Deck 1: The Demand for Audit and Other Assurance Services

Question 1

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.

Answer 1

D

Question 2

Discuss the differences and similarities between the roles of accountants and auditors.What additional expertise must an auditor possess beyond that of an accountant?

Answer 2

The role of accountants is to record,classify,and summarize economic events in a logical manner for the purpose of providing financial information for decision making.To provide relevant information,accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information.In addition,accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost.
The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period.Because U.S.or international accounting standards provide the criteria for evaluating whether financial information is properly recorded,auditors must thoroughly understand those accounting standards.In addition to understanding accounting,the auditor must possess expertise in the accumulation and interpretation of audit evidence.It is this expertise that distinguishes auditors from accountants.Determining the proper audit procedures,deciding the number and types of items to test,and evaluating the results are unique to the auditor.

Question 3

Recording,classifying,and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called

A)finance.
B)auditing.
C)accounting.
D)economics.

Answer 3

C

Question 4

In the auditing process

A)the types and amounts of evidence remain constant from audit to audit.
B)the criteria for evaluating information will not vary depending on the information being audited.
C)the audit report communicates the auditor's findings to users.
D)records are gathered by the auditor to determine whether the audited information is stated in accordance with SEC standards.

Question 5

Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports.

Question 6

An auditor must be competent and have an independent mental attitude.

Question 7

Evidence is paramount to audit and attestation engagements.List the four basic types of audit evidence.

Question 8

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

Question 9

A correct relationship among the auditor,the client,and the external users is

A)management of a public company hires the independent auditor.
B)the audit committee of a private company hires the independent auditor.
C)the client provides capital to the external users.
D)the external users can rely upon the auditor's report to reduce information risk.

Question 10

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

Question 11

Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence.

Question 12

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.

Question 13

The criteria by which an auditor evaluates the information under audit may vary with the information being audited.

Question 14

Which of the following can be used as a criteria for evaluating information being audited?

A)International Financial Reporting Standards (IFRS)
B)Generally Accepted Accounting Principles (GAAