ch1-3

Chapter 01Auditing and Assurance Services

Chapter 01 Auditing and Assurance Services Answer Key

Multiple Choice Questions

1. The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions? A. ExistenceB. Rights and obligationsC. CompletenessD. Valuation

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: Easy

2. To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process? A. Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes.B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes.C. Recognize the financial assertions made in management's financial statements and footnotes.D. Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: Hard

3. Which of the following is an underlying condition that in part creates the demand by users for reliable information? A. Economic transactions that are numerous and complex.B. Decisions are time-sensitive.C. Users separated from accounting records by distance and time.D. Financial decisions that are important to investors and users.E. All of the above.

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AACSB: AnalyticAICPA BB: IndustryAICPA FN: ResearchBloom's: KnowledgeDifficulty: Medium

4. Which of the following is not included in The American Accounting Association (AAA) definition of auditing? A. Potential conflict of interest.B. Systematic process.C. Assertions about economic actions.D. Established criteria.

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5. What is the term used to identify the risk that the client's financial statements may be materially false and misleading? A. Business risk.B. Information risk.C. Client risk.D. Risk assessment.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: Easy

6. Which of the following is not a recommendation usually made following the completion of an operational audit? A. Economic and efficient use of resources.B. Effective achievement of business objectives.C. Attesting to the fairness of the financial statements.D. Compliance with company policies.

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AACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBloom's: KnowledgeDifficulty: Easy

7. In order to be considered as external auditors with respect to government agencies, GAO auditors must be A. Organizationally independent.B. Empowered as the accounting and auditing agency by the U.S. Congress.C. Funded by the federal government.D. Guided by standards similar to GAAS.

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AACSB: EthicsAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: Medium

8. Which of the following is the essential purpose of the audit function? A. Detection of fraud.B. Examination of individual transactions to certify as to their validity.C. Determination of whether the client's financial statement assertions are fairly stated.D. Assurance of the consistent application of correct accounting procedures.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBloom's: KnowledgeDifficulty: Medium

9. The audit objective that all the transactions and accounts presented in the financial statements represent real assets, liabilities, revenues, and expenses is related most closely to which of the PCAOB assertions? A. Existence or occurrenceB. Rights and obligationsC. CompletenessD. Presentation and disclosure

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10. The audit objective that all transactions are recorded in the proper period is related most closely to which of the Audit Standards Board (ASB) transaction assertions? A. OccurrenceB. CompletenessC. CutoffD. Accuracy

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11. The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions? A. OccurrenceB. CompletenessC. AccuracyD. Classification

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12. The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions? A. ExistenceB. Rights and obligationsC. CompletenessD. Valuation

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13. The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of the ASB balance assertions? A. ExistenceB. Rights and obligationsC. CompletenessD. Valuation

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14. The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions? A. OccurrenceB. Rights and obligationsC. ComprehensibilityD. Understandability

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15. The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. The auditor reviewed all work orders that were capitalized as part of the equipment costs. Which of the following is the ASB transaction assertion most closely related to the auditor's testing? A. OccurrenceB. CompletenessC. AccuracyD. Classification

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: ComprehensionDifficulty: Hard

16. The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing? A. ExistenceB. CompletenessC. Rights and obligationsD. Valuation

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17. Which of the following best describes the primary role and responsibility of independent external auditor? A. Produce a company's annual financial statements and notes.B. Express an opinion on the fairness of a company's annual financial statements and footnotes.C. Provide business consulting advice to audit clients.D. Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.

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18. Which of the following best describes the main reason independent auditors report on management's financial statements? A. Management fraud may exist, and it is likely to be detected by independent auditors.B. The management that prepares the statements and the persons who use the statements may have conflicting interests.C. Misstated account balances may be corrected as the result of the independent audit work.D. The management that prepares the statements may have a poorly designed system of internal control.

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AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingBloom's: ComprehensionDifficulty: Medium

19. The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of A. Quality control.B. Generally accepted auditing standards, which include the concept of materiality.C. The auditor's evaluation of the audited company's internal control.D. The applicable financial reporting framework (i.e., GAAP in the United States).

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: Medium

20. Assurance services involve all of the following, except A. Relevance as well as the reliability of information.B. Nonfinancial information as well as traditional financial statements.C. Providing absolute rather than reasonable assurance.D. Electronic databases as well as printed reports.

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21. 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 A. Objective judgment.B. Independent integrity.C. Professional skepticism.D. Impartial conservatism.

AICPA

AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: Medium

22. Which of the following best describes assurance services? A. Independent professional services that report on the client's financial statements.B. Independent professional services that improve the quality of information for decision makers.C. Independent professional services that report on specific written management assertions.D. Independent professional services that improve the operations of the client.

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23. Which of the following is not a PCAOB assertion about inventory related to presentation and disclosure? A. Inventory is properly classified as a current asset on the balance sheet.B. Inventory is properly stated at its cost on the balance sheet.C. Major inventory categories and their valuation bases are adequately disclosed in notes.D. All of the above are PCAOB presentation and disclosure assertions about inventory.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: ComprehensionDifficulty: Medium

24. Which of the following is not an ASB assertion about inventory related to presentation and disclosure? A. Inventory is properly classified as a current asset on the balance sheet.B. Inventory is properly stated at cost on the balance sheet.C. Major inventory categories and their valuation bases are adequately disclosed in notes.D. All of the above are ASB presentation and disclosure assertions about inventory.

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25. In performing an attestation engagement, a CPA typically A. Supplies litigation support services.B. Assesses control risk at a low level.C. Expresses a conclusion on an assertion about some type of subject matter.D. Provides management consulting advice.

AICPA


26. An attestation engagement is one in which a CPA is engaged to A. Issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party.B. Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.C. Testify as an expert witness in accounting, auditing or tax matters, given certain stipulated facts.D. Assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.

AICPA


27. The underlying conditions that create demand by users for reliable information include all of the following, except: A. Transactions are numerous and complex.B. Users lack professional skepticism.C. Users are separated from accounting records by distance and time.D. Financial decisions are important to investors and users.E. Decisions are time-sensitive.

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28. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of A. Presentation.B. Completeness.C. Rights.D. Existence.

AICPA


29. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the PCAOB assertion of A. Completeness.B. Existence.C. Presentation.D. Valuation.E. Rights and obligations.

AICPA


30. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the ASB balance assertion of A. Completeness.B. Existence.C. Presentation.D. Valuation.E. Rights and obligations.

AICPA


31. The probability that the information circulated by a company will be false or misleading is referred to as A. Business risk.B. Information risk.C. Assurance risk.D. Audit risk.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: Medium

32. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating: A. They have read the financial statements.B. They are not aware of any false or misleading statements (or any key omitted disclosures).C. They believe that the financial statements present an accurate picture of the company's financial condition.D. All of the above.

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33. The process of a CPA obtaining a certificate and license in a state other than the state in which the CPA's certificate was originally obtained is referred to as A. Substantial equivalency.B. Quid pro quo.C. Relicensing.D. Re-examination.

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34. The risk an entity will fail to meet its objectives is referred to as A. Business risk.B. Information risk.C. Assurance risk.D. Audit risk.

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35. The four basic requirements for becoming a CPA in most states are A. Education, the CPA Examination, experience, and substantial equivalency.B. The CPA Examination, experience, continuing professional education, and a state certificate.C. Continuing professional education, the CPA Examination, experience, and an AICPA certificate.D. Education, the CPA Examination, experience, and a state certificate.

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36. The study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policies is referred to as A. Environmental auditing.B. Financial auditing.C. Compliance auditing.D. Operational auditing.

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37. The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S. Comptroller General is known as A. The Federal Bureau of Investigation (FBI).B. The U.S. General Accounting Office (GAO).C. The Internal Revenue Service (IRS).D. The United States Legislative Auditors (USLA).

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38. Which of the following would be considered an assurance engagement? Refer To: 01-38 A. Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past.B. Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles.C. Giving an opinion on the fair presentation of a newspaper's circulation data.D. Giving assurance about the average drive length achieved by golfers with a client's golf balls.E. All of the above.

Original


39. It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that Refer To: 01-38 A. A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.B. In audits of financial statements, the auditor acts exclusively in the capacity of an auditor.C. The professional status of the independent auditor imposes commensurate professional obligations.D. Financial statements and financial data are verifiable.

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40. In an attestation engagement, a CPA practitioner is engaged to Refer To: 01-38 A. Compile a company's financial forecast based on management's assumptions without expressing any form of assurance.B. Prepare a written report containing a conclusion about the reliability of a management assertion.C. Prepare a tax return using information the CPA has not audited or reviewed.D. Give expert testimony in court on particular facts in a corporate income tax controversy.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBloom's: KnowledgeDifficulty: Medium

41. Determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of Refer To: 01-38 A. Environmental auditing.B. Financial auditing.C. Compliance auditing.D. Operational auditing.

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42. The primary difference between operational auditing and financial auditing is that in operational auditing Refer To: 01-38 A. The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards.B. The operational auditor is seeking to help management use resources in the most effective manner possible.C. The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them.D. The operational auditor can use analytical skills and tools that are not necessary in financial auditing.

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43. According to the AICPA, the purpose of an audit of financial statements is to Refer To: 01-38 A. Enhance the degree of confidence that intended users can place in the financial statements.B. Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board.C. Express an opinion on the fairness with which they present financial position, result of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission.D. Obtain systematic and objective evidence about financial assertions and report the results to interested users.

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44. Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because Refer To: 01-38 A. Financial statements are too complex to analyze themselves.B. They are too far away from company headquarters to perform accounting and auditing themselves.C. The consequences of making a bad loan are very undesirable.D. 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.

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AACSB: AnalyticAICPA BB: IndustryAICPA FN: ResearchBloom's: ComprehensionDifficulty: Medium

45. The Sarbanes-Oxley Act of 2002 prohibits professional service firms from providing which of the following services to an audit client? Refer To: 01-38 A. Bookkeeping services.B. Internal audit services.C. Valuation services.D. All of the above.

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46. Independent auditors of financial statements perform audits that reduce Refer To: 01-38 A. Business risks faced by investors.B. Information risk faced by investors.C. Complexity of financial statements.D. Timeliness of financial statements.

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47. The primary objective of compliance auditing is to Refer To: 01-38 A. Give an opinion on financial statements.B. Develop a basis for a report on internal control.C. Perform a study of effective and efficient use of resources.D. Determine whether an audit client's personnel are following laws, rules, regulations, and policies.

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48. What requirements are usually necessary to become licensed as a CPA? Refer To: 01-38 A. Successful completion of the Uniform CPA Examination.B. Experience in the accounting field.C. Education.D. All of the above.

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49. The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the Refer To: 01-38 A. Governmental Internal Audit Agency (GIAA).B. Central Internal Auditors (CIA).C. Securities and Exchange Commission (SEC).D. Government Accountability Office (GAO).

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50. Performance audits usually include (two answers) Refer To: 01-38 A. Financial audits.B. Economy and efficiency audits.C. Compliance audits.D. Program audits.

Original


51. The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's financial statement assertion about Refer To: 01-38 A. Completeness.B. Existence.C. Valuation and allocation.D. Rights and obligations.E. Occurrence.

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52. Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard Refer To: 01-38 A. Is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses.B. Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion.C. Should be disregarded because it is not in writing.D. Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

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53. The risk to investors that a company's financial statements may be materially misleading is called Refer To: 01-38 A. Client acceptance risk.B. Information risk.C. Moral hazard.D. Business risk.

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54. 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? Refer To: 01-38 A. Cutoff.B. Existence.C. Valuation and allocation.D. Rights and obligations.E. Occurrence.

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55. 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? Refer To: 01-38 A. Completeness.B. Existence.C. Valuation and allocation.D. Rights and obligations.E. Occurrence.

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56. When an auditor reviews additions to the equipment (fixed asset) account to make sure that repair and maintenance expenses are not understated, she wants to obtain evidence as to management's assertion regarding Refer To: 01-38 A. Completeness.B. Existence.C. Valuation and allocation.D. Rights and obligations.E. Occurrence.

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57. The Sarbanes-Oxley Act of 2002 generally prohibits professional service firms from Refer To: 01-38 A. Acting in a managerial decision-making role for an audit client.B. Auditing the firm's own work on an audit client.C. Providing tax consulting to an audit client without audit committee approval.D. All of the above.

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58. Substantial equivalency refers to Refer To: 01-38 A. An auditor's tendency not to believe management's assertions without sufficient corroboration.B. Providing consulting work for another firm's audit client in exchange for the other firm's providing consulting services to one of your clients.C. The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization.D. Permitting a CPA to practice in another state without having to obtain a license in that state.

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59. Which of the following best describes the relationship between auditing and attestation engagements? Refer To: 01-38 A. Auditing is a subset of attestation engagements that focuses on the certification of financial statements.B. Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement.C. Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support.D. Attestation is a subset of auditing that improves the quality of information, or its context, for decision makers.

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60. Which of the following best describes the focus of the following engagements?

Refer To: 01-38 A. Option AB. Option BC. Option CD. Option D

Original


61. Which of the following is a reason to obtain professional certification? Refer To: 01-38 A. Certification provides credibility that an individual is technically competent.B. Certification often is a necessary condition for advancement and promotion within a professional services firm.C. Obtaining certification is often monetarily rewarded by an individual's employer.D. All of the above.

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Question also found in Study Guide

62. Which of the following is not an underlying condition that creates demand by users for reliable financial information? A. RemotenessB. VaguenessC. ConsequencesD. Complexity

Original


63. According to the American Accounting Association (AAA), the definition of auditing includes the following statement A. an independent appraisal function established within an organization to examine and evaluate its activities.B. a process of reducing to a socially acceptable level the information risk to users of financial statements.C. an expression of opinion on the fairness of financial statements.D. a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events.

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64. Which of the following is not a major element of assurance services? A. IndependenceB. Improving the quality of informationC. Improving profitability of the clientD. Improving the context of information

Original


65. The goal of operational auditing is to A. Help managers discharge their management responsibilities and improve profitability.B. Evaluate compliance with specific laws and regulations.C. Reduce to a socially acceptable level the information risk to users of financial statements.D. Express an opinion on the fairness of financial statements.

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66. The PCAOB assertions made by management in financial statements do not include A. Existence.B. Compliance.C. Completeness.D. Presentation.

Original


67. Which of the following is not a role of the AICPA? A. Refine the body of professional knowledge, regulate membership admissions, and police conduct of members.B. Prepare and grade the uniform CPA examination.C. License the practices of CPAs in the various states.D. Issue public statements on practice standards.

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68. The ASB transaction objective that requires the auditor to establish evidence that all transactions and accounts that should be presented in the financial statements are included is? A. Completeness.B. Existence or occurrence.C. Rights and obligations.D. Valuation or allocation.

Original


69. Which of the following is an example of a regulatory auditor? A. Internal auditorsB. Big 4 auditorsC. U.S. Internal Revenue Service auditorsD. Operational auditors

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70. The definition of performance audits does not include A. economy audits.B. efficiency audits.C. financial audits.D. program audits.

Original


71. CPA certificates and licenses to practice are issued by the A. AICPA.B. States or territories.C. AICPA Examinations Division.D. GAO.

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Matching Questions


72. Which of the PCAOB assertions (A - E) are best verified by the following audit procedures (1-4)?

1. Valuation or allocation

Confirming inventory held on consignment by the client with independent third party. 4

2. Valuation or allocation

Consulting the Wall Street Journal for year-end prices of securities held by the client. 1

3. Existence or occurrence

Physically examine all major property and equipment additions. 3

4. Rights and obligations

Review the aged trial balance for significant past due accounts. 1


73. ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. The auditors performed the audit procedures listed 1 - 3. For each audit procedure select the ASB transaction assertion that is most likely being tested.

1. Completeness The auditor reviewed the shipping documents to check the

date that product was shipped to XYZ Company. 2

2. Cutoff

The auditor reviewed the shipping documents to ensure that all product included in the sales revenue to XYZ had

been shipped. 1

3. Accuracy The auditor reviewed the invoice sent to XYZ Company to

ensure that XYZ had been properly billed. 3


74. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit procedures listed 1 - 5. For each audit procedure select the ASB balance assertion that is most likely being tested.

