Exam 1

Question 1

Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information. T or F

Answer 1

False

Question 2

Decision makers demand reliable information that is provided by accountants and accounting information systems. T or F

Answer 2

True

Question 3

Conflicts of interest often occur between absentee owners (principals) and managers (agents). T or F

Answer 3

True

Question 4

Auditing is a type of attest service. T or F

Answer 4

True.

Question 5

Testing all transactions that occurred during the period is cost prohibitive in the absence of computer data analytic approaches. T or F

Answer 5

True

Question 6

Why do auditors often use a sampling approach to evidence gathering?

–Auditors are experts and do not need to look at much to know whether the financial statements are correct or not.
–Auditors must balance the cost of the audit with the need for precision and for some types of evidence, computer data analytic approaches cant be used.
–Auditors must limit their exposure to their auditee to maintain independence.
–The auditor’s relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.

Answer 6

Auditors must balance the cost of the audit with the need for precision and for some types of evidence, computer data analytic approaches can’t be used.

Question 7

Which of the following statements best describes a relationship between sample size and other elements of auditing?

–If materiality increases, so will sample size.
–If the desired level of assurance increases, sample sizes can be smaller.
–If materiality decreases, sample size will need to increase.
–There is no relationship between sample size and materiality or the desired level of assurance.

Answer 7

If materiality decreases, sample size will need to increase

Question 8

The basic definition of auditing essentially indicates that, overall, auditing is a process to:

–Detect Fraud
–Examine individual transactions so that the auditor may certify as to their validity.
–Objectively obtain and evaluate evidence regarding assertions made by another party.
–Assure the consistent application of correct accounting procedures.

Answer 8

Objectively obtain and evaluate evidence regarding assertions made by another party.

Question 9

Evidence is reliable if it:

–Signals the true state of a management assertion
–Applies to the period being audited
–Relates to the audit assertion being tested
–Is sufficient to justify a conclusion.

Answer 9

Signals the true state of a management assertion

Question 10

Which of the following best describes the concept of audit risk?

–The risk of the auditor being sued because of association with an auditee.
–The risk that the auditor will provide an inappropriate opinion on financial statements that are, in fact, materially misstated.
–The overall risk that a material misstatement exists in the financial statements.
–The risk that auditors use audit procedures that are inappropriate

Answer 10

The risk that the auditor will provide an inappropriate opinion on financial statements that are, in fact, materially misstated.

Question 11

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entities industry at that point, should:

–Engage financial experts familiar with the nature of the business entity
–Obtain a knowledge of matters that relate to the nature of the entity’s business and the industry in which it operates.
–Refer a substantial portion of the audit to another CPA, who will act as the principal auditor.
–First inform management that an unqualified opinion cannot be issued.

Answer 11

Obtain a knowledge of matters that relate to the nature of the entity’s business and the industry in which it operates.

Question 12

For publicly-held companies, which of the following is integrated with the audit of financial statements?

budgetary information audit

the audit of internal controls

audit of management forecasts

audit of interim financial statements

Answer 12

the audit of internal controls

Question 13

During the first phase of an audit, a CPA most likely would:

identify specific internal control activities that are likely to prevent fraud.

evaluate the reasonableness of the company’s accounting estimates.

evaluate the integrity of management.

inquire of the company’s attorney as to whether any unrecorded claims are probable or asserted.

Answer 13

evaluate the integrity of management.

Question 14

The audit committee generally includes senior executives of the organization. T or F

Answer 14

False

Question 15

A financial statement audit is generally organized based on the five basic business processes or cycles. T or F

Answer 15

True

Question 16

The Public Company Accounting Oversight Board’s role is to:

conduct the final review of auditors’ work before the auditor’s opinion is issued.

oversee the auditors of public companies in order to protect the interests of investors.

conduct audits of governmental entities.

sanction auditors who fail to follow GAAS.

Answer 16

oversee the auditors of public companies in order to protect the interests of investors.

Question 17

What organization is responsible for setting auditing standards for audits of publicly traded companies in the U.S.?

AICPA

FASB

GASB

PCAOB

Answer 17

PCAOB

Question 18

The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS states that auditors are responsible for having appropriate competence and:

independence with respect to the financial statements and supplementary disclosures.

exercising professional care as judged by peer reviewers.

capabilities to perform the audit.

objectivity as an auditor as verified by proper supervision.

Answer 18

capabilities to perform the audit.

