IT Audit, Midterm Exam Test Bank

False

One criterion used by an external auditor to evaluate published financial statements is known as generally accepted auditing standards.

True

Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period.

False

Auditing can have a significant effect on both information risk and business risk.

False

As society becomes more complex, decision makers are more likely to receive reliable information.

True

Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting.

False

The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles.

False

CPA firms are often called and thought of by outsiders as external auditors, independent auditors, or internal auditors.

True

Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

False

In a CPA firm, the audit senior or the in-charge auditor performs most of the detailed audit work.

False

The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publicly traded and private companies.

True

A CPA must meet continuing education requirements to maintain their license to practice.

False

Small local CPA Firms are allowed under Sarbanes-Oxley and the Securities and Exchange Commission a special exemption to perform audits of publicly-listed firms.

False

Professional skepticism must be maintained only if the auditor suspects fraud.

True

Quality controls are established for the entire CPA firm whereas auditing standards are applicable to the individual engagement.

False

An audit provides a guarantee that a material misstatement will not exist in the financial statements.

False

An auditor will issue a disclaimer when he or she concludes that the financial statements are not fairly presented.

False

Auditors of public company financial statements must issue separate reports on internal control over financial reporting.

False

Changes in accounting estimates require the auditor to issue a modified audit report with a consistency paragraph inserted after the opinion paragraph.

False

When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.

False

Client imposed restrictions on the audit always require a disclaimer of opinion.

True

The final step in the auditor’s decision process for audit reports is to write the audit report.

False

When developing the audit objectives, the first step is to divide the financial statements into cycles.

True

When an auditor believes that an illegal act may have occurred, the first step he or she should take is to gather additional evidence to determine the extent of the illegality and if there is a direct impact on the financial statements.

True

An auditor embracing the responsibility during the audit of maintaining a questioning mind and critically evaluating evidence significantly reduces the likelihood of audit failure throughout the audit.

True

Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.

False

An audit objective focused on the balance in accounts receivable or accounts payable is a transaction-related audit objective.

True

The auditor’s audit objectives follow and are closely related to management assertions.

False

The transaction-related audit objective that deals with whether recorded transactions have actually occurred is the completeness objective.

False

An example of highly persuasive evidence to an auditor is the responses to questions on a questionnaire by audit client employees.

False

The sample size generally does not depend on client circumstances such as the extent of automated controls in place in the client’s accounting information system.

True

The relevance of audit evidence depends on the audit objective being tested.

False

Accounts receivable confirmations must be controlled by the client from the time they are prepared until the time they are returned to the auditor.

False

As long as analytical procedures are performed during the planning and testing phase of the audit, it is not necessary for the auditor to perform analytical procedures during the completion phase of the audit.

True

Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of the allowance for doubtful accounts.

True

An auditor can use engagement management software to facilitate tracking audit progress.

D) absolute assurance on the financial statements including assuming responsibility for them.

Auditors do not provide which of the following?
A) assurance on financial statements.
B) assurance on the effectiveness of internal controls over financial reporting.
C) assurance on corporate sustainability reports
D) absolute assurance on the financial statements including assuming responsibility for them.

A) determining whether recorded information properly reflects the economic events that occurred during the accounting period.

When auditing accounting data, auditors focus on:
A) determining whether recorded information properly reflects the economic events that occurred during the accounting period.
B) determining if fraud has occurred.
C) determining if taxable income has been calculated correctly.
D) analyzing the financial information to be sure that it complies with government requirements.

D) business risk.

3) The possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as:
A) materiality risk.
B) information risk.
C) interest rate risk.

D) business risk.

B) have an independent audit.

The most common way for users to obtain reliable information is to:
A) have an internal audit.
B) have an independent audit.
C) verify all information individually.
D) verify the information with management.

A) review.

Which of the following services provides the lowest level of assurance on a financial statement?

A) review.
B) audit.
C) Neither services provides assurance on financial statements.
D) Each service provides the same level of assurance on financial statements.

C) make recommendations for improving performance.

One objective of an operational audit is to:
A) determine whether the financial statements fairly represent the entity’s operations.
B) determine if the auditee is in compliance with GAAP.
C) make recommendations for improving performance.
D) report on the entity’s relative success in attaining profit maximization.

