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Whittington -principles of auditing 19e

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Whittington -principles of auditing 19e

  1. 1. 1-1 Chapter 01 The Role of the Public Accountant in the American Economy True / False Questions 1. Independent audits of today place more emphasis on sampling than did the audits of the 19th century. True False 2. The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice. True False 3. A company is either audited by the GAO or internal auditors, but not both. True False 4. The SEC does not pass on the merits of the securities that are registered with the agency. True False 5. The American Institute of Certified Public Accountants has the primary authority to establish accounting standards. True False 6. An annual peer review is a requirement of the AICPA. True False 7. Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit. True False 8. Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements. True False
  2. 2. 9. The Sarbanes-Oxley Act requires that auditors of certain publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations. True False 10. Auditing is frequently only a small part of the practice of local CPA firms. 1-2 True False Multiple Choice Questions 11. A summary of findings rather than assurance is most likely to be included in a(n): A. Agreed-upon procedures report. B. Compilation report. C. Examination report. D. Review report. 12. The Statements on Auditing Standards have been issued by the: A. Auditing Standards Board. B. Financial Accounting Standards Board. C. Securities and Exchange Commission. D. Federal Bureau of Investigation. 13. The risk associated with a company's survival and profitability is referred to as: A. Business Risk. B. Information Risk. C. Detection Risk. D. Control Risk. 14. Historically, which of the following has the AICPA been most concerned with providing? A. Professional standards for CPAs. B. Professional guidance for regulating financial markets. C. Standards guiding the conduct of internal auditors. D. Staff support to Congress.
  3. 3. 15. The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: A. Auditing Standards Board. B. Financial Accounting Standards Board. C. Government Accounting Standards Boards. D. Securities and Exchange Commission. 16. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA 1-3 firm is referred to as a(n): A. Peer Review Engagement. B. Quality Control Engagement. C. Quality Assurance Engagement. D. Attestation Engagement. 17. The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as: A. Auditing Statements of Position (ASPs). B. Accounting Series Releases (ASRs). C. Statements on Auditing Standards (SASs). D. Statements on Auditing Principles (SAPs). 18. The Government Accountability Office (GAO): A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal government. B. Conducts operational audits and reports the results to Congress. C. Is a multinational organization of professional accountants. D. Is primarily concerned with budgets and forecasts approved by the SEC. 19. The risk that information is misstated is referred to as: A. Information risk. B. Inherent risk. C. Relative risk. D. Business risk.
  4. 4. 20. The risk that a company will not be able to meet its obligations when they become due is an 1-4 aspect of: A. Information risk. B. Inherent risk. C. Relative risk. D. Business risk. 21. Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management? A. Integrity. B. Competence. C. Independence. D. Keeping informed on current professional developments. 22. The attest function: A. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services. B. Includes the preparation of a report of the CPA's findings. C. Requires a consideration of internal control. D. Requires a complete review of all transactions during the period under examination. 23. Attestation risk is limited to a low level in which of the following engagement(s)? A. Both examinations and reviews. B. Examinations, but not reviews. C. Reviews, but not examinations. D. Neither examinations nor reviews. 24. When compared to an audit performed prior to 1900, an audit today: A. Is more likely to include tests of compliance with laws and regulations. B. Is less likely to include consideration of the effectiveness of internal control. C. Has bank loan officers as the primary financial statement user group. D. Includes a more detailed examination of all individual transactions.
  5. 5. 25. Which of the following are issued by the Securities and Exchange Commission? 1-5 A. Accounting Research Studies. B. Accounting Trends and Techniques. C. Industry Audit Guides. D. Financial Reporting Releases. 26. Which of the following is not correct relating to the Sarbanes-Oxley Act? A. It toughens penalties for corporate fraud. B. It restricts the types of consulting CPAs may perform for audit clients. C. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board. D. It eliminates a significant portion of the accounting profession's system of self-regulation. 27. An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? A. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement. B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period. C. Operational audits do not ordinarily result in the preparation of a report. D. The operational audit deals with pre-tax income. 28. The review of a company's financial statements by a CPA firm: A. Is substantially less in scope of procedures than an audit. B. Requires detailed analysis of the major accounts. C. Is of similar scope as an audit and adds similar credibility to the statements. D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements. 29. Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA? A. Only members employed by the AICPA are required to take such courses. B. Only members in public practice are required to take such courses. C. Members, regardless of whether they are in public practice, are required to meet such requirements. D. There is no requirement for members to participate in CPE.
  6. 6. 30. The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over: 1-6 A. Compliance with laws and regulations. B. Financial reporting. C. Effectiveness of operations. D. Efficiency of operations. 31. Passage of the Sarbanes-Oxley Act led to the establishment of the: A. Auditing Standards Board. B. Accounting Enforcement Releases Board. C. Public Company Accounting Oversight Board. D. Securities and Exchange Commission. 32. Which of the following professionals has primary responsibility for the performance of an audit? A. The managing partner of the firm. B. The senior assigned to the engagement. C. The manager assigned to the engagement. D. The partner in charge of the engagement. 33. Which of the following types of services is generally provided only by CPA firms? A. Tax audits. B. Financial statement audits. C. Compliance audits. D. Operational audits. 34. The right to practice as a CPA is given by which of the following organizations? A. State Boards of Accountancy. B. The AICPA. C. The SEC. D. The General Accounting Office.
  7. 7. 35. Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor? 1-7 A. Operational audit. B. Internal audit. C. Compliance audit. D. Government audit. 36. Inquiries and analytical procedures ordinarily form the basis for which type of engagement? A. Agreed-upon procedures. B. Audit. C. Examination. D. Review. 37. Which of the following best describes the reason why independent auditors report on financial statements? A. A management fraud may exist and it is more likely to be detected by independent auditors. B. Different interests may exist between the company preparing the statements and the persons using the statements. C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work. D. Poorly designed internal control may be in existence. 38. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also: A. Accuracy. B. Evaluation. C. Compliance. D. Internal control. 39. Operational auditing is primarily oriented toward: A. Future improvements to accomplish the goals of management. B. The accuracy of data reflected in management's financial records. C. The verification that a company's financial statements are fairly presented. D. Past protection provided by existing internal control.
