Chapter 1

Question 1

The underlying conditions that create demand by users for reliable information include:

Answer 1

• transaction that are numerous and complex
• users separated from accounting records by distance and time
• financial decisions that are important to investors
• decisions that are time sensitive

Question 2

According to the AICPA, the purpose of an audit of financial statements is to:

Answer 2

enhance the degree of confidence that intended users can place in the financial statements

Question 3

Which of the following best describes the focus of the following engagements?

Answer 3

Auditing engagement - Financial Statements

Attestation Engagements - Financial Information

Question 4

Which best describes the relationship between auditing and attestation engagements?

Answer 4

Auditing is a subset of attestation engagements that focuses on the certification of financial statements

Question 5

Management asserts that accounting receivable on the balance sheet represents valid amounts owed to the company that were likely provided in exchange for goods or services from the country

Answer 5

PCAOB Assertion - existence or occurrence

Question 6

Management asserts that all amounts should be recorded and included in the financial statements as receivable actually have been recorded

Answer 6

PCAOD Assertion - Completeness

Question 7

Management asserts that A/R are stated at NRV

Answer 7

PCAOB Assertion - Valuation or Allocation

Question 8

Management asserts that the A/R on the Balance Sheet really are owned by the company. As a result, they have not factored (sold) any of the balances that are listed on the balance sheet

Answer 8

PCAOB Assertion - Rights and Obligations

Question 9

Management asserts that the presentation of A/R and the related allowance for doubtful accounts have been presented are are disclosed in accordance with GAAP

Answer 9

PCAOB Assertion - Presentation and Disclosure

Question 10

The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from:

Answer 10

• acting in a manegerial decison-making role for an audit client
• auditing the firms own work on an audit client
• providing tax consulting to an audit client without audit committee approval

Question 11

What requirements are usually necessary to become licensed as a CPA

Answer 11

• Successful completion of the Uniform CPA Exam
• Experience in the accounting field
• Education

Question 12

Professional skepticism distates that when management makes a statement to the auditors, the auditors should:

Answer 12

corroborate the statement with other documentary evidence whenever possible

Question 13

Match the auditor to the type of work:

1. Audit the Company They Work For
2. Enforce Federal Tax Laws Only
3. Independent-Audit Financial Statements
4. Report to Congress or Municipal Governments

Answer 13

1. Internal Auditors
2. IRS Auditors
3. Financial Statement Auditors
4. Governmental Auditors

Question 14

Most large corporations typically have a large group of

Answer 14

Internal Auditors

Question 15

Headed by the Auditor General, the work of ___ includes compliance, operational, and financial audits

Answer 15

Governmental Audits

Question 16

___ perform compliance audits of income tax returns of individuals and corporations to determine that income has been computed and taxes are paid as required

Answer 16

IRS Auditors

Question 17

___ are the only auditors that work for the company that they are auditing

Answer 17

Internal Auditors

Question 18

___ are required to be public accountants

Answer 18

External Auditors

Question 19

Which is an underlying condition that in part creates the demand by users for reliable information?

Answer 19

• Users separated from accounting records by distance and time
• Economic transactions that are numerous and complex.
• Financial decisions that are important to investors and users.
• Decisions that are time-sensitive.

Question 20

What is the essential purpose of the audit function?

Answer 20

Determination of whether the client’s financial statement assertions are fairly stated.

Question 21

What type of evidence would provide the highest level of assurance in an attestation engagement?

Answer 21

Evidence obtained from independent sources.

Question 22

Assurance services involve all of the following, except

Answer 22

providing absolute rather than reasonable assurance

Question 23

Which of the following best describes the primary role and responsibility of independent external auditor?

Answer 23

Express an opinion on the fairness of a company’s annual financial statements and footnotes

Question 24

The engineering department at Omni Company built a piece of equipment in the company’s own shop for use in the company’s operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB assertion about account balances and related disclosures most closely related to the auditor’s testing?

Answer 24

Valuation

Question 25

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of

Answer 25

completeness

Question 26

During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management’s assertion of

Answer 26

presentation and disclosure

Question 27

The audit objective that all balances include items owned by the client is related most closely to which one of the ASB assertions about account balances and related disclosures?

Answer 27

Rights and obligations

Question 28

The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of the ASB assertions about account balances and related disclosures?

Answer 28

Completeness

Question 29

The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB assertions about account balances and related disclosures ?

Answer 29

Presentation

Question 30

The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB assertions about classes of transactions and events and related disclosures?

Answer 30

Classification

Question 31

The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions?

Answer 31

Completeness

Question 32

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of

Answer 32

Professional Skepticism

Question 33

The Sarbanes–Oxley Act of 2002 requires that the key company officials certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating

Answer 33

• they have read the financial statements
• they are not aware of any false or misleading statements (or any key omitted disclosures)
• they believe that the financial statements present an accurate picture of the company’s financial condition