Question 19

Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS?

the purpose and value of a financial statement audit and lays out the responsibilities of management for an effective audit to be possible

the fundamental responsibilities and characteristics of an auditor

auditors’ responsibilities in performing an effective audit

auditors provide a written report that expresses their opinion about the financial statements

Answer 19

auditors’ responsibilities in performing an effective audit

Question 20

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:

objective cynicism.

independent differentialism.

professional skepticism.

impartial conservatism.

Answer 20

professional skepticism.

Question 21

The first phase of audit planning is risk assessment. T or F

Answer 21

False

Question 22

When the prospective client has previously been audited, auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement. T or F

Answer 22

True

Question 23

Before accepting an engagement to audit a new client, a CPA is required to obtain:

an understanding of the prospective client’s industry and business.

the prospective client’s signature on the engagement letter.

a preliminary understanding of the prospective client’s control environment.

the prospective client’s consent to make inquiries of the predecessor auditor.

Answer 23

the prospective client’s consent to make inquiries of the predecessor auditor.

Question 24

A written understanding between the auditor and the client concerning the auditor’s responsibility for the discovery of illegal acts is usually set forth in a(n):

client representation letter.

letter of audit inquiry.

management letter.

engagement letter.

Answer 24

engagement letter.

Question 25

Engagement letters include all of the following except: a list of additional services, if any, that will be provided. a list of adjusting journal entries. information about the audit fee. arrangements involving the use of specialists.

Answer 25

a list of adjusting journal entries.

Question 26

To provide for the greatest degree of independence in performing internal audit activities, the internal audit function most likely should report to the: vice-president - finance. corporate controller. audit committee of the board of directors. corporate stockholders.

Answer 26

audit committee of the board of directors.

Question 27

An independent auditor might consider the procedures performed by the internal audit function because: they are employees whose work must be reviewed during substantive testing. they are employees whose work might be relied upon. their work impacts the cost/benefit tradeoff in evaluating inherent limitations. their degree of independence may be inferred by the nature of their work.

Answer 27

they are employees whose work might be relied upon.

Question 28

As generally conceived, the audit committee of a publicly held company should be made up of: representatives of the major equity interests (preferred stock, common stock). the audit partner, the chief financial officer, the legal counsel, and at least one outsider. representatives from the client's management, investors, suppliers, and customers. members of the board of directors who are not officers or employees.

Answer 28

members of the board of directors who are not officers or employees.

Question 29

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the: extent of tests of controls. level of detection risk. extent of substantive tests. level of inherent risk.

Answer 29

extent of substantive tests.

Question 30

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: decrease amount of substantive testing. decrease detection risk. increase detection risk. increase materiality levels.

Answer 30

decrease detection risk.

Question 31

The risk of material misstatement includes which of the following? detection risk audit risk inherent risk nonsampling risk

Answer 31

inherent risk

Question 32

An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except: fraud risk increases. the risk of misappropriation of assets increases. risk of material misstatement increases. detection risk increases.

Answer 32

detection risk increases.

Question 33

The auditor gathers audit evidence to test management's assertions. T or F

Answer 33

True

Question 34

The classification assertion refers to transactions and events being recorded in the correct accounting period. True or False

Answer 34

False

Question 35

The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded. T or F

Answer 35

True

Question 36

The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period. T or F

Answer 36

True

Question 37

The relevance of audit evidence or specific audit procedures depends on the assertion being tested. T or F

Answer 37

True

Question 38

Audit documentation is the principal record of the audit and provides the principal support for the representations in the auditor’s report. Because of this, audit documentation should do all of the following except for: demonstrate how the audit complied with auditing and related professional practice standards. support the audit firm's human resource department in employee retention decisions. support the basis for the auditor's conclusions concerning each material financial statement assertion. demonstrate that the underlying accounting records agreed or reconciled with the financial statements.

Answer 38

support the audit firm's human resource department in employee retention decisions.

Question 39

Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? account analyses supporting schedules control accounts lead schedules

Answer 39

lead schedules

Question 40

The permanent (continuing) file of an auditor's working papers most likely would include copies of the bank statements. organizational chart. lead schedules. audit plan.

Answer 40

organizational chart.

Question 41

You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? existence completeness rights and obligations accuracy, valuation, and allocation

Answer 41

rights and obligations

Question 42

An example of an audit procedure that results in evidence with a medium level of reliability is: analytical procedures. recalculation. observation. All of these choices are correct.

Answer 42

analytical procedures.