Chapter 1 - Additional Practice Questions Flashcards
It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that:
a potential conflict of interest always exists between the auditor and the management of the enterprise under audit.
In an attestation engagement, a CPA practitioner is engaged to:
prepare a written report containing a conclusion about the reliability of a management assertion.
A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of:
operational auditing.
- Operational auditing refers to the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies.
The primary difference between operational auditing and financial auditing is that in operational auditing:
the operational auditor is seeking to help management use resources in the most effective manner possible.
According to the AICPA, the purpose of an audit of financial statements is to:
enhance the degree of confidence that intended users can place in the financial statements.
Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because:
they generally see a potential conflict of interest between company managers who want to get loans and the bank’s needs for reliable financial statements.
The Sarbanes–Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?
- Bookkeeping services.
- Internal auditing services.
- Valuation services.
Independent auditors of financial statements perform audits that reduce:
information risk faced by investors.
After completing a financial statement audit, information risk has been reduced for investors.
The primary objective of compliance auditing is to:
determine whether client personnel are following laws, rules, regulations, and policies.
What requirements are usually necessary to become licensed as a certified public accountant?
- Successful completion of the Uniform CPA Examination.
- Experience in the accounting field.
- Education.
Performance audits usually include:
- Financial Audits
- Economy and efficiency audits
- Program audits
The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about:
Valuation or allocation.
- A review of credit ratings of customers’ gives indirect evidence of the collectability of accounts receivable. Because GAAP requires the accounts receivable balance to be valued at the amount expected to be collected from customers, the review of credit ratings relates to valuation.
The risk to investors that a company’s financial statements may be materially misleading is called:
Information risk.
When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?
Cutoff
- This is clearly a test of the completeness as the assertion always includes any issues of transaction cutoff, which means that the recording of all revenue, expense, and other transactions must be included in the proper period in accordance with GAAP.
When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client’s ending inventory balance. This audit procedure provides assurance about which management assertion?
Rights and obligations.
When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management’s assertion regarding:
Existence.
The Sarbanes–Oxley Act of 2002 generally prohibits public accounting firms from:
- acting in a managerial decision-making role for an audit client.
- auditing the firm’s own work on an audit client.
- providing tax consulting to an audit client without audit committee approval.
Substantial equivalency refers to:
permitting a CPA to practice in another state without having to obtain a license in that state.
Which of the following best describes the relationship between auditing and attestation engagements?
Auditing is a subset of attestation engagements that focuses on the certification of financial statements.
During an audit of a company’s cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion?
Existence.
- Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of cash and the fact that is no foreign currency translation calculation, the existence assertion is clearly the most important assertion.
When auditing an investment in a publicly traded company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion?
Obtain market quotations from The Wall Street Journal or another independent source.
Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management’s assertion of:
completeness.
- A cutoff test is clearly a test of the completeness assertion as the test is designed to insure that all transactions that should have been included in accordance with GAAP have been recorded.
Which of the following audit procedures probably would provide the most reliable evidence related to the entity’s assertion of rights and obligations for the inventory account?
Inspect agreements for evidence of inventory held on consignment.
In auditing the accrued liabilities account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of:
completeness.
- Management is more likely to understate liabilities. As a result, when auditing the accrued liabilities account, the most relevant assertion is likely to be completeness.
Which of the following best describes the focus of the following engagements?
- Auditing Engagement -> Financial Statements
- Attestation Engagement -> Financial Information
- Assurance Engagement -> Any information
- Consulting Services Engagement -> Advice & Decision Support
Which of the following is a reason to obtain professional certification?
- Certification provides credibility that an individual is technically competent.
- Certification often is a necessary condition for advancement and promotion within a professional services firm.
- Obtaining certification is often monetarily rewarded by an individual’s employer.
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:
presentation and disclosure.
- Restrictions on retained earnings from loans, agreements or state law would need to be disclosed in the footnotes to the financial statements. As a result, presentation and disclosure is clearly the most important assertion.
When auditing the accounts receivable account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of:
existence.
- Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of accounts receivable and the fact that valuation is not an option, the existence assertion is clearly the most important assertion.
An auditor selected items for test counts from the client’s warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management’s assertion of:
completeness.
- Most importantly, the auditor did not select items for testing from any financial statement records. Rather, the auditor selected items to be tested from the warehouse, without considering the financial statement records. As a result, this is a test that is designed specifically to test whether all items that should be recorded on the financial statements actually are included on the financial statements. Thus, the assertion being tested is the completeness assertion. The absolute key to understanding this question is to focus on how the items were selected for testing.
Which of the following would best be described as an attest engagement?
An engagement to assess the effectiveness of an internal control system.
- This is an attestation service. In order to assess the effectiveness of an internal control system, the assurance provider would have to attest to management’s assertion that the internal control was effective in accordance with the COSO framework, as this is the most common way of expressing the effectiveness of an internal control system. As a result, this is the definition of an attestation service, as articulated in the book and the professional standards.
An auditor seeks to test the accuracy of the amount recorded as revenue on a contract with a customer under ASC 606. Which PCAOB assertion is most likely being tested?
Valuation or Allocation.
- Valuation and allocation is the PCAOB assertion that is most likely to be tested. In general, management is more likely to overstate revenue to improve profitability. As a result, when auditing the revenue account, the most relevant assertions are likely to be either existence or occurrence or valuation. In this situation, because of the nature of revenue and the fact that accuracy is more closely related to valuation, the valuation assertion is clearly the most important assertion. In addition, the existence or occurrence option is not an available option.
In testing the goodwill at an audit client in the retail industry, an auditor may seek to determine whether the account balance had been impaired. Such impairment procedures would be designed to test which financial statement assertion?
Valuation or allocation.
In testing inventory at an audit client in the retail industry, you note that some of the inventory is contracted to be held on consignment. As a result, which financial statement assertion is now relevant?
Rights and obligations.