  8. 8. 40. A typical objective of an operational audit is for the auditor to: A. Determine whether the financial statements fairly present 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. 41. An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on: 1-8 A. Option A B. Option B C. Option C D. Option D Matching Questions
  9. 9. 42. Accountants are regulated by a variety of organizations. Match the following statements with the most directly related organizations. Organizations may be used once or not at all. 1-9 1. Formed to improve standards of financial accounting for state and local government entities State Boards of Accountancy. ____ 2. Issue CPA certificates Government Accounting Standards Board. ____ 3. Develop accounting standards for public and nonpublic companies American Institute of Certified Public Accountants. ____ 4. Develop accounting standards for the U.S. Government Financial Accounting Standards Board. ____ 5. Issue auditing standards for public companies Federal Accounting Standards Advisory Board. ____ 6. Prepares the CPA exam Public Company Accounting Oversight Board. ____ Essay Questions 43. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors. a. Describe the events that led up to the passage of the Act. b. Describe the major changes made by the Act.
  10. 10. 44. Many people confuse the responsibilities of the independent auditors and the client's management with respect to audited financial statements. a. Describe management's responsibility regarding audited financial statements. b. Describe the independent auditors' responsibility regarding audited financial statements. c. Evaluate the following statement: "If the auditors disagree with management regarding an accounting principle used in the financial statements the auditors should express their views in the notes to the financial statements." 45. An investor is considering investing in one of two companies. The companies have very similar reported financial position and results of operations. However, only one of the companies has its financial statements audited. a. Describe what creates the demand for an audit in this situation. Include a discussion of how audited financial statements facilitate this investment transaction, and the effect of the audit on business risk and information risk. b. Identify the potential consequences to the company of not having its financial statements audited. 1-10
  11. 11. Chapter 01 The Role of the Public Accountant in the American Economy Answer Key 1-11 True / False Questions 1. Independent audits of today place more emphasis on sampling than did the audits of the 19th century. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits 2. The American Institute of Certified Public Accountants issues CPA certificates and permits CPAs to practice. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 3. A company is either audited by the GAO or internal auditors, but not both. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits 4. The SEC does not pass on the merits of the securities that are registered with the agency. TRUE AACSB: Analytic
  12. 12. 1-12 AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 5. The American Institute of Certified Public Accountants has the primary authority to establish accounting standards. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 6. An annual peer review is a requirement of the AICPA. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 7. Many small companies elect to have their financial statements reviewed by a CPA firm, rather than incur the cost of an audit. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 8. Staff assistants in CPA firms generally are responsible for planning and coordinating audit engagements. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy
  13. 13. Learning Objective: 01-08 Describe how public accounting firms are typically organized and the responsibilities of auditors at the 1-13 various levels in the organization. Topic: Public Accounting Profession 9. The Sarbanes-Oxley Act requires that auditors of certain publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and on compliance with laws and regulations. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits 10. Auditing is frequently only a small part of the practice of local CPA firms. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-08 Describe how public accounting firms are typically organized and the responsibilities of auditors at the various levels in the organization. Topic: Public Accounting Profession Multiple Choice Questions 11. A summary of findings rather than assurance is most likely to be included in a(n): A. Agreed-upon procedures report. B. Compilation report. C. Examination report. D. Review report. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function
  14. 14. 12. The Statements on Auditing Standards have been issued by the: A. Auditing Standards Board. B. Financial Accounting Standards Board. C. Securities and Exchange Commission. D. Federal Bureau of Investigation. 1-14 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 13. The risk associated with a company's survival and profitability is referred to as: A. Business Risk. B. Information Risk. C. Detection Risk. D. Control Risk. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits 14. Historically, which of the following has the AICPA been most concerned with providing? A. Professional standards for CPAs. B. Professional guidance for regulating financial markets. C. Standards guiding the conduct of internal auditors. D. Staff support to Congress. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession
  15. 15. 15. The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: A. Auditing Standards Board. B. Financial Accounting Standards Board. C. Government Accounting Standards Boards. D. Securities and Exchange Commission. 1-15 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 16. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n): A. Peer Review Engagement. B. Quality Control Engagement. C. Quality Assurance Engagement. D. Attestation Engagement. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 17. The serially-numbered pronouncements issued by the Auditing Standards Board over a period of years are known as: A. Auditing Statements of Position (ASPs). B. Accounting Series Releases (ASRs). C. Statements on Auditing Standards (SASs). D. Statements on Auditing Principles (SAPs). AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession
  16. 16. 18. The Government Accountability Office (GAO): A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal 1-16 government. B. Conducts operational audits and reports the results to Congress. C. Is a multinational organization of professional accountants. D. Is primarily concerned with budgets and forecasts approved by the SEC. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits 19. The risk that information is misstated is referred to as: A. Information risk. B. Inherent risk. C. Relative risk. D. Business risk. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits 20. The risk that a company will not be able to meet its obligations when they become due is an aspect of: A. Information risk. B. Inherent risk. C. Relative risk. D. Business risk. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits
  17. 17. 21. Which of the following attributes most clearly differentiates a CPA who audits management's financial statements as contrasted to management? A. Integrity. B. Competence. C. Independence. D. Keeping informed on current professional developments. 1-17 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the nature of assurance services. Topic: Assurance Services 22. The attest function: A. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services. B. Includes the preparation of a report of the CPA's findings. C. Requires a consideration of internal control. D. Requires a complete review of all transactions during the period under examination. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function 23. Attestation risk is limited to a low level in which of the following engagement(s)? A. Both examinations and reviews. B. Examinations, but not reviews. C. Reviews, but not examinations. D. Neither examinations nor reviews. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function
  18. 18. 24. When compared to an audit performed prior to 1900, an audit today: A. Is more likely to include tests of compliance with laws and regulations. B. Is less likely to include consideration of the effectiveness of internal control. C. Has bank loan officers as the primary financial statement user group. D. Includes a more detailed examination of all individual transactions. 1-18 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits 25. Which of the following are issued by the Securities and Exchange Commission? A. Accounting Research Studies. B. Accounting Trends and Techniques. C. Industry Audit Guides. D. Financial Reporting Releases. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 26. Which of the following is not correct relating to the Sarbanes-Oxley Act? A. It toughens penalties for corporate fraud. B. It restricts the types of consulting CPAs may perform for audit clients. C. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the Financial Accounting Standards Board. D. It eliminates a significant portion of the accounting profession's system of self-regulation. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-05 Describe how the credibility of the accounting profession was affected by the large number of companies reporting accounting irregularities in the beginning of this century. Topic: Financial Statement Audits
