report?
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. An audit involves examining items on a test (i.e.
sampling) basis.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 01-08 Know what an audit report is and understand the nature of an unqualified report.
Topic: The Audit Process
Short Answer Questions
Full download please email me stoneklopp@gmail.com
35.
On a high level, the accounting processes of a business consist of internal controls,
individual transactions, and account balances.
Required:
A. Describe the relationship between internal controls, individual transactions, and
account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor
determine if the financial statements are fairly stated.
A. A company implements internal controls as a safeguard to ensure appropriate
capturing and recording of individual transactions, which are then collected into
ending account balances. Ending account balances are then used to prepare the
financial statements. The auditor expresses an opinion on the financial statements,
which are made up of ending account balances and disclosures.
B. The auditor can obtain evidence from all three areas of the accounting process. For
instance, an auditor can directly test the account balance (e.g., by examining a bank
statement reconciliation). This evidence is usually the highest-quality but costliest
evidence. Alternatively, the auditor can obtain indirect information by testing the
individual transactions that make up an account balance. If transactions are handled
properly, this provides indirect evidence that the ending balances are more likely to
be fairly stated. The least direct method of obtaining evidence is to evaluate and test
the company's internal controls, which are implemented to ensure that transactions
are handled properly. If a company's system of internal control is effective,
transactions are more likely to be handled properly, and thus the ending balances
making up a set of financial statements are more likely to be fairly stated. Auditors
usually collect evidence relating to all three areas: internal control, transactions, and
ending balances.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
36.
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.
Possible solutions:
Independence: Because George is Sally's brother-in-law, he is not considered
independent. This presents a problem, both in the perceived value of the audit and in
the actual objectivity of the audit. That is, George may be intentionally or
unintentionally biased towards Sally's Shoes rather than its creditors. This would also
violate professional standards.
Competence: George's competence in this audit is also questionable. While George
has experience in auditing, he has no experience or knowledge of retail stores or even
for-profit organizations. To successfully perform an audit, George would need to
obtain an understanding of the industry. One audit should not be performed exactly
the same as another—rather, audits should be tailored to the specific circumstances
and risks.
Other: An unqualified audit opinion provides only reasonable assurance, not certainty
or "absolute" assurance. It also provides assurance only with respect to the fairness of
the financial statements "in all material respects;" it does not provide assurance with
respect to all misstatements, only material ones.
AACSB: Ethics
AICPA: BB Legal
AICPA: FN Risk Analysis
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
Topic: The Demand for Auditing and Assurance
Full download please email me stoneklopp@gmail.com
37.
Explain the relationship between audit, attest and assurance services.
All three services entail the evaluation of evidence to determine the correspondence
of some information to a set of criteria and the issuance of a report to indicate the
degree of correspondence.
Assurance services are independent professional services that improve the quality of
information or its context, for decision makers. Note that assurance services cover
both nonfinancial and financial information. Assurance services can capture
information, improve its quality, and enhance its usefulness for decision makers. The
extended reach of this definition allows professionals to report not only on the
reliability and credibility of information but also on the relevance and timeliness of
that information.
Attestation is a type of assurance. Attest services occur when a practitioner is
engaged to issue or does issue a report on subject matter or an assertion about
subject matter that is the responsibility of another party. The practitioner is able to
add reliability and credibility to information beyond traditional financial information.
Examples of attest services include financial forecasts and reports on internal control.
Auditing is a specialized form of an attest service. Auditing is a systematic process of
(1) objectively maintaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and (2) communicating results to interested
users. Examples of audit services include compliance auditing and audits of financial
statements.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-03 Understand the relationships among auditing; attestation; and assurance services.
Topic: Auditing, Attest, and Assurance Services Defined
38.
Define "information asymmetry" and discuss it in the context of the financial markets.
Include in your discussion how information asymmetry is reduced.
In the context of financial markets, information asymmetry is the concept that the
company's management generally has more information about the true financial
position and results of operations of the entity than the absentee owner does. While
management of a public company works as an agent for the stockholders, a conflict of
interest is apparent because both sides seek to maximize their self interest. This leads
to a risk that the manager will not always act in the best interest of the owner.
Therefore, the owners attempt to protect themselves through monitoring. Audits
provide reasonable assurance that the information presented by management is fairly
stated. The owners are attempting to reduce information asymmetry by seeking out
reliable company information.
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Apply
Full download please email me stoneklopp@gmail.com
Difficulty: 2 Medium
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
39.
The textbook presented the concept of auditing through an analogy that involved
buying a house and hiring a house inspector. Name three desirable qualities of a
house inspector or an auditor and discuss how those qualities apply to an auditor and
why those qualities are important for an auditor to possess.
