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BSA 33P > Chapter 5 TB > Flashcards

Chapter 5 TB Flashcards

1
Q

(T/F) The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA.

A

FALSE

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2
Q

(T/F) Auditors in the U.S. follow guidance issued by the PCAOB, AICPA, and the IAASB.

A

TRUE

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3
Q

(T/F) The PCAOB is committed to merging its standards with those of the AICPA and the IAASB.

A

FALSE

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4
Q

(T/F) An auditor would follow the PCAOB’s guidance when auditing a company whose stock is traded on the London Stock Exchange if the company conducts operations in multiple U.S. cities.

A

FALSE

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5
Q

(T/F) The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results.

A

TRUE

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6
Q

(T/F) Auditors are responsible for having the appropriate competence and capabilities to perform the audit, complying with ethical requirements, and maintaining professional skepticism throughout the audit.

A

TRUE

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7
Q

(T/F) An audit must be performed by persons who can make sound judgments relating to complex accounting issues.

A

TRUE

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8
Q

(T/F) The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement.

A

FALSE

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9
Q

(T/F) PCAOB guidance includes standards on certain auditor responsibilities related to SEC filings.

A

TRUE

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10
Q

(T/F) In some circumstances, the auditor will not express an opinion on the financial statements but will instead state that an opinion cannot be expressed.

A

TRUE

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11
Q

(T/F) The common purpose of auditing standards created by the various authorities is to provide reasonable assurance that audits are conducted in a quality manner.

A

TRUE

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12
Q

(T/F) The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining reasonable assurance that the statements are free from misstatement.

A

FALSE

The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining absolute assurance that the statements are free from misstatement.

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13
Q

(T/F) If controls are effective, there is a higher likelihood that the financial statements are free of material misstatement.

A

TRUE

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14
Q

(T/F) The activities performed by the auditor throughout the opinion formulation process are determined by whether the auditor is conducting a financial statement audit only or an integrated audit.

A

FALSE

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15
Q

(T/F) The cycle approach to auditing is a convenient way to break the audit into manageable time periods.

A

FALSE

The cycle approach to auditing is a convenient way to break the audit such that closely related types of transactions and account balances are included in the same cycle.

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16
Q

(T/F) Comparability is one of the five management assertions.

A

FALSE

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17
Q

(T/F) Making client acceptance and continuance decisions is the first phase of the audit opinion formulation process.

A

TRUE

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18
Q

(T/F) An auditor should give equal emphasis to all management assertions when testing accounts.

A

FALSE

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19
Q

(T/F) The revenue cycles includes transactions related to revenue such as sales, receivables, and gain or loss from disposal of equipment.

A

FALSE

Capital gain is not included in the revenue cycle.

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20
Q

(T/F) An audit firm’s portfolio management includes client acceptance and continuance decisions that occur before the audit opinion formation process is initiated.

A

FALSE

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21
Q

(T/F) Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for the auditor’s opinion.

A

TRUE

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22
Q

(T/F) Audit documentation would not include analyses prepared by the client.

A

FALSE

Audit documentation includes:
- analyses prepared by the client
- audit programs summarizing audit procedures

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23
Q

(T/F) Developing an understanding of the client’s business and industry is essential to the auditor’s assessment of risk.

A

TRUE

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24
Q

(T/F) Tests of controls are a type of substantive procedure.

A

FALSE

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25
Q

(T/F) The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies.

A

FALSE

The Public Company Accounting Oversight Board (PCAOB) sets specific standards for audits of public companies.

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26
Q

(T/F) Tests of controls are procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements.

A

FALSE

Risk assessment procedures are procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements.

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27
Q

(T/F) The auditor performs substantive procedures to detect material misstatements in account balances.

A

TRUE

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28
Q

(T/F) Audit procedures can be classified as risk assessment procedures, tests of controls, or substantive procedures.

A

TRUE

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29
Q

(T/F) Assertions about existence address whether assets and liabilities exist, and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred.

A

TRUE

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30
Q

(T/F) The first phase in the audit opinion formulation process is performing a risk assessment.

A

FALSE

The first phase in the audit opinion formulation process is making client acceptance and continuance decisions.

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31
Q

(T/F) Physically inspecting a client’s assets is an audit procedure.

A

TRUE

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32
Q

(T/F) Audit documentation is frequently referred to as working papers.

