Chapter 1 Homework

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that:

A potential conflict of interest always exists between the auditor and the management of the enterprise under audit

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because:

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

The Sarbanes–Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?

• Bookkeeping services.

• Internal auditing services.

• Valuation services.

• All of the choices are correct.

All of the choices are correct.

Independent auditors of financial statements perform audits that reduce:

information risk faced by investors

The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about:

Valuation or allocation

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:

is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

The risk to investors that a company’s financial statements may be materially misleading is called:

Information risk.

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?

Rights and obligations.

When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management’s assertion regarding:

Existence.

The Sarbanes–Oxley Act of 2002 generally prohibits public accounting firms from:

• acting in a managerial decision-making role for an audit client.

• auditing the firm’s own work on an audit client.

• providing tax consulting to an audit client without audit committee approval.

• All of the choices are correct.

All of these choices are correct.

During an audit of a company’s cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion?

Existence.

When auditing an investment in a publicly traded company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion?

Obtain market quotations from The Wall Street Journal or another independent source.

Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management’s assertion of:

completeness.

Which of the following audit procedures probably would provide the most reliable evidence related to the entity’s assertion of rights and obligations for the inventory account?

Inspect agreements for evidence of inventory held on consignment

In auditing the accrued liabilities account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of:

completeness.

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:

presentation and disclosure.

When auditing the accounts receivable account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of:

existence.

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 agreed to the financial statements. This procedure most likely provided evidence concerning management’s assertion of:

completeness.

An auditor’s purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management’s assertion about:

presentation and disclosure.

An auditor seeks to test the accuracy of the amount recorded as revenue on a contract with a customer under ASC 606. Which PCAOB assertion is most likely being tested?

Valuation or Allocation.

In testing the goodwill at an audit client in the retail industry, an auditor may seek to determine whether the account balance had been impaired. Such impairment procedures would be designed to test which financial statement assertion?

Valuation or allocation.

In testing inventory at an audit client in the retail industry, you note that some of the inventory is contracted to be held on consignment. As a result, which financial statement assertion is now relevant?

Rights and obligations.