  19. 19. 27. An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? A. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement. B. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period. C. Operational audits do not ordinarily result in the preparation of a report. D. The operational audit deals with pre-tax income. 1-19 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits 28. The review of a company's financial statements by a CPA firm: A. Is substantially less in scope of procedures than an audit. B. Requires detailed analysis of the major accounts. C. Is of similar scope as an audit and adds similar credibility to the statements. D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function 29. Which statement is correct with respect to continuing professional education (CPE) requirements of members of the AICPA? A. Only members employed by the AICPA are required to take such courses. B. Only members in public practice are required to take such courses. C. Members, regardless of whether they are in public practice, are required to meet such requirements. D. There is no requirement for members to participate in CPE. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium
  20. 20. Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. 1-20 Topic: Public Accounting Profession 30. The FDIC Improvement Act requires that management of large financial institutions engage auditors to attest to assertions by management about the effectiveness of the institution's internal controls over: A. Compliance with laws and regulations. B. Financial reporting. C. Effectiveness of operations. D. Efficiency of operations. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits 31. Passage of the Sarbanes-Oxley Act led to the establishment of the: A. Auditing Standards Board. B. Accounting Enforcement Releases Board. C. Public Company Accounting Oversight Board. D. Securities and Exchange Commission. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-05 Describe how the credibility of the accounting profession was affected by the large number of companies reporting accounting irregularities in the beginning of this century. Topic: Financial Statement Audits 32. Which of the following professionals has primary responsibility for the performance of an audit? A. The managing partner of the firm. B. The senior assigned to the engagement. C. The manager assigned to the engagement. D. The partner in charge of the engagement. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium
  21. 21. Learning Objective: 01-08 Describe how public accounting firms are typically organized and the responsibilities of auditors at the 1-21 various levels in the organization. Topic: Public Accounting Profession 33. Which of the following types of services is generally provided only by CPA firms? A. Tax audits. B. Financial statement audits. C. Compliance audits. D. Operational audits. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function 34. The right to practice as a CPA is given by which of the following organizations? A. State Boards of Accountancy. B. The AICPA. C. The SEC. D. The General Accounting Office. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Public Accounting Profession 35. Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor? A. Operational audit. B. Internal audit. C. Compliance audit. D. Government audit. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits
  22. 22. 36. Inquiries and analytical procedures ordinarily form the basis for which type of engagement? 1-22 A. Agreed-upon procedures. B. Audit. C. Examination. D. Review. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function 37. Which of the following best describes the reason why independent auditors report on financial statements? A. A management fraud may exist and it is more likely to be detected by independent auditors. B. Different interests may exist between the company preparing the statements and the persons using the statements. C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work. D. Poorly designed internal control may be in existence. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Source: AICPA Topic: Financial Statement Audits 38. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also: A. Accuracy. B. Evaluation. C. Compliance. D. Internal control. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 3 Hard Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Source: AICPA
  23. 23. 1-23 Topic: Financial Statement Audits 39. Operational auditing is primarily oriented toward: A. Future improvements to accomplish the goals of management. B. The accuracy of data reflected in management's financial records. C. The verification that a company's financial statements are fairly presented. D. Past protection provided by existing internal control. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 3 Hard Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Source: AICPA Topic: Financial Statement Audits 40. A typical objective of an operational audit is for the auditor to: A. Determine whether the financial statements fairly present 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. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 3 Hard Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Source: AICPA Topic: Financial Statement Audits 41. An integrated audit performed under the Sarbanes-Oxley Act requires that auditors report on: A. Option A B. Option B C. Option C D. Option D AACSB: Analytic
  24. 24. 1-24 AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits Matching Questions 42. Accountants are regulated by a variety of organizations. Match the following statements with the most directly related organizations. Organizations may be used once or not at all. 1. Formed to improve standards of financial accounting for state and local government entities State Boards of Accountancy. 2 2. Issue CPA certificates Government Accounting Standards Board. 1 3. Develop accounting standards for public and nonpublic companies American Institute of Certified Public Accountants. 6 4. Develop accounting standards for the U.S. Government Financial Accounting Standards Board. 3 5. Issue auditing standards for public companies Federal Accounting Standards Advisory Board. 4 6. Prepares the CPA exam Public Company Accounting Oversight Board. 5 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Learning Objective: 01-07 Explain the regulatory process for auditors of public companies and auditors of nonpublic companies. Topic: Financial Statement Audits Topic: Public Accounting Profession Essay Questions
  25. 25. 43. The Sarbanes-Oxley Act of 2002 made significant reforms for public companies and their auditors. a. Describe the events that led up to the passage of the Act. b. Describe the major changes made by the Act. a. The events leading up to the passage of the Sarbanes-Oxley Act include: • A large number of misstatements of financial statements, many of which resulted from fraudulent financial reporting. Notably including WorldCom and Enron. • The conviction of the Big 5 accounting firm of Arthur Andersen on charges of destroying evidence. b. The major reforms made the Act include: • Tougher penalties for fraud. • Restrictions on the types of consulting services that may be provided by auditors to their public audit clients. • The creation of the Public Company Accounting Oversight Board to create auditing standards and oversee accounting firms that audit public companies. • Requirements for management to make an assertion about the effectiveness of internal control. • Requirements for auditors of public companies to audit and report on internal control. 1-25 AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 3 Hard Learning Objective: 01-05 Describe how the credibility of the accounting profession was affected by the large number of companies reporting accounting irregularities in the beginning of this century. Learning Objective: 01-06 Contrast the various types of audits and types of auditors. Topic: Financial Statement Audits
  26. 26. 44. Many people confuse the responsibilities of the independent auditors and the client's management with respect to audited financial statements. a. Describe management's responsibility regarding audited financial statements. b. Describe the independent auditors' responsibility regarding audited financial statements. c. Evaluate the following statement: "If the auditors disagree with management regarding an accounting principle used in the financial statements the auditors should express their views in the notes to the financial statements." a. Management has primary responsibility for the fairness of the financial statements and internal control. b. The auditors are responsible for performing an independent audit of the financial statements and issuing a report on them in accordance with generally accepted auditing standards. c. The statement if false. The notes to the financial statements should contain only representations of management. The auditors should express their reservations in their report. 1-26 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify assurance services that involve attestation. Topic: Attest Function
