Audit Homework for exam 1

Which of the following would be considered an assurance engagement?

opinion on claims of sweepstake prizes

opinion on conformity of financial statements with gaap

opinion on fair presentation of newspaper circulation data

assurance on average drive length from client golf balls

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.

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

prepare a written report containing a conclusion about the reliability of a management assertion.

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

operation auditing

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

the operational auditor is seeking to help management use resources in the most effective manner possible.

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

enhance the degree of confidence that intended users can place in the financial statements.

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

internal auditing

valuation

Independent auditors of financial statements perform audits that reduce:

information risk faced by investors.

The primary objective of compliance auditing is to:

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

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

cpa exams

experience

education

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 ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?

Cutoff.

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

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

Auditing is a subset of attestation engagements that focuses on the certification of financial statements.

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.

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.

Which of the following would best be described as an attest engagement?

An engagement to assess the effectiveness of an internal control system.

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?

vaulation 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

Which of the following categories of principles is most closely related to gathering audit evidence?

performance

Which of the following is not related to ethical requirements of auditors?

Professional judgment

One of an accounting firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following:

standards within a system of quality management.

Which of the following best demonstrates the concept of professional skepticism?

Critically assessing verbal evidence received from the entity’s management.

The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit is:

to determine the nature, timing, and extent of substantive procedures to be performed.

Ordinarily, what source of evidence should least affect audit conclusions?

Inquiry of management.

The most reliable evidence regarding the existence of newly acquired computer equipment is:

physical observation.

Which of the following procedures would provide the most reliable audit evidence?

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

Breaux & Company CPAs require that all audit documentation indicates the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?

Adequate planning and supervision

Which of the following concepts is least related to the standard of due care?

reasonable assurance

The evidence considered most appropriate by auditors is best described as:

direct personal knowledge obtained through physical observation and mathematical recalculation.

Auditors’ understanding of the internal control in an entity provides information for:

planning the nature, timing, and extent of substantive procedures on an audit.

Which of the following elements of a system of quality management is related to firms receiving independence confirmations from its professionals with respect to clients?

relevant ethical requirements

Which of the following is most closely related to the responsibilities principle?

The auditors’ compliance with relevant ethical requirements of independence and due care.

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:

be considered as exercising proper due care.

Which of the following topics is not addressed in the auditors’ report for an issuer?

Absolute assurance regarding the fairness of the entity’s financial statements in accordance with GAAP.

Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements?

Reasonable assurance

Which of the following is most closely related to the relevance of audit evidence?

In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable.

Which of the following statements is not true with respect to the performance principle?

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.

Which of the following is true with respect to PCAOB inspections of accounting firms?

PCAOB inspections review a sample of audits conducted by firms as well as the firm’s systems of quality management.

The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as:

audit procedures.

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?

Develop Auditing Standards for the audits of issuers.

Which of the following best describes the general contents of the first paragraph of the "Basis for Opinion" section of the auditors’ report?

Statements identifying the responsibility of auditors and management in the financial reporting process.

Which of the following opinions would be issued if auditors believed that the entity’s financial statements were not presented in conformity with GAAP?

Adverse opinion

Which of the following principles is most closely associated with the auditors’ conclusion as to the fair presentation of the entity’s financial statements?

reporting principle

Generally accepted auditing standards require that auditors always prepare and use:

a written audit plan.

When initiating communications with predecessor auditors, prospective auditors should expect:

take responsibility for obtaining the client’s consent for the predecessor to give info

conduct interviews with partner and manager in charge of previous cpa firms engagement

obtain copies of some or all of the previous auditor’s documentation

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?

The auditors’ judgment about their independence with regard to the client

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the:

current file audit documentation.

An auditor's permanent file audit documentation most likely will contain:

excerpts of the corporate charter and bylaws.

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?

Being able to decide early what type of audit opinion to issue

Which of the following is an advantage of computer-assisted audit techniques (CAATs)?

The software can be used for audits of clients that use differing computer equipment and file formats.

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

Schedules and analyses to be prepared by the client’s employees.

When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company’s precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes’s work in the audit report?

The auditors’ report should mention the use of the audit specialist only when the audit specialist’s findings affect the auditors’ conclusions.

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

Scanning the minutes for significant transactions with members of the board of directors

Which of the following communications is most likely to be written before the balance-sheet date?

An engagement letter

Which of the following procedures would most likely be performed during planning?

Identifying related parties

An audit plan contains:

specifications of procedures the auditors believe appropriate for the financial statements under audit.