C) are employed by all types of organizations.

Internal auditors:
A) must be independent of the company that employs them.
B) report to the accounting department.
C) are employed by all types of organizations.
D) must be CPAs.

B) II only.

Sarbanes-Oxley and the Securities and Exchange Commission restricts auditors from providing many consulting services to their publicly traded audit clients. Which of the following is true for auditors of publicly traded companies?

I. They are restricted from providing consulting services to privately held companies.

II. There is no restriction on providing consulting services to non-audit clients.

A) I only.
B) II only.
C) I and II.
D) Neither I nor II.

B) staff assistant.

Which staff level in a CPA firm performs most of the detailed audit work?

A) partner.
B) staff assistant.
C) senior auditor.
D) senior manager.

A) performs inspections of the quality controls of firms that audit public companies.

The Public Company Accounting Oversight Board:

A) performs inspections of the quality controls of firms that audit public companies.
B) establishes auditing standards that must be followed by CPAs on all audits.
C) oversees auditors of private companies.
D) performs all of the above functions.

D) sets rules of conduct that CPAs are required to meet.

The American Institute of Certified Public Accountants (AICPA):

A) is responsible for issuing licenses to new CPAs.

B) restricts its membership to CPAs who are independent auditors.
C) sets auditing standards for both public and private companies.
D) sets rules of conduct that CPAs are required to meet.

A) the issue in question is immaterial in amount.

An auditor need not abide by a particular auditing standard if the auditor believes that:
A) the issue in question is immaterial in amount.
B) more expertise is needed to fulfill the requirement.
C) the requirement of the standard has not been addressed by the PCAOB.
D) fraud is involved.

A) includes the organizational structure of the firm and the procedures it establishes.

Quality control for a CPA firm:

A) includes the organizational structure of the firm and the procedures it establishes.
B) is tailored to each specific audit engagement.
C) is a guarantee that auditing standards are followed.
D) is required for firms auditing SEC companies.

D) Firms required to be registered with and inspected by the PCAOB are exempt.

Which one of the following is not true regarding the American Institute of Certified Public Accountants peer review requirement?

A) A CPA firm must develop and adhere to quality control standards.
B) Peer reviews are mandatory.
C) A CPA firm will lose AICPA eligibility if a peer review is not performed.
D) Firms required to be registered with and inspected by the PCAOB are exempt.

D) The auditor’s responsibilities paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

Which of the following is a correct statement regarding the standard unmodified opinion audit report?

A) The format of the audit report for public and nonpublic entities are identical.
B) The auditor’s responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles.
C) The audit report includes the name of the lead partner on the audit.
D) The auditor’s responsibilities paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders’ equity.

An audit of historical financial statements most commonly includes the:
A) balance sheet, statement of retained earnings, and the statement of cash flows.
B) income statement, the statement of cash flows, and the statement of net working capital.
C) statement of cash flows, balance sheet, and the statement of retained earnings.
D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders’ equity.

C) either I or II.

Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms?

I. A combined report on financial statements and internal control over financial reporting.

II. Separate reports on financial statements and internal control over financial reporting.

A) I only.
B) II only.
C) either I or II.

D) neither I nor II.

B) one year from the date of the financial statements.

When there is uncertainty about a company’s ability to continue as a going concern, the auditor’s concern is the possibility that the client may not be able to continue its operations or meet its obligations for a “reasonable period of time.” For this purpose, a reasonable period of time is considered not to exceed:

A) six months from the date of the financial statements.
B) one year from the date of the financial statements.
C) six months from the date of the audit report.
D) one year from the date of the audit report.

D) Lack of full disclosure within the footnotes.

In which situation would the auditor be choosing between “except for” qualified opinion and an adverse opinion?

A) The auditor lacks independence.
B) A client-imposed scope limitation.
C) A circumstance-imposed scope limitation.

D) Lack of full disclosure within the footnotes.

D) all of the above.

Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes:

A) net income.
B) total assets.
C) working capital.
D) all of the above.

A) standard unmodified opinion.