  27. 27. 45. An investor is considering investing in one of two companies. The companies have very similar reported financial position and results of operations. However, only one of the companies has its financial statements audited. a. Describe what creates the demand for an audit in this situation. Include a discussion of how audited financial statements facilitate this investment transaction, and the effect of the audit on business risk and information risk. b. Identify the potential consequences to the company of not having its financial statements audited. a. Audits add credibility to the financial statements of the company. The individual can invest in the company knowing that there is a low probability that the financial statements depart materially from generally accepted accounting principles. Audited financial statements facilitate this transaction by reducing risk related to the investment. Specifically, audits reduce information risk--the risk that information used to make the investment decision is misstated-- related to the financial statements. Audited financial statements do not directly affect business risk, which is the risk that the company will not be able to meet its financial obligations. b. The potential consequences of not having an audit are: • If the investor is particularly risk averse, he or she may not invest in the company at all. • If the investor decides to invest in the company, he or she will not be willing to pay as high a price because the investor will want to be compensated for the additional risk that is involved in relying upon unaudited financial statements. 1-27 AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Explain why audits are demanded by society. Topic: Financial Statement Audits
  28. 28. 1-28 Chapter 02 Professional Standards Multiple Choice Questions 1. The attestation standards of reporting do not require the attestation report to include a statement that A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria. B. Indicates that the practitioner has significant reservations about the engagement. C. Identifies the subject matter or assertion being reported on. D. Indicates that the accountant assumes no responsibility to update the report. 2. Control risk is A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B. The probability that a material misstatement could occur and not be detected by auditors' procedures. C. The risk that auditors will not be able to complete the audit on a timely basis. D. The risk that auditors will not properly control the staff on the audit engagement. 3. The responsibilities principle under generally accepted auditing standards does not include which of the following? A. Competence and capabilities. B. Independent attitude. C. Due care. D. Planning and supervision. 4. Which of the following types of auditors' reports does not require an explanatory paragraph to support the opinion? A. Unqualified opinion. B. Adverse opinion. C. Qualified opinion. D. Disclaimer of opinion.
  29. 29. 5. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? A. Lending credibility to a client's financial statements. B. Using statistical sampling techniques. C. Acceptance and continuance of clients. D. Membership in the Center for Public Company Audit Firms (CPCAF). 1-29 6. Which of the following presumptions does not relate to the reliability of audit evidence? A. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements. B. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly. 7. An important role of the Public Company Accounting Oversight Board (PCAOB) is to oversee the A. Issuance of statements by the Financial Accounting Standards Board. B. Preparation and grading of the Uniform CPA Examination. C. Peer review of member firms of the Private Companies Practice Section. D. Regulation of firms that audit public companies. 8. Audit evidence is usually considered sufficient when A. It is reliable. B. There is enough quantity to afford a reasonable basis for an opinion on financial statements. C. It has the qualities of being relevant, objective, and free from unknown bias. D. It has been obtained through random selection methods.
  30. 30. 1-30 9. Which of the following is not considered a type of audit evidence? A. The company's trial balance. B. Auditors' calculations. C. Physical observation. D. Verbal statements made by client personnel. 10. The AICPA attestation standards differ from the AICPA responsibilities principle, performance principle and reporting principle in that: A. The attestation standards contain no requirement to obtain an understanding of the entity and assess the risk of material misstatement. B. The attestation standards do not require competence and capabilities. C. The attestation standards do not require planning for attestation engagements or supervision of accountants and consultants who perform the work. D. The attestation standards do not require a report that states the character of the engagement. 11. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: A. Certify the correctness of Camden's financial statements. B. Make a complete examination of Camden's records and verify all of Camden's transactions. C. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions. 12. Auditors try to achieve independence in appearance in order to: A. Maintain public confidence in the profession. B. Become independent in fact. C. Comply with the responsibilities principle. D. Maintain an unbiased mental attitude.
  31. 31. 13. The independent auditors' plan prepared prior to the start of field work is appropriately considered documentation of A. Planning. B. Supervision. C. Information evaluation. D. Quality assurance. 14. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's accounting staff held in private. B. Inspection of pre-­‐numbered client shipping documents. C. Inspection of bank statements obtained directly from the client's financial institution. D. Analytical procedures performed by auditors on the client's trial balance. 15. Which of the following is not an attestation standard? A. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report. B. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement. C. The practitioner must adequately plan the work and must properly supervise any assistants. D. A sufficient understanding of the client's internal controls shall be obtained to plan the engagement. 16. Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. C. An auditor on the engagement owns a financial interest in the stock of the client. D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm. 1-31
  32. 32. 17. A vendor's invoice received and held by the client would be considered what type of evidence? A. External. B. Internal. C. External-­‐internal. D. Written representation. 18. Which of the following statements is generally correct about the appropriateness of audit evidence? A. Auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be reliable, audit evidence must be either valid or relevant, but need not be both. C. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on client financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained. 19. The standard auditors' report refers to GAAS and GAAP in which paragraph? A. GAAS: Scope only; GAAP: Opinion only B. GAAS: Introductory only; GAAP: Scope and opinion C. GAAS: Introductory and scope; GAAP: Opinion only D. GAAS: Introductory only; GAAP: All paragraphs 20. Which of the following is not included in the auditors' standard report representing an unqualified opinion? A. A brief indication of the responsibility of auditors and management for the financial statements. B. An indication that all appropriate disclosures have been made and included in the financial statements. C. An indication that the audit was conducted in accordance with standards established by the PCAOB. D. The auditors' opinion on the fairness of the financial statements. 1-32
  33. 33. 21. Internal evidence A. Is obtained directly from third parties independent of the client. B. Originates outside of the client's system but has been received and processed by the client. C. Consists of documents that are produced, used, and stored within the client's information system. D. Consists of representations made by the client's officers, directors, owners, and employees. 22. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable form of audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective system of internal control provides more assurance about the reliability of audit evidence. 23. When auditors do not mention consistency in the auditors' report, a reader of the financial statements may infer A. That the applicable financial reporting framework (e.g., GAAP) has been consistently observed in the current period in relation to the preceding period. B. That no material departure from the applicable financial reporting framework (e.g., GAAP) has been detected. C. That no reclassification of items or change in classifications has occurred. D. Nothing about application of accounting principles within the period. 24. The auditors' responsibility to express an opinion on the financial statements is A. Implicitly represented in the auditors' standard report. B. Explicitly represented in the introductory paragraph of the auditors' standard report. C. Explicitly represented in the scope paragraph of the auditors' standard report. D. Explicitly represented in the opinion paragraph of the auditors' standard report. 1-33