A

TRUE

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33
Q

(T/F) Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure, and which could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

A

TRUE

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34
Q

(T/F) Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls.

A

FALSE

Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

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35
Q

(T/F) There is an inverse relationship between the assessment of risk of material misstatement in an account and the amount of evidence required.

A

FALSE

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35
Q

(T/F) The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work.

A

TRUE

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36
Q

(T/F) The effectiveness of entity-wide controls may reduce the extent of testing of transaction controls.

A

TRUE

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37
Q

(T/F) When assessing the effectiveness of controls for relevant assertions, the auditor tests only transaction controls.

A

FALSE

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38
Q

(T/F) The auditor is not required to test every control related to relevant assertions in a significant account.

A

TRUE

39
Q

(T/F) For an integrated audit, the auditor’s opinion about internal control effectiveness is based on control effectiveness at year-end as opposed to throughout the year.

A

TRUE

40
Q

(T/F) A controls reliance audit includes substantive procedures and does not include tests of controls.

A

FALSE

Substantive audit includes substantive procedures and does not include tests of controls.

41
Q

(T/F) Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.

A

TRUE

42
Q

(T/F) Presentation and disclosure assertions address whether components of the financial statements are properly classified, described, and disclosed.

A

TRUE

43
Q

(T/F) The PCAOB does not currently have a mandate for convergence with other auditing standards.

A

TRUE

44
Q

(T/F) Substantive analytical procedures are optional for significant accounts and disclosures.

A

TRUE

45
Q

(T/F) In performing substantive tests on account balances, the auditor performs tests for all five assertions.

A

FALSE

46
Q

(T/F) If the auditor assesses internal controls to be effective, substantive testing likely will be performed for some, but not all, significant accounts and disclosures.

A

FALSE

47
Q

(T/F) If the auditor’s assessment is that there is high risk due to the subjectivity of the accounting process, substantive procedures should be more rigorous.

A

TRUE

48
Q

(T/F) An integrated audit requires the issuance of separate reports for the opinions expressed on the financial statements and on internal control.

A

FALSE

An integrated audit is one that combines an examination of financial statements with an evaluation of internal financial controls.

49
Q

(T/F) In an integrated audit, the auditor issues an opinion on both the financial statements and internal control.

A

TRUE

50
Q

The PCAOB’s General Auditing Standards requires that an audit be performed by which type of person?

An auditor with seasoned judgment in varying degrees of supervision and review.
An auditor having the appropriate professional qualifications.
An auditor with adequate technical and leadership skills.
All of the above.

A

An auditor having the appropriate professional qualifications.

51
Q

Which auditing standards apply to private companies?

The AICPA Standards.
The IASSB Standards.
The Standards of the PCAOB.
All of the above.

A

The AICPA Standards.

52
Q

The AICPA Principles Governing an Audit include which of the following categories that guide the conduct of an audit?

Purpose of an audit and premise upon which an audit is conducted.
Responsibilities.
Performance.
All of the above.

A

All of the above.

53
Q

What is the scope of applicability of the auditing standards of the AICPA?

Nonpublic companies traded in non-U.S. markets.
Nonpublic companies in the U.S.
Public companies traded in non-U.S. markets.
Public companies traded in the U.S.

A

Nonpublic companies in the U.S.

54
Q

Which of the following is not required by the PCAOB’s General Auditing Standards category?

Exercise due professional care.
Obtain reasonable assurance as to whether internal controls are effective.
Maintain an independence in mental attitude.
Exercise professional skepticism.

A

Obtain reasonable assurance as to whether internal controls are effective.

55
Q

Which of the following organizations provides auditing standards for public companies?

GAO.
AICPA.
GAAP.
PCAOB.

A

PCAOB.

56
Q

Which of the following factors has the greatest effect on the reliability of financial statements?

The size of the client
The industry of the client
The client’s internal control structure.
The client’s trend of earnings.

A

The client’s internal control structure.

57
Q

What is management’s responsibility with respect to the conduct of an audit?

Preparing financial statements.
Maintaining internal control over financial reporting.
Providing the auditor with relevant information and access to personnel.
All of the above.

A

Preparing financial statements.

58
Q

Which of the following assertions address whether accounts have been included in the financial statements at appropriate amounts?

Completeness assertion.
Valuation or allocation assertion.
Rights and obligations assertion.
None of the above.

A

Valuation or allocation assertion.

59
Q

Which of the following is the primary assertion related to testing inventory on hand to see if it includes consignment goods?

