Audit Ch. 2 MCQ/Notes

Chapter 2 Professional Standards

Which of the following categories of principles is most closely related to gathering audit evidence?
a. Performance.
b. Reasonable assurance.

c. Reporting.
d. Responsibilities.

a. Correct Gathering audit evidence is a component of the performance principle

Which of the following is not related to ethical requirements of auditors?
a. Due care.
b. Independence in appearance.
c. Independence in fact.
d. Professional judgment.

d. Correct While professional judgment is part of the responsibilities principle, it is not related to the ethical requirements of auditors.

One of an accounting firm's basic objectives is to provide professional services that con- form to professional standards. Reasonable assurance of achieving this objective can be obtained by following
a. Generally accepted auditing standards.
b. Standards within a system of quality control.
c. Generally accepted accounting principles.
d. International auditing standards.

b. Correct Standards within a system of quality control are firm- (rather than auditor-) related.

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 finan-
cial statements.
c. Critically assessing verbal evidence received from the entity's management.
d. Evaluating potential financial interests held by auditors in the client.

c. Correct Professional skepticism is characterized by appropriate questioning and a critical assessment of audit evidence.

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 substantive procedures to be performed.
b. To make consulting suggestions to the entity's 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.

a. Correct Auditors study internal control to determine the nature, timing, and extent of further audit procedures.

Ordinarily, what source of evidence should least affect audit conclusions?
a. External documentary evidence.
b. Inquiry of management.
c. Documentation prepared by the audit team.
d. Inquiry of entity legal counsel.

b. Correct Inquiry of management is a form of internal evidence, which is the least reliable form of evidence.

The most reliable evidence regarding the existence of newly-acquired computer equipment is
a. Inquiry of management.
b. Documentation prepared externally.
c. Evaluation of the client's procedures.
d. Physical observation.

d. Correct Auditors' personal knowledge through physical observation provides the most reliable form of evidence; in addition, unlike evaluation of client procedures (choice c), this relates directly to verifying the existence of newly-acquired equipment.

Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client's internal audit staff.
b. Inspection of prenumbered 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.

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

Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
a. Independence.
b. Adequate competence and capabilities.
c. Adequate planning and supervision.
d. Gathering sufficient appropriate evidence.

c. Correct Initials of the preparer and reviewer provide evidence that the documentation was reviewed, which relates to planning and supervision.

Which of the following concepts is least related to the standard of due care?
a. Independence in fact.
b. Professional skepticism.
c. Prudent auditor.
d. Reasonable assurance.

d. Correct Reasonable assurance is related to the auditors' responsibility for detecting misstatements and procedures performed during the examination, not the concept of due care.

Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
a. Independence.
b. Adequate competence and capabilities.
c. Adequate planning and supervision.
d. Gathering sufficient appropriate evidence.

c. Correct Initials of the preparer and reviewer provide evidence that the documentation was reviewed, which relates to planning and supervision.

Which of the following concepts is least related to the standard of due care?
a. Independence in fact.
b. Professional skepticism.
c. Prudent auditor.
d. Reasonable assurance.

d. Correct Reasonable assurance is related to the auditors' responsibility for detecting misstatements and procedures performed during the examination, not the concept of due care.

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.

d. Correct Direct, personal knowledge of auditors is the most appropriate form of evidence.

Auditors' understanding of the internal control in an entity provides 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 substantive procedures on an audit.

d. Correct The primary purpose of obtaining an understanding of a client's internal control is to plan the nature, timing, and extent of further audit procedures on an engagement.

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.

d. Direct personal knowledge obtained through physical observation and mathematical
recalculation.

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 client relationships and specific engagements.
b. Engagement performance.
c. Monitoring.
d. Relevant ethical requirements.

d. Correct Independence confirmations would ensure that all firm personnel are independent with respect to that firm's clients, which is related to the "Relevant Ethical Requirements" element of a system of quality control. It would not relate to acceptance and continuance of client relationships and specific engagements (a), engagement performance (b), or monitoring (c).

Auditors' understanding of the internal control in an entity provides 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 substantive procedures on an audit.

d. Correct The primary purpose of obtaining an understanding of a client's internal control is to plan the nature, timing, and extent of further audit procedures on an engagement.

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 client relationships and specific engagements.
b. Engagement performance.
c. Monitoring.
d. Relevant ethical requirements.

d. Correct Independence confirmations would ensure that all firm personnel are independent with respect to that firm's clients, which is related to the "Relevant Ethical Requirements" element of a system of quality control. It would not relate to acceptance and continuance of client relationships and specific engagements (a), engagement performance (b), or monitoring (c).