Possible solutions:
A house inspector should be competent, which means he should possess the required
training, expertise, and experience to evaluate the property for sale. An auditor
should also be competent. An auditor must know the acceptable methods to perform
an audit and report an opinion. Furthermore, the auditor should have or obtain
knowledge of the specific industry involved in the audit so she can appropriately
adjust the timing, nature, and extent of auditing procedures.
A house inspector should be objective. He should have no reason to side with the
seller; he is independent of the seller's influence. In the same way, an auditor should
be independent of management's influence. Financial statement audits differ from
house inspections in that auditing fees are paid for by the seller instead of the buyer.
Because of this, an auditor needs to maintain independence in fact and appearance to
decrease bias towards the company's management and garner public confidence for
the findings.
A house inspector should be honest; he should conduct himself with integrity and
share all findings with the buyer. If an auditor discovers a material misstatement, she
is required to report the findings to management. If nothing is done to rectify the
situation and the auditor feels the financial statements are not fairly presented, she
cannot issue an unqualified report.
A house inspector should be skeptical. He will not simply take the seller's assertions
at face value. He will conduct his own analysis and testing. An auditor, in comparison,
should always exercise professional skepticism. An auditor gathers her own evidence
to determine the validity of management's assertions.
A house inspector should be responsible and/or liable. He should stand behind his
assessment with a guarantee and/or be subject to litigation if he fails to act with due
care. An auditor should always act with due care. When a firm issues a report, the
report is signed with the firm's name to signify the firm's responsibility for performing
the audit.
AACSB: Communication
AICPA: BB Marketing
AICPA: FN Decision Making
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-02 Understand the demand for auditing and be able to explain the desired characteristics of
auditors and audit services through an analogy to a house inspector and a house inspection service.
Topic: The Demand for Auditing and Assurance
Full download please email me stoneklopp@gmail.com
40.
Discuss an overview of the financial statement audit process using the terms
"assertion," "evidence," and "report."
The auditor gathers evidence about the business transactions that have occurred
(economic activity and events) and about management (the preparer of the
statements). The auditor uses this evidence to compare the assertions contained in
the financial statements to the criteria chosen by the user. The auditor's report
communicates to the user the degree of correspondence between the assertions and
the criteria.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
41.
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.
A. The scope of an audit is the type and amount of audit work to be performed.
B. The auditor's assessments of risk and materiality influence the scope of the audit.
For instance, if an auditor sets a lower materiality amount or would like to
substantially reduce audit risk, the scope of the audit would be increased. In
establishing the scope of an audit, the auditor must make decisions about the nature,
extent, and timing of evidence to be gathered in order to evaluate management's
assertions.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
42.
Why must an auditor assess materiality?
An auditor must assess materiality because to find all misstatements would not be
cost-efficient, or even feasible. To search for all misstatements, the auditor would
need to examine every transaction. In addition, relatively minor misstatements may
not matter to users. For this reason, when planning and performing an audit the
auditor focuses on misstatements that would affect the users' decisions (i.e. material
misstatements).
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Learning Objective: 01-06 Be able to explain why on most audit engagements an auditor tests only a sample of
transactions that occurred.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
Topic: The Audit Process
43.
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.
Student answers will vary. The following answer provides an example:
To obtain direct evidence, an auditor might physically examine and count the items
included in the ending balance of the inventory account. To obtain indirect evidence,
an auditor might examine invoices from suppliers relating to purchases of inventory
or test whether the internal controls over the inventory process were working
properly.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 01-05 Understand three fundamental concepts that underlie financial statement auditing.
Topic: Fundamental Concepts in Conducting a Financial Statement Audit
Full download please email me stoneklopp@gmail.com
44.
Name and discuss the seven phases of the audit process.
1. Client acceptance/continuance: To minimize the likelihood that an auditor will be
associated with companies who lack integrity, prospective auditors are required to
confer with the predecessor auditor and frequently conduct background checks on top
management.
2. Preliminary engagement activities: Preliminary engagement activities include (1)
determining the audit engagement team requirements; (2) ensuring the
independence of the audit team and audit firm; and (3) establishing an understanding
with management regarding the services to be performed and the other terms of the
engagement.
3. Plan the audit: The audit team must make a preliminary assessment of materiality
and relevant risks. With those determinations, the audit team can assess risk relating
to the likelihood of material misstatements in the financial statements. Based on
these assessments, the auditor then prepares a written audit plan that sets forth, in
reasonable detail, the nature, extent, and timing of the audit work.
4. Consider and audit internal control: The auditor gains an understanding of internal
control to determine its effectiveness at achieving reliability of financial reporting.
5. Audit business processes and related accounts: The auditor determines and
performs individual audit procedures directed toward specific assertions in the
accounts that are likely to be misstated.