1. Valuation The auditors walked through the warehouse looking for

obsolete inventory. 1

2. Rights and obligations

The auditors compared invoices received from suppliers with the cost of inventory listed in the inventory

accounts. 5

3. Valuation The auditors reviewed purchase orders to determine if

any inventory was on consignment. 2

4. Completeness

The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs had been included

in inventory costs. 1

5. Accuracy

The auditors selected items from the inventory and reviewed inventory records to ensure these items were

included in those records. 4


True / False Questions

Questions also found in Study Guide

75. Financial decision makers demand reliable information that is provided by accountants. TRUE

76. Financial decision makers obtain their accounting information from lenders of funds. FALSE

77. Four conditions that create demand for reliable information are complexity, remoteness, timeliness, and consequences. TRUE

78. The lending of credibility to financial information is known as certification. FALSE

79. Independent auditors are employees of the client. FALSE

80. Assurance service is the systematic process of objectively obtaining and evaluating evidence. FALSE

81. Evidence consists of assertions about economic actions and events. FALSE

82. The purpose of obtaining and evaluating evidence is to ascertain the degree of correspondence between the assertions and established criteria. TRUE

83. The AICPA Statement on Auditing Standards defines auditing more broadly than the AAA definition of auditing. FALSE

84. The PCAOB audit objective related to the completeness assertion is to establish evidence that assets, liabilities, and equities actually exist. FALSE

85. The ASB balance audit objective related to valuation or accuracy is to determine whether proper values have been assigned to assets, liabilities, equities, revenues, and expenses. TRUE

86. The objective of internal auditing is to assist members of an organization to effectively perform their obligations. TRUE

87. Internal auditors perform only operational audits. FALSE

88. Government auditors perform both financial and performance audits. TRUE

89. Expanded scope governmental auditing includes economy and efficiency and program results audits. TRUE

90. The AICPA licenses CPAs to practice in the United States. FALSE

91. Professional skepticism is an auditor's tendency not to believe anyone. FALSE

92. Assurance services are independent professional services that improve the quality of information or its context for decision makers. TRUE

93. The concept "professional skepticism" requires that auditors assume management is dishonest and should not be trusted. FALSE

94. For independent auditors of financial statements in the United States, established criteria largely consist of the generally accepted accounting principles (GAAP). TRUE

Fill in the Blank Questions


95. The risk that the information disseminated by a company will be materially false or misleading is called _____________________________ _____________________________. information risk

96. The audit process involves obtaining and evaluating _____________________________. evidence

97. The purpose of obtaining and evaluating evidence is to ascertain the degree of correspondence between the _____________________________ and _____________________________. assertions, established criteria

98. The objective of the ordinary examination of financial statements by the independent auditor is the expression of a(n) _____________________________ on the _____________________________ of financial statements. opinion, fairness

99. _____________________________ refers to recognizing assets and liabilities as of proper date and accounting for revenue, expense, and other transactions in the proper period. Cutoff

100. The ASB balance objective related to _____________________________ is to establish with evidence that all transactions and accounts that should be presented in the financial statements are included. completeness

101. The ASB transaction objective related to _____________________________ is to determine whether proper values have been assigned to all financial transactions. accuracy

102. _____________________________ _____________________________ is the study of business operations for the purpose of making recommendations to managers on how to improve profitability. Operational auditing

103. The _____________________________ is the accounting, auditing, and investigating agency of the U.S. Congress. GAO

104. _____________________________ governmental auditing goes beyond an audit of financial reports and compliance with laws and regulations to include _____________________________ and _____________________________ and _____________________________ _____________________________ audits. Expanded-scope, economy, efficiency, program results

105. The four basic requirements for becoming a CPA are _____________________________, _____________________________, _____________________________, and _____________________________. education, examination, experience, state certificate and license

106. _____________________________ _____________________________ is an auditor's tendency not to believe management assertions. Professional skepticism

107. A _____________________________ consists of writing up the financial statements from a client's books and records. compilation

108. Through the process of _____________________________, after becoming a CPA licensed in one state, a person can obtain a CPA certificate and license in another state. Substantial equivalency

109. Examples of _____________________________ _____________________________ are (1) economy and efficiency audits and (2) program audits. performance audits

Essay Questions

110. What are the differences between the American Accounting Association and AICPA definitions and objectives of auditing?

The AAA definition is broad and general enough to encompass independent, internal, and governmental auditing. The AICPA has not defined auditing but its statement on objectives of financial audits restricts auditing to independent CPA's audit of the traditional financial statements and their footnotes. The AICPA SAS also offers guides to report on internal control, letters to underwriters, and special reports.


111. What is operational auditing and by whom is it performed?

Operational auditing is the evaluation of business operations for various purposes. Operational auditing includes: (1) testing for compliance with laws and regulations and company policies and procedures, (2) evaluating the effectiveness of operations in achieving goals and objectives, and (3) evaluating the efficiency and economy of operations. Operational audits are normally performed by internal auditors. However, operational audits also may be conducted by independent CPA firms as part of their management advisory services.


112. What is information risk? What is business risk?

Information risk is the risk that financial statements will be materially false or misleading. Business risk is the risk an entity will fail to meet its objectives.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ResearchBloom's: KnowledgeDifficulty: Easy

113. What are the four basic requirements for becoming a CPA?

Education, the CPA Examination, experience, and a state certificate.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ResearchBloom's: KnowledgeDifficulty: Easy

114. Define assurance, attestation, and auditing in the context of "lending credibility."

Assurance is the "lending of credibility" to information. Attestation is the "lending of credibility" to assertions made by a third party. Auditing is the "lending of credibility" to financial statements.


This question is also in the Study Guide

115. Audits may be characterized as (a) financial statement audits, (b) compliance audits, or (c) operational audits. The work can be done by (a) independent (external) auditors, (b) internal auditors, or (c) government auditors. Below is a list of several audit engagements. For each engagement indicate (a) the type of audit and (b) who would typically do the audit.1. Render an opinion on the fairness of the presentation of financial statements of a public corporation.2. Compare the cost of maintaining a fleet of delivery trucks with the option of using an independent delivery service.3. Audit reported income on a corporation's tax return.4. Review contract cost of constructing aircraft engines for the armed services.5. Report on how the installation of a new computer system would help a client reduce data processing costs and improve financial reporting.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ResearchBloom's: ComprehensionDifficulty: Hard

Chapter 01 Auditing and Assurance Services Answer Key

Multiple Choice Questions 1. The audit objective that all transactions and accounts that should be presented in

the financial statements are in fact included is related to which of the PCAOB assertions?

A. Existence

B. Rights and obligations

C. Completeness

D. Valuation

AACSB: AnalyticAICPA: BB Legal

AICPA: FN ResearchAccessibility: Keyboard Navigation

Blooms: RememberDifficulty: 1 Easy

Learning Objective: 01-03 Describe and define the assertions that management makes about the recognition; measurement; presentation; and disclosure of the financial statements and explain why auditors use them as

the focal point of the audit.Source: Original

Topic: Management's Financial Statement Assertions

2. Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of

A. presentation and Disclosure.

B. completeness.

C. rights and obligations.

D. existence.



Blooms: RememberDifficulty: 2 Medium




3. 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

A. existence or occurrence.

B. completeness.

C. valuation or allocation.

D. presentation and disclosure.







4. The confirmation of an account payable balance selected from the general ledger provides primary evidence regarding which management assertion?

A. Completeness

B. Valuation

C. Allocation

D. Existence







5. What type of evidence would provide the highest level of assurance in an attestation engagement?

A. Evidence secured solely from within the entity.

B. Evidence obtained from independent sources.

C. Evidence obtained indirectly.

D. Evidence obtained from multiple internal inquiries.



Blooms: RememberDifficulty: 3 Hard

Learning Objective: 01-02 Define and contrast financial statement auditing; attestation; and assurance services.Source: AICPA

Topic: Auditing, Attestation, and Assurance Services

6. Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

A. The entity has rights to the inventory.

B. Inventory is properly valued.

C. Inventory is properly presented in the financial statements.

D. Inventory is complete.





the focal point of the audit.Source: AICPA


7. An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the following management assertions is supported by this test?

A. Valuation and allocation.

B. Completeness.

C. Rights and obligations.

D. Presentation and disclosure.







8. An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the

A. control environment factors that affect the organizational structure.

B. correlation of detection risk and inherent risk.

C. effectiveness of the entity's internal control activities.

D. possible entity's financial statements.







9. Which of the following types of audit evidence provides the least assurance of reliability?

A. Receivable confirmations received from the client's customers.

B. Prenumbered receiving reports completed by the client's employees.

C. Prior months' bank statements obtained from the client.

D. Municipal property tax bills prepared in the client's name.







10. Which of the following is a management assertion regarding account balances at the period end?

A. Transactions and events that have been recorded have occurred and pertain to the entity.

B. Transactions and events have been recorded in the proper accounts.

C. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.

D. Amounts and other data related to the transactions and events have been recorded appropriately.







11. A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

A. Statement of Auditing Standards.

B. Statements on Standards for Attestation Engagements.

C. Statements on Standards for Accounting and Review Services.

D. Statements on Standards for Consulting Services.






12. In auditing the long term debt account, an auditor's procedures most likely would focus primarily on management's assertion of

A. existence.

B. completeness.

C. allocation.

D. rights and obligations.







13. 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 ultimately agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of

A. completeness.

B. valuation.

C. presentation and disclosure.

D. existence.

E. rights and obligations.







14. An auditor selected items from the client's detailed inventory listing (that agreed to the financial statements). During the physical inventory observation, the auditor then found each item selected and counted the number of units on hand. Assuming that the amount on hand was the same as the amount in the client's detailed inventory listing, this procedure most likely would provide evidence concerning management's assertion of

A. completeness.

B. valuation.

C. presentation and disclosure.

D. existence.








15. According to PCAOB Auditing Standard No. 5 (AS 5), the auditor should identify

significant accounts and disclosures and their relevant assertions. Which of the following financial statement assertions is not explicitly identified in AS 5?

A. Completeness

B. Valuation or Allocation

C. Accuracy

D. Existence or Occurrence

E. All of these are assertions identified in AS 5.







16. When testing the completeness assertion for a liability account, an auditor ordinarily works from the

A. financial statements to the potentially unrecorded items.

B. potentially unrecorded items to the financial statements.

C. accounting records to the supporting evidence.

D. trial balance to the subsidiary ledger.







17. If an auditor is performing procedures related to the information that is contained in the client's pension footnote, he/she is most likely obtain evidence concerning management's assertion about

A. rights and obligations.

B. existence.

C. valuation.

D. presentation and disclosure.







18. Which of the following questions would be inappropriate for an auditor to ask a client when exhibiting an appropriate level of professional skepticism while completing an audit procedure related to the internal control system?

A. What can go wrong in this process?

B. Which of your employees is a fraudster?

C. What else is important to know about this process?

D. What happens when a key employees goes on vacation?




Learning Objective: 01-04 Define professional skepticism and explain its key characteristics.Source: Original

Topic: Professional Skepticism

19. To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process?

A. Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes.

B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes.

C. Recognize the financial assertions made in management's financial statements and footnotes.

D. Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality.







20. Which of the following is an underlying condition that in part creates the demand by users for reliable information?

A. Economic transactions that are numerous and complex

B. Decisions are time-sensitive

C. Users separated from accounting records by distance and time

D. Financial decisions that are important to investors and users

E. All of these

AACSB: Analytic

AICPA: BB IndustryAICPA: FN Research

Accessibility: Keyboard NavigationBlooms: RememberDifficulty: 2 Medium

Learning Objective: 01-01 Define information risk and explain how the financial statement auditing process helps to reduce this risk; thereby reducing the cost of capital for a company.

Source: OriginalTopic: User Demand for Reliable Information

21. Which of the following is not included in The American Accounting Association (AAA) definition of auditing?

A. Potential conflict of interest

B. Systematic process

C. Assertions about economic actions

D. Established criteria




Learning Objective: 01-02 Define and contrast financial statement auditing; attestation; and assurance services.Source: Original


22. What is the term used to identify the risk that the client's financial statements may be materially false and misleading?

A. Business risk

B. Information risk

C. Client risk

D. Risk assessment


AICPA: FN Risk AnalysisAccessibility: Keyboard Navigation




23. Which of the following is not a recommendation usually made following the completion of an operational audit?

A. Economic and efficient use of resources

B. Effective achievement of business objectives

C. Attesting to the fairness of the financial statements

D. Compliance with company policies

AACSB: Communication

AICPA: BB LegalAICPA: FN Reporting

Accessibility: Keyboard NavigationBlooms: Remember

Difficulty: 1 EasyLearning Objective: 01-06 Describe the audits and auditors in governmental; internal; and operational auditing.

Source: OriginalTopic: Other Kinds of Engagements and Information Professionals

24. In order to be considered as external auditors with respect to government

agencies, GAO auditors must be

A. organizationally independent.

B. empowered as the accounting and auditing agency by the U.S. Congress.

C. funded by the federal government.

D. guided by standards similar to GAAS.

AACSB: Ethics

AICPA: BB LegalAICPA: FN Research


Learning Objective: 01-06 Describe the audits and auditors in governmental; internal; and operational auditing.Source: Original

Topic: Other Kinds of Engagements and Information Professionals

25. Which of the following is the essential purpose of the audit function?

A. Detection of fraud

B. Examination of individual transactions to certify as to their validity

C. Determination of whether the client's financial statement assertions are fairly state

D. Assurance of the consistent application of correct accounting procedures


AICPA: FN ReportingAccessibility: Keyboard Navigation




26. The audit objective that all the transactions and accounts presented in the financial statements represent real assets, liabilities, revenues, and expenses is related most closely to which of the PCAOB assertions?

A. Existence or occurrence


C. Completeness

D. Presentation and disclosure







27. The audit objective that all transactions are recorded in the proper period is related most closely to which of the Audit Standards Board (ASB) transaction assertions?

A. Occurrence

B. Completeness

C. Cutoff

D. Accuracy







28. The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions?

A. Occurrence

B. Completeness

C. Accuracy

D. Classification







29. The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions?

A. Existence


C. Completeness

D. Valuation







30. The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of the ASB balance assertions?

A. Existence


C. Completeness

D. Valuation







31. The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions?

A. Occurrence


C. Comprehensibility

D. Understandability







32. The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. The auditor reviewed all work orders that were capitalized as part of the equipment costs. Which of the following is the ASB transaction assertion most closely related to the auditor's testing?

A. Occurrence

B. Completeness

C. Accuracy

D. Classification



Blooms: UnderstandDifficulty: 3 Hard




33. The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing?

A. Existence

B. Completeness

C. Rights and obligations

D. Valuation



Blooms: UnderstandDifficulty: 3 Hard




34. Which of the following best describes the primary role and responsibility of independent external auditor?

A. Produce a company's annual financial statements and notes.

B. Express an opinion on the fairness of a company's annual financial statements and footnotes.

C. Provide business consulting advice to audit clients.

D. Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.






35. Which of the following best describes the main reason independent auditors report on management's financial statements?

