Exam 1 External Audit

Which of the following audit phases would generally be conducted before all of the others listed below?

Multiple Choice

• Auditing business processes and related accounts.

• Consideration of internal control systems.

• Evaluation of audit evidence.

• Gaining an understanding of the auditee’s industry.

Gaining an understanding of the auditee’s industry.

The most favorable type of audit opinion for an entity to receive is

Multiple Choice

• Qualified.

• Unqualified.

• Exceptional.

• Full assurance.

Unqualified

Financial statement users’ demand for assurance is similar to that of a potential home buyer who hires a home inspector in that

Multiple Choice

• The cost of obtaining information is not relevant.

• The buyer [or user] pays directly for this assurance in both situations.

• There may be information asymmetry and conflicts of interest.

• Independence is not relevant in either situation.

There may be information asymmetry and conflicts of interest.

An auditor’s evaluation of the reasonableness of a company’s loan loss reserve would normally be made during which phase of the audit?

Multiple Choice

• Client acceptance.

• Consideration of internal control systems.

• Gaining an understanding of the auditee’s industry.

• Auditing business processes and related accounts.

Auditing business processes and related accounts

The study and practice of auditing is unlike other areas in accounting because it

Multiple Choice

• Requires the memorization of formulas and patterns.

• Is required by law for all companies in the United States.

• Requires logic, imagination, and innovation.

• Requires the knowledge of GAAP.

Requires logic, imagination, and innovation

Assurance services differ from auditing services in that

Multiple Choice

• Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.

• Assurance services are limited to economic events or actions, and audit services are not similarly limited.

• Audit services do not improve the quality of information as do assurance services.

• Assurance services are more narrow in scope than audit services.

Assurance services may include a report about the relevance and timeliness, not just the reliability, of the information.

Audit evidence

Multiple Choice

• May only be gathered from the auditee to be reliable since they are the most knowledgeable source of information.

• Can be gathered from many sources and is not limited to the underlying accounting data.

• May only be gathered from parties external to the auditee to be reliable.

• May only be gathered from computerized sources to avoid human error.

Can be gathered from many sources and is not limited to the underlying accounting data.

Information asymmetry

Multiple Choice

• Refers to an imbalance of information between the auditor and the stockholders of the company.

• Refers to an imbalance of information between the auditor and the management of the company.

• Refers to an imbalance of information among stockholders in a company.

• Refers to an imbalance of information between stockholders and the management of the company.

Refers to an imbalance of information between stockholders and the management of the company.

Independent auditing can best be described as

Multiple Choice

• A professional activity that measures and communicates financial and business information.

• A branch of accounting.

• A discipline that provides assurance regarding the results of accounting and other functional operations and information.

• A regulatory function that prevents the issuance of improper financial information.

A discipline that provides assurance regarding the results of accounting and other functional operations and information.

Audit risk

Multiple Choice

• Is the risk that a company may hire an incompetent auditor.

• Is what creates the demand for an audit.

• Is the risk that an inappropriate opinion will be issued on financial statements that are materially misstated.

• Can be completely eliminated through appropriate sampling of transactions.

Is the risk that an inappropriate opinion will be issued on financial statements that are materially misstated.

Which of the following is not considered an act discreditable to the profession?

Multiple Choice

• Billing an audit client an amount in excess of the originally quoted fee.

• Solicitation of CPA exam questions.

• Discrimination or harassment of employees.

• Failure to file a personal tax return on a timely basis.

Billing an audit client an amount in excess of the originally quoted fee.

Prior to the Sarbanes-Oxley Act of 2002, the _____________blank was responsible for creating all new auditing standards in the United States. Today, for the audits of publicly held companies, that responsibility rests with the _____________blank.

Multiple Choice

• AICPA Auditing Standards Board [ASB]; Public Company Accounting Oversight Board [PCAOB].

• Financial Accounting Standards Board [FASB]; Public Company Accounting Oversight Board [PCAOB].

• Financial Accounting Standards Board [FASB]; Securities and Exchange Commission [SEC].

• AICPA Auditing Standards Board [ASB]; Securities and Exchange Commission [SEC].

AICPA Auditing Standards Board [ASB]; Public Company Accounting Oversight Board [PCAOB].

Which of the following agencies/organizations govern the independence rules for audits of public companies?

Multiple Choice

• Public Company Accounting Oversight Board (PCAOB).

• Financial Accounting Standards Board (FASB).

• Auditing Standards Board (ASB).

• American Institute of Certified Public Accountants (AICPA).

Public Company Accounting Oversight Board (PCAOB).

What is the essential meaning of the auditor being independent in fact?

Multiple Choice

• The auditor must be objective.

• The auditor must adopt a critical attitude during the audit.