6. Complete the audit: The auditor evaluates the sufficiency of the evidence gathered,
assesses the possibility of contingent liabilities, and searches for any events
subsequent to the balance sheet date that may impact the financial statements.
7. Evaluate results and issue audit report: The auditor reaches a conclusion as to
whether or not the financial statements are fairly stated. If the uncorrected
misstatements incorporated into the financial statements do not cause the
statements to be materially misstated, the auditor issues an unqualified report.
AACSB: Communication
AICPA: BB Resource Management
AICPA: FN Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 01-07 Be able to describe the basic financial statement auditing process and the phases in
which an audit is carried out.
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
45.
A standard, unqualified auditor's report contains three paragraphs, plus a fourth
explanatory paragraph in some circumstances. Provide a brief (one sentence)
description for each paragraph.
The introductory paragraph indicates which financial statements are covered by the
report, that the statements are the responsibility of management, and that the
auditor has a responsibility to express an opinion. The scope paragraph
communicates to the users, in very general terms, what an audit entails and how the
audit was conducted (in accordance with the applicable auditing standards—usually
either the standards of the PCAOB or GAAS). The opinion paragraph indicates the
auditor's opinion as to whether the financial statements are fairly presented in
accordance with the criteria against which they were audited, GAAP. An explanatory
paragraph is used to bring matters of importance to the reader's attention. For
example, in an audit of a public company, the auditor's report on a company's
financial statements will contain an explanatory paragraph referring the reader to the
auditor's report on the audit of internal control over financial reporting.
AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-08 Know what an audit report is and understand the nature of an unqualified report.
Topic: The Audit Process
46.
Explain the relationship between sample size, materiality, and desired level of
assurance.
The size of a sample is influenced by the materiality and the desired level of
assurance for the account or assertion being examined. There is an inverse
relationship between sample size and materiality (i.e., if materiality increases then
sample size decreases) and a direct relationship between sample size and the desired
level of assurance (i.e., if the desired level of assurance increases then sample size
increases).
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 01-06 Be able to explain why on most audit engagements an auditor tests only a sample of
transactions that occurred.
Topic: The Audit Process
Full download please email me stoneklopp@gmail.com
Chapter 02
The Financial Statement Auditing Environment
True / False Questions
1.
A series of business and related auditing failures led to the passage of the SarbanesOxley Act (2002).
True
2.
The primary audit context with which an auditor is concerned is the auditee's industry or
business.
True
3.
False
A financial statement audit must be conducted based on GAAP.
True
9.
False
PCAOB auditing standards must be followed on all financial statement audits performed
in the U.S.
True
8.
False
The IAASB and the ASB collaborated on a replacement for the 10 GAAS standards which
include principles underlying an audit conducted in accordance with generally accepted
auditing standards.
True
7.
False
One of the five basic business processes is the warehousing cycle.
True
6.
False
A financial statement audit is generally organized based on the five basic business
processes or cycles.
True
5.
False
The audit committee generally includes senior executives of the organization.
True
4.
False
False
Generally, the financial statements of U.S. companies must be prepared based on GAAP.
True
False
2-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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10. PCAOB auditing standards must be followed on all audits of public companies' financial
statements.
True
False
Multiple Choice Questions
11. 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.
12. What organization is responsible for setting auditing standards for audits of publiclytraded companies in the U.S.?
A. AICPA.
B. FASB
.
C. GASB
.
D. PCAOB.
13. 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.
2-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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14. The authoritative body designed 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. General Accounting
Office.
C. Public Company Accounting Oversight
Board.
D. Auditing Standards
Board.
15. 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.
16. Which of the following describes the PCAOB generally accepted auditing standard
requiring a critical review of the work done and the judgment exercised by those
assisting in an audit at every level of supervision?
A. Proficienc
y.
B. Audit
risk.
C. Inspectio
n.
D. Due
care.
17. Which of the following best describes the general character of the three PCAOB generally
accepted auditing standards that are classified as standards of fieldwork?
A. The competence, independence, and professional care of persons
performing the audit.
B. Criteria for the content of the auditor's report on financial statements and related
footnote disclosures.
C. The criteria of audit planning and evidencegathering.
D. The need to maintain independence in mental attitude in all matters relating
to the audit.
2-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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18. The first PCAOB general standard requires that the examination of financial statements
is to be performed by a person or persons having adequate technical training and
A. Independence with respect to the financial statements and supplementary
disclosures.
B. Exercising professional care as judged by peer
reviewers.
C. Proficiency as an auditor, which likely has been acquired from previous
experience.
D. Objectivity as an auditor as verified by proper
supervision.
19. The first PCAOB standard of reporting requires that, "the report shall state whether the
financial statements are presented in accordance with generally accepted accounting
principles." 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.