A. Management fraud may exist and it is likely to be detected by independent auditors.

B. The management that prepares the statements and the persons who use the statements may have conflicting interests.

C. Misstated account balances may be corrected as the result of the independent audit work.

D. The management that prepares the statements may have a poorly designed system of internal control.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN Reporting

Accessibility: Keyboard NavigationBlooms: UnderstandDifficulty: 2 Medium



36. The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of

A. quality control.

B. generally accepted auditing standards, which include the concept of materiality.

C. the auditor's evaluation of the audited company's internal control.

D. the applicable financial reporting framework (i.e., GAAP in the United States).






37. Assurance services involve all of the following, except

A. relevance as well as the reliability of information.

B. nonfinancial information as well as traditional financial statements.

C. providing absolute rather than reasonable assurance.

D. electronic databases as well as printed reports.

AACSB: Analytic





38. 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

A. objective judgment.

B. independent integrity.

C. professional skepticism.

D. impartial conservatism.




Learning Objective: 01-04 Define professional skepticism and explain its key characteristics.Source: AICPA

Topic: Professional Skepticism

39. Which of the following best describes assurance services?

A. Independent professional services that report on the client's financial statements

B. Independent professional services that improve the quality of information for decision makers

C. Independent professional services that report on specific written management assertions

D. Independent professional services that improve the operations of the client

AACSB: Analytic





40. Which of the following is not a PCAOB assertion about inventory related to presentation and disclosure?

A. Inventory is properly classified as a current asset on the balance sheet.

B. Inventory is properly stated at its cost on the balance sheet.

C. Major inventory categories and their valuation bases are adequately disclosed in notes.

D. All of these are PCAOB presentation and disclosure assertions about inventory



Blooms: UnderstandDifficulty: 2 Medium




41. Which of the following is not an ASB assertion about inventory related to presentation and disclosure?

A. Inventory is properly classified as a current asset on the balance sheet.

B. Inventory is properly stated at cost on the balance sheet.

C. Major inventory categories and their valuation bases are adequately disclosed in notes.

D. All of these are ASB presentation and disclosure assertions about inventory.







42. In performing an attestation engagement, a CPA typically

A. supplies litigation support services.

B. assesses control risk at a low level.

C. expresses a conclusion on an assertion about some type of subject matter.

D. provides management consulting advice.






43. An attestation engagement is one in which a CPA is engaged to

A. issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party.

B. provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.

C. testify as an expert witness in accounting, auditing or tax matters, given certain stipulated facts.

D. assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.






44. The underlying conditions that create demand by users for reliable information include all of the following, except

A. transactions are numerous and complex.

B. users lack professional skepticism.

C. users are separated from accounting records by distance and time.

D. financial decisions are important to investors and users.

E. decisions are time-sensitive.

AACSB: Analytic





45. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of

A. presentation.

B. completeness.

C. rights.

D. existence.







46. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the PCAOB assertion of

A. completeness.

B. existence.

C. presentation.

D. valuation.








47. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the ASB balance assertion of

A. completeness.

B. existence.

C. presentation.

D. valuation.








48. The probability that the information circulated by a company will be false or misleading is referred to as

A. business risk.

B. information risk.

C. assurance risk.

D. audit risk.






49. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating

A. they have read the financial statements.

B. they are not aware of any false or misleading statements (or any key omitted disclosures).

C. they believe that the financial statements present an accurate picture of the company's financial condition.

D. All of these.




Learning Objective: 01-05 Describe the organization of public accounting firms and identify the various services that they offer.

Source: OriginalTopic: Public Accounting

50. The process of a CPA obtaining a certificate and license in a state other than the

state in which the CPA's certificate was originally obtained is referred to as

A. substantial equivalency.

B. quid pro quo.

C. relicensing.

D. re-examination.




Learning Objective: 01-07 List and explain the requirements for becoming a certified public accountant (CPA) and other certifications available to an accounting professional.

Source: OriginalTopic: Become a Professional and Get Certified!

51. The risk an entity will fail to meet its objectives is referred to as

A. business risk.

B. information risk.

C. assurance risk.

D. audit risk.






52. The four basic requirements for becoming a CPA in most states are

A. education, the CPA Examination, experience, and substantial equivalency.

B. the CPA Examination, experience, continuing professional education, and a state certificate.

C. continuing professional education, the CPA Examination, experience, and an AICPA certificate.

D. education, the CPA Examination, experience, and a state certificate.




Learning Objective: 01-07 List and explain the requirements for becoming a certified public accountant (CPA) and other certifications available to an accounting professional.

Source: OriginalTopic: Become a Professional and Get Certified!

53. The study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policies is referred to as

A. environmental auditing.

B. financial auditing.

C. compliance auditing.

D. operational auditing.






54. The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S. Comptroller General is known as

A. the Federal Bureau of Investigation (FBI).

B. the U.S. General Accountability Office (GAO).

C. the Internal Revenue Service (IRS).

D. the United States Legislative Auditors (USLA).






Short Answer Questions

55. Which of the PCAOB assertions (A-E) are best verified by the following audit procedures (1-4)?

A. Existence or occurrenceB. Rights and obligationsC. Valuation or allocationD. CompletenessE. Presentation and disclosure

1. Confirming inventory held on consignment by the client with independent third party.2. Consulting the Wall Street Journal for year-end prices of securities held by the client.3. Physically examine all major property and equipment additions.4. Review the aged trial balance for significant past due accounts.

1. B, 2. C, 3. A, 4. C


AICPA: FN ResearchBlooms: Understand

Difficulty: 3 HardLearning Objective: 01-03 Describe and define the assertions that management makes about the recognition; measurement; presentation; and disclosure of the financial statements and explain why auditors use them as



56. ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. The auditors performed the audit procedures listed 1-3. For each audit procedure select the ASB transaction assertion that is most likely being tested.

A. OccurrenceB. CompletenessC. CutoffD. AccuracyE. Classification

1. The auditor reviewed the shipping documents to check the date that product was shipped to XYZ Company.2. The auditor reviewed the shipping documents to ensure that all product included in the sales revenue to XYZ had been shipped.3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been properly billed.

1. C, 2. B, 3. D






57. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit procedures listed 1-5. For each audit procedure select the ASB balance assertion that is most likely being tested.

A. ExistenceB. Rights and obligationsC. CompletenessD. AccuracyE. Valuation

1. The auditors walked through the warehouse looking for obsolete inventory.2. The auditors compared invoices received from suppliers with the cost of inventory listed in the inventory accounts.3. The auditors reviewed purchase orders to determine if any inventory was on consignment.4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs had been included in inventory costs.5. The auditors selected items from the inventory and reviewed inventory records to ensure these items were included in those records.

1. E, 2. D, 3. B, 4. E, 5. C






Essay Questions

58. What are the differences between the American Accounting Association and AICPA definitions and objectives of auditing?

The AAA definition is broad and general enough to encompass independent, internal, and governmental auditing. The AICPA has not defined auditing but its statement on objectives of financial audits restricts auditing to independent CPA's audit of the traditional financial statements and their footnotes. The AICPA SAS also offers guides to report on internal control, letters to underwriters, and special reports.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN ResearchBlooms: UnderstandDifficulty: 2 Medium



59. What is operational auditing and by whom is it performed?

Operational auditing is the evaluation of business operations for various purposes. Operational auditing includes: (1) testing for compliance with laws and regulations and company policies and procedures, (2) evaluating the effectiveness of operations in achieving goals and objectives, and (3) evaluating the efficiency and economy of operations. Operational audits are normally performed by internal auditors. However, operational audits also may be conducted by independent CPA firms as part of their management advisory services.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN ResearchBlooms: RememberDifficulty: 2 Medium



60. What is information risk? What is business risk?

Information risk is the risk that financial statements will be materially false or misleading. Business risk is the risk an entity will fail to meet its objectives.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN ResearchBlooms: Remember

Difficulty: 1 EasyLearning Objective: 01-01 Define information risk and explain how the financial statement auditing process

helps to reduce this risk; thereby reducing the cost of capital for a company.


61. What are the four basic requirements for becoming a CPA?

Education, the CPA Examination, experience, and a state certificate.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN ResearchBlooms: Remember

Difficulty: 1 EasyLearning Objective: 01-07 List and explain the requirements for becoming a certified public accountant (CPA)

and other certifications available to an accounting professional.Source: Original

Topic: Become a Professional and Get Certified!

62. Define assurance, attestation, and auditing in the context of "lending credibility."

Assurance is the "lending of credibility" to information. Attestation is the "lending of credibility" to assertions made by a third party. Auditing is the "lending of credibility" to financial statements.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN ResearchBlooms: UnderstandDifficulty: 2 Medium



Chapter 02 Professional Standards Answer Key

Multiple Choice Questions 1. Control risk is

A. the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.

B. the probability that a material misstatement could occur and not be detected by auditors' procedures.

C. the risk that auditors will not be able to complete the audit on a timely basis.

D. the risk that auditors will not properly control the staff on the audit engagement.

AACSB: Analytic

AICPA: BB IndustryAICPA: FN Risk Analysis


Difficulty: 1 EasyLearning Objective: 02-03 Describe the fundamental principle of performance and identify the major activities

performed in an audit.Source: Original

Topic: Fundamental Principle: Performance

2. The responsibilities principle under generally accepted auditing standards does not include which of the following?

A. Competence and capabilities

B. Independent attitude

C. Due care

D. Planning and supervision

AACSB: Analytic

AICPA: BB IndustryAICPA: FN Decision Making


Difficulty: 1 EasyLearning Objective: 02-02 Describe the fundamental principle of responsibilities and how this principle relates to

the characteristics and qualifications of auditors.Source: Original

Topic: Fundamental Principle: Responsibilities

3. Which of the following types of auditors' reports does not require an additional paragraph to support the opinion?

A. Unmodified opinion

B. Adverse opinion

C. Qualified opinion

D. Disclaimer of opinion




Difficulty: 1 EasyLearning Objective: 02-04 Understand the fundamental principle of reporting and identify the basic contents of

the auditors' report.Source: Original

Topic: Fundamental Principle: Reporting

4. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures?

A. Lending credibility to a client's financial statements

B. Using statistical sampling techniques

C. Acceptance and continuance of client relationships and specific engagements

D. Membership in the Center for Public Company Audit Firms

AACSB: Analytic



Learning Objective: 02-05 Understand the role of a system of quality control and monitoring efforts in enabling public accounting firms to meet appropriate levels of professional quality.

Source: OriginalTopic: Evaluating the Quality of Public Accounting Firms' Practice

5. Which of the following presumptions does not relate to the reliability of audit evidence?

A. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.

B. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.

D. The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: EvaluateDifficulty: 3 Hard

Learning Objective: 02-03 Describe the fundamental principle of performance and identify the major activities performed in an audit.

Source: AICPATopic: Fundamental Principle: Performance

6. An important role of the Public Company Accounting Oversight Board is to oversee

the

A. issuance of statements by the Financial Accounting Standards Board.

B. preparation and grading of the Uniform CPA Examination.

C. peer review of member firms of the Private Companies Practice Section.

D. regulation of firms that audit public entities.

AACSB: Analytic



Learning Objective: 02-01 Understand the development and source of generally accepted auditing standards.Source: Original

Topic: Generally Accepted Auditing Standards (GAAS)

7. Audit evidence is usually considered sufficient when

A. it is reliable.

B. there is enough quantity to afford a reasonable basis for an opinion on financial statements.

C. it has the qualities of being relevant, objective, and free from unknown bias.

D. it has been obtained through random selection methods.

AACSB: Analytic





8. Which of the following is not considered a type of audit evidence?

A. The entity's trial balance

B. Auditors' calculations

C. Physical observation

D. Verbal statements made by client personnel

AACSB: Analytic




Source: OriginalTopic: Fundamental Principle: Performance

9. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to

A. certify the correctness of Camden's financial statements.

B. make a complete examination of Camden's records and verify all of Camden's transactions.

C. give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).

D. give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.




Learning Objective: 02-04 Understand the fundamental principle of reporting and identify the basic contents of the auditors' report.

Source: OriginalTopic: Fundamental Principle: Reporting

10. Auditors try to achieve independence in appearance in order to

A. maintain public confidence in the profession.

B. become independent in fact.

C. comply with the responsibilities principle.

D. maintain an unbiased mental attitude.

AACSB: Ethics



Learning Objective: 02-02 Describe the fundamental principle of responsibilities and how this principle relates to the characteristics and qualifications of auditors.

Source: OriginalTopic: Fundamental Principle: Responsibilities

11. The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of

A. planning.

B. supervision.

C. information evaluation.

D. quality assurance.

AACSB: Analytic






12. Which of the following procedures would provide the most reliable audit evidence?

A. Inquiries of the client's accounting staff held in private

B. Inspection of prenumbered client shipping documents

C. Inspection of bank statements obtained directly from the client's financial institution

D. Analytical procedures performed by auditors on the client's trial balance

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Apply

Difficulty: 3 HardLearning Objective: 02-03 Describe the fundamental principle of performance and identify the major activities

performed in an audit.Source: AICPA


13. Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards?

A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.

B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm.

C. An auditor on the engagement owns a financial interest in the stock of the client.

D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

AACSB: Ethics


Accessibility: Keyboard NavigationBlooms: AnalyzeDifficulty: 3 Hard



14. A vendor's invoice received and held by the client would be considered what type

of evidence?

A. External

B. Internal

C. External-internal

D. Written representation

AACSB: Analytic






15. Which of the following statements is generally correct about the appropriateness of audit evidence?

A. Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.

B. To be reliable, audit evidence must be either valid or relevant, but need not be both.

C. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements.

D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

AACSB: Analytic





16. The standard auditors' report refers to standards of the PCAOB and GAAP in which

paragraph?

A. Standards of the PCAOB: Scope only; GAAP: Opinion only

B. Standards of the PCAOB: Introductory only; GAAP: Scope and opinion

C. Standards of the PCAOB: Introductory and scope; GAAP: Opinion only

D. Standards of the PCAOB: Introductory only; GAAP: All paragraphs





the auditors' report.Source: AICPA


17. Which of the following is not included in the auditors' standard report representing an unmodified opinion?

A. A brief indication of the responsibility of auditors and management for the financial statements

B. An indication that all appropriate disclosures have been made and included in the financial statements

C. An indication that the audit was conducted in accordance with standards established by the PCAOB

D. The auditors' opinion on the fairness of the financial statements







18. Internal evidence

A. is obtained directly from third parties independent of the client.

B. originates outside of the client's system but has been received and processed by the client.

C. consists of documents that are produced, used, and stored within the client's information system.

D. consists of representations made by the client's officers, directors, owners, and employees.

AACSB: Analytic






19. Which of the following presumptions is correct about the reliability of audit evidence?

A. Information obtained indirectly from outside sources is the most reliable form of audit evidence.

B. To be reliable, audit evidence should be convincing rather than persuasive.

C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.

D. An effective system of internal control provides more assurance about the reliability of audit evidence.

AACSB: Analytic





20. The auditors' responsibility to express an opinion on the financial statements is

A. implicitly represented in the auditors' standard report.

B. explicitly represented in the introductory paragraph of the auditors' standard report.

C. explicitly represented in the scope paragraph of the auditors' standard report.

D. explicitly represented in the opinion paragraph of the auditors' standard report.





the auditors' report.Source: AICPA


21. Which of the following is not a concept from the performance principle under generally accepted auditing standards?

A. The auditor must plan the work and properly supervise any assistants.

B. The auditor must express an opinion in accordance with the auditor's findings.

C. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.

D. The auditor must determine and apply an appropriate materiality level throughout the audit.

AACSB: Analytic






22. Under generally accepted auditing standards, which of the following relates to the responsibilities principle?

A. The initial planning of the audit engagement

B. The confirmation of accounts receivable

C. The completion of an internal control questionnaire

D. Maintaining professional skepticism and exercising professional judgment

AACSB: Analytic






23. Which of the following represent audit quality guides that remain stable over time and are applicable for all audits?

A. Auditing procedures

B. Auditing standards

C. Due care

D. System of quality control

AACSB: Analytic



Difficulty: 1 EasyLearning Objective: 02-05 Understand the role of a system of quality control and monitoring efforts in enabling

public accounting firms to meet appropriate levels of professional quality.Source: Original

Topic: Evaluating the Quality of Public Accounting Firms' Practice

24. Which of the following situations would most likely be in conflict with the responsibilities principle?

A. Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors.

B. Auditors obtain expertise in their client's industry as they are conducting the audit examination.

C. Auditors are directly involved with a client manager in a strategic decision-making capacity.

D. Auditors fail to document their assessment of control risk following their study of internal control.

AACSB: Analytic



Difficulty: 3 HardLearning Objective: 02-02 Describe the fundamental principle of responsibilities and how this principle relates to



25. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high?

A. Auditors would be required to rely on external (rather than internal) forms of evidence.

B. Auditors would be required to perform procedures at interim periods, rather than at year end.

C. Auditors would be required to confirm a larger number of customer accounts receivable balances.

D. Auditors would be required to obtain more evidence through direct personal observation.

AACSB: Analytic

AICPA: BB Critical ThinkingAICPA: FN Risk Analysis





26. As it relates to audit evidence, appropriateness refers to the

A. originality of evidence gathered.

B. quality of evidence gathered.

C. quantity of evidence gathered.

D. timeliness of evidence gathered.

AACSB: Analytic






27. Which of the following information would not be included in the auditors' standard report?

A. The names of the financial statements audited

B. A description of the nature of an audit

C. An indication that all necessary disclosures have been presented

D. An opinion on the entity's financial statements







28. The primary purpose of the auditors' study of internal control for a nonpublic entity is

A. to provide constructive suggestions to the client for improving its internal control.

B. to report on internal control as required by Auditing Standard No. 5.

C. to identify and detect fraud and irregularities perpetrated by client personnel.

D. to determine the nature, timing, and extent of further audit procedures.

AACSB: Analytic





29. Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)?

