Audit Exam 1 - Q's

1-13 An independent audit adds value to the communication of financial information because the audit

b. Lends credibility to the financial statements.

1-14 Which of the following best describes the reason why an independent auditor is often retained to report on financial statements?

b. Different interests may exist between the entity preparing the statements and the persons using the statements, thus outside assurance is needed to enhance the credibility of the statements.

1-15 Which of the following best describes relationships among auditing, attest, and assurance services?

c. Auditing is a type of assurance service.

1-16 Which of the following statements relating to attest and assurance services is not correct?

c. Financial statement auditing is a form of attest service but it is not an assurance service.

1-17 For what primary purpose does the auditor obtain an understanding of the entity and its environment?

c. To plan the audit and determine the nature, timing, and extent of audit procedures to be performed.

1-18 Which of the following statements best describes how materiality is related to audit evidence in a financial statement audit?

c. The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

1-19 Which of the following is the most important reason for an auditor to gain an understanding of an audit client's system of internal control over financial reporting?

a. Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.

1-20 Preliminary engagement activities include

d. All of the above. (Understanding the client and the client's industry; Determining audit engagement team requirements; Ensuring the independence of the audit team and audit firm.)

1-21 Which of the following statements best describes what is meant by an unqualified audit opinion?

d. An unqualified auditor's opinion indicates that in the auditor's opinion the client's financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases.

1-22 The auditing standards that are used to guide the conduct of the audit are

d. Explicitly referred to in the Basis for Opinion section of the auditor's standard report.

1-23 A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are presented fairly in the auditor's opinion. Which kind of audit report should the auditor issue under these circumstances?

b. Qualified opinion due to departure from GAAP.

2-15 Which of the following is not a part of the role of internal auditors?

b. Providing reports on the reliability of financial statements to investors and creditors.

2-16 Operational auditing is oriented primarily toward

a. Efficiency and future improvements to accomplish the goals of management.

2-17 Which of the following would be considered a nonattest assurance service engagement? (I. Expressing an opinion about the reliability of an entity's financial statements. II. Reporting that a company's sustainability metrics are complete and accurate.)

b. II only.

2-18 Which of the following best places the events of the last decade in proper sequence?

d. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB.

2-19 Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements?

c. Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

2-20 Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions?

a. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

2-21 The Public Company Accounting Oversight Board

a. Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

2-22 Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States?

c. ASB: Nonpublic company audits | PCAOB: Public company audits.

2-23 Which of the following best describes the general character of the section of the "Principles Underlying an Audit of Financial Statements," titled "Performance"?

c. Criteria for audit planning and evidence gathering.

19-14 Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance?

Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary.

19-15 All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence with respect to an audited entity except

Some specific tax services.

19-16 Under the SEC's rules regarding independence, which of the following must an entity disclose?

Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm.

19-17 The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a

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

19-18 In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? (1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.)

2 and 3.

19-19 An audited company has not paid its 2024 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2025 audit, the 2024 audit fees must be paid before the

2025 report is issued.

19-20 Which of the following legal situations would be considered to impair the auditor's independence?

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

19-21 A violation of the profession's ethical standards is least likely to occur when a CPA

Forms an association—not a legally binding partnership—with two other sole practitioners and calls the association Adams, Betts & Associates, CPAs.

19-22 Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using

A justice-based perspective.

19-23 During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance?

Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information.

19-24 Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n)

Successor CPA firm that has been engaged to audit the former audit entity.

19-25 One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through

A system of quality management.

19-26 In connection with the element of engagement performance, a CPA firm's system of quality management should ordinarily include procedures covering all of the following except

Financial considerations are not allowed to unduly influence client acceptance decisions.

5-17 Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?

Comparing a sample of shipping documents to the sales journal.

5-18 In testing the existence assertion for an asset, an auditor ordinarily works from the

Accounting records to the supporting documents.

5-19 Which of the following statements concerning audit evidence is correct?

The measure of the reliability of audit evidence lies in the auditor's judgment.

5-20 Which of the following presumptions is least likely to relate to the reliability of audit evidence?

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

5-21 Which of the following types of audit evidence is the least reliable?

Prenumbered purchase order forms prepared by the entity.

5-22 Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?

Computations made by the auditor.

5-23 An auditor would be least likely to use confirmations in connection with the examination of

Stockholders' equity.

5-24 The assurance bucket is filled with all of the following types of evidence except

The audit report.

5-25 The current file of the auditor's working papers should generally include

A copy of the financial statements.

5-26 The permanent file section of the working papers that is kept for each audit client most likely contains

Narrative descriptions of the entity's accounting system and control procedures.

5-27 An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n)

Lead schedule.

5-28 The primary objective of final analytical procedures is to

Assist the auditor in assessing the validity of the conclusions reached on the audit.

5-29 The substantive analytical procedure known as trend analysis is best described by

The examination of changes in an account over time.

3-17 Prior to taking on a new audit client, what primary inquiry must the successor auditor make to the predecessor auditor?

d. Clarification regarding the reasons behind the change in auditors.

3-18 Which document establishes the formal written agreement between the auditor and client regarding responsibilities for detecting fraud?

d. Engagement letter.

3-19 When an external auditor plans to utilize the work of an entity's internal audit department, which two key attributes of the internal auditors must be evaluated first?

a. Competence and objectivity.

3-20 Which procedure is an auditor most likely to perform during the initial planning stage of an engagement?

c. Reviewing the proposed timing and schedule of audit procedures with client management.

3-21 To maintain independence, the audit committee of a publicly traded firm should ideally consist of:

d. Board of directors members who are not officers or employees of the company.

3-22 What is a primary objective for an auditor during the initial planning phase of an audit?

b. Establish the overall materiality threshold for the audit.

3-23 Which statement accurately reflects the auditor's responsibility regarding client illegal acts?

a. Auditors have the same responsibility to detect direct and material illegal acts as they do for errors or fraud.

3-24 During the review process, what do engagement partners and managers look to verify regarding team members' work?

d. All of the above are correct. (The planned audit work was executed and documented accurately; The specific objectives for each procedure were fully achieved; The documented results logically support the final audit conclusions.)

3-25 How is "tolerable misstatement" defined in an audit context?

d. The specific materiality threshold applied to individual accounts or disclosures to scope audit testing.

3-26 Which factor is most commonly used by an auditor to establish initial overall materiality during audit planning?

b. Interim income before taxes (e.g., period-to-date results).