Existence.
Completeness.
Valuation.
Rights and Obligations.

A

Rights and Obligations.

60
Q

Which assertion is most closely related to the determination of the adequacy of the allowance for doubtful accounts?

Existence.
Valuation.
Rights and Obligations.
Presentation and Disclosure.

A

Valuation.

61
Q

Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included?

Existence.
Valuation.
Completeness.
Rights and Obligations

A

Completeness.

62
Q

Which assertion addresses whether the financial statement items are properly classified in the financial statements?

Completeness.
Existence.
Valuation.
Presentation and Disclosure.

A

Presentation and Disclosure.

63
Q

Which of the following groups are committed to the convergence of the auditing standards?

IAASB.
PCAOB.
AICPA.
Both A and C.
All of the above.

A

Both A and C.

64
Q

Which of the following is a procedure that requests a direct written response to the auditor from a third party?

Inquiry.
Confirmation.
Inspection.
Observation.

A

Confirmation.

65
Q

Which of the following is a procedure which analyzes plausible relationships among financial and nonfinancial data?

Analytical procedures.
Scanning.
Reviewing.
Observation.

A

Analytical procedures.

66
Q

What does the quality of the evidence an auditor collects depend upon?

The nature of the procedures.
The extent of the procedures.
The timing of the procedures.
Both A and C.
All of the above

A

All of the above

67
Q

Which of the following terms describes procedures designed to detect material misstatements in accounts?

Substantive procedures.
Control tests.
Risk assessment procedures.
Business risk procedures.

A

Substantive procedures.

68
Q

When testing accounts receivable, which of the following audit procedures would an auditor likely use with respect to accounts with unusual sales terms?

Inquiries.
Confirmation.
Contract review.
Aging of receivables

A

Confirmation.

69
Q

Which of the following statements accurately describes the auditor’s reporting responsibility for a financial statement audit?

The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.
The auditor will identify in the auditor’s report those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period.
The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonably accurate, the auditor must so state in the auditor’s report.
The auditor will express an unqualified opinion on the financial statements or will conduct additional audit procedures until such an opinion can be expressed.

A

The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.

70
Q

Which of the following statements about the auditing standards issued by the AICPA is true?

The auditing standards issued by the AICPA are no longer recognized by the PCAOB.
The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of existence.
The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies.
The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

A

The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

71
Q

Which of the following is a reason why an auditor needs an understanding of internal controls?

To provide individual comments on internal control non-compliance.
To become comfortable that the client will pay its audit bills.
To assess materiality.
To assess the risk of possible misstatements in the financial statements

A

To assess the risk of possible misstatements in the financial statements

72
Q

Which of the following is not a reason why an auditor obtains an understanding of internal controls?

Understanding the entity’s internal control is a requirement of professional auditing standards.
The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control.
It is the primary basis for the audit report.
It assists the auditor in designing the nature, timing, and extent of further audit procedures.

A

It is the primary basis for the audit report.

73
Q

Which type of audit documentation is required by PCAOB standards?

Flowcharts.
Narratives.
Questionnaires.
A specific form of documentation is not required.

A

A specific form of documentation is not required.

74
Q

Which of the following is not a typical accounting cycle?

Revenue.
Inventory.
Cash.
Internal controls.

A

Internal controls.

75
Q

Which of the following statements about assertions is true?

All assertions are equally important for all accounts.
The importance of an assertion depends upon the account.
Assertions are not related to accounts.
None of the above.

A

The importance of an assertion depends upon the account.

76
Q

Which of the following assertions would the auditor usually consider most relevant for accounts payable?
Existence.
Valuation.
Disclosure.
Completeness

A

Completeness

77
Q

Which of the following is a use of audit documentation?

Assisting the engagement team in planning and performing the audit.
Assisting members of the engagement team responsible for supervising and reviewing the audit work.
Retaining a record of matters of continuing significance to future audits of the same organization.
All of the above

A

All of the above

78
Q

Which of the following factors influence the risk of material misstatement?

Business risks.
Management incentives.
IT risks.
All of the above

A

All of the above

79
Q

What does business risk include?

Economic factors.
Competitive factors.
Regulatory risk.
All of the above.

A

All of the above.

80
Q

At what level does the auditor assess the risk of material misstatement?

The financial statement level.
The company level.
The assertion level.
Both A and C.
All of the above.

A

Both A and C.

81
Q

What does the effectiveness of internal controls influence?