A. Unmodified opinion or disclaimer of opinion

B. Qualified opinion or disclaimer of opinion

C. Unmodified opinion or adverse opinion

D. Qualified opinion or adverse opinion







30. Which of the following statements is true with respect to the quality of audit evidence?

A. Quality is related to the relevance of evidence, but not the reliability of evidence.

B. Evidence is considered of higher quality when gathered prior to year-end than following year-end.

C. Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control.

D. In evaluating quality, sufficiency of evidence is of greater importance than appropriateness of evidence.

AACSB: Analytic

AICPA: BB Critical ThinkingAICPA: FN Decision Making




31. Which of the following concepts is least related to the risk of material misstatement?

A. Control risk

B. Detection risk

C. Inherent risk

D. Materiality

AACSB: Analytic





32. Which of the following statements describes an appropriate relationship with

respect to the reliability of audit evidence?

A. Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities.

B. Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers.

C. A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.

D. Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.

AACSB: Analytic






33. A periodic review of an audit firm's system of quality control by the PCAOB is referred to as a(n)

A. inspection.

B. peer review.

C. principles review.

D. quality review.

AACSB: Analytic

AICPA: FN Decision MakingAccessibility: Keyboard Navigation




34. The performance principle would include all of the following except

A. the auditors' determination of materiality levels.

B. the auditors' evaluation of independence with respect to their clients.

C. the auditors' evaluation of the risk of material misstatement.

D. the auditors' determination of the nature, timing, and extent of further audit procedures.

AACSB: Analytic






35. Which of the following is most closely associated with the responsibilities principle?

A. Due care

B. Planning

C. Qualified audit opinion

D. Risk of material misstatement

AACSB: Analytic






36. Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards?

A. The PCAOB issues auditing standards for the audit of public entities, subject to SEC approval

B. Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities

C. If not superseded by the PCAOB, Statements on Auditing Standards issued prior to 2003 are applicable to the audit of public entities

D. Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both public and private entities

AACSB: Analytic





37. Which of the following would normally be considered earliest in the audit examination?

A. Determination of materiality levels for use during the audit

B. Consideration of the ability of the entity's internal control to prevent or detect errors

C. Preparation of a written audit plan

D. Evaluation of the type of audit opinion to be issued, based on the auditor's findings

AACSB: Analytic






38. The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as

A. due care.

B. independence in appearance.

C. professional judgment.

D. professional skepticism.

AACSB: Analytic






39. Which of the following is least related to the concept of independence in appearance?

A. The auditors' objectivity and ability to act impartially toward the client

B. The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements

C. The ownership of a financial interest in a client by the auditor

D. The employment of the auditor's family member in an important position with the client

AACSB: Ethics





40. The concept of _________ recognizes that a GAAS audit may fail to detect all

material misstatements.

A. absolute assurance

B. due care

C. reasonable assurance

D. risk of material misstatement

AACSB: Analytic






41. Generally accepted auditing standards are

A. specific actions performed by auditors during an examination.

B. standards that guide the conduct of an audit examination.

C. legal requirements auditors must observe during the audits of public entities.

D. standards used by entities in deciding whether to engage or retain the services of auditors.

AACSB: Analytic



Difficulty: 1 EasyLearning Objective: 02-01 Understand the development and source of generally accepted auditing standards.

Source: OriginalTopic: Generally Accepted Auditing Standards (GAAS)

42. Which of the following could serve as a source of professional guidance in the audit

of a public entity?

A. Option A

B. Option B

C. Option C

D. Option D

AACSB: Analytic





43. Which of the following is not true with respect to the responsibilities for establishing generally accepted auditing standards?

A. Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission.

B. Interpretive publications are issued by the AICPA to provide guidance on the application of generally accepted auditing standards in specific circumstances.

C. The PCAOB is the body with formal authority for the creation of auditing standards for the audits of public entities.

D. If specific guidance is not provided by PCAOB Auditing Standards, auditors may refer to Statements on Auditing Standards that have not been amended or superseded.

AACSB: Analytic





44. Which of the following is not related to the responsibilities principle?

A. Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession

B. Firm-wide policies to evaluate the financial and professional relationships of its professionals

C. Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting

D. The auditors' use of professional judgment throughout the examination

AACSB: Analytic





45. A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as

A. due care.

B. independence.

C. professional judgment.

D. professional skepticism.

AACSB: Analytic






46. During which stages of an audit examination are auditors required to exhibit the appropriate use of professional judgment?

A. Option A

B. Option B

C. Option C

D. Option D

AACSB: Analytic


Blooms: ApplyDifficulty: 2 Medium



47. Which of the following is not true with respect to the concept of reasonable assurance?

A. Reasonable assurance allows for mistakes and misinterpretations by the audit team throughout the examination.

B. The nature of many audit procedures is such that they cannot always be relied upon to detect misstatements.

C. Audit teams should evaluate all transactions and components of an account balance or class of transactions.

D. Auditors should control the overall risk in an audit to an acceptably low level.

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Understand




48. Which of the following factors influences the risk of material misstatement?

A. Option A

B. Option B

C. Option C

D. Option D

AACSB: Analytic





49. Which of the following is not true with respect to the auditors' report for a public entity?

A. The report title should contain the word "independent."

B. The report provides a detailed listing of major auditing procedures performed during the examination.

C. The opinion assesses the financial statements against an applicable financial reporting framework.

D. The report specifically identifies the financial statements and years examined by the auditor.





Source: OriginalTopic: Fundamental Principle: Reporting

50. Which of the following paragraphs references the conduct of the audit in

accordance with PCAOB standards?

A. Introductory paragraph

B. Scope paragraph

C. Opinion paragraph

D. Internal control paragraph







51. Which of the following is true with respect to the PCAOB inspection process?

A. All firms performing audits of public entities are inspected every year.

B. PCAOB inspections are conducted by partners of other CPA firms.

C. PCAOB inspection teams review a sample of audit engagements conducted by the firm as well as the firm's system of quality control.

D. Deficiencies from sample audit engagements reviewed by the inspection team and deficiencies in the firm's system of quality control are publicly disclosed on the PCAOB's website.

AACSB: Analytic





52. Which of the following would be evaluated during the PCAOB inspection process?

A. Option A

B. Option B

C. Option C

D. Option D

AACSB: Analytic





53. The Public Company Accounting Oversight Board was established by which of the following?

A. The Financial Accounting Standards Board

B. The American Institute of Certified Public Accountants

C. The Sarbanes-Oxley Act of 2002

D. The International Accounting Standards Board

AACSB: Analytic




Source: AICPATopic: Generally Accepted Auditing Standards (GAAS)

54. Which of the following types of audit evidence provides the least assurance of

reliability?

A. Receivable confirmations from the client's customers

B. Prenumbered receiving reports completed by the client's employees

C. Prior months' bank statements obtained from the client

D. Municipal property tax bills prepared in the client's name

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 02-03 Describe the fundamental principle of performance and identify the major activities



55. A CPA firm would provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

A. establishing an understanding with each client concerning individual responsibilities in a signed engagement letter.

B. assessing the risk that errors and fraud may cause the financial statements to contain material misstatements.

C. developing specific audit objectives to support management's assertions that are embodied in the financial statements.

D. maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

AACSB: Analytic




Source: AICPATopic: Evaluating the Quality of Public Accounting Firms' Practice

56. Which of the following courses of action is most appropriate if an auditor concludes

that there is a high risk of material misstatement?

A. Use smaller, rather than larger, sample sizes.

B. Perform substantive tests as of an interim date.

C. Select more effective substantive tests.

D. Increase tests of controls.

AACSB: Analytic





57. Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards?

A. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.

B. Use attributes sampling techniques in testing internal controls.

C. Consider inherent risk and control risk before determining detection risk.

D. Establish policies to ensure that the audit work meets applicable professional standards.

AACSB: Analytic




Source: AICPATopic: Evaluating the Quality of Public Accounting Firms' Practice

58. Which of the following is a definition of control risk?

A. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls

B. The risk that the auditor will not detect a material misstatement

C. The risk that the auditor's assessment of internal controls will be at less than the maximum level

D. The susceptibility of material misstatement assuming there are no related internal control policies or procedures

AACSB: Analytic






59. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?

A. Presumptive

B. Judgmental

C. Criticizing

D. Questioning

AACSB: Analytic




Source: AICPATopic: Fundamental Principle: Responsibilities

60. An independent auditor must have which of the following?

A. A pre-existing and well-informed point of view with respect to the audit

B. Technical training that is adequate to meet the requirements of a professional

C. A background in many different disciplines

D. Experience in taxation that is sufficient to comply with generally accepted auditing standards

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 02-02 Describe the fundamental principle of responsibilities and how this principle relates to

the characteristics and qualifications of auditors.Source: AICPA


61. What type of evidence would provide the highest level of assurance in an attestation engagement?

A. Evidence secured solely from within the entity

B. Evidence obtained from independent sources

C. Evidence obtained indirectly

D. Evidence obtained from multiple internal inquiries

AACSB: Analytic






62. Which of the following is an important consideration during the planning of the audit?

A. Considering the independence of members of the audit team

B. Performing some of the audit procedures prior to the end of the year under audit

C. Considering the ability and expertise of the audit team with respect to accounting and auditing issues in the client's industry

D. Considering the impact of tests of controls on the overall assessment of control risk

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 02-03 Describe the fundamental principle of performance and identify the major activities



63. The initial development of auditing standards was in response to

A. a scandal involving embezzlement that was not detected during an audit engagement.

B. auditors' concerns that all components of the financial statements were not being verified.

C. independent inquiries of the public accounting profession made by the SEC.

D. requests by companies for greater assurance with respect to the auditors' ability to detect financial statement misstatements.

AACSB: Analytic





64. All of the following statements are true regarding generally accepted auditing

standards (GAAS) except

A. departures from auditing standards that impose presumptively mandatory requirements on auditors are not permitted under any circumstances.

B. Interim Auditing Standards, issued by the AICPA, may serve as an appropriate source of GAAS for the audits of public entities.

C. separate auditing standards have been developed for the audits of U.S. governmental entities and foreign entities.

D. Interpretive Publications, which are officially considered less authoritative and less binding than auditing standards, are included as part of GAAS.

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Evaluate

Difficulty: 2 MediumLearning Objective: 02-01 Understand the development and source of generally accepted auditing standards.


65. The particular and specialized actions that auditors undertake to obtain evidence in a specific audit engagement are known as

A. Interim Auditing Standards.

B. audit procedures.

C. Interpretive Publications.

D. Statements on Auditing Standards.

AACSB: Analytic





66. The role of the Public Company Accounting Oversight Board in the standard-setting

process is to develop

A. Statements on Auditing Standards for the audits of nonpublic entities.

B. Auditing Standards for the audits of public entities.

C. Governmental Auditing Standards for the audits of governmental entities.

D. International Standards on Auditing for the audits of foreign entities.

AACSB: Analytic





67. Pronouncements issued by the Public Company Accounting Oversight Board are subject to formal approval by the

A. American Institute of Certified Public Accountants.

B. Auditing Standards Board.

C. International Auditing and Assurance Standards Board.

D. Securities and Exchange Commission.

AACSB: Analytic





68. The three fundamental principles underlying GAAS include all of the following,

except

A. general principle.

B. performance principle.

C. reporting principle.

D. responsibilities principle.

AACSB: Analytic





69. The fundamental principles developed by the Auditing Standards Board are best described as

A. ten basic standards underlying an audit.

B. standards that apply only to audits of public entities.

C. industry-specific guidance on how audit procedures should be conducted.

D. guidelines for the general conduct of audit engagements.

AACSB: Analytic





70. The relevant ethical requirements relating to due care, professional skepticism, and professional judgment are responsibilities of the auditor at which stage(s) of the audit?

A. Option A

B. Option B

C. Option C

D. Option D

AACSB: Analytic





71. Which of the following does not directly relate to an auditor's responsibility for having appropriate competence and capabilities to perform the audit?

A. Participating in continuing professional education

B. Gaining experience through hands-on practice

C. Obtaining reliable documentary evidence

D. Attending on-the-job training

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Understand




72. Which of the following situations would result in the issuance of a disclaimer of opinion?

A. The audit reveals weaknesses in the client's internal control over financial reporting.

B. The auditor is discovered to own a financial interest in the entity.

C. The audit is performed, with limited exception, in accordance with generally accepted auditing standards.

D. The entity's financial statements are not presented in conformity with the applicable financial reporting framework.







73. In a system of quality control, leadership responsibilities for quality within the firm are best characterized by

A. basing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients.

B. management's evaluation of the integrity and business reputation of the client.

C. management's clear and consistent demonstration of its own commitment to quality control and high-quality work.

D. assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 02-05 Understand the role of a system of quality control and monitoring efforts in enabling



74. The audit failures of both Enron and WorldCom were examples in which the leadership responsibilities for quality work within the accounting firm were overshadowed by fears that losing a key client would

A. result in shareholder losses from reduced company profitability.

B. require additional audit procedures and increase the fees paid by the companies to the accounting firm.

C. negatively influence the results of the firm's inspection.

D. negatively impact individual auditors' performance evaluations.

AACSB: Analytic






75. Which of the following is an example of the appropriate implementation of a system of quality control?

A. The firm requires all documents obtained during the audit to be destroyed immediately following the engagement to ensure the client's information remains confidential.

B. The firm's quality control policies have evolved through the performance of audit procedures but are not formally developed or communicated to staff members.

C. All firm employees must verbally confirm their compliance with the appropriate independence requirements before being assigned to an engagement.

D. The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.

AACSB: Analytic





76. An internal evaluation of the significant judgments made by the audit team and the

conclusions reached in formulating its report for engagements meeting specified criteria is known as a(n)

A. engagement quality control review.

B. inspection.

C. peer review.

D. performance control evaluation.

AACSB: Analytic






77. Which element of a system of quality control strives to provide the firm with reasonable assurance that its policies and procedures are operating effectively?

A. Human resources

B. Leadership responsibilities for quality within the firm

C. Monitoring

D. Relevant ethical requirements

AACSB: Analytic






78. When a firm decides to withdraw from an engagement, it should document all of the following except

A. significant issues influencing the decision to withdraw from the engagement.

B. the basis for any conclusions related to this decision to withdraw from the engagement.

C. significant consultations related to the decision to withdraw from the engagement.

D. significant effects the decision to withdraw from the engagement could have on the firm.

AACSB: Analytic





79. Firm A performs audits of 60 public entities, while firm B performs audits of 120 public entities. How often must each firm undergo a PCAOB inspection?

A. Both firm A and firm B will be inspected every other year.

B. Firm A will be inspected annually and firm B will be inspected every three years.

C. Firm A will be inspected every three years and firm B will be inspected annually.

D. Both firm A and firm B will be inspected annually.

AACSB: Analytic






80. PCAOB inspections are conducted by

A. individuals selected by the PCAOB who are not current employees of public accounting firms.

B. another public accounting firm selected by the firm being inspected.

C. current employees of another public accounting firm selected by the PCAOB.

D. the AICPA's Public Oversight Board.

AACSB: Analytic






81. All of the following are examples of procedures a firm can use to monitor its system of quality control except

A. discussions with firm personnel.

B. conducting reviews of engagement documentation.

C. devoting sufficient resources to developing a system of quality control.

D. assessing compliance with independence policies and procedures.

AACSB: Analytic






Essay Questions

82. For each of the items below, indicate through the appropriate letter the fundamental principle to which the item is most closely related.

A. Responsibilities principleB. Performance principleC. Reporting principle

___ 1. Maintaining professional skepticism.___ 2. An auditors' overall conclusion of the fairness of the client's financial statements.___ 3. The use of an audit plan to identify audit procedures to be performed during the engagement.___ 4. Auditors' assessment of the risk of material misstatement.___ 5. Accounting firm policies with respect to the level of expected continuing professional education.___ 6. Expressing an opinion in accordance with the auditor's findings.___ 7. Proper supervision of assistants on the audit.___ 8. Auditors' requests to obtain bank statements directly from financial institutions with whom the client does business.___ 9. An indication that an opinion cannot be expressed.___ 10. Determining and applying an appropriate materiality level.

