I75 Chapter 1: Intro to Audit Flashcards
Which of the following refers to why a financial statement
audit is an essential part of the reporting process for a
public entity?
I. Independent Audit function is designed to add
creditability to financial statements.
II. Financial statements are produced primarily for outside
decision-makers by management who are insiders in the
company but once the audit is completed, the auditor is
responsible for the financial statements.
A. II only
B. I only
C. Neither I nor II
D. Both I and II
ANSWER: B
Explanation:
I is correct The independent audit function is designed to add
creditability to financial statements.
II. is wrong, While financial statements are produced primarily for outside decision-makers, they are produced by insiders within an organization, management, who could be biased and even possibly unethical but they remain responsible for the financial statements, before, during and even after the audit.
Staff assistants involved in an audit engagement often have
little experience and need supervision. Proper supervision
of assistants is required for which of the following reasons:
I. To ensure that the work performed by assistants is
adequate to accomplish the objectives of the engagement.
II. To ensure that the work performed by assistants is
consistent with the conclusions presented in the report.
III. To ensure that the audit firm is independent of the
client.
A. I II and III
B. I and III
C. I and II
D. II only
ANSWER: C
Explanation:
I. is correct Proper supervision of assistants is required to ensure that the work performed by assistants is adequate to accomplish the objectives of the engagement.
II. is correct, Proper supervision of assistants is required to ensure that the work performed by assistants is consistent with the conclusions presented in the report.
III is wrong, Supervision of assistants has nothing to do with the need of the audit firm to be independent. Firm independence comes from the firm not owning
Which of the following financial statement account
balances are based on estimates made by management?
A. Pension expense
B. Depreciation expense
C. All of these
D. Allowance for doubtful accounts
ANSWER: C
Explanation:
GAAP requires management to make many estimates in the account balances.
Depreciation involves an estimate of useful life, allowance for doubtful accounts involves estimates of uncollectible accounts, pension expense is based on multiple estimates, so many that an actuary is needed to determine much of what becomes the final pension expense figure on the income statement. Other estimates include warranty expense and percentage of completion on long term contracts.
Does an auditor have to get a clients permission to speak or communicate with a predecessor auditor?
YES!!
Even if the communication is oral.
Which of the following is NOT an example of the
application of professional skepticism.
I. The auditor’s belief that management is neither honest
nor dishonest
II. Being aware of evidence that contradicts other evidence
Answer
A. II only
B. Both I and II
C. I only
D. Neither I nor II
ANSWER D
Explanation:
I. is wrong, the auditor’s belief that management is neither honest nor dishonest is an example of an auditor demonstrating professional
skepticism.
II is wrong, Being aware of evidence that contradicts other evidence is an example of an auditor demonstrating professional skepticism. For example, an auditor who observes client inventory sees that the inventory exists but should still ask to see the invoices to make sure
that the inventory belongs to the client. Should the invoice contain a name other than the client, this would be an example of evidence that contradicts other evidence, an indication of fraud.
Regarding auditor independence, materiality is a factor
with respect to what type of financial interest in an audit
client?
A. Direct financial interest
B. Indirect financial interest
C. Both
D. Neither
ANSWER: B
Regarding auditor independence, materiality is a factor with respect to indirect financial interest as these are judged on a case by case basis and are not automatically a violation of auditor independence. A direct financial interest is a violation and materiality is not even a factor.
A CPA need NOT obtain a general level of knowledge about
accounting principles and practices of the client’s industry
for a
A. compilation engagement
B. neither of these
C. review engagement
D. both of these
ANSWER: B
A CPA needs to obtain a general level of knowledge about accounting principles and practices of the client’s industry for both a compilation
and review
If an auditing standard is considered the
procedure or standard should be complied with unless the
auditor has documented a good reason for not complying.
A. “material”
B. “presumptively mandatory”,
C. “conditional”
D. “unconditional”
ANSWER B
Explanation:
If an auditing standard is considered “presumptively mandatory”, the procedure or standard should be complied with as well unless the auditor has documented a good reason for not complying.
Before accepting a new audit engagement, which of the
following questions would a successor auditor likely ask a
predecessor?
I. “What is the predecessor’s understanding of the reason
why the company decided to change auditors?”
II. “Were there any communications between the auditor
and those charged with governance, regarding matters
relating to internal control or fraud”.
A. I only
B. Neither I nor II
C. II only
D. Both I and II
ANSWER: D
Explanation:
I is correct, Before accepting a new audit engagement, a successor auditor would likely question the predecessor as to the predecessor’s understanding of the reason why the company decided to change auditors because the predecessor’s answer could be beneficial to the
successor auditor in determining if their were any unresolved issues from last year’s audit.
An examination, review, or agreed upon procedures
engagement related to subject matter or an assertion that
is the responsibility of another party is known as
A. An audit
B. An attestation
C. A preparation
D. A compilation
ANSWER: B
Explanation:
An examination, review, or agreed upon procedures engagement related to subject matter or an assertion that is the responsibility of another party is known as an attestation and the engagement is performed under attestation standards also known as SSAE, Statements on Standards for Attestation engagements.
Which of the following best describes attestation standards
and quality control standards?
A. Quality control standards apply to individual attestation engagements while attestation standards apply to the firm’s attestation practice as a whole.
B. Attestation standards apply to individual attestation engagements while quality control standards apply to some attestation engagements but not others.
C. Attestation standards apply to individual attestation engagements while quality control standards apply to the firm’s attestation practice as a whole.
D. Attestation standards and quality control standards both apply equally to individual attestation engagements and to the firm’s attestation practice as a whole
ANSWER: C
Explanation:
Attestation standards apply to individual attestation engagements while quality control standards apply to the firm’s attestation practice as a whole.
According to SSAE, presumptively mandatory requirements
A. must be complied with in all relevant circumstances and are indicated by the words, “the CPA should”
B. allow for rare exceptions and are indicated by the words, “the CPA should”
C. must be complied with in all relevant circumstances and are indicated by the words, “the CPA must”
D. allow for rare exceptions and are indicated by the words “the CPA must”
ANSWER: B
Explanation:
According to SSAE, presumptively mandatory requirements allow for rare exceptions and are indicated by the words, “the CPA should”. For any such exceptions, the practitioner should perform alternative procedures to meet the requirements intent.
Which of the following would NOT be included in an
engagement letter for an agreed upon procedures
engagement?
A. Identification of any assistance to be provided to the CPA
B. A statement that the engagement will be conducted according to statements on standards for accounting and review services, SSARS.
C. Identification of the restricted use of the report
D. A reference to the procedures to be performed
ANSWER: B
Explanation:
A statement that the engagement will be conducted according to statements on standards for accounting and review services, SSARS would NOT be included in an engagement letter for an agreed upon procedures engagement because SSAE standards would apply to an agreed upon procedures engagement, not SSARS. The other choices are wrong because they would be expected in an agreed upon procedures engagement letter, A reference to the procedures to be
performed,Identification of any assistance to be provided to the CPA and identification of the restricted use of the report
