GLEAM MODULE 1

The objective of assurance services is to

Compare internal information and policies to those of other firms.

Provide more timely information.

Improve the firm's outcomes.

Enhance decision making.

Enhance decision making.

ssurance services differ from consulting services in that assurance services

Focus on

Providing Advice

Involve Monitoring of

One Party by Another

Focus on Providing Advice

Yes

Involve Monitoring of One Party by Another

Yes

Focus on Providing Advice

Yes

Involve Monitoring of One Party by Another

No

Focus on Providing Advice

No

Involve Monitoring of One Party by Another

No

Focus on Providing Advice

No

Involve Monitoring of One Party by Another

Yes

Focus on Providing Advice

No

Involve Monitoring of One Party by Another

Yes

Which of the following statements correctly defines the term “reasonable assurance”?

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.

A significant level of assurance to allow an auditor to detect a material misstatement.

A substantial level of assurance to allow an auditor to detect a material misstatement.

An absolute level of assurance to allow an auditor to detect a material misstatement.

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.

An auditor must obtain professional experience primarily to

Earn a specialty designation by the AICPA.

Receive a favorable peer review.

Receive a positive employment evaluation.

Exercise professional judgment.

Exercise professional judgment.

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

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

Transactions and events have been recorded in the proper accounts.

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

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

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

Management assertions are categorized into two main groups under auditing standards (PCAOB and ASB): assertions about classes of transactions (the income statement events that happened during the period) and assertions about account balances at period-end (the balance sheet items remaining at the end of the period).

Independent auditing can best be described as

A professional activity that measures and communicates financial and business data.

A discipline that enhances the degree of confidence that users can place in financial statements.

A branch of accounting.

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

A discipline that enhances the degree of confidence that users can place in financial statements.

Which of the following statements is true concerning an auditor’s responsibilities regarding financial statements?

Making suggestions that are adopted about an entity’s internal control environment impairs an auditor’s independence.

The adoption of sound accounting policies is an implicit part of an auditor’s responsibilities.

An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion.

An auditor may not draft an entity’s financial statements based on information from management’s accounting system.

An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion.

Which of the following best describes the reason an independent auditor reports on financial statements?

The company preparing the statements may have poorly designed internal control.

The company preparing the statements and the persons using the statements may have different interests.

A management fraud may exist, and it is more likely to be detected by independent auditors.

A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.

The company preparing the statements and the persons using the statements may have different interests.

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

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

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

Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

Assemble prospective financial statements based on the assumptions of the entity’s management without expressing any assurance.

Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

A financial statement audit is designed to

Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.

Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material.

Obtain absolute assurance on the financial statements and express an opinion on the financial statements.

Provide assurance on internal control and to identify significant deficiencies and material weaknesses.

Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error.

Which of the following best characterizes an auditor’s exercise of professional skepticism?

Taking into account past relationships and experiences with management.

Having an attitude that includes a questioning mind.

Conducting all fraud-related inquiries in a nonconfrontational manner.

Obtaining adequate conclusive evidence in support of the fairness of the financial statements.

Having an attitude that includes a questioning mind.

The primary reason for an audit by an independent, external audit firm is to

Relieve management of responsibility for the financial statements.

Satisfy governmental regulatory requirements.

Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered.

Provide increased assurance to users as to the fairness of the financial statements.

Provide increased assurance to users as to the fairness of the financial statements.

Notes that are included with financial statements are the responsibility of the

Internal auditor.

Securities and Exchange Commission.

Independent auditor.

Company’s management.

Company’s management.

The primary objective of consulting services is to

Provide the client with better information to make better decisions.

Verify the reliability of the client’s information.

Evaluate management’s representations.

Provide better outcomes.

Provide better outcomes.

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures?

Selection of tests of financial statement assertions should depend upon the understanding of internal control.

The auditor should resolve any substantial doubt about any of management’s relevant financial statement assertions.

The relationship between financial statement assertions and audit procedures should be one-to-one.

Audit procedures should be developed in light of financial statement assertions about the financial statement components.

The relationship between financial statement assertions and audit procedures should be one-to-one.

The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley’s financial statements. The primary objective of this audit is to provide assurance to the

Securities and Exchange Commission.

Investors in Donley securities.

Regional stock exchange.

Board of directors of Donley.

Investors in Donley securities.