1. A, 2. C, 3. B, 4. B, 5. A, 6. C, 7. B, 8. B, 9. C, 10. B

AACSB: Analytic


Blooms: AnalyzeDifficulty: 3 Hard





Topic: Fundamental Principle: ReportingTopic: Fundamental Principle: Responsibilities

83. For each of the statements below, indicate through the appropriate letter whether it relates to the PCAOB, Auditing Standards Board, both the PCAOB and Auditing Standards Board, or neither the PCAOB nor Auditing Standards Board.

A. PCAOBB. Auditing Standards BoardC. Both PCAOB and Auditing Standards BoardD. Neither PCAOB nor Auditing Standards Board

___ 1. Conducts inspections of firms that audit public entities.___ 2. Pronouncements may be used in the audit of nonpublic entities.___ 3. Pronouncements may be used in the audit of public entities.___ 4. Was created by the Sarbanes Oxley Act of 2002.___ 5. Involved with the certification and licensure of public accountants.___ 6. Issues Statements on Auditing Standards.___ 7. Conducts peer reviews of firms that audit nonpublic entities.___ 8. Sanctions individual auditors for violations of generally accepted auditing standards.

1. A, 2. B, 3. C, 4. A, 5. D, 6. B, 7. D, 8. D

AACSB: Analytic

AICPA: BB IndustryAICPA: BB Legal

AICPA: FN Decision MakingBlooms: AnalyzeDifficulty: 3 Hard

Learning Objective: 02-01 Understand the development and source of generally accepted auditing standards.Learning Objective: 02-05 Understand the role of a system of quality control and monitoring efforts in enabling


Topic: Evaluating the Quality of Public Accounting Firms' PracticeTopic: Generally Accepted Auditing Standards (GAAS)

84. For each of the items below, indicate through the appropriate letter the element of a system of quality control to which it is most closely related.

A. Leadership responsibilitiesB. Relevant ethical requirementsC. Acceptance and continuance of clientsD. Human resourcesE. Engagement performanceF. Monitoring

___ 1. Reviewing selected administrative and personnel records.___ 2. Obtaining written confirmations regarding compliance with appropriate independence requirements.___ 3. Ensuring that financial considerations do not override the quality of work performed.___ 4. Establishing policies and procedures for resolving differences of opinion within the engagement team.___ 5. Devoting sufficient resources for developing, communicating, and supporting the firm's quality control policies and procedures.___ 6. Evaluating the integrity and business reputation of the client.___ 7. Identifying circumstances and relationships that create threats to auditor independence.___ 8. Ensuring the firm's ability to perform the engagement with an appropriate level of professional competence.___ 9. Maintaining engagement documentation for an appropriate period of time.___ 10. Assessing the appropriateness of the firm's guidance materials and professional aids.

1. F, 2. B, 3. A, 4. E, 5. A, 6. C, 7. B, 8. C, 9. E, 10. F

AACSB: Analytic


Blooms: AnalyzeDifficulty: 3 Hard



85. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan.

Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working.

After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything - it will only make us go over the budget." When Alan came to the client near the end of field work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager.

Required:

1. Describe the performance principle of GAAS.2. Do you believe that the Mellow Markets audit complies with the performance principle? Explain.

According to the performance principle, to obtain reasonable assurance, which is high but not an absolute level of assurance, the auditor:

1. Plans the work and properly supervises any assistants.

2. Determines and applies appropriate materiality level or levels throughout the audit.

3. Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control.

4. Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.

The Mellow Markets audit does not comply with the performance principle. With respect to planning, the failure to prepare an appropriate audit plan and lack of

time and attention the inexperienced staff received from Alan violate the performance principle. In addition, there is no indication that any steps were taken to either understand the client's business or its internal control. Finally, these deficiencies suggest that the appropriate procedures were not performed to collect sufficient appropriate evidence. Further, the lack of a relevant plan to observe inventory in other cities and Alan's decision to limit inventory procedures to agreeing the inventory sheets and the general ledger inventory balance demonstrates the failure to gather sufficient appropriate evidence and represents an overall violation of the performance principle.

AACSB: Analytic


Blooms: ApplyDifficulty: 3 Hard



Chapter 02 Professional Standards Answer Key

Multiple Choice Questions

1. The attestation standards of reporting do not require the attestation report to include a statement that A. Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria.B. Indicates that the practitioner has significant reservations about the engagement.C. Identifies the subject matter or assertion being reported on.D. Indicates that the accountant assumes no responsibility to update the report.

Original


2. Control risk is A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.B. The probability that a material misstatement could occur and not be detected by auditors' procedures.C. The risk that auditors will not be able to complete the audit on a timely basis.D. The risk that auditors will not properly control the staff on the audit engagement.

Original


3. The responsibilities principle under generally accepted auditing standards does not include which of the following? A. Competence and capabilities.B. Independent attitude.C. Due care.D. Planning and supervision.

Original


4. Which of the following types of auditors' reports does not require an explanatory paragraph to support the opinion? A. Unqualified opinion.B. Adverse opinion.C. Qualified opinion.D. Disclaimer of opinion.

Original


5. Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? A. Lending credibility to a client's financial statements.B. Using statistical sampling techniques.C. Acceptance and continuance of clients.D. Membership in the Center for Public Company Audit Firms (CPCAF).

Original


6. Which of the following presumptions does not relate to the reliability of audit evidence? A. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.B. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.D. The independent auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

AICPA


7. An important role of the Public Company Accounting Oversight Board (PCAOB) is to oversee the A. Issuance of statements by the Financial Accounting Standards Board.B. Preparation and grading of the Uniform CPA Examination.C. Peer review of member firms of the Private Companies Practice Section.D. Regulation of firms that audit public companies.

Original


8. Audit evidence is usually considered sufficient when A. It is reliable.B. There is enough quantity to afford a reasonable basis for an opinion on financial statements.C. It has the qualities of being relevant, objective, and free from unknown bias.D. It has been obtained through random selection methods.

AICPA


9. Which of the following is not considered a type of audit evidence? A. The company's trial balance.B. Auditors' calculations.C. Physical observation.D. Verbal statements made by client personnel.

Original


10. The AICPA attestation standards differ from the AICPA responsibilities principle, performance principle and reporting principle in that: A. The attestation standards contain no requirement to obtain an understanding of the entity and assess the risk of material misstatement.B. The attestation standards do not require competence and capabilities.C. The attestation standards do not require planning for attestation engagements or supervision of accountants and consultants who perform the work.D. The attestation standards do not require a report that states the character of the engagement.

Original


11. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: A. Certify the correctness of Camden's financial statements.B. Make a complete examination of Camden's records and verify all of Camden's transactions.C. Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

Original


12. Auditors try to achieve independence in appearance in order to: A. Maintain public confidence in the profession.B. Become independent in fact.C. Comply with the responsibilities principle.D. Maintain an unbiased mental attitude.

Original

AACSB: EthicsAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: Medium

13. The independent auditors' plan prepared prior to the start of field work is appropriately considered documentation of A. Planning.B. Supervision.C. Information evaluation.D. Quality assurance.

Original


14. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's accounting staff held in private.B. Inspection of pre-numbered client shipping documents.C. Inspection of bank statements obtained directly from the client's financial institution.D. Analytical procedures performed by auditors on the client's trial balance.

AICPA

AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: Hard

15. Which of the following is not an attestation standard? A. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report.B. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement.C. The practitioner must adequately plan the work and must properly supervise any assistants.D. A sufficient understanding of the client's internal controls shall be obtained to plan the engagement.

AICPA


16. Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm.C. An auditor on the engagement owns a financial interest in the stock of the client.D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.

Original

AACSB: EthicsAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: Easy

17. A vendor's invoice received and held by the client would be considered what type of evidence? A. External.B. Internal.C. External-internal.D. Written representation.

Original


18. Which of the following statements is generally correct about the appropriateness of audit evidence? A. Auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.B. To be reliable, audit evidence must be either valid or relevant, but need not be both.C. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on client financial statements.D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.

AICPA

AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: Medium

19. The standard auditors' report refers to GAAS and GAAP in which paragraph? A. GAAS: Scope only; GAAP: Opinion onlyB. GAAS: Introductory only; GAAP: Scope and opinionC. GAAS: Introductory and scope; GAAP: Opinion onlyD. GAAS: Introductory only; GAAP: All paragraphs

AICPA

AACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBloom's: KnowledgeDifficulty: Medium

20. Which of the following is not included in the auditors' standard report representing an unqualified opinion? A. A brief indication of the responsibility of auditors and management for the financial statements.B. An indication that all appropriate disclosures have been made and included in the financial statements.C. An indication that the audit was conducted in accordance with standards established by the PCAOB.D. The auditors' opinion on the fairness of the financial statements.

Original


21. Internal evidence A. Is obtained directly from third parties independent of the client.B. Originates outside of the client's system but has been received and processed by the client.C. Consists of documents that are produced, used, and stored within the client's information system.D. Consists of representations made by the client's officers, directors, owners, and employees.

Original


22. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable form of audit evidence.B. To be reliable, audit evidence should be convincing rather than persuasive.C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.D. An effective system of internal control provides more assurance about the reliability of audit evidence.

AICPA

AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: Hard

23. When auditors do not mention consistency in the auditors' report, a reader of the financial statements may infer A. That the applicable financial reporting framework (e.g., GAAP) has been consistently observed in the current period in relation to the preceding period.B. That no material departure from the applicable financial reporting framework (e.g., GAAP) has been detected.C. That no reclassification of items or change in classifications has occurred.D. Nothing about application of accounting principles within the period.

AICPA

AACSB: CommunicationAICPA BB: LegalAICPA FN: ReportingBloom's: KnowledgeDifficulty: Hard

24. The auditors' responsibility to express an opinion on the financial statements is A. Implicitly represented in the auditors' standard report.B. Explicitly represented in the introductory paragraph of the auditors' standard report.C. Explicitly represented in the scope paragraph of the auditors' standard report.D. Explicitly represented in the opinion paragraph of the auditors' standard report.

AICPA


25. Which of the following is not a concept from the performance principle under generally accepted auditing standards? A. The auditor must plan the work and properly supervise any assistants.B. The auditor must express an opinion in accordance with the auditor's findings.C. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.D. The auditor must determine and apply an appropriate materiality level throughout the audit.

Original


26. Under generally accepted auditing standards, which of the following reflects a concept related to the responsibilities principle? A. The initial planning of the audit engagement should occur with the audit partner, manager, senior, and client personnel.B. The confirmation of accounts receivable should occur on each audit.C. The completion of an internal control questionnaire.D. Maintaining professional skepticism and exercising professional judgment.

Original


27. Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? A. Auditing procedures.B. Auditing standards.C. Due care.D. System of quality control.

Original


28. Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors perform the engagement with prudent auditors, but not expert auditors.B. Auditors obtain expertise in their client's industry as they are conducting the audit examination.C. Auditors are directly involved with a client manager in a strategic decision-making capacity.D. Auditors fail to document their assessment of control risk following their study of internal control.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: ApplicationDifficulty: Medium

29. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? A. Auditors would be required to rely on external (rather than internal) forms of evidence.B. Auditors would be required to perform procedures at interim periods, rather than at year end.C. Auditors would be required to confirm a larger number of customer accounts receivable balances.D. Auditors would be required to obtain more evidence through direct personal observation.

Original

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: Hard

30. As it relates to audit evidence, appropriateness refers to the A. Originality of evidence gathered.B. Quality of evidence gathered.C. Quantity of evidence gathered.D. Timeliness of evidence gathered.

Original


31. Which of the following information would not be included in the auditors' standard report? A. The names of the financial statements audited.B. A description of the nature of an audit.C. An indication that all necessary disclosures have been presented.D. An opinion on the entity's financial statements.

Original


32. The primary purpose of the auditors' study of internal control for a nonpublic entity is: A. To provide constructive suggestions to the client for improving its internal control.B. To report on internal control as required by Auditing Standard No. 5.C. To identify and detect fraud and irregularities perpetrated by client personnel.D. To determine the nature, timing, and extent of substantive procedures.

Original


33. Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)? A. Unqualified or disclaimer of opinion.B. Qualified or disclaimer of opinion.C. Unqualified or adverse.D. Qualified or adverse.

Original


34. Which of the following is most closely related to system of quality control regarding engagement performance? A. Requiring all of the firm's personnel to provide a summary of their investments and other financial relationships.B. Evaluating the firm's system of quality controls on a periodic basis.C. Utilizing standardized audit plans and audit documentation on engagements in a particular industry.D. Evaluating the firm's ability to provide a quality audit to a prospective client.

Original


Question also found in textbook

35. Which of the following categories of principles is most closely related to gathering audit evidence? A. Performance.B. Reasonable assurance.C. Reporting.D. Responsibilities.

Original


36. To exercise due care, an accountant should A. Take continuing professional education classes.B. Report whether the financial statements are in accordance with the applicable financial reporting framework (e.g., GAAP, IFRS).C. Gather enough audit evidence to have complete assurance that there is enough support for the accountant's opinion on the financial statements.D. Conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis.

Original


37. One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following A. Generally Accepted Auditing Standards (GAAS).B. Standards within a system of quality control.C. Generally Accepted Accounting Practices (GAAP).D. International Auditing Standards.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBloom's: ApplicationDifficulty: Medium

38. Which of the following best demonstrates the concept of professional skepticism? A. Relying more extensively on external evidence rather than internal evidence.B. Focusing on items that have a more significant quantitative effect on the entity's financial statements.C. Critically assessing verbal evidence received from the entity's management.D. Evaluating potential financial interests held by auditors in the client.

Original

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: Medium

39. The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is A. To determine the nature, timing, and extent of further audit procedures to be performed.B. To make consulting suggestions to the management.C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements.D. To determine whether the entity has changed any accounting principles.

Original


40. Ordinarily, what source of evidence should least affect audit conclusions? A. External.B. Inquiry of management.C. Auditor prepared.D. Inquiry of entity legal counsel.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: Easy

41. The most persuasive evidence regarding the existence of newly acquired computer equipment is A. Inquiry of management.B. Documentation prepared externally.C. Observation of auditee's procedures.D. Physical observation.

Original


42. Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private.B. Inspection of pre-numbered client purchase orders filed in the vouchers payable department.C. Inspection of vendor sales invoices received from client personnel.D. Inspection of bank statements obtained directly from the client's financial institution.

Original


43. Breaux & Co., CPAs require that all audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of Breaux & Co., CPAs' professional concern regarding which of the following? A. Independence.B. Adequate competence and capabilities.C. Adequate planning and supervision.D. Gathering sufficient appropriate evidence.

Original


44. The attestation standards do not contain a requirement that auditors obtain A. Adequate knowledge in the subject matter of the assertions being examined.B. An understanding of the auditee's internal controls.C. Sufficient evidence for the conclusions expressed in an attestation report.D. Independence in mental attitude.

Original


45. Which of the following concepts is least related to the standard of due care? A. Independence in factB. Professional skepticismC. Prudent auditorD. Reasonable assurance

Original


46. The evidence considered most appropriate by auditors is best described as A. Internal documents such as sales invoice copies produced under conditions of strong internal control.B. Written representations made by the president of the entity.C. Documentary evidence obtained directly from independent external sources.D. Direct personal knowledge obtained through physical observation and mathematical recalculation.

Original


47. Auditors' understanding of the internal control in an entity contributes information for A. Determining whether members of the audit team have the required competence and capabilities to perform the audit.B. Ascertaining the independence in mental attitude of members of the audit team.C. Planning the professional development courses the audit staff needs to keep up to date with new auditing standards.D. Planning the nature, timing, and extent of further audit procedures on an audit.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBloom's: KnowledgeDifficulty: Medium

48. Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? A. Acceptance and continuance of clients.B. Engagement performance.C. Monitoring.D. Relevant ethical requirements.

Original


49. Which of the following standards is not correctly associated with its rule-making body? A. Public Company Accounting Oversight Board, Auditing StandardsB. Governmental Accounting Standards Board, Government Auditing StandardsC. Auditing Standards Board, Statements on Auditing StandardsD. International Auditing and Assurance Standards Board, International Statements on Auditing

Original


50. Kramer, CPA consulted with an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with a specialist in this case would A. Be considered proper due care.B. Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement.C. Not be considered a violation of GAAS because GAAS does not apply to not-for-profit entities.D. None of the above.