  34. 34. 25. Which of the following is not a concept from the performance principle under generally accepted auditing standards? A. The auditor must plan the work and properly supervise any assistants. B. The auditor must express an opinion in accordance with the auditor's findings. C. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. D. The auditor must determine and apply an appropriate materiality level throughout the audit. 26. Under generally accepted auditing standards, which of the following reflects a concept related to the responsibilities principle? A. The initial planning of the audit engagement should occur with the audit partner, manager, senior, and client personnel. B. The confirmation of accounts receivable should occur on each audit. C. The completion of an internal control questionnaire. D. Maintaining professional skepticism and exercising professional judgment. 27. Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? A. Auditing procedures. B. Auditing standards. C. Due care. D. System of quality control. 28. Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors perform the engagement with prudent auditors, but not expert auditors. B. Auditors obtain expertise in their client's industry as they are conducting the audit examination. C. Auditors are directly involved with a client manager in a strategic decision-­‐making capacity. D. Auditors fail to document their assessment of control risk following their study of internal control. 1-34
  35. 35. 1-35 29. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? A. Auditors would be required to rely on external (rather than internal) forms of evidence. B. Auditors would be required to perform procedures at interim periods, rather than at year end. C. Auditors would be required to confirm a larger number of customer accounts receivable balances. D. Auditors would be required to obtain more evidence through direct personal observation. 30. As it relates to audit evidence, appropriateness refers to the A. Originality of evidence gathered. B. Quality of evidence gathered. C. Quantity of evidence gathered. D. Timeliness of evidence gathered. 31. Which of the following information would not be included in the auditors' standard report? A. The names of the financial statements audited. B. A description of the nature of an audit. C. An indication that all necessary disclosures have been presented. D. An opinion on the entity's financial statements. 32. The primary purpose of the auditors' study of internal control for a nonpublic entity is: A. To provide constructive suggestions to the client for improving its internal control. B. To report on internal control as required by Auditing Standard No. 5. C. To identify and detect fraud and irregularities perpetrated by client personnel. D. To determine the nature, timing, and extent of substantive procedures. 33. Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)? A. Unqualified or disclaimer of opinion. B. Qualified or disclaimer of opinion. C. Unqualified or adverse. D. Qualified or adverse.
  36. 36. 34. Which of the following is most closely related to system of quality control regarding engagement performance? A. Requiring all of the firm's personnel to provide a summary of their investments and other financial relationships. B. Evaluating the firm's system of quality controls on a periodic basis. C. Utilizing standardized audit plans and audit documentation on engagements in a particular industry. D. Evaluating the firm's ability to provide a quality audit to a prospective client. 1-36 Question also found in textbook 35. Which of the following categories of principles is most closely related to gathering audit evidence? A. Performance. B. Reasonable assurance. C. Reporting. D. Responsibilities. 36. To exercise due care, an accountant should A. Take continuing professional education classes. B. Report whether the financial statements are in accordance with the applicable financial reporting framework (e.g., GAAP, IFRS). C. Gather enough audit evidence to have complete assurance that there is enough support for the accountant's opinion on the financial statements. D. Conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis. 37. One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following A. Generally Accepted Auditing Standards (GAAS). B. Standards within a system of quality control. C. Generally Accepted Accounting Practices (GAAP). D. International Auditing Standards.
  37. 37. 38. Which of the following best demonstrates the concept of professional skepticism? A. Relying more extensively on external evidence rather than internal evidence. B. Focusing on items that have a more significant quantitative effect on the entity's financial statements. C. Critically assessing verbal evidence received from the entity's management. D. Evaluating potential financial interests held by auditors in the client. 39. The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is A. To determine the nature, timing, and extent of further audit procedures to be performed. B. To make consulting suggestions to the management. C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. D. To determine whether the entity has changed any accounting principles. 40. Ordinarily, what source of evidence should least affect audit conclusions? A. External. B. Inquiry of management. C. Auditor prepared. D. Inquiry of entity legal counsel. 41. The most persuasive evidence regarding the existence of newly acquired computer equipment is A. Inquiry of management. B. Documentation prepared externally. C. Observation of auditee's procedures. D. Physical observation. 42. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of pre-­‐numbered client purchase orders filed in the vouchers payable department. C. Inspection of vendor sales invoices received from client personnel. D. Inspection of bank statements obtained directly from the client's financial institution. 1-37
  38. 38. 43. Breaux & Co., CPAs require that all audit documentation contain the initials of the preparer and the reviewer in the top right-­‐hand corner. This procedure provides evidence of Breaux & Co., CPAs' professional concern regarding which of the following? A. Independence. B. Adequate competence and capabilities. C. Adequate planning and supervision. D. Gathering sufficient appropriate evidence. 1-38 44. The attestation standards do not contain a requirement that auditors obtain A. Adequate knowledge in the subject matter of the assertions being examined. B. An understanding of the auditee's internal controls. C. Sufficient evidence for the conclusions expressed in an attestation report. D. Independence in mental attitude. 45. Which of the following concepts is least related to the standard of due care? A. Independence in fact B. Professional skepticism C. Prudent auditor D. Reasonable assurance 46. The evidence considered most appropriate by auditors is best described as A. Internal documents such as sales invoice copies produced under conditions of strong internal control. B. Written representations made by the president of the entity. C. Documentary evidence obtained directly from independent external sources. D. Direct personal knowledge obtained through physical observation and mathematical recalculation.
  39. 39. 47. Auditors' understanding of the internal control in an entity contributes information for A. Determining whether members of the audit team have the required competence and capabilities to perform the audit. B. Ascertaining the independence in mental attitude of members of the audit team. C. Planning the professional development courses the audit staff needs to keep up to date with new auditing standards. D. Planning the nature, timing, and extent of further audit procedures on an audit. 48. Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? A. Acceptance and continuance of clients. B. Engagement performance. C. Monitoring. D. Relevant ethical requirements. 49. Which of the following standards is not correctly associated with its rule-­‐making body? A. Public Company Accounting Oversight Board, Auditing Standards 1-39 B. Governmental Accounting Standards Board, Government Auditing Standards C. Auditing Standards Board, Statements on Auditing Standards D. International Auditing and Assurance Standards Board, International Statements on Auditing 50. Kramer, CPA consulted with an independent appraiser regarding the valuation of fine art for a not-­‐for-­‐profit museum. Consultation with a specialist in this case would A. Be considered proper due care. B. Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement. C. Not be considered a violation of GAAS because GAAS does not apply to not-­‐for-­‐profit entities. D. None of the above.
