Auditing Chapter 1 MCQ

1.23 Which of the following would be considered an assurance engagement?

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.

Because attestation and audit engagements are subsets of assurance engagements, all of the responses are examples of assurance engagements.

All of the above

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

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.

A.

The management team is generally trying to put its "best foot forward" when reporting their financial statement information. The auditor must make sure that the management team does not violate the accounting rules when doing so. IN essence, this statement characterizes why professional skepticism is required to be exercised by auditors.

1.25 In an attestation engagement, a CPA practitioner is engaged to

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.

b.

This is the basic definition of an attestation service, as articulated in the book and the professional standards.

1.26 A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of

a. Environmental auditing.

b. Financial auditing.

c. Compliance auditing.

d. Operational auditing.

D.

Operational auditing refers to the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies.

1.27 The primary difference between operational auditing and financial auditing is that in operational auditing

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.

B

This statement exactly characterizes the goal of an operational audit. In addition, the statement is part of the basic definition of operational auditing.

1.28 According to the AICPA, the purpose of an audit of financial statements is to

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, results 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.

A

According to the AICPA definition found in AU 200 (paragraph 11) and in your book, "the purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. As a result, this is the correct response.

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

a. Financial statements are too complex for the bankers 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.

D

The potential conflict of interest between management and the bank is far and away the biggest factor driving the demand for audited financial statements. Consider for example a company that was desperate for cash in order to survive. Would it be possible that the management team would present unreliable financial statements to the bank in order to get a desperation loan? Because of this possibility, a financial statement audit is needed to add credibility to the financial statements.

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

a. Bookkeeping services.

b. Internal auditing services.

c. Valuation services.

d. All of the above.

D

1.31 Independent auditors of financial statements perform audits that reduce

a. Business risks faced by investors.

b. Information risk faced by investors.

c. Complexity of financial statements.

d. Timeliness of financial statements.

B

After completing a financial statement audit, information risk has been reduced for investors.

1.32 The primary objective of compliance auditing is to

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 client personnel are following laws, rules, regulations, and policies.

D

A compliance audit refers to procedures that are designed to ascertain that the company's personnel are following laws, rules, regulations, and policies.

1.33 What requirements are usually necessary to become licensed as a certified public accountant?

a. Successful completion of the Uniform CPA Examination.

b. Experience in the accounting field.

c. Education.

d. All of the above.

D all of the above

1.34 The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the

A. Governmental Internal Audit Agency (GIAA).

B. Central Internal Auditors (CIA).

C. Securities and Exchange Commission (SEC).

D. Government Accountability Office (GAO).

D

The mission of the U.S. Government Accountability Office is to ensure that public officials are using public funds efficiently, effectively, and economically.

1.35 Performance audits usually include [two answers]

A. Financial audits.

B. Economy and efficiency audits.

C. Compliance audits.

D. Program audits.

B and D

The two categories of performance audits are economy and efficiency audits and program audits.

1.36 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

a. Completeness.

b. Existence.

c. Valuation and allocation.

d. Rights and obligations.

e. Occurrence.

C

A review of credit ratings of customers' gives indirect evidence of the collectability of accounts receivable. Because GAAP requires the accounts

1.37 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

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.

d

Rhonda's assertions are nice. However, to be considered as sufficient to conclude that all expenses have been recorded, they will need corroboration with documentary evidence. Thus, this is the correct response.

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

a. Client acceptance risk.

b. Information risk.

c. Moral hazard.

d. Business risk.

B

By definition, information risk is the probability that the information circulated by a company will be false or misleading.

1.39 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?

a. Cutoff.

b. Existence.

c. Valuation and allocation.

d. Rights and obligations.

e. Occurrence

a

This is clearly a test of the completeness as the assertion always includes any issues of transaction cutoff, which means that the recording of all revenue, expense, and other transactions must be included in the proper period in accordance with GAAP.

1.40 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?

a. Completeness.

b. Existence.

c. Valuation and allocation.

d. Rights and obligations.

e. Occurrence.

D

This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that amounts reported as assets of the company represent true assets that it really does own and that the amounts reported as liabilities truly represent its obligations. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

1.41 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

a. Completeness.

b. Existence.

c. Valuation and allocation.

d. Rights and obligations.

e. Occurrence.

B

This is a test of existence. This test is completed by auditors to answer the question as to whether the transactions recorded as an asset really represent assets that exist and did add value to the company's equipment as compared to routine repair and maintenance expenses under GAAP. Management's existence assertion states that the reported assets actually exist. If an addition to the equipment account cannot be located or identified as adding value to the equipment balance, it is possible that the amount should have been classified as repair and maintenance expenses under GAAP.

1.42 The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from

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.

D

1.43 Substantial equivalency refers to

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.

D

Substantial equivalency relates to the practice of public accountancy in states other than a CPA's state of licensure. Under the concept of substantial equivalency, as long as the licensing (home) state requires (1) 150 hours of education, (2) successful completion of the CPA exam, and (3) one year of experience, a CPA can practice (either in person or electronically) in another substantial equivalency state without having to obtain a license in that state

1.44 Which of the following best describes the relationship between auditing and attestation engagements?

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.

A

Auditing is a subset of attestation engagements that focuses on the certification of financial statements. The subject matter is the set of financial statements

1.45

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?

a. Existence.

b. Rights and Obligations.

c. Valuation or Allocation.

d. Occurrence.

A

Management is more likely to overstate assets and understate liabilities. As a result, when auditing an asset balance, the most relevant assertions are likely to be either existence or valuation. In this situation, because of the nature of cash and the fact that is no foreign currency translation calculation, the existence assertion is clearly the most important assertion

1.46

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

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.

D

Always remember that management is more likely to overstate assets. As a result, when auditing an asset balance like investments, a relevant assertion is likely to be valuation. In this situation, to answer the question of what the investment should be valued at in the balance sheet, an auditor would first seek to obtain a market quotation from an independent source like the Wall Street Journal.

1.47

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

a. Presentation and Disclosure.

b. Completeness.

c. Rights and Obligations.

d.Existence.

B

A cutoff test is clearly a test of the completeness assertion as the test is designed to insure that all transactions that should have been included in accordance with GAAP have been recorded.

1.48

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?

a. Trace test counts noted during physical count 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 PO file for significant commitments to consider for disclosure.

B

This is clearly a test related to rights and obligations as the question that must be answered with evidence is to establish that the inventory reported as assets really is owned by the company. Goods on consignment, by definition, are not owned by the company. Thus, there is a risk that the company is recording assets that they do not own on their balance sheet.

1.49

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

a. Existence or occurrence.

b. Completeness.

c. Presentation and disclosure.

d. Valuation or allocation.

B

Management is more likely to understate liabilities. As a result, when auditing the accrued liabilities account, the most relevant assertion is likely to be completeness.

1.50

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

Auditing Engagement

Attestation Engagement

Assurance Engagement

Consulting Services Engagement

Financial Statements

Advice and decision support

Any Information

Financial Information

D

This is correct as an auditing engagement refers to an examination of the financial statements to determine whether the information has been presented in accordance with GAAP and an attestation engagement can include a financial statement audit. In addition, An assurance engagement can apply to all types of information and a consulting engagement is one where the professional provides advice and decision support.

1.51

Which of the following is a reason to obtain professional certification?

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.

D

Credibility, advancement, and monetary rewards are all reasons to become certified