Original

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: Medium

51. Which of the following topics is not addressed in the auditors' report for a public entity? A. Responsibilities of the auditor and management in the financial reporting process.B. Absolute assurance regarding the fairness of the entity's financial statements in accordance with the applicable financial reporting framework (e.g., GAAP).C. A description of an audit engagement.D. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.

Original


52. Which of the following is a conceptual difference between attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements.B. The requirement that the practitioner be independent is not required under attestation standards.C. The attestation standards do not permit an attestation engagement to examine prospective "what-if" financial statements.D. Requirements related to evidence are not included in the attestation standards.

Original



53. The attestation standards are a general set of standards intended to guide work in A. Audits of financial statements.B. Financial forecasts and prospective financial information.C. Areas other than audits of financial statements.D. Understanding internal control.

Original


54. Statements on Auditing Standards (SASs) are considered to be A. Specialized to obtain evidence to render an opinion.B. Detailed interpretations of the fundamental principles.C. Standards for preparation of financial statements.D. Standards to govern the quality of a specific firm's audit practice.

Original


55. Which of the following is not a subject related to the performance principle of GAAS? A. Risk of material misstatementB. Planning and supervisionC. Sufficient appropriate evidenceD. Due care

Original


56. Which of the following statements is true for attestation standards, but not for the fundamental principles of generally accepted auditing standards? A. The practitioner or practitioners must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.B. The work shall be adequately planned and assistants, if any, are to be properly supervised.C. Due care shall be exercised.D. A sufficient understanding of the internal control is to be obtained.

Original


57. The quality control of personnel management in a public accounting firm includes which of the following? A. Supervision appropriate for the competencies of the personnel assigned to the work is important.B. Professional development continuing education should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities.C. People at all organizational levels must maintain independence in fact and appearance.D. When accepting and continuing client relationships, firms should consider their own competence.

Original

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ResearchBloom's: ComprehensionDifficulty: Medium

58. Which of the following is not an implicit message in the opinion paragraph in the auditors' unqualified opinion? A. The accounting principles in the financial statements have general acceptance.B. The accounting principles used by the entity are appropriate in the circumstances.C. The audit was performed in accordance with generally accepted auditing standards.D. The financial statements are accurate within practical materiality limits.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBloom's: CommunicationDifficulty: Medium

59. Auditors' opinions on statements "taken as a whole" would not include A. Disclaimers of opinion.B. Adverse opinions.C. Qualified opinions.D. Unqualified opinions.

Original


60. The opinion paragraph of the auditors' standard report includes a statement that A. The financial statements are the responsibility of management.B. The audit was conducted in accordance with generally accepted auditing standards.C. The audit provides a reasonable basis for an opinion.D. The financial statements are presented in conformity with generally accepted accounting principles.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBloom's: CommunicationDifficulty: Easy

61. The auditors' standard report should be dated with the date A. The report was delivered to the client.B. When all significant procedures have been completed and auditors have gathered sufficient appropriate evidence.C. When the client's fiscal year ended.D. When the audit was completely reviewed by supervisory personnel.

Original

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingBloom's: CommunicationDifficulty: Medium

62. To ensure that a public accounting firm is providing services that conform to professional standards, the firm should follow A. The performance principle of GAAS.B. Its system of quality controls.C. Generally accepted accounting principles.D. International auditing standards.

Original


Matching Questions

63. For each of the matters below, indicate through the appropriate letter the fundamental principle to which the matter is most closely related.

1. Responsibilities principle Maintaining professional skepticism. 1 2. Responsibilities principle

An auditors' overall conclusion of the fairness of the client's financial statements. 3

3. Reporting principle The use of an audit plan to identify audit procedures

to be performed during the engagement. 4 4. Performance principle

Auditors' assessment of the risk of material misstatement. 4

5. Performance principle

Accounting firm policies with respect to the level of expected continuing professional education. 1


Expressing an opinion in accordance with the auditor's findings. 3

7. Reporting principle Proper supervision of assistants on the audit. 4


Auditors' requests to obtain bank statements directly from financial institutions with whom the client does

business. 4 9. Reporting principle An expression that an opinion cannot be expressed. 3 10. Performance principle

Determining and applying an appropriate materiality level. 4


True / False Questions

Question also Found in Study Guide

64. Auditors may be independent in fact but not independent in appearance. TRUE

65. Standards for accountants in public practice are limited to auditing services. FALSE

66. The attestation standards provide guidance for a wide variety of attestation engagements. TRUE

67. The AICPA's Generally Accepted Auditing Standards must be followed on all audit engagements. TRUE

68. The reporting principle relates to a firm's system of quality control criteria for conducting an audit. FALSE

69. Auditors cannot effectively satisfy the responsibilities principle requiring due care if they have not also satisfied the performance principle. TRUE

70. Auditing procedures are quality guides that are less specific than auditing standards. FALSE

71. Auditing procedures are the same as auditing standards. FALSE

72. The concept of due care requires auditors to observe the performance, responsibilities and reporting principles. TRUE

73. Attestation standards require the practitioner to obtain a sufficient understanding of the client's internal control. FALSE

74. The performance principle sets forth the quality criteria for conducting an audit. TRUE

75. Auditors of entities registered with the Securities and Exchange Commission are required to register with the Public Company Accounting Oversight Board (PCAOB). TRUE

76. Control risk is the probability that a material misstatement (error or fraud) could occur and not be prevented or detected on a timely basis by the entity's external auditors. FALSE

77. Evidence that is considered "appropriate" in auditing means that all underlying accounting data and corroborating information must be absolutely compelling to auditors. FALSE

78. Even in the audit of historical cost financial statements, auditors may have to make inferences about the future. TRUE

79. The contents of the auditors' report are guided exclusively by the reporting principle of GAAS. FALSE

80. The auditors' standard report should always make direct reference to consistency and disclosure. FALSE

81. The auditors' standard report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. TRUE

82. Evidence is considered appropriate when it is both valid and relevant. TRUE

83. The statement on quality control standards No. 7 notes that the purpose of a system of quality control is to provide reasonable assurance that the firm and its personnel issue reports that are appropriate under the circumstances. TRUE

Fill in the Blank Questions


84. The _____________________________ standards are a general set of standards to guide attestation engagements in areas other than audits of financial statements. attestation

85. Audits of historical financial statements are guided by a broad set of principles referred to as _______________________ _________________________ _____________________________ _____________________________. generally accepted auditing standards

86. Attestation reporting is different because attestation engagements related to nonfinancial information do not require information to be presented in accordance with _____________________________ _____________________________ _____________________________ _____________________________. generally accepted accounting principles

87. The AICPA's fundamental principles of generally accepted auditing standards are classified in three categories: _______________________ principle, _______________________ principle, and the _____________________________ principle. responsibilities, performance, reporting

88. A(n) _____________________________ _____________________________ is a list of auditing procedures that will be performed during the engagement to gather sufficient appropriate evidence. audit plan

89. The responsibilities principle of GAAS highlights the importance of complying with ethical requirements, including those pertaining to __________________________ and _____________________________. independence, due care

90. The three aspects of practical independence are _____________________________ independence, _____________________________ independence, and _____________________________ independence. programming, investigative, reporting

91. The concept of _____________________________ relates to financial statement users' perceptions of auditors' independence. independence in appearance

92. _____________________________ ________________________ reflects a level of performance that would be exercised by reasonable auditors in similar circumstances. Due care

93. Since audit samples are used, audit evidence is considered to be _____________________________, rather than _____________________________. sufficient, absolute

94. The auditors' report must state whether the financial statements are presented in accordance with __________________________ _____________________________ _____________________________ _____________________________. generally accepted accounting principles

95. Under the reporting principle of GAAS, the auditor expresses an opinion in accordance with the ___________________ ______________. auditor's findings

96. Under the reporting principle of GAAS, the report will contain either an expression of _____________________________ regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. opinion

97. An overall opinion that the financial statements present the financial condition, results of operations, and cash flows according to generally accepted accounting principles is a(n) _____________________________ opinion. unqualified

98. If a material departure from GAAP is noted, auditors can choose between a(n) __________________________ opinion or a(n) ___________________________ opinion. qualified, adverse

99. Auditors' indication that no opinion is given is referred to as a(n) _______________________ ___________________________________________ disclaimer of opinion

100. The _____________________________ paragraph of the auditors' report declares that the audit was conducted in accordance with generally accepted _________________________________________________________

Answer: scope, auditing standards

101. A(n) _____________________________ _____________________________ is a study of an accounting firm's quality control policies and procedures, followed by a report on the firm's quality of audit practice in accordance with the system of quality controls. peer review

102. The _____________________________ _____________________________ Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). Sarbanes-Oxley

103. The PCAOB has two primary roles: _____________________________ and _____________________________. standard setting, monitoring

Essay Questions

104. Distinguish between attestation standards and the fundamental principles of generally accepted auditing standards by identifying and describing major differences between the two sets of standards.

1. Attestation standards do not attempt to describe one type of engagement (such as a GAAS audit) or identify one type of information on which assurance is provided (such as the financial statements).2. In addition to general training and knowledge in the attest (audit) function, attestation standards require that practitioners have adequate knowledge of the subject matter to which the attestation engagement relates. (Because of the wide range of attestation engagements, this is a requirement that is necessary for attestation engagements but not audit engagements).3. Practitioners can only accept attestation engagements if the subject matter is capable of being assessed against established criteria (since financial statements can always be assessed against GAAP, there is no requirement such as this in GAAS).4. Attestation standards do not require auditors to obtain an understanding of the client to assess the risk of material misstatement.5. Since attestation engagements may not depend upon one type of criteria (such as GAAP in an audit), information is evaluated based on "established or stated criteria".6. Since attestation engagements may be conducted on a wide range of information, the use of the attestation report may be limited to specified individuals (the use of auditors' reports is generally available to any interested party).


105. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan.Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working.After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything - it will only make us go over the budget." When Alan came to the client near the end of field Work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager.Required:1. Describe the performance principle of GAAS.2. Do you believe that the Mellow Markets audit complies with these standards? Explain.

According to the performance principle, to obtain reasonable assurance, which is high but not an absolute level of assurance, the auditor:1. Plans the work and properly supervises any assistants.2. Determines and applies appropriate materiality level or levels throughout the audit.3. Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control4. Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.The Mellow Markets audit does not comply with these standards. With respect to planning, the failure to prepare an appropriate audit plan and lack of time and attention the inexperienced staff received from Alan violate the performance principle. In addition, there is no indication that any steps were taken to either understand the client's business or its internal control. Finally, these deficiencies suggest that the appropriate procedures were not performed to collect sufficient appropriate evidence. Further, the lack of a relevant plan to observe inventory in other cities and Alan's decision to limit inventory procedures to agreeing the inventory sheets and the general ledger inventory balance demonstrates the failure to gather sufficient appropriate evidence and represents an overall violation of the performance principle.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: Hard

Matching Questions

Question also Found in Study Guide

106. Using I (introductory), S (scope), O (opinion), A (additional), or N (none), indicate the paragraph in which the following statements or topics would be included in the auditors' report.

1. none The titles of the financial statements examined by the

auditors. 3

2. none A description of any scope limitation(s) encountered during

the audit. 4

3. introductory A statement that auditors were independent with respect to

the entity. 1

4. additional The auditors' conclusion with respect to the fairness of the

entity's financial statements. 5

5. opinion A statement that an audit was conducted in accordance with

generally accepted auditing standards. 8

6. opinion A statement that the entity's management is responsible for

the fairness of the financial statements. 3

7. introductory A description of an audit, which includes examining

evidence in support of the financial statements. 8 8. scope Reference to generally accepted accounting principles. 5

9. scope A description of any specific departures from GAAP noted

during the audit that were material. 4

10. additional A statement that the financial statements were consistently

prepared compared to those of prior period(s). 1


The responsibilities principle under generally accepted auditing standards does not include which of the following?Competence and capabilitiesIndependent attitudeDue carePlanning and supervision

Which of the following presumptions does not relate to the reliability of audit evidence?The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.

An independent auditor must have which of the following?A pre-existing and well-informed point of view with respect to the auditTechnical training that is adequate to meet the requirements of a professionalA background in many different disciplinesExperience in taxation that is sufficient to comply with generally accepted auditing standards

Which of the following would be evaluated during the PCAOB inspection process?

Option A

Which of the following paragraphs references the conduct of the audit in accordance with PCAOB standards?Introductory paragraphScope paragraphOpinion paragraphInternal control paragraph

All of the following are examples of procedures a firm can use to monitor its system of quality control exceptdiscussions with firm personnel.conducting reviews of engagement documentation.devoting sufficient resources to developing a system of quality control.assessing compliance with independence policies and procedures.

Which of the following statements is generally correct about the appropriateness of audit evidence?Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.To be reliable, audit evidence must be either valid or relevant, but need not be both.Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements.

Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.In a system of quality control, leadership responsibilities for quality within the firm are best characterized bybasing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients.management's evaluation of the integrity and business reputation of the client.management's clear and consistent demonstration of its own commitment to quality control and high-quality work.assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.

Which of the following could serve as a source of professional guidance in the audit of a public entity?

Option b

The performance principle would include all of the following exceptthe auditors' determination of materiality levels.the auditors' evaluation of independence with respect to their clients.the auditors' evaluation of the risk of material misstatement.the auditors' determination of the nature, timing, and extent of further audit procedures.

The three fundamental principles underlying GAAS include all of the following, exceptgeneral principle.performance principle.reporting principle.responsibilities principle.

Which of the following situations would result in the issuance of a disclaimer of opinion?The audit reveals weaknesses in the client's internal control over financial reporting.The auditor is discovered to own a financial interest in the entity.The audit is performed, with limited exception, in accordance with generally accepted auditing standards.The entity's financial statements are not presented in conformity with the applicable financial reporting framework.

The role of the Public Company Accounting Oversight Board in the standard-setting process is to developStatements on Auditing Standards for the audits of nonpublic entities.Auditing Standards for the audits of public entities.Governmental Auditing Standards for the audits of governmental entities.International Standards on Auditing for the audits of foreign entities.

Under generally accepted auditing standards, which of the following relates to the responsibilities principle?The initial planning of the audit engagementThe confirmation of accounts receivable

The completion of an internal control questionnaireMaintaining professional skepticism and exercising professional judgment

Which of the following is an important consideration during the planning of the audit?Considering the independence of members of the audit teamPerforming some of the audit procedures prior to the end of the year under auditConsidering the ability and expertise of the audit team with respect to accounting and auditing issues in the client's industryConsidering the impact of tests of controls on the overall assessment of control risk

Which of the following represent audit quality guides that remain stable over time and are applicable for all audits?Auditing proceduresAuditing standardsDue careSystem of quality control

Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards?Establish procedures that comply with the standards of the Sarbanes-Oxley Act.Use attributes sampling techniques in testing internal controls.Consider inherent risk and control risk before determining detection risk.Establish policies to ensure that the audit work meets applicable professional standards.

Auditors try to achieve independence in appearance in order tomaintain public confidence in the profession.become independent in fact.comply with the responsibilities principle.maintain an unbiased mental attitude.

Generally accepted auditing standards arespecific actions performed by auditors during an examination.standards that guide the conduct of an audit examination.legal requirements auditors must observe during the audits of public entities.standards used by entities in deciding whether to engage or retain the services of auditors.

Which of the following would normally be considered earliest in the audit examination?Determination of materiality levels for use during the auditConsideration of the ability of the entity's internal control to prevent or detect errorsPreparation of a written audit planEvaluation of the type of audit opinion to be issued, based on the auditor's findings

Chapter 03 Engagement Planning Answer Key https://s3-us-west-2.amazonaws.com/tbcrv/11545aSampleCh3.pdf

True / False Questions 1. An important element of a public accounting firm's system of quality

control is the decision about client acceptance and retention. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Topic: Audit Plan

2. The Code of Professional Conduct permits predecessor auditors to give information to the auditors without client consent. FALSEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Topic: Audit Plan 3. Engagement letters are not necessary for continuing clients.