An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to

Make a 100% examination of Camden’s records.

Express an opinion as to the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.

Certify the correctness of Camden’s financial statements.

Express an opinion as to the fairness of Camden’s financial statements.

Express an opinion as to the fairness of Camden’s financial statements.

Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as

A professional activity that measures and communicates financial and business data.

A discipline that attests to financial information presented by management.

An activity whose purpose is to search for fraud.

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

A discipline that attests to financial information presented by management.

Which of the following services provides the least assurance regarding the fairness of financial statements?

Attestation.

Review.

Compilation.

Audit.

Compilation.

Assurance and advisory services differ from consulting services because

Assurance and advisory services focus on improving information and generally do not involve situations in which one party wants to monitor another.

Assurance and advisory services usually involve situations in which one party wants to monitor another and focus on improving information.

Assurance and advisory services focus on providing advice and involve two-party arrangements.

Assurance and advisory services focus on providing advice and usually involve situations in which one party wants to monitor another.

Assurance and advisory services usually involve situations in which one party wants to monitor another and focus on improving information.

An auditor may not express a qualified opinion when

A scope limitation prevents the auditor from completing an important audit procedure.

The auditor lacks independence with respect to the audited entity.

An accounting principle at variance with the applicable financial reporting framework is used.

The auditor’s report refers to the work of a specialist.

The auditor lacks independence with respect to the audited entity.

For a particular entity’s financial statements to be presented fairly, it is not required that

The accounting policies be appropriate.

The information be comparable and understandable.

Significant accounting policies be disclosed.

Accounting policies be applied on a basis consistent with those followed in the prior year.

Accounting policies be applied on a basis consistent with those followed in the prior year.

In which of the following circumstances would an auditor be most likely to express an adverse opinion?

The chief executive officer refuses the auditor access to minutes of board of directors’ meetings.

Tests of controls show that the entity’s system of internal control is so poor that it cannot be relied upon.

Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern.

The financial statements are not in conformity with the FASB Codification’s guidance regarding the capitalization of leases.

The financial statements are not in conformity with the FASB Codification’s guidance regarding the capitalization of leases.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?

Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed.

The auditor did not observe the entity’s physical inventory and is unable to become satisfied about its balance by other auditing procedures.

There has been a change in accounting principles that has a material effect on the comparability of the entity’s financial statements.

The auditor is unable to apply necessary procedures concerning an investor’s share of an investee’s earnings recognized in accordance with the equity method.

Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed.

Which of the following most completely describes how independence has been defined by the accounting profession?

Performing an audit from the viewpoint of the public.

Accepting responsibility to act professionally and in accordance with a professional code of ethics.

Avoiding the appearance of significant interests in the affairs of an audit client.

Possessing the ability to act with integrity and objectivity.

Possessing the ability to act with integrity and objectivity.

The objective of the audit of GAAP-based financial statements is to

Make suggestions as to the form or content of the financial statements or to draft them in whole or in part.

Express an opinion on the accuracy with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.

Ensure adoption of sound accounting policies and the establishment and maintenance of the system of internal control.

Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.

Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a

Description of a member’s procedures for responding to an inquiry from a trial board.

List of specific acts discreditable to the profession.

Set of specific, mandatory rules describing minimum levels of conduct a member must maintain.

List of violations that would cause the automatic suspension of a member’s license.

Set of specific, mandatory rules describing minimum levels of conduct a member must maintain.

An external auditor finds that the financial statements contain material misstatements that are not pervasive. Which audit opinion is appropriate?

Disclaimer of opinion.

Unqualified opinion.

Qualified opinion.

Adverse opinion.

Qualified opinion.

An external auditor discovers that a payroll supervisor of the firm being audited has misappropriated $10,000. The firm’s total assets and before-tax net income are $14 million and $3 million, respectively. Assuming no other issues affect the report, the external auditor’s report will most likely contain a(n)

Scope qualification.

Unmodified opinion.

Adverse opinion.

Disclaimer of opinion.

Unmodified opinion.

Which of the following rules of the AICPA Code of Professional Conduct must be observed only by a member who is in public practice?

Compliance with Standards.

Integrity and Objectivity.

Commissions.