20. 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.
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21. The accuracy of information included in footnotes accompanying the audited financial
statements issued by a company whose shares are traded on a stock exchange is the
primary responsibility of
A. The stock exchange
officials.
B. The independent
auditor.
C. The company's
management.
D. The Securities and Exchange
Commission.
22. 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.
23. The largest public accounting firms typically are structured as
A. Subchapter S
corporations.
B. Professional
corporations.
C. Limited liability
partnerships.
D. Limited liability
corporations.
24. Typically, an external auditor first gets supervisory experience at what level of
authority?
A. Associat
e.
B. Senio
r.
C. Manage
r.
D. Partne
r.
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25. An "in-charge" auditor typically holds the rank of
A. Associat
e.
B. Senio
r.
C. Manage
r.
D. Partne
r.
26. 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 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.
27. Forensic audits include all of the following except
A. Criminal
investigations.
B. Manufacturers' assertions about product
quality.
C. Employee
fraud.
D. Management
fraud.
28. 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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29. 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. Evaluatio
n.
C. Accurac
y.
D. Complianc
e.
30. 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.
31. Which is not an attribute of an external auditor?
A. Independenc
e.
B. Auditee
advocacy.
C. Objectivit
y.
D. Concern for the public
interest.
32. What is the general character of the work conducted in performing a forensic 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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33. 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.
34. A CPA is most likely to refer to one or more of the three PCAOB general auditing
standards 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.
35. 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.
36. The three PCAOB general standards are concerned with
A. Adequate training and proficiency of the auditor, proper planning and supervision, and
due professional care.
B. Adequate training and
independence.
C. Due professional
care.
D. Independence, adequate training and due
professional care.
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37. The first PCAOB general standard 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. Education and experience in
auditing.
D. Supervision and review
skills.
38. The main difference between SAS and AU is
A. They are the same except that SAS are organized chronologically and the AU are
organized by topical area.
B. SAS are issued by the ASB and AU are issued by the
PCAOB.
C. SAS are issued by the PCAOB and AU are issued by the
ASB.
D. SAS define minimum standards of performance for auditors while AU define financial
accounting principles that must be followed according to GAAP.
39. The AICPA's Statements on Auditing Standards can be described as
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. Defining the minimum standards of performance for an
auditor.
D. Providing assurance that an auditor will not issue an
incorrect opinion.
40. 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.
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41. The objective of the second PCAOB Standard of Reporting is to provide assurance that
A. There are no variations in the format and presentation of financial
statements.
B. Substantially different transactions and events are not accounted for on an
identical basis.
C. The auditor is consulted before material changes are made in the application of
accounting principles.
D. The comparability of financial statements between periods is not materially affected
by changes in accounting principles that are not disclosed.
42. An internal auditor is likely to be more concerned with
external auditor.
than the
A. Internal administrative
procedures
B. Cost accounting
procedures
C. The efficiency of
operations
D. Internal
control
43. 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.
44. 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.
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45. 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.
46. Due professional care requires
A. Auditors to plan and perform their duties with the skill and care that is commonly
expected of accounting professionals.
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.
47. 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. Holding the management team 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.
48. The four PCAOB standards of reporting are concerned with all of the following except
A. The presentation of the financial statements based
on GAAS.
B. The presentation of the financial statements based
on GAAP.
C. Whether principles are consistently applied, whether all informative disclosures have
been made, and the degree of responsibility the auditor is taking.
D. The degree of responsibility the auditor is
taking.
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49. Which of the following best describes what is meant by generally accepted auditing
standards?
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.
50. The fourth PCAOB standard of reporting requires an auditor to render a report whenever
an auditor's name is associated with financial statements. The overall purpose of the
fourth standard of reporting is to require that reports
A. State that the examination of financial statements has been conducted in accordance
with generally accepted auditing standards.
B. Indicate the character of the auditor's examination and the degree of responsibility
assumed by the auditor.
C. Imply that the auditor is independent in fact as well as in appearance with respect to
the financial statements under examination.
D. Express whether the accounting principles used in preparing the financial statements
have been applied consistently in the period under examination.
51. The three PCAOB standards of fieldwork are concerned with
A. Planning and supervision and understanding the auditee's internal
control system.
B. Choosing evidence with due professional
care.
C. Adequate training to understand the auditee's internal
controls system.
D. Ensuring consistency in financial statements for periods
presented.
52. The fourth PCAOB reporting standard 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 the fourth
standard is to prevent
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.
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Short Answer Questions
53. The IAASB and the ASB have collaborated on 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?
54. 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.
55. You are the owner of a small grocery store, Corner Marketplace. Explain the five process
categories and how they apply to your business.
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