FALSEReference: Question also found in study guide


https://s3-us-west-2.amazonaws.com/tbcrv/11545aSampleCh3.pdf

4. A second audit partner is required for audits of financial statements filed with the SEC. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Topic: Audit Documentation

5. CAATs software requires auditors to do the original programming. FALSEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Topic: Planning in a Computerized Environment 6. A first-time audit requires more work than a repeat engagement.

TRUEReference: Question also found in study guide


7. A major reason for thinking about overall materiality at the planning stage is to try to fine-tune the audit for effectiveness and efficiency. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Topic: Materiality

8. The use of computer-assisted auditing techniques has significantly changed auditing objectives. FALSEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Topic: Planning in a Computerized Environment

9. The computer has simplified auditing by providing a better audit trail. FALSEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Topic: Planning in a Computerized Environment 10. The use of computer systems has increased the potential for

management supervision of the internal control system. TRUEReference: Question also found in study guide


11. The degree of computer complexity and use may influence the nature, timing, and extent of audit procedures. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: Understand

Difficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Topic: Planning in a Computerized Environment 12. Control activities in computerized accounting systems may have

characteristics that differ from manual control activities designed to accomplish the same control objectives. TRUEReference: Question also found in study guide


13. CAATs software may be utilized to read, compute, and operate on machine-readable records. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Topic: Planning in a Computerized Environment 14. The most important facet of the current audit evidence files is the

requirement that they show the auditor's decision-making process and conclusions reached. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Topic: Audit Documentation

15. The concept of materiality emphasizes the accountants' and managers' point of view, not the users' point of view. FALSEReference: Question also found in study guide


16. Auditors are generally left without definitive, quantitative guidelines for determining materiality. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Topic: Materiality 17. When management can exercise discretion over an accounting

treatment, auditors tend to exercise more care and use a more stringent materiality criterion. TRUEReference: Question also found in study guide


18. Auditors usually choose separate measures of materiality for each of the financial statements. FALSEReference: Question also found in study guide


19. Auditors usually prepare an audit plan summarizing the preliminary analytical review and the materiality assessment. FALSEReference: Question also found in study guide


20. Auditors use two kinds of audit plans, one for obtaining evidence about control risk, and the other for obtaining evidence about dollar amounts and disclosures. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Topic: Audit Plan 21. Audit procedures are intended to enable auditors to conduct work in

accordance with the three performance principle. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Topic: Audit Procedures for Obtaining Audit Evidence

22. Scanning is an "eyes-open" approach of looking for anything unusual in the accounts. TRUEReference: Question also found in study guide

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Topic: Audit Procedures for Obtaining Audit Evidence

23. Audit plans are used as audit planning tools.

FALSEReference: Question also found in study guide


Multiple Choice Questions 24. Which of the following auditor concerns most likely could be so

serious that the auditor would conclude that a financial statement audit cannot be conducted?

A. The entity has no formal written code of conduct.

B. The integrity of entity's management is suspect.

C. Procedures requiring separation of duties are subject to management override.

D. Management fails to modify prescribed controls for changes in conditions.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities

25. Before accepting an engagement to audit a new client, an auditor is required to

A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

B. Obtain the prospective client's signature to the engagement letter.

C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.

D. Discuss the management representation letter with the prospective client's audit committee.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities

26. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

A. An inadequate understanding of the entity's internal controls.

B. The close proximity to the end of the entity's fiscal year.

C. Concluding that the entity's management probably lacks integrity.

D. The inability to perform preliminary analytical procedures before assessing control risk.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities

27. The auditor is not required to ask the predecessor auditor about

A. Facts that might bear on the integrity of management.

B. Disagreements the predecessor may have had with management about accounting principles and audit procedures.

C. The fees charged for the previous audit.

D. The predecessor's understanding about the reasons for the change of auditors.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: OriginalTopic: Pre-Engagement Activities

28. Audit documentation does not normally include the

A. Specific assertions under audit.

B. Industry accounting guides.

C. Record of the procedures performed.

D. Decisions made in the course of the audit.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit Documentation

29. C. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was K. Post, CPA, whom Monday has notified by that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?

A. Hill, the auditor.

B. Post, the predecessor auditor.

C. Monday's controller or CFO.

D. The chair of Monday's board of directors.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities

30. Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit?

A. Performing tests of details of transactions and balances.

B. Reviewing prior year audit documentation and the permanent file for the client.

C. Reading specialized industry journals.

D. Reevaluating the client's internal control environment.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: AICPATopic: Planning

31. The pre-engagement activities of an audit engagement for a public accounting firm do not include

A. Evaluating the public accounting firm's independence with regard to the audit engagement.

B. Obtaining predecessor audit documentation.

C. Obtaining an engagement letter.

D. Ensuring that there are sufficient firm resources to complete the engagement on a timely basis.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: OriginalTopic: Pre-Engagement Activities

32. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

A. Inquiring of the client's legal counsel concerning pending litigation.

B. Comparing the financial statements to anticipated results.

C. Examining computer-generated exception reports to verify the effectiveness of internal controls.

D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.


33. This year, Blakeney Enterprises engaged a new auditor who must

A. Attempt to communicate with the predecessor auditor before accepting the engagement.

B. Review the predecessor's audit documentation if the audit is to be in accordance with GAAS.

C. Seek the SEC's permission to accept the engagement if Blakeney is publicly owned.

D. Reject the engagement if the change in auditors resulted from a dispute with the predecessor.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities

34. An engagement letter is used primarily to

A. Ensure a clear contractual understanding of the services to be provided by the CPA.

B. Express an opinion on the financial statements.

C. Provide management representations to be included in the audit evidence.

D. Disclaim liability.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities

35. The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard?

A. Independence.

B. Adequate technical competence and capabilities.

C. Adequate planning and supervision.

D. Gathering sufficient competent evidence.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: AICPATopic: Audit Documentation

36. During the initial planning phase of an audit, a CPA most likely would

A. Test specific internal control activities that are likely to prevent fraud.

B. Evaluate the reasonableness of the client's accounting estimates of inventory obsolescence.

C. Discuss the timing of the audit procedures with the client's management.

D. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ApplyDifficulty: 3 HardLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: AICPATopic: Planning

37. Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should

A. Reduce audit risk by lowering the preliminary levels of materiality.

B. Design special substantive tests to compensate for the lack of industry expertise.

C. Engage financial experts familiar with the nature of the industry.

D. Obtain knowledge of matters that relate to the nature of the entity's business.


38. Which of the following types of transactions would be routine and computerized?

A. Capital stock sales and repurchases.

B. Credit sales and billings.

C. Income tax expense and liability.

D. Bank loan transactions.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

39. Errors in data processed in a batch computer system may not be detected immediately because

A. Transaction trails in a batch system are available for only a limited period of time.

B. There are time delays in processing transactions in a batch system.

C. Errors in some transactions cause rejection of other transactions in the batch.

D. Random errors are more likely in a batch system than in an online system.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: AICPATopic: Information Technology

40. Management's responsibility in a computer system would not include

A. Ensuring that the documentation of the system is complete and up to date.

B. Maintaining a system of transaction processing that includes an audit trail.

C. Assessing the control risk.

D. Making computer resources and knowledgeable personnel available for questions.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

41. The characteristics that distinguish computer processing from manual processing would not include

A. A decrease of management supervision of operations.

B. Automatic initiation and execution of transactions.

C. The possible concentration of control activities.

D. A high potential for unauthorized access to data.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

42. Which of the following is not a category of audit documentation?

A. Temporary files.

B. Permanent files.

C. Audit administrative files.

D. Current documentation files.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit Documentation

43. The essential advantages of a computer-assisted audit techniques (CAATs) package would not include the fact that

A. The same software can be used on different types of clients' computer environments.

B. A large number of CAATs packages are currently available.

C. Software packages are always inexpensive.

D. The ability to control and modify the program to meet an auditors' need.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

44. Computer-assisted audit techniques (CAATs) could not be used for which of the following audit tasks?

A. Testing calculations and making computations.

B. Evaluating control risk assessment.

C. Summarizing, resequencing, and reformatting data.

D. Comparing audit evidence from manual audit procedures to company needs.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

45. Comparing data on separate files can be accomplished by using computer-assisted audit techniques (CAATs) to determine whether comparable information is in agreement. Examples of such comparisons would not include

A. Payroll details with personnel records.

B. Current and prior inventory to details of purchases and sales.

C. Paid vouchers to disbursements.

D. Observation of inventory accounts.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

46. The basic auditing application of the personal computer as an audit tool would not include

A. Spreadsheet analysis.

B. Sample planning, selection, and evaluation.

C. Continuous monitoring of a client's internal control system.

D. Analytical review.


47. An auditor would most likely be use word processing software for what purpose?

A. Performing analytical procedures.

B. Preparing a trial balance.

C. Preparing an audit plan.

D. Obtaining a sample selection.


48. Which of the following use of computer-assisted audit techniques (CAATs) would most likely be considered a search for fraudulent activities?

A. Selecting customers' accounts receivable for confirmation.

B. Recalculating inventory extensions.

C. Scanning accounts receivable balances for amounts over the credit limit.

D. Comparing a list of vendor addresses to employee address files.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

49. An auditor would least likely use computer software to

A. Access client data files.

B. Prepare spreadsheets.

C. Assess information systems control risk.

D. Construct parallel simulations to test the client's computing system.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: AICPATopic: Information Technology

50. A primary advantage of using computer-assisted audit techniques (CAATs) packages to audit the financial statements of a client that uses computerized information systems is that the auditor may

A. Access information stored on computer files even with a limited understanding of the client's hardware and software features.

B. Consider increasing the use of substantive tests of transactions in place of analytical procedures.

C. Substantiate the accuracy of data by using self-checking digits and hash totals.

D. Reduce the level of required tests of controls to a relatively small amount.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: AICPATopic: Information Technology

51. For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?

A. Assessment of inherent risk, yes; assessment of control risk, yes

B. Assessment of inherent risk, yes; assessment of control risk, no

C. Assessment of inherent risk, no; assessment of control risk, yes

D. Assessment of inherent risk, no; assessment of control risk, no

AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 3 HardLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: AICPATopic: Planning

52. Which of the following is not considered an accounting estimate?

A. Allowance for loan losses.

B. Credit sales.

C. Net realizable value of inventory.

D. Percentage-of-completion revenue to be recorded.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Accounting Estimates

53. Which of the following would be a step in an internal control program?

A. Obtain an aged trial balance of the accounts receivable.

B. Prepare and send confirmations on a sample of customers' accounts receivable.

C. Assess the control risk for sales and collections.

D. Read sales contracts for evidence of customers' rights of return or price allowance terms.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Control Testing

54. The idea of the cycle approach is to group accounts together by

A. Specific function.

B. Financial statement assertion.

C. Audit objective.

D. Transactions that affect all accounts in that particular group.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Accounting Cycles

55. Which of the following is not one of the four major cycles?

A. Revenue and cash collection.

B. Acquisition and expenditure.

C. Cash receipts and disbursements.

D. Financing and investing.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Accounting Cycles

56. Looking at vendors' invoices for particular information is an example of

A. Physical observation.

B. Confirmation.

C. Inspection of documents.

D. Scanning.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

57. An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on

A. Absolute size.

B. Relative size.

C. Nature of the item.

D. Cumulative effects.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Materiality

58. Which of the following is not a way in which auditors use the concept of overall materiality?

A. As a guide to planning the audit plan.

B. As a guide to the evaluation of evidence.

C. As a guide for making decisions about the audit report.

D. As a guide for assessing control risk.

AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Materiality

59. The auditor looked at a bank statement received and held by the client. What kind of audit procedure would this be considered?

A. Recalculation.

B. Physical observation.

C. Confirmation.

D. Examination of documents.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

60. In testing the existence assertion for an asset, an auditor ordinarily works from the

A. Financial statements to the potentially unrecorded items.

B. Potentially unrecorded items to the financial statement.

C. Accounting records to the supporting evidence.

D. Supporting evidence to the accounting records.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: AICPATopic: Assertions

61. In determining whether transactions have been recorded, the direction of the audit testing should start from the

A. General ledger balances.

B. Adjusted trial balance.

C. Original source documents.

D. General journal entries.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: AICPATopic: Audit Procedures

62. Auditors should design the written audit plan so that

A. All material transactions will be selected for substantive testing.

B. Substantive tests prior to the balance sheet date will be minimized.

C. The audit procedures selected will achieve specific audit objectives.

D. Each account balance will be tested under either tests of controls or tests of transactions.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: AICPATopic: Planning

63. In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the

A. Timing of audit procedures.

B. Cost-benefit of gathering techniques.

C. Selected audit techniques.

D. Financial statement assertions.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 3 HardLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: AICPATopic: Planning

64. In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating

A. $10,000.

B. $15,000.

C. $20,000.

D. $30,000.

AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: AICPATopic: Materiality

65. The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of

A. Planning.

B. Supervision.

C. Information evaluation.

D. Quality assurance.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: AICPATopic: Planning

66. In the preparation of an audit plan, which of the following items is not essential?

A. A review of material from prior audits.

B. The preparation of a budget identifying the costs of resources needed.

C. An understanding of controls established by management.

D. Assessment of inherent risk.


67. To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to

A. Inspect the stock certificates evidencing the investment.

B. Examine the audited financial statements of the investee company.

C. Review the broker's advice or canceled check for the investment's acquisition.

D. Obtain market quotations from The Wall Street Journal or another independent source.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

68. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of

A. Presentation and disclosure.

B. Completeness.

C. Rights and obligations.

D. Existence.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Assertions

69. Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A. Trace test counts noted during the physical count of inventory to the summarization of quantities.

B. Inspect agreements for evidence of inventory held on consignment.

C. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.

D. Inspect the open purchase order file for significant commitments to consider for disclosure.


70. 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

A. Existence or occurrence.

B. Completeness.

C. Valuation or allocation.

D. Presentation and disclosure.


71. Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?

A. Tracing amounts in the subsidiary ledger to details on shipping documents.

B. Comparing receivable turnover rates to industry statistics for reasonableness.

C. Inquiring about receivables pledged under loan agreements.

D. Assessing the allowance for uncollectible accounts for reasonableness.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 3 HardLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

72. An auditor most likely would inspect additions to the audit client's Property, Plant, and Equipment account to obtain evidence concerning management's assertions about


B. Rights and obligations.

C. Presentation and disclosure.

D. Valuation or allocation.


73. Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

A. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.

B. Receiving the client's unopened mail for a reasonable period of time after year-end to search for unrecorded vendor's invoices.

C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

D. Confirming accounts payable balances with known vendors and suppliers who have zero balances at year-end.


74. An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

A. Rights and obligations.

B. Completeness.


D. Existence or occurrence.


75. In auditing accrued liabilities, an auditor's procedures most likely would focus primarily on management's assertion of


B. Completeness.


D. Valuation or allocation.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 3 HardLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Assertions

76. An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them. This procedure most likely obtained evidence concerning management's assertion of


B. Completeness.

C. Existence or occurrence.

D. Valuation.


77. An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of

A. Valuation or allocation.

B. Presentation and disclosure.

C. Existence or occurrence.

D. Rights and obligations.


78. Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?

A. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.

B. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

C. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.

D. Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.


79. The confirmation of a cash balance provides primary evidence regarding which management assertion?

A. Existence.

B. Valuation.

C. Allocation.

D. Completeness.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Assertions

80. The confirmation of an accounts receivable balance provides primary evidence regarding which management assertion?

A. Completeness.

B. Valuation.

C. Allocation.

D. Existence.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Assertions

81. In testing the completeness assertion for a liability account, an auditor ordinarily works from the

A. Financial statements to the potentially unrecorded items.

B. Potentially unrecorded items to the financial statements.

C. Accounting records to the supporting evidence.

D. Trial balance to the subsidiary ledger.


82. An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about


B. Existence.


D. Valuation.


83. When initiating communications with predecessor auditors, prospective auditors should expect

A. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits.

B. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement.

C. To obtain copies of some or all of the predecessor auditors' audit documentation.

D. All of the above.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: AICPATopic: Pre-Engagement Activities 84. When planning an audit, which of the following is not a factor that

affects auditors' decisions about the quantity, type, and content of audit documentation?