Independence.

independence

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Public practice consists of the performance of professional services for a client by an AICPA member or his or her firm. Professional services include, but are not limited to, services for which standards are issued by bodies designated by the AICPA Council. A client is (1) any person or entity, other than the member’s employer, that engages the member to perform professional services or (2) a person or entity with respect to which the services are performed.

NOTE: An employer does not include (1) an entity in public practice or (2) governments if certain requirements are met. The Independence Rule explicitly applies only to a member in public practice. Thus, it is limited to professional services performed for a client.

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Members in public practice are prohibited from accepting a commission from any attest client. Members in general are prohibited from accepting a commission unless it is disclosed to the client.

An accountant has an immaterial direct financial interest in a nonpublic entity. The accountant is

Not independent and may not perform a compilation.

Not independent and may perform a review but not an audit.

Independent because the financial interest is immaterial.

Not independent and may not perform a review.

Not independent and may not perform a review.

Which of the following is the responsibility of the auditor when performing an audit of a nonissuer?

Obtaining reasonable assurance regarding fair presentation.

Expressing an opinion on internal control.

Conducting the audit in accordance with the standards of the PCAOB.

Detecting material misstatements.

Obtaining reasonable assurance regarding fair presentation.

If an entity’s financial statements are “presented fairly,” they

Contain a footnote describing any potential material misstatements they may contain.

Are free from material misstatement.

Are free of any presentation tactics used to make the company look better.

Are presented following industry standards.

Are free from material misstatement.

Which of the following legal situations would be considered to impair the auditor’s independence?

Actual litigation by the auditor against the current management alleging management fraud or deceit.

Actual litigation by the auditor against the client for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for consulting services.

Actual litigation by the client against the auditor for an amount not material to the auditor or to the financial statements of the client arising out of disputes as to billings for tax services.

An expressed intention by the current management to commence litigation against the auditor alleging deficiencies in audit work for the client, although the auditor considers that there is only a remote possibility that such a claim will be filed.

Actual litigation by the auditor against the current management alleging management fraud or deceit.

The auditor’s report refers to the U.S. GAAP-based financial statements, which are customarily considered to include the balance sheet and the statements of

Income, changes in retained earnings, and cash flows.

Income and cash flows.

Income and changes in equity.

Income, changes in equity, and cash flows.

Income, changes in equity, and cash flows.

On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client’s financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client’s December 31, Year 2, financial statements?

No, because the CPA had a loan with the client during the period covered by the financial statements.

Yes, because the loan was fully secured.

Yes, because the CPA was not required to be independent at the time the loan was granted.

No, because the CPA had a loan with the client during the period of a professional engagement.

Yes, because the CPA was not required to be independent at the time the loan was granted.

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

A CPA in public practice providing auditing and other attestation services.

A CPA in public practice providing tax and management advisory services.

A CPA not in public practice.

All CPAs.

A CPA in public practice providing auditing and other attestation services.

An auditor concludes that a client’s noncompliance with laws and regulations, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on how pervasive the effect is on the financial statements, the auditor should express either a(n)

Disclaimer of opinion or an unmodified opinion with a separate explanatory paragraph.

Unmodified opinion with a separate emphasis-of-matter paragraph or a qualified opinion.

Adverse opinion or a disclaimer of opinion.

Qualified opinion or an adverse opinion.

Qualified opinion or an adverse opinion.

When an issuer refuses to include in its audited financial statements the segment disclosures that the auditor believes are required, the auditor should express a(n)

Adverse opinion because of a significant uncertainty.

Unmodified opinion with an emphasis-of-matter paragraph.

Qualified opinion because of inadequate disclosure.

Disclaimer of opinion because of the significant scope limitation.

Qualified opinion because of inadequate disclosure.

CPAs are required to complete engagements competently. Competence includes all of the following except

The capacity to exercise judgment.

The technical qualifications of the CPA’s staff.

The ability to research subject matter and consult with others.

An unbiased mental attitude.

An unbiased mental attitude.

Substantive testing of cash addresses assertions related to which of the financial statements?

Profit and loss statement.

Statement of retained earnings.

Balance sheet.

Income statement.

Balance sheet.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of

Accuracy, valuation, and allocation.

Rights and obligations.

Completeness.

Existence.

Accuracy, valuation, and allocation.

Which of the following assertions is most closely related to the audit objective to verify that all sales have been recorded?

Occurrence.

Completeness.

Accuracy, valuation, and allocation.