When accounting principles are not consistently applied, and the material level is immaterial, the auditor will issue a(n):
A) standard unmodified opinion.
B) unmodified opinion with an explanatory paragraph.
C) adverse opinion.
D) disclaimer opinion.

A) know the proper type of audit opinion to issue.

Which of the following is not one of the steps used to develop audit objectives?
A) know the proper type of audit opinion to issue.
B) divide the financial statements into cycles.
C) know the management assertions about the financial statements.

D) know the specific audit objectives for the classes of transactions.

B) management.

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to:

A) the auditor.
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.

C) company management.

Fraudulent financial reporting is most likely to be committed by whom?
A) line employees of the company.
B) outside members of the company’s board of directors.
C) company management.
D) the company’s auditors.

B) a critical assessment of the audit evidence.

An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components; a questioning mind and:

A) the assumption that upper-level management is dishonest.
B) a critical assessment of the audit evidence.
C) the assumption that all employees are motivated by greed.

D) verification of all critical information by independent third parties.

C) accrued payroll, cash in bank, and accrued payroll taxes.

Which balance sheet accounts are included in the payroll and processing cycle?
A) cash in bank, accrued payroll, trade accounts receivable.
B) accrued payroll, notes payable, and deferred tax.
C) accrued payroll, cash in bank, and accrued payroll taxes.
D) salaries and commissions, cash in bank, accrued payroll taxes.

D) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

In describing the cycle approach to segmenting an audit, which of the following statements is not true?

A) All general ledger accounts and journals are included at least once.

B) Some journals and general ledger accounts are included in more than one cycle.
C) The “capital acquisition and repayment” cycle is closely related to the “acquisition of goods and services and payment” cycle.
D) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

D) classification assertion.

If a short-term payable is included in the accounts payable balance on the financial statement, there is a violation of the:
A) completeness assertion.
B) existence assertions.
C) cutoff assertion.
D) classification assertion.

C) The auditor uses evidence to determine whether the statements are fairly presented.

Which of the following is an accurate statement regarding audit evidence?
A) Responses to the auditor’s questions by client employees are considered highly persuasive evidence.
B) Audit evidence should provide an absolute level of assurance.
C) The auditor uses evidence to determine whether the statements are fairly presented.
D) All evidence must be highly persuasive.

A) Prior to the fiscal year-end of the client, and subsequent to the fiscal year-end of the client.

When can audit procedures be performed?
A) Prior to the fiscal year-end of the client, and subsequent to the fiscal year-end of the client.
B) Neither.
C) Prior to the fiscal year-end of the client.
D) Subsequent to the fiscal year-end of the client.

B) audit procedure.

Examine the cash receipts journal in the accounting system and compare the amounts received to the corresponding amounts invoiced in the revenue accounting system and to the bank statement evidencing the deposit. This is an example of which of the following?
A) audit objective.
B) audit procedure.
C) audit assertion.
D) audit program.

D) realizable value.

Which balance-related audit objective is not relevant to an audit of prepaid expenses?
A) rights.
B) accuracy.
C) detail tie-in.
D) realizable value.

A) responses to auditor’s questions by the president and controller regarding the investments account.

Which of the following forms of evidence would be the least persuasive in forming the auditor’s opinion about marketable securities and other investments held by the company?
A) responses to auditor’s questions by the president and controller regarding the investments accounts.
B) correspondence with a stockbroker regarding the quantity of client’s investments held in street name by the broker.
C) minutes of the board of directors authorizing the purchase of a stock as an investment.
D) the auditor’s count of marketable securities.

C) Audit documentation should be indexed and cross-referenced.

Audit documentation should possess certain characteristics. Which of the following is true regarding those characteristics?

A) Audit documentation should be indexed and cross-referenced, and audit documentation should be organized to benefit the client’s staff.
B) Neither.
C) Audit documentation should be indexed and cross-referenced.
D) Audit documentation should be organized to benefit the client’s staff.

D) all of the above.

Financial ratios:
A) are used during the planning and final review phases of the audit.
B) can be linked to the trial balance so that calculations are automatically updated as adjustments are made.
C) should be compared to previous years and industry averages.

D) all of the above.