The revenue cycle of a company generally includes which accounts?

Cash, accounts receivable, and sales

When auditing the existence assertion for an asset, auditors proceed from the:

general ledger back to the supporting original transaction documents.

Confirmations of accounts receivable provide evidence primarily about which two assertions?

Existence and rights and obligations

With respect to the concept of materiality, which of the following statements is correct?

Materiality is a matter of professional judgment.

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most concerned about which of the following?

Evidence of a conservative systematic bias

Which of the following would be considered an analytical procedure?

Comparing inventory balances to recent sales activities

Which of the following procedures would a CPA most likely perform in planning a financial statement audit?

Compare financial information with nonfinancial operating data.

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They typically use financial and nonfinancial data aggregated at a high level.

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:

allow the internal auditor to perform certain tests of internal controls

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

There will be a client-imposed scope limitation.

Which of the following is not reflective of a standard philosophical answer to the question, “what is ethical behavior” for CPAs to consider in completing their work?

Ethical behavior conforms to AICPA Code of Conduct.

Which of the following best defines what is meant by an ethical problem situation?

One where an individual must make a decision where there is a choice among alternative actions, the right choice is not clear, and the final choice affects the well-being of other persons.

Which of the following philosophical principles in ethics directs a decision maker to take actions in accordance with the requirements of moral rules and principles?

The Imperative principle

Which of the following philosophical principles in ethics directs a decision maker to take actions in a manner that produces the greatest good?

The principle of Utilitarianism

Which of the following is not identified as a principle in the AICPA Code of Professional Conduct?

Risk assessment

Auditors are interested in having independence in appearance because:

they want the public at large to have confidence in the profession.

Under Sarbanes-Oxley and PCAOB rules, ensuring that the auditor is independent in appearance is the responsibility of:

the audit committee.

If a public accounting firm says it always follows the rule that requires adherence to FASB pronouncements in order to give a standard unmodified auditors’ report, it is following a philosophy characterized by:

the imperative principle.

Which of the following agencies issues independence rules for the auditors of public companies?

Public Company Accounting Oversight Board (PCAOB)

Audit independence in fact is most clearly lost when:

an auditor agrees to the argument made by the client’s financial vice president that deferring losses on debt refinancing is in accordance with generally accepted accounting principles.

The audit committee’s responsibility for auditor independence concerns:

ensuring that nonaudit services provided by the auditor do not impair independence.

AICPA members who work in industry and government must always uphold which two of the following AICPA rules of conduct?

integrity and objectivity rule

act discredtible rule

A public accounting firm's independence is not impaired when a member of the audit engagement team does which of the following for a public company audit client?

Completes operational internal audit assignments under the directions of the client’s director of internal auditing.

Which of the following is considered a close relative (but not an immediate family member) as defined by the AICPA?

Parent

Which of the following is true if an auditor performs nonaudit services for a government entity?

The scope of the audit cannot be reduced because the nonaudit work was performed by the public accounting firm.

Which of the following is true?

The public accounting firm must discuss with the audit client’s board or its audit committee the independence implications of the client’s having hired the audit engagement team manager as its financial vice president.

Which of the following “bodies designated by Council” have been authorized to promulgate general standards enforceable under the General Standards Rule of the AICPA Code of Professional Conduct?

Accounting and Review Services Committee

Which of the following "bodies designated by Council" have been authorized to promulgate accounting principles enforceable under the Accounting Principles Rule of the AICPA Code of Professional Conduct?

Federal Accounting Standards Advisory Board

Phil Greb has a thriving practice in which he assists attorneys in preparing litigation dealing with accounting and auditing matters. He is “practicing public accounting” if he:

uses his CPA designation on his letterhead and business card.

The AICPA removed its general prohibition of CPAs taking commissions and contingent fees because:

nothing is inherently wrong about the form of fees charged to nonaudit clients.

CPA Kara Rambo is the auditor of Ajax Corporation. Her audit independence will not be considered impaired if she:

owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax’s ownership of 40 percent of Pericles’ stock, and Pericles contributes 3 percent of its total assets and income in Ajax’s financial statements

When a client’s financial statements contain a material departure from a FASB Statement on Accounting Standards and the public accounting firm believes the departure is necessary to ensure that the statements are not misleading,

the public accounting firm can explain why the departure is necessary and then give an unmodified opinion paragraph in the auditors’ report.

Which of the following would not be considered confidential information obtained in the course of an engagement for which the client’s consent would be needed for disclosure?

Information about material contingent liabilities relevant for audited financial statements.