Cutoff.

Completeness

The auditing standards define external confirmation as “a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium.” The assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligations and existence.

Completeness and presentation.

Existence and completeness.

Classification and rights and obligations.

Rights and obligations and existence.

Which of the following factors would most likely influence an auditor’s consideration of the reliability of data when performing analytical procedures?

Whether the data were prepared on the cash basis or in conformity with U.S. GAAP.

Whether the data were processed in an online system or a batch entry system.

Whether the data were developed in a computerized or a manual accounting system.

Whether the data were developed under a system with adequate controls

Whether the data were developed under a system with adequate controls

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor’s conclusions?

Professional experience.

Professional requirements.

Professional judgment.

Professional standards.

Professional judgment.

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures?

Audit procedures should be developed in light of financial statement assertions about the financial statement components.

The auditor should resolve any substantial doubt about any of management’s relevant financial statement assertions.

Selection of tests of financial statement assertions should depend upon the understanding of internal control.

The relationship between financial statement assertions and audit procedures should be one-to-one.

The relationship between financial statement assertions and audit procedures should be one-to-one.

Which of the following types of audit evidence is the most persuasive?

Bank statements obtained from the client.

Client worksheets supporting cost allocations.

Client representation letter.

Prenumbered client purchase order forms.

Bank statements obtained from the client.

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management’s financial statement assertion(s) of

Rights and Obligations	Accuracy, Valuation, and Allocation

Rights and Obligations No

Accuracy, Valuation, and Allocation No

Rights and Obligations Yes

Accuracy, Valuation, and Allocation Yes

Rights and Obligations Yes

Accuracy, Valuation, and Allocation No

Rights and Obligations No

Accuracy, Valuation, and Allocation Yes

Rights and Obligations No

Accuracy, Valuation, and Allocation Yes

An auditor selects a sample of recorded cash receipts and vouches them to accounts receivable and customer orders. This procedure is relevant to which assertion?

Existence.

Cutoff.

Occurrence.

Completeness.

Occurrence

The auditor’s inventory observation test counts are traced to the client’s inventory listing to test for which of the following financial statement assertions?

Accuracy, valuation, and allocation.

Rights and obligations.

Completeness.

Presentation.

Completeness

The appropriateness of evidence available to an auditor is least likely to be affected by the

Relevance of such evidence to the financial statement assertion being investigated.

Relationship of the preparer of such evidence to the entity being audited.

Timeliness of such audit evidence.

Sampling method employed by the auditor to obtain a sample of such evidence.

Sampling method employed by the auditor to obtain a sample of such evidence.

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

Cutoff.

Existence.

Rights and obligations.

Classification.

Cutoff

An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertion(s) of

Classification	Existence

Classification No

Existence Yes

Classification No

Existence No

Classification Yes

Existence Yes

Classification Yes

Existence No

Classification	Existence

Classification No

Existence Yes

Vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel provides evidence that

Payroll checks were signed by an appropriate officer independent of the payroll preparation process.

Only bona fide employees worked and their pay was properly computed.

Employees worked the number of hours for which their pay was computed.

Internal controls relevant to assertions about payroll disbursements were operating effectively.

Employees worked the number of hours for which their pay was computed.

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of

Authorizations.

Cutoffs.

Transactions.

Costs.

Transactions

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

Rights and obligations.

Completeness.

Accuracy, valuation, and allocation.

Occurrence.

Completeness

When the risk of material misstatement is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

Inspecting payroll tax returns.

Footing and crossfooting the payroll register.

Recalculating payroll accruals.

Observing the distribution of paychecks.

Recalculating payroll accruals.

Each of the following might, by itself, form a valid basis for an auditor to decide to omit a procedure except for the

Difficulty and cost involved in testing a particular item.

Assessment of the risks of material misstatement at a low level.

Inherent risk involved.

Relationship between the cost of obtaining evidence and its usefulness.

Difficulty and cost involved in testing a particular item.

At 12:01 a.m. on the first day of the new year, the cash receipts journal for the year just ended is electronically locked down. The new year’s cash receipts journal can only be opened by a manager, and the manager notes the time and amount of the first receipt of the new year. This control would best alleviate concerns regarding which assertion?

Cutoff.

Accuracy, valuation, and allocation.

Classification.

Existence.

Cutoff