  40. 40. 1-40 51. Which of the following topics is not addressed in the auditors' report for a public entity? A. Responsibilities of the auditor and management in the financial reporting process. B. Absolute assurance regarding the fairness of the entity's financial statements in accordance with the applicable financial reporting framework (e.g., GAAP). C. A description of an audit engagement. D. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting. 52. Which of the following is a conceptual difference between attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements. B. The requirement that the practitioner be independent is not required under attestation standards. C. The attestation standards do not permit an attestation engagement to examine prospective "what-­‐if" financial statements. D. Requirements related to evidence are not included in the attestation standards. Questions also found in Study Guide 53. The attestation standards are a general set of standards intended to guide work in A. Audits of financial statements. B. Financial forecasts and prospective financial information. C. Areas other than audits of financial statements. D. Understanding internal control. 54. Statements on Auditing Standards (SASs) are considered to be A. Specialized to obtain evidence to render an opinion. B. Detailed interpretations of the fundamental principles. C. Standards for preparation of financial statements. D. Standards to govern the quality of a specific firm's audit practice.
  41. 41. 1-41 55. Which of the following is not a subject related to the performance principle of GAAS? A. Risk of material misstatement B. Planning and supervision C. Sufficient appropriate evidence D. Due care 56. Which of the following statements is true for attestation standards, but not for the fundamental principles of generally accepted auditing standards? A. The practitioner or practitioners must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users. B. The work shall be adequately planned and assistants, if any, are to be properly supervised. C. Due care shall be exercised. D. A sufficient understanding of the internal control is to be obtained. 57. The quality control of personnel management in a public accounting firm includes which of the following? A. Supervision appropriate for the competencies of the personnel assigned to the work is important. B. Professional development continuing education should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities. C. People at all organizational levels must maintain independence in fact and appearance. D. When accepting and continuing client relationships, firms should consider their own competence. 58. Which of the following is not an implicit message in the opinion paragraph in the auditors' unqualified opinion? A. The accounting principles in the financial statements have general acceptance. B. The accounting principles used by the entity are appropriate in the circumstances. C. The audit was performed in accordance with generally accepted auditing standards. D. The financial statements are accurate within practical materiality limits.
  42. 42. 59. Auditors' opinions on statements "taken as a whole" would not include A. Disclaimers of opinion. B. Adverse opinions. C. Qualified opinions. D. Unqualified opinions. 60. The opinion paragraph of the auditors' standard report includes a statement that A. The financial statements are the responsibility of management. B. The audit was conducted in accordance with generally accepted auditing standards. C. The audit provides a reasonable basis for an opinion. D. The financial statements are presented in conformity with generally accepted accounting principles. 61. The auditors' standard report should be dated with the date A. The report was delivered to the client. B. When all significant procedures have been completed and auditors have gathered sufficient appropriate evidence. C. When the client's fiscal year ended. D. When the audit was completely reviewed by supervisory personnel. 62. To ensure that a public accounting firm is providing services that conform to professional standards, the firm should follow A. The performance principle of GAAS. B. Its system of quality controls. C. Generally accepted accounting principles. D. International auditing standards. 1-42
  43. 43. 1-43 Matching Questions 63. For each of the matters below, indicate through the appropriate letter the fundamental principle to which the matter is most closely related. 1. Responsibilities principle Maintaining professional skepticism. ____ 2. Responsibilities An auditors' overall conclusion of the fairness of the principle client's financial statements. ____ 3. Reporting principle The use of an audit plan to identify audit procedures to be performed during the engagement. ____ 4. Performance principle Auditors' assessment of the risk of material misstatement. ____ 5. Performance principle Accounting firm policies with respect to the level of expected continuing professional education. ____ 6. Performance principle Expressing an opinion in accordance with the auditor's findings. ____ 7. Reporting principle Proper supervision of assistants on the audit. ____ Auditors' requests to obtain bank statements directly 8. Performance from financial institutions with whom the client does principle business. ____ 9. Reporting principle An expression that an opinion cannot be expressed. ____ 10. Performance Determining and applying an appropriate materiality principle level. ____ True / False Questions Question also Found in Study Guide 64. Auditors may be independent in fact but not independent in appearance. True False 65. Standards for accountants in public practice are limited to auditing services. True False
  44. 44. 66. The attestation standards provide guidance for a wide variety of attestation engagements. True False 67. The AICPA's Generally Accepted Auditing Standards must be followed on all audit engagements. True False 68. The reporting principle relates to a firm's system of quality control criteria for conducting an audit. True False 69. Auditors cannot effectively satisfy the responsibilities principle requiring due care if they have not also satisfied the performance principle. True False 70. Auditing procedures are quality guides that are less specific than auditing standards. True False 71. Auditing procedures are the same as auditing standards. True False 72. The concept of due care requires auditors to observe the performance, responsibilities and reporting principles. True False 73. Attestation standards require the practitioner to obtain a sufficient understanding of the client's internal control. True False 1-44
  45. 45. 74. The performance principle sets forth the quality criteria for conducting an audit. True False 75. Auditors of entities registered with the Securities and Exchange Commission are required to register with the Public Company Accounting Oversight Board (PCAOB). True False 76. Control risk is the probability that a material misstatement (error or fraud) could occur and not be prevented or detected on a timely basis by the entity's external auditors. True False 77. Evidence that is considered "appropriate" in auditing means that all underlying accounting data and corroborating information must be absolutely compelling to auditors. True False 78. Even in the audit of historical cost financial statements, auditors may have to make inferences about the future. True False 79. The contents of the auditors' report are guided exclusively by the reporting principle of GAAS. True False 80. The auditors' standard report should always make direct reference to consistency and disclosure. True False 1-45
  46. 46. 81. The auditors' standard report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. True False 82. Evidence is considered appropriate when it is both valid and relevant. True False 83. The statement on quality control standards No. 7 notes that the purpose of a system of quality control is to provide reasonable assurance that the firm and its personnel issue reports that are appropriate under the circumstances. True False 1-46 Fill in the Blank Questions Question also found in Study Guide 84. The _____________________________ standards are a general set of standards to guide attestation engagements in areas other than audits of financial statements. ________________________________________ 85. Audits of historical financial statements are guided by a broad set of principles referred to as _______________________ _________________________ _____________________________ _____________________________. ________________________________________
