I75 section 1 Exam Flashcards
Wrong Answers
Which of the following financial statement account balances are based on estimates made by management?
A. Allowance for doubtful accounts
B. Pension expense
C. Depreciation expense
D. All of these
D . All of these
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.
If a generally accepted auditing standard is considered __________ it must be complied with in all cases.
A. unconditional Incorrect
B. material
C. presumptively mandatory
D. All of the above
A . unconditional
Explanation
If a generally accepted auditing standard is considered “unconditional” it must be complied with in all cases.
For example, it is unconditional that an auditor be independent and also unconditional that an auditor plan
and perform an audit with professional skepticism.
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. review engagement
C. both of these
D. neither of these
D . neither of these
Explanation
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.
In an audit, which of the following would be an example of the auditor’s use of professional skepticism?
I. Using third party confirmations to provide support for management’s representations.
II. Circumstances that suggest the need for audit procedures in addition to those required by GAAS.
A. Both I and II
B. I only
C. II only
D. Neither I nor II
A . Both I and II
Explanation
I is correct, using third party confirmations to provide support for management’s representations is an
example of using professional skepticism.
II. is correct, circumstances that suggest the need for audit procedures in addition to those required by GAAS
would be an example of professional skepticism such as hiring a specialist to corroborate the client’s
inventory of precious gems.
Which of the following is correct regarding the difference between auditing procedures and auditing
standards?
I. Audit procedures measure the quality of the auditors performance.
II. Audit standards relate to acts performed by the auditor in gathering evidence.
A. Neither I nor II
B. I only
C. II only
D. Both I and II
A . Neither I nor II
Explanation
*I is wrong, audit procedures relate to acts performed by the auditor in gathering evidence to support the audit opinion. An act would include sending confirmations, observing inventory.
*II is wrong, audit standards measure the quality of the auditors performance.
Which of the following is correct regarding the decision to accept a new engagement?
I. The CPA does not need to understand the internal auditor’s techniques in order to accept a new auditengagement.
II. Management’s disregard of its responsibility to maintain an adequate internal control environment would
likely NOT impact the decision to accept a new audit engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
A . I only
I. is correct, The CPA does not need to understand the internal auditor’s techniques in order to accept a new
audit engagement.
II. is wrong, Management’s disregard of its responsibility to maintain an adequate internal control
environment would likely impact the decision to accept a new audit engagement because an auditor does
not want to knowingly associate with a client that lacks an adequate internal control environment.
The term “reasonable assurance” describes the level of assurance that auditors are required to obtain by
performing audit procedures and evaluating the resulting evidence. Reasonable assurance includes an
understanding that there is a __________ likelihood that material misstatements will not be prevented or
detected on a timely basis.
A. remote
B. high Incorrect
C. absolute
D. less than substantial
A . remote
The term reasonable assurance includes an understanding that there is a remote likelihood that material misstatements will not be prevented or detected on a timely basis. While reasonable assurance provides a high level of assurance, it is not possible for an auditor to provide absolute assurance.
The Auditor is required to communicate certain matters to “those charged with governance”. Which of the
following parties are considered “charged with governance”.
I. Board of Directors
II. Audit Committee
III. Officers who are also stockholders
A. I and II
B. I II and III
C. II and III
D. I and III
A . I and II
The term “those charged with governance” refer to those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity. This term is broadly interpreted to encompass the terms Board of Directors and Audit Committee. Officers/ Management are NOT included in this term even if they are shareholders (which they probably are).
