Whittington -principles of auditing 19e

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

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.

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.
B.
C.
Government Accounting Standards Boards.
D.
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.

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.

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
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.

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.
B.
Accounting Enforcement Releases Board.
C.
Public Company Accounting Oversight Board.
D.
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.

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.

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

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.
____
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.

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

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
Blooms: Remember
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
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-06 Contrast the various types of audits and types of auditors.
4.
The SEC does not pass on the merits of the securities that are registered with the agency.
TRUE
AACSB: Analytic

1-12
AICPA BB: Industry
Blooms: Remember
5.
The American Institute of Certified Public Accountants has the primary authority to establish
accounting standards.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
6.
An annual peer review is a requirement of the AICPA.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
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
Blooms: Remember
Difficulty: 1 Easy
8.
Staff assistants in CPA firms generally are responsible for planning and coordinating audit
engagements.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy

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.
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
Blooms: Remember
10.
Auditing is frequently only a small part of the practice of local CPA firms.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
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
Blooms: Remember
Learning Objective: 01-02 Identify assurance services that involve attestation.
Topic: Attest Function

12.
The Statements on Auditing Standards have been issued by the:
A.
B.
C.
D.
Federal Bureau of Investigation.
1-14
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember

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.
B.
C.
Government Accounting Standards Boards.
D.
1-15
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
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
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember
Difficulty: 1 Easy

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
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember
Difficulty: 1 Easy

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
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
Blooms: Remember
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
Blooms: Remember
Difficulty: 1 Easy

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
Blooms: Remember
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
Blooms: Remember
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
Blooms: Remember
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.

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
Blooms: Remember
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
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember

1-20
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
Blooms: Remember
31.
Passage of the Sarbanes-Oxley Act led to the establishment of the:
A.
B.
Accounting Enforcement Releases Board.
C.
Public Company Accounting Oversight Board.
D.
AACSB: Analytic
AICPA BB: Industry
Blooms: Remember
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
Blooms: Remember

1-21
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
Blooms: Remember
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
Blooms: Remember
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
Blooms: Remember

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
Blooms: Remember
Difficulty: 1 Easy
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
Blooms: Remember
Source: AICPA
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
Blooms: Understand
Difficulty: 3 Hard
Source: AICPA

1-23
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.
Blooms: Understand
Difficulty: 3 Hard
Source: AICPA
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.
Blooms: Understand
Difficulty: 3 Hard
Source: AICPA
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

1-24
AICPA BB: Industry
Blooms: Remember
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
public and nonpublic companies
American Institute of
Certified Public
Accountants.
6
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
Blooms: Remember
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.
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
Blooms: Understand
Difficulty: 3 Hard

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
Blooms: Remember

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
Blooms: Remember

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.

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.

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.

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

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

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

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

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.

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.

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

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.

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.

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.

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.

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

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

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

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

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
_______________________
_________________________
_____________________________
_____________________________.
________________________________________

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

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

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

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.

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

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).
____

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Whittington -principles of auditing 19e

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