Inherent risk.
Control risk.
Risk of material misstatement.
Both B and C.

A

Both B and C.

82
Q

Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk?

Controls over significant, unusual transaction.
Controls over related-party transactions.
Controls related to marketable securities.
Controls related to significant management estimates.

A

Controls related to marketable securities.

83
Q

Which statement is true concerning materiality?

Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements.
Materiality guidelines are specifically prescribed by the PCAOB.
Materiality is not a useful concept in assessing internal control effectiveness.
Materiality is a concept applied to financial statement presentation but not to disclosures.

A

Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements.

84
Q

Which of the following statements is true regarding client acceptance or continuance decisions?

An audit firm cannot discontinue providing audit services to a client without just cause.
Potential audit fees are not a valid consideration in the acceptance or continuance decision.
The client acceptance/continuance decision is one of the most important factors in audit quality.
Audit firms are not permitted to conduct background checks on the management of a potential client.

A

The client acceptance/continuance decision is one of the most important factors in audit quality.

85
Q

Which of the following is not a component of business risk?

Regulatory risk and changes.
Economic or competitive changes.
Changes in stock market performance.
Changes in fair market values of assets or liabilities.

A

Changes in stock market performance.

86
Q

With a substantive audit strategy, what is an auditor likely to do?

Extensively tests internal controls.
Limit the testing of internal controls.
Not assess control risks.
Issue an adverse opinion on the financial statements.

A

Limit the testing of internal controls.

87
Q

Which of the following is not a question an auditor considers in deciding whether to pursue a lower control risk approach prior to substantive testing?

Is the design of the control effective?
Does the control promote operational efficiency?
Is it cost effective to test controls?
Are controls operating effectively?

A

Does the control promote operational efficiency?

88
Q

Which of the following would not affect an auditor’s judgment concerning internal controls?

The assertion being tested.
The design of the control.
The operation of the control.
The level of inherent risk.

A

The level of inherent risk.

89
Q

With a dual-purpose test, what is an auditor likely to do?

Perform a substantive procedure concurrently with a test of a control.
Perform a substantive procedure concurrently with a risk assessment test.
Perform a risk assessment test concurrently with a test of a control.
None of the above.

A

Perform a substantive procedure concurrently with a test of a control.

90
Q

Which statement is correct?

Assertions affected by highly objective estimates usually require direct tests of balances.
The materiality of the account totally dictates the substantive procedures to be performed.
The evidence the auditor obtains from risk assessment procedures does not influence the substantive procedures to be performed.
The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.

A

The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.

91
Q

Which of the following factors affect the substantive procedures performed in an audit?

The subjectivity of the accounting process.
Size of the account.
Effectiveness of the relevant controls.
All of the above affect the substantive procedures that are performed.

A

All of the above affect the substantive procedures that are performed.

92
Q

If the auditor’s assessment of the materiality of the account balance is high, what would be the respective effect on
(1) the extent of substantive testing and (2) the nature of procedures performed?

(1) Less (2) More rigorous
(1) Less (2) Less rigorous.
(1) More (2) Less rigorous
(1) More (2) More rigorous

A

(1) More (2) More rigorous

93
Q

An auditor gathers evidence on internal controls for which respective time periods for the purposes of expressing an opinion on (1) control effectiveness and for (2) testing controls in the financial statement period?

Control Effectiveness - Financial Statement
(1) As of year-end (2) As of year end
(1) As of year-end (2) Throughout the year
(1) Throughout the year (2) As of year end
(1) Throughout the year (2) Throughout the year

A

(1) As of year-end (2) Throughout the year

94
Q

Which of the following would not be a factor in whether a control weakness would be considered to be a material weakness as opposed to a significant deficiency?

The materiality of the related balance.
The volume of transactions affected.
The subjectivity of the account balance.
The nature of the client’s industry.

A

The nature of the client’s industry.

95
Q

Which of the following statements is correct concerning the auditor’s opinion on internal control effectiveness?

The report describes any material weaknesses and discusses actions taken by management to remediate the problems.
The report does not discuss whether the control weaknesses were first identified by management or the auditor.
The report does not recognize the integrated nature of the audit and the effect of the material weakness on the planning of the financial statement audit.
The report identifies management’s actions to remedy the prior year’s control weaknesses.

A

The report does not discuss whether the control weaknesses were first identified by management or the auditor.

BSA 33P (21 decks)

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