Which of the following is most closely related to the responsibilities principle?
a. The auditors' responsibility to issue a report as a result of their examination.
b. The requirement that auditors gather sufficient, appropriate evidence upon which to base
an opinion on the financial statements.
c. The auditors' compliance with relevant ethical requirements of independence and due care.
d. The auditors' responsibility to plan the audit and properly supervise assistants.

c. Correct The auditors' compliance with independence and due care is related to the responsibilities principle.

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would
a. Be considered as exercising 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.

a. Correct Consultation with an appraiser demonstrates due care if auditors do not have expertise in the area in question.

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 accor-
dance with 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.

b. Correct Auditors provide reasonable (but not absolute) assurance in an audit engagement (this is noted in the scope paragraph of the auditors' report).

Which of the following recognizes that an audit conducted under generally accepted audit-
ing standards may not detect all material misstatements?
a. Absolute assurance.
b. Professional judgment.
c. Reliability of audit evidence.
d. Reasonable assurance

d. Correct Reasonable assurance recognizes that an audit conducted under GAAS may fail to detect all material misstatements.

Which of the following combinations would provide the auditor the most reliable evidence?
Source of Evidence
a. Internal

b. Internal

c. External

d. External
Effectiveness of Internal control
More effective Less effective More effective Less effective

c. Correct Evidence is most reliable when the source of the evidence is external and when the evidence is developed under more effective internal control.

Which of the following is most closely related to the relevance of audit evidence?
a. Auditors decide to physically inspect investment securities held by a custodian instead of
obtaining confirmations from the custodian.
b. In addition to confirmations of accounts receivable, auditors perform an analysis of the
aging of accounts receivable to evaluate the collectability of accounts receivable.
c. In response to less effective internal control, auditors increase the number of customer
accounts receivable confirmations mailed compared to that in the prior year.
d. Because of a large number of transactions occurring near year-end,auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.

b. Correct The aging of accounts receivable will evaluate valuation, which is not directly evaluated through confirmation. Therefore, aging provides relevant evidence with respect to the valuation assertion.

Which of the following statements is not true with respect to the performance principle?
a. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.
b. Audit teams consider materiality in planning the audit,performing the audit,and evaluating the effect of misstatements on the entity's financial statements.
c. In assessing the risk of material misstatements,the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements.
d. Auditors are required to consider both the relevance and reliability of evidence in evalu- ating whether the evidence they have gathered is appropriate.

a. Correct Written audit plans are required in both initial and continuing audits.

Which of the following is true with respect to PCAOB inspections of accounting firms?
a. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB.
b. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.
c. All results of PCAOB inspections are made available to the public following the inspection.
d. Firms performing audits of 100 or fewer public entities may elect to have a peer review
conducted through the AICPA in lieu of a PCAOB inspection.

b. Correct In a PCAOB inspection, a sample of audits as well as the firm's system of quality control are reviewed by the inspection team.

The particular and specialized actions that auditors take to obtain evidence during a specific
engagement are known as
a. Audit procedures.
b. Audit standards.
c. Interpretive publications.
d. Statements on Auditing Standards.

a. Correct Audit procedures are particular and specialized actions that auditors take to obtain evidence during a specific engagement.

Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board?
a. Develop Auditing Standards for the audits of nonpublic entities.
b. Develop Auditing Standards for the audits of public entities.
c. Develop Statements on Auditing Standards for the audits of nonpublic entities.
d. Develop Statements on Auditing Standards for the audits of public entities.

b. Correct The PCAOB develops Auditing Standards for the audit of public entities.

Which of the following best describes the general contents of the introductory paragraph of
the auditors' report?
a. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB.
b. The auditors' conclusion with respect to the fairness of the entity's financial statements.
c. Statements identifying the responsibility of auditors and management in the financial
reporting process.
d. The auditors' conclusion with respect to the effectiveness of the entity's internal control
over financial reporting

c. Correct The responsibility of auditors and management in the financial reporting process is described in the introductory paragraph.

Which of the following opinions would be issued if auditors believed that the entity's finan-
cial statements were not presented in conformity with GAAP?
a. Adverse opinion.
b. Disclaimer of opinion
c. Qualified opinion
d. Unmodified opinion.

a. Correct An adverse opinion is issued for material and pervasive departures from GAAP.

Which of the following principles is most closely associated with the auditors' conclusion as to the fair presentation of the entity's financial statements?
a. Communication principle.
b. Performance principle.
c. Reporting principle.
d. Responsibilities principle.

c. Correct The reporting principle is related to the contents of the auditors' report, which expresses an opinion on the entity's financial statements (or indicates that an opinion cannot be expressed).

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In class example MCQ

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In class MCQ

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CH.2 Lecture Professional Standards Notes

We will assess generally accepted auditing standards (GAAS)

1. Internal auditors control systems audit firms implement

2. External monitoring efforts that ensure can audit engagement is conducted in compliance

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