  47. 47. 86. Attestation reporting is different because attestation engagements related to nonfinancial information do not require information to be presented in accordance with _____________________________ _____________________________ _____________________________ _____________________________. ________________________________________ 87. The AICPA's fundamental principles of generally accepted auditing standards are classified in three categories: _______________________ principle, _______________________ principle, and the _____________________________ principle. ________________________________________ 88. A(n) _____________________________ _____________________________ is a list of auditing procedures that will be performed during the engagement to gather sufficient appropriate evidence. ________________________________________ 89. The responsibilities principle of GAAS highlights the importance of complying with ethical requirements, including those pertaining to __________________________ and _____________________________. ________________________________________ 90. The three aspects of practical independence are _____________________________ independence, _____________________________ independence, and _____________________________ independence. ________________________________________ 91. The concept of _____________________________ relates to financial statement users' perceptions of auditors' independence. ________________________________________ 1-47
  48. 48. 92. _____________________________ ________________________ reflects a level of performance that would be exercised by reasonable auditors in similar circumstances. ________________________________________ 93. Since audit samples are used, audit evidence is considered to be _____________________________, rather than _____________________________. ________________________________________ 94. The auditors' report must state whether the financial statements are presented in accordance with __________________________ _____________________________ _____________________________ _____________________________. ________________________________________ 95. Under the reporting principle of GAAS, the auditor expresses an opinion in accordance with the ___________________ ______________. ________________________________________ 96. Under the reporting principle of GAAS, the report will contain either an expression of _____________________________ regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. ________________________________________ 97. An overall opinion that the financial statements present the financial condition, results of operations, and cash flows according to generally accepted accounting principles is a(n) _____________________________ opinion. ________________________________________ 98. If a material departure from GAAP is noted, auditors can choose between a(n) __________________________ opinion or a(n) ___________________________ opinion. ________________________________________ 1-48
  49. 49. 99. Auditors' indication that no opinion is given is referred to as a(n) _______________________ ___________________________________________ ________________________________________ 100. The _____________________________ paragraph of the auditors' report declares that the audit was conducted in accordance with generally accepted _________________________________________________________ ________________________________________ 101. A(n) _____________________________ _____________________________ is a study of an accounting firm's quality control policies and procedures, followed by a report on the firm's quality of audit practice in accordance with the system of quality controls. ________________________________________ 102. The _____________________________ _____________________________ Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). ________________________________________ 103. The PCAOB has two primary roles: _____________________________ and _____________________________. ________________________________________ 1-49
  50. 50. 1-50 Essay Questions 104. Distinguish between attestation standards and the fundamental principles of generally accepted auditing standards by identifying and describing major differences between the two sets of standards.
  51. 51. 105. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan. Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything -­‐ it will only make us go over the budget." When Alan came to the client near the end of field Work, one assistant was concerned that no inventory observation was done at the out-­‐of-­‐town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-­‐town stores only). Happy Time had only one out-­‐of-­‐town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager. Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with these standards? Explain. 1-51 Matching Questions Question also Found in Study Guide
  52. 52. 106. Using I (introductory), S (scope), O (opinion), A (additional), or N (none), indicate the paragraph in which the following statements or topics would be included in the auditors' report. 1-52 1. none The titles of the financial statements examined by the auditors. ____ 2. none A description of any scope limitation(s) encountered during the audit. ____ 3. introductory A statement that auditors were independent with respect to the entity. ____ 4. additional The auditors' conclusion with respect to the fairness of the entity's financial statements. ____ 5. opinion A statement that an audit was conducted in accordance with generally accepted auditing standards. ____ 6. opinion A statement that the entity's management is responsible for the fairness of the financial statements. ____ 7. introductory A description of an audit, which includes examining evidence in support of the financial statements. ____ 8. scope Reference to generally accepted accounting principles. ____ A description of any specific departures from GAAP noted 9. scope during the audit that were material. ____ 10. additional A statement that the financial statements were consistently prepared compared to those of prior period(s). ____
  53. 53. Chapter 02 Professional Standards Answer Key 1-53 Multiple Choice Questions 1. The attestation standards of reporting do not require the attestation report to include a statement that A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria. B. Indicates that the practitioner has significant reservations about the engagement. C. Identifies the subject matter or assertion being reported on. D. Indicates that the accountant assumes no responsibility to update the report. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy 2. Control risk is A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B. The probability that a material misstatement could occur and not be detected by auditors' procedures. C. The risk that auditors will not be able to complete the audit on a timely basis. D. The risk that auditors will not properly control the staff on the audit engagement. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy
  54. 54. 3. The responsibilities principle under generally accepted auditing standards does 1-54 not include which of the following? A. Competence and capabilities. B. Independent attitude. C. Due care. D. Planning and supervision. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy 4. Which of the following types of auditors' reports does not require an explanatory paragraph to support the opinion? A. Unqualified opinion. B. Adverse opinion. C. Qualified opinion. D. Disclaimer of opinion. Original AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Easy
  55. 55. 5. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? A. Lending credibility to a client's financial statements. B. Using statistical sampling techniques. C. Acceptance and continuance of clients. D. Membership in the Center for Public Company Audit Firms (CPCAF). 1-55 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium 6. Which of the following presumptions does not relate to the reliability of audit evidence? A. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements. B. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly. AICPA AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Comprehension Difficulty: Hard
  56. 56. 7. An important role of the Public Company Accounting Oversight Board (PCAOB) is to oversee the A. Issuance of statements by the Financial Accounting Standards Board. B. Preparation and grading of the Uniform CPA Examination. C. Peer review of member firms of the Private Companies Practice Section. D. Regulation of firms that audit public companies. 1-56 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy 8. Audit evidence is usually considered sufficient when A. It is reliable. B. There is enough quantity to afford a reasonable basis for an opinion on financial statements. C. It has the qualities of being relevant, objective, and free from unknown bias. D. It has been obtained through random selection methods. AICPA AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium
  57. 57. 1-57 9. Which of the following is not considered a type of audit evidence? A. The company's trial balance. B. Auditors' calculations. C. Physical observation. D. Verbal statements made by client personnel. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium 10. The AICPA attestation standards differ from the AICPA responsibilities principle, performance principle and reporting principle in that: A. The attestation standards contain no requirement to obtain an understanding of the entity and assess the risk of material misstatement. B. The attestation standards do not require competence and capabilities. C. The attestation standards do not require planning for attestation engagements or supervision of accountants and consultants who perform the work. D. The attestation standards do not require a report that states the character of the engagement. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Hard