A. The auditors' need to document compliance with generally accepted auditing standards.

B. The existence of new sales contracts important for the client's business.

C. The auditors' judgment about their independence with regard to the client.

D. The auditors' judgments about materiality.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning

85. Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the

A. Current file evidence audit documentation.

B. Permanent file audit documentation.

C. Administrative audit documentation in the current file.

D. Planning memorandum in the current file.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit Documentation 86. An auditor's permanent file audit documentation most likely will

contain

A. Internal control analysis for the current year.

B. The most recent engagement letter.

C. Memoranda of conference with management.

D. Excerpts of the corporate charter and bylaws.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit Documentation

87. Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?

A. Being able to fine-tune the audit work for effectiveness and efficiency.

B. Avoiding the problem of doing more work than necessary (overauditing).

C. Being able to decide early what type of audit opinion to issue.

D. Avoiding the problem of doing too little work (underauditing).

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Materiality 88. Spreadsheet software would be most useful for which of the following

audit activities?

A. Testing internal controls over computerized accounting applications.

B. Preparing an audit plan.

C. Preparing a comparison of current-year expenses with those from the previous year.

D. Drafting a planning memorandum.

Reference: Question also found in textbook AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology

89. Which of the following is an advantage of computer-assisted audit techniques (CAATs)?

A. The CAATs programs are all written in one computer language.

B. The software can be used for audits of clients that use differing computer equipment and file formats.

C. The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures.

D. The use of CAATs can be substituted for a relatively large part of the required testing.

Reference: Question also found in textbook AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: CAATs 90. A primary advantage of using CAATs in the audit of an advanced

computerized system is that it enables the auditor to

A. Substantiate the accuracy of data through self-checking digits and hash totals.

B. Utilize the speed and accuracy of the computer.

C. Verify the performance of machine operations that leave visible evidence of occurrence.

D. Gather and store large quantities of supportive audit evidence in machine-readable form.

Reference: Question also found in textbook AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: CAATs

91. An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

A. Schedules and analyses to be prepared by the client's employees.

B. Methods of statistical sampling the auditor will use.

C. Specification of litigation in progress against the client.

D. Client representations about availability of all minutes of meetings of the board of directors.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning 92. When auditing Vandalay Jewelry, Costanza, CPA was not familiar with

the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist in the inventory valuation. Should Costanza refer to Benes's work in the audit report?

A. Yes, the auditors' report should mention the fact that a specialist was used.

B. The auditors' report should mention the use of the specialist only when the specialist's findings affect the auditors' conclusions.

C. The use of a specialist need not be mentioned if the auditors decide not to take responsibility for the specialist's findings.

D. The auditors' report should mention the specialist only if Vandalay agrees with the specialist's findings.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 3 HardLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Specialists

93. Which of the following communications is most likely to be written before the balance-sheet date?

A. A report to the audit committee on the results of testing of internal control over cash receipts.

B. Confirmation letters to vendors confirming the amounts they owe to the client.

C. An attorney's letter regarding contingent liabilities.

D. An engagement letter.

Reference: Question also found in textbook AACSB: CommunicationAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning 94. Which of the following procedures would most likely be performed

during planning?

A. Surprise counts of the client's petty cash fund.

B. Reporting internal control deficiencies to the audit committee.

C. Performing a search for unrecorded liabilities.

D. Identifying related parties.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning

95. Prior to accepting a new audit engagement, a public accounting firm should

A. Attempt to contact the predecessor auditors.

B. Evaluate the integrity of management.

C. Assess the firm's resources to ensure that they are sufficient to permit them to accept the engagement.

D. All of the above.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: OriginalTopic: Pre-Engagement Activities 96. An audit plan contains

A. Specifications of audit standards relevant to the financial statements being audited.

B. Specifications of procedures the auditors believe appropriate for the financial statements under audit.

C. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached.

D. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

97. The revenue cycle of a company generally includes which accounts?

A. Inventory, accounts payable, and general expenses.

B. Inventory, general expenses, and payroll.

C. Cash, accounts receivable, and sales.

D. Cash, notes payable, and capital stock.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Accounting Cycles 98. When auditing the existence assertion for an asset, auditors proceed

from the

A. Financial statement amounts back to the potentially unrecorded items.

B. Potentially unrecorded items forward to the financial statement amounts.

C. General ledger back to the supporting original transaction documents.

D. Supporting original transaction documents to the general ledger.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

99. Confirmations of accounts receivable provide evidence primarily about which two assertions?

A. Completeness and valuation.

B. Valuation and rights and obligations.

C. Existence and rights and obligations.

D. Existence and completeness.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Assertions 100. With respect to the concept of materiality, which one of the following

statements is correct?

A. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.

B. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.

C. Materiality is determined by reference to AICPA guidelines.

D. Materiality is a matter of professional judgment.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Materiality

101. When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following?

A. Key factors that are consistent with prior periods.

B. Assumptions that are similar to industry guidelines.

C. Measurements that are objective and not susceptible to bias.

D. Evidence of a conservative systematic bias.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures 102. Generally accepted auditing standards require that auditors always

prepare and use

A. A written planning memorandum explaining the auditors' understanding of the client's business.

B. A written client consent to discuss audit matters with prospective auditors.

C. A written audit plan.

D. The written time budgets and schedules for performing each audit.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning

103. Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

A. Interviewing internal auditors about their reporting responsibilities.

B. Reviewing accounting records for recurring transactions occurring near year-end.

C. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities.

D. Scanning the minutes for significant transactions with members of the board of directors.

Reference: Question also found in textbook AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning 104. An audit engagement letter should normally exclude the following

matter of agreement between the public accounting firm and the client

A. Fees to be charged.

B. Terms of the engagement.

C. Schedules to be prepared by client.

D. Type of opinion to be produced.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: OriginalTopic: Pre-Engagement Activities

105. The time reports are recorded by budget categories for all the following purposes except for

A. Providing evidence that the audit plan was satisfied.

B. Evaluating the efficiency of the audit team members.

C. Compiling a record for billing the client.

D. Compiling a record for planning the next audit.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning 106. For all audits of financial statements filed with the Securities and

Exchange Commission, which of the following is required?

A. A computer specialist.

B. A second audit partner.

C. Electronic documentation.

D. Computer-assisted audit techniques.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning

107. Which of the following is used to maintain control of the audit and ensure that it is completed on a timely basis?

A. Engagement letter.

B. Termination letter.

C. Time budget.

D. Analytical procedures.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning 108. Which of the following is not an example of early information-

gathering activities?

A. Review of the corporate charter and bylaws.

B. Review of contracts, agreements, and legal proceedings.

C. Reading and studying the minutes of the meetings of directors and committees of the board of directors.

D. Preparing a time budget.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 1 EasyLearning Objective: 03-01 List and describe the required preengagement activities that auditors undertake before beginning an audit engagement.Source: OriginalTopic: Pre-Engagement Activities

109. In a computerized information system, uniform processing of transactions

A. Means that transactions will never be processed incorrectly.

B. Requires that a company use the same program for all functions.

C. Subjects similar transactions to the same processing instructions.

D. Always leaves an audit trail.

Reference: Question also found in study guide AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: Information Technology 110. Auditing standards do not require that documentation show that

A. It conforms to AICPA model papers.

B. The work was adequately planned and supervised.

C. The client's accounting records agree or reconcile with financial statements.

D. Sufficient appropriate evidential matter was obtained.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit Documentation

111. Which of the following can CAATs not do?

A. Scan inventory quantities for negative balances.

B. Determine the reasonableness of the allowance for doubtful accounts.

C. Recalculate depreciation.

D. Select customers' accounts receivable for confirmation.

Reference: Question also found in study guide AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: CAATs 112. The major cycles that auditors typically group accounts by do not

include

A. Revenue and collection.

B. Production and conversion.

C. Finance and investment.

D. Assets and liabilities.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Accounting Cycles

113. Physical observation by an audit team would include

A. Examination of a sales invoice.

B. Recalculation of depreciation.

C. Examination of securities certificates.

D. Scanning of the expense accounts for unusual transactions.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures 114. The concept of materiality is not used by auditors as a guide to

A. Planning the audit plan.

B. Evaluating the evidence.

C. Applying the responsibilities principle.

D. Making decisions about the audit report.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Planning

115. An internal control program for understanding the client's inherent risk and control risk would not include which of the following procedures?

A. Communicate with predecessor auditors.

B. Study previous year audit documentation.

C. Evaluate the competence and independence of the internal auditors.

D. Obtain written representation from the client concerning collectability of receivables.

Reference: Question also found in study guide AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: OriginalTopic: Audit Procedures

Fill in the Blank Questions 116. When companies change auditors, the former auditors are referred to

as the ________________________________________ predecessor auditorsReference: Question also found in study guide

117. Auditing standards require the auditors to ask that client consent be

given to permit the _________________________ auditors to speak. predecessorReference: Question also found in study guide

118. A(n) ________________________________________________ is recommended

as a means of reducing risk of misunderstanding between a client and auditor. engagement letterReference: Question also found in study guide

119. ____________________________________________________________ include programs that may be utilized to read, compute, and operate on machine-readable records. Computer-assisted audit techniquesReference: Question also found in study guide

120. ____________________________________________________________ refers to

procedures performed shortly before and after the balance sheet date. Year-end audit workReference: Question also found in study guide

121. The ____________________________________________________ is the

amount by which a particular account may be misstated and cause the financial statements to be materially misleading. tolerable misstatementReference: Question also found in study guide

122. For continuing audits, specific information about the client is

available in ____________________________________________________. prior audit documentationReference: Question also found in study guide

123. Audit _____________________________ can often be realized by working

in tandem with _____________________________ auditors. efficiency; internalReference: Question also found in study guide

124. _____________________________ are persons skilled in fields other than

accounting and auditing who are not members of the audit team. SpecialistsReference: Question also found in study guide

125. A(n) _______________________________ is a chain of evidence provided

through coding, cross-references, and documentation connecting account balances and other summary results with the original transaction documents calculations. audit trailReference: Question also found in study guide

126. The _____________________________ of the client's computer operations should be considered in audit ____________________________. complexity; planningReference: Question also found in study guide

127. The ________________________________ contains information of

continuing audit significance over many years' audits of the same client. permanent fileReference: Question also found in study guide

128. _____________________________ is the auditor's record of compliance

with generally accepted auditing standards. DocumentationReference: Question also found in study guide

129. The ____________________________ approach to quantifying materially

assigns an overall material amount for the financial statements and then allocates it to the particular accounts. top-downReference: Question also found in study guide

130. In vouching, an item of financial information is selected from an

account, and then the audit team goes _____________________________ through the accounting and control system to find the ____________________________. backward; source documentationReference: Question also found in study guide

131. _____________________________ is a procedure that generally involves

the collection of oral evidence from independent parties and client officials. InquiryReference: Question also found in study guide

132. Management is responsible for making the accounting

____________________________, and auditors are responsible for evaluating their ____________________________. estimates; reasonablenessReference: Question also found in study guide

133. ________________________________ are composed of independent, outside members of the board of directors (those not involved in the company's day-to-day operations) who can provide a buffer between the public accounting firm and management. Audit committeesReference: Question also found in study guide

134. Procedures used to detect material misstatements in dollar amounts

and disclosures in financial statements are known as _______________________________________________. substantive proceduresReference: Question also found in study guide

135. Planning becomes a basis for preparing the

_________________________________. audit planReference: Question also found in study guide

136. A __________________________________________ program contains

specification of audit procedures for gathering direct evidence on ______________________________________ about _____________________________ and _____________________________ in financial statements. substantive audit; management's assertions; amounts; disclosuresReference: Question also found in study guide

137. Auditors cannot place complete reliance on

_____________________________________ to the exclusion of other audit procedures. internal controlReference: Question also found in study guide

138. Information is _____________________________ if it is likely to influence

financial statement users' decisions. materialReference: Question also found in study guide

Short Answer Questions

139. For each of the descriptions in Column A, match the correct word or words from Column B.

1. D, 2. F, 3. G, 4. E, 5. A

Feedback: Reference: Question also found in study guide AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Learning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Learning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit DocumentationTopic: Audit ProceduresTopic: Planning

140. For each of the descriptions 1-6, match the correct word or phrase from A-H.

1.F; 2.C; 3.H; 4.A; 5.B; 6.G AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Learning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Learning Objective: 03-06 Define what is meant by the proper form and content of audit documentation.Source: OriginalTopic: Audit DocumentationTopic: Audit ProceduresTopic: Planning

Essay Questions 141. Explain the bottom-up approach and the top-down approach to

quantifying overall materiality.

In the bottom-up approach to judging materiality, amounts in each account are judged separately and then combined to determine the overall effect. In the top-down approach to judging materiality, an overall material amount is determined for the financial statements and then allocated to each particular account.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 Medium

Learning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Materiality 142. Do the following regarding auditors' concepts of overall "materiality"

considered at the planning stage (i.e., "planning materiality").

a. Define or describe independent auditors' concept of "planning materiality."b. Name (but do not describe or explain) three common relationships or considerations used by auditors when assessing the dollar amount considered to be material.

a. Planning materiality is the largest amount of uncorrected dollar misstatement the auditors believe could exist in published financial statements without causing them to be considered materially misleading.b. Absolute size, relative size, nature of the item or issue, circumstances, uncertainty, cumulative effects.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-03 Define materiality and explain its importance in the audit planning process.Source: OriginalTopic: Materiality

143. What are the characteristics that distinguish computer processing from manual processing?

Characteristics that distinguish computer processing from manual processing include:

a. Computer system transaction trails may exist for only a short time.b. Computers process similar transactions uniformly.c. Functions are more concentrated in a computer system.d. Increased potential for errors and irregularities exist in computer systems.e. Certain transactions can be initiated or executed automatically in a computer system.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: Original

Topic: Information Technology 144. What are the advantages and limitations derived from using

computer-assisted audit techniques (CAATs) packages?

The advantages of computer-assisted audit techniques (CAATs) packages:

a. Original programming is not required.b. The required programming is easy.c. Training time to use the programming is short.

The limitations of computer-assisted audit techniques (CAATs) packages:

a. The computer cannot observe and count physical things.b. The computer cannot examine external and internal documentation.c. The computer cannot conduct inquiry procedures.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBlooms: RememberDifficulty: 2 MediumLearning Objective: 03-05 List and discuss matters of planning that auditors should consider related to the client's computer environment and describe how CAATs can be used to improve the efficiency of the audit process.Source: OriginalTopic: CAATs

145. D. Jackson, CPA, audited Washington Company's financial statements for the year ended December 31, 2007. On November 1, 2008, Washington notified Jackson that it was changing auditors and that Jackson's services were being terminated. On November 5, 2008, Washington invited Lincoln, CPA, to make a proposal for an engagement to audit its financial statements for the year ended December 31, 2008.

Required:

What procedures concerning Jackson should Lincoln perform before accepting the engagement?

a. Lincoln should explain to Washington the need to make an inquiry of Jackson and should request permission to do so.

b. Lincoln should ask Washington to authorize Jackson to respond fully to Lincoln's inquiries.

c. If Washington refuses to permit Jackson to respond or limits Jackson's response, Lincoln should inquire as to the reasons and consider the implications in deciding whether to accept the engagement.

d. Lincoln should make specific and reasonable inquiries of Jackson regarding matters Lincoln believes will assist in determining whether to accept the engagement, including specific questions regarding.

(1) Facts that might bear on the integrity of management.(2) Disagreements with management as to accounting principles, audit procedures, or other similarly significant matters.(3) Communications Jackson made to management about fraud, illegal acts, or internal control recommendations.(4) Jackson's understanding as to the reasons for the change of auditors.

e. If Lincoln receives a limited response, Lincoln should consider its implications in deciding whether to accept the engagement.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 03-04 List and describe the eight general types of audit procedures for gathering evidence.Source: AICPA adaptedTopic: Audit Procedures

146. Identify the two types of audit plans and indicate the purpose of each.

The two types of audit plans are (1) the internal control program and (2) the substantive audit plan. The internal control program contains the specification of procedures for obtaining an understanding of the entity's business and environment, including its internal control, and for assessing the inherent risk and the control risk related to the financial account balances. The substantive audit plan contains the specification of substantive tests for gathering direct evidence on the assertions about dollar amounts in the account balances.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 03-02 Understand the importance of planning the audit engagement so that it is conducted in accordance with professional standards.Source: OriginalTopic: Planning

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