• The auditor's sole obligation is to third parties.

• The auditor may have a direct ownership interest in his auditee's business if it is not material.

The auditor must be objective.

An "integrated audit" includes

Multiple Choice

• A financial statement audit and an audit of internal control over financial reporting.

• A special audit related to management fraud and an audit of internal control over financial reporting.

• A special audit related to management fraud.

• A financial statement audit and a special audit related to management fraud.

A financial statement audit and an audit of internal control over financial reporting.

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the

Multiple Choice

• External auditors.

• Shareholders.

• Senior management.

• Internal audit department.

Senior management

The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except

Multiple Choice

• The auditor should obtain sufficient appropriate audit evidence about whether material misstatements exist in the financial statements.

• The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.

• The auditor should have appropriate competence and capability to perform the audit.

• The auditor should maintain professional skepticism and exercise professional judgment throughout the planning and performance of the audit.

The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.

To exercise due professional care, an auditor should

Multiple Choice

• Exercise professional skepticism.

• Examine all available corroborating evidence supporting management's assertions.

• Design the audit to detect all instances of illegal acts.

• Attain the proper balance of professional experience and formal education

Exercise professional skepticism.

A CPA, while performing an audit, strives to achieve independence in appearance in order to

Multiple Choice

• Maintain public confidence in the profession.

• Comply with the generally accepted accounting principles.

• Become independent in fact.

• Reduce risk and liability.

Maintain public confidence in the profession.

Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards?

Multiple Choice

• Standards issued by the PCAOB are called “Auditing Standards” and standards issued by the AICPA Auditing Standards Board are called “Statements on Auditing Standards”.

• All of the above.

• The AICPA sets auditing standards for use in audits of nonpublic entities.

• The PCAOB sets auditing standards for use in audits of publicly held companies.

All of the above.

Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees?

Multiple Choice

• They help to limit auditor liability in the event of misunderstandings.

• They document the audit fees and deadlines that have been agreed upon.

• They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.

• They provide documentation of management’s responsibility for the financial statements.

They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.

Which of the following statements is correct with regard to the predecessor-successor auditor communications?

Multiple Choice

• The successor auditor has no responsibility to contact the predecessor auditor.

• The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.

• The successor auditor should obtain permission from the entity before contacting the predecessor auditor.

• The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.

The successor auditor should obtain permission from the entity before contacting the predecessor auditor.

An auditor inspects a document for proper authorization of a transaction and verifies a transaction amount that is stated within the document. The auditor has performed a(n)

Multiple Choice

• test of controls.

• test of details.

• substantive analytical procedure.

• dual-purpose test.

dual-purpose test.

Which of the following statements best represents the reason why auditors prepare engagement letters to be signed by their auditees?

Multiple Choice

• They provide documentation of management’s responsibility for the financial statements.

• They document the audit fees and deadlines that have been agreed upon.

• They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.

• They help to limit auditor liability in the event of misunderstandings.

They communicate and clarify the expectations and responsibilities of both the auditee and the auditor.

The concept of materiality as it applies to a financial statement audit

Multiple Choice

• Relates primarily to the quantity of audit procedures performed.

• Generally involves less professional judgment for public companies.

• Relates primarily to the audit fees involved.

• Is determined, in part, based on how financial statement users may be influenced in making decisions.

Is determined, in part, based on how financial statement users may be influenced in making decisions.

Tests of controls include all of the following except:

Multiple Choice

• Observation.

• Inspection of documents, files, etc.

• Analytical procedures.

• Walkthroughs.

Analytical procedures.

Tolerable misstatement (also referred to as performance materiality) is:

Multiple Choice

• materiality for the income statement as a whole.

• materiality for the balance sheet as a whole.

• materiality allocated to an assertion.

• materiality allocated to a specific account.

materiality allocated to a specific account.

Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors?

Multiple Choice

• The nature of the audit software documentation used by the internal auditors.

• The audit risk associated with the accounts examined by the internal auditors.

• The competence and objectivity of the internal audit function.

• The materiality or significance of the accounts examined by the internal audit function.

The nature of the audit software documentation used by the internal auditors.

Engagement letters include all of the following except:

Multiple Choice

• a list of additional services, if any, that will be provided.

• arrangements involving the use of specialists.

• a list of adjusting journal entries.

• information about the audit fee.

a list of adjusting journal entries.

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Multiple Choice

• The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions.

• Management's refusal to permit the CPA to perform substantive tests before the year-end.

• The prospective client refuses to let the predecessor auditor respond to communication from the successor auditor.

• The CPA's lack of understanding of the prospective client's internal audit function's audit plan.

The prospective client refuses to let the predecessor auditor respond to communication from the successor auditor.