  58. 58. 11. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: A. Certify the correctness of Camden's financial statements. B. Make a complete examination of Camden's records and verify all of Camden's transactions. C. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions. 1-58 Original AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Easy 12. Auditors try to achieve independence in appearance in order to: A. Maintain public confidence in the profession. B. Become independent in fact. C. Comply with the responsibilities principle. D. Maintain an unbiased mental attitude. Original AACSB: Ethics AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium
  59. 59. 13. The independent auditors' plan prepared prior to the start of field work is appropriately considered documentation of A. Planning. B. Supervision. C. Information evaluation. D. Quality assurance. 1-59 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy 14. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's accounting staff held in private. B. Inspection of pre-­‐numbered client shipping documents. C. Inspection of bank statements obtained directly from the client's financial institution. D. Analytical procedures performed by auditors on the client's trial balance. AICPA AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Hard
  60. 60. 15. Which of the following is not an attestation standard? A. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report. B. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement. C. The practitioner must adequately plan the work and must properly supervise any assistants. D. A sufficient understanding of the client's internal controls shall be obtained to plan the engagement. 1-60 AICPA AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium 16. Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. C. An auditor on the engagement owns a financial interest in the stock of the client. D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm. Original AACSB: Ethics AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy
  61. 61. 17. A vendor's invoice received and held by the client would be considered what type of evidence? A. External. B. Internal. C. External-­‐internal. D. Written representation. 1-61 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy 18. Which of the following statements is generally correct about the appropriateness of audit evidence? A. Auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be reliable, audit evidence must be either valid or relevant, but need not be both. C. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on client financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained. AICPA AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Medium
  62. 62. 19. The standard auditors' report refers to GAAS and GAAP in which paragraph? A. GAAS: Scope only; GAAP: Opinion only B. GAAS: Introductory only; GAAP: Scope and opinion C. GAAS: Introductory and scope; GAAP: Opinion only D. GAAS: Introductory only; GAAP: All paragraphs 1-62 AICPA AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Medium 20. Which of the following is not included in the auditors' standard report representing an unqualified opinion? A. A brief indication of the responsibility of auditors and management for the financial statements. B. An indication that all appropriate disclosures have been made and included in the financial statements. C. An indication that the audit was conducted in accordance with standards established by the PCAOB. D. The auditors' opinion on the fairness of the financial statements. Original AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Medium
  63. 63. 21. Internal evidence A. Is obtained directly from third parties independent of the client. B. Originates outside of the client's system but has been received and processed by the client. C. Consists of documents that are produced, used, and stored within the client's information system. D. Consists of representations made by the client's officers, directors, owners, and employees. 1-63 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium 22. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable form of audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective system of internal control provides more assurance about the reliability of audit evidence. AICPA AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Hard
  64. 64. 23. When auditors do not mention consistency in the auditors' report, a reader of the financial statements may infer A. That the applicable financial reporting framework (e.g., GAAP) has been consistently observed in the current period in relation to the preceding period. B. That no material departure from the applicable financial reporting framework (e.g., GAAP) has been detected. C. That no reclassification of items or change in classifications has occurred. D. Nothing about application of accounting principles within the period. 1-64 AICPA AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Hard 24. The auditors' responsibility to express an opinion on the financial statements is A. Implicitly represented in the auditors' standard report. B. Explicitly represented in the introductory paragraph of the auditors' standard report. C. Explicitly represented in the scope paragraph of the auditors' standard report. D. Explicitly represented in the opinion paragraph of the auditors' standard report. AICPA AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Hard
  65. 65. 25. Which of the following is not a concept from the performance principle under generally accepted auditing standards? A. The auditor must plan the work and properly supervise any assistants. B. The auditor must express an opinion in accordance with the auditor's findings. C. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. D. The auditor must determine and apply an appropriate materiality level throughout the audit. 1-65 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium 26. Under generally accepted auditing standards, which of the following reflects a concept related to the responsibilities principle? A. The initial planning of the audit engagement should occur with the audit partner, manager, senior, and client personnel. B. The confirmation of accounts receivable should occur on each audit. C. The completion of an internal control questionnaire. D. Maintaining professional skepticism and exercising professional judgment. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium
  66. 66. 27. Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? A. Auditing procedures. B. Auditing standards. C. Due care. D. System of quality control. 1-66 Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy 28. Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors perform the engagement with prudent auditors, but not expert auditors. B. Auditors obtain expertise in their client's industry as they are conducting the audit examination. C. Auditors are directly involved with a client manager in a strategic decision-­‐making capacity. D. Auditors fail to document their assessment of control risk following their study of internal control. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium
  67. 67. 1-67 29. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? A. Auditors would be required to rely on external (rather than internal) forms of evidence. B. Auditors would be required to perform procedures at interim periods, rather than at year end. C. Auditors would be required to confirm a larger number of customer accounts receivable balances. D. Auditors would be required to obtain more evidence through direct personal observation. Original AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Hard 30. As it relates to audit evidence, appropriateness refers to the A. Originality of evidence gathered. B. Quality of evidence gathered. C. Quantity of evidence gathered. D. Timeliness of evidence gathered. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy
  68. 68. 31. Which of the following information would not be included in the auditors' standard report? A. The names of the financial statements audited. B. A description of the nature of an audit. C. An indication that all necessary disclosures have been presented. D. An opinion on the entity's financial statements. 1-68 Original AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Easy 32. The primary purpose of the auditors' study of internal control for a nonpublic entity is: A. To provide constructive suggestions to the client for improving its internal control. B. To report on internal control as required by Auditing Standard No. 5. C. To identify and detect fraud and irregularities perpetrated by client personnel. D. To determine the nature, timing, and extent of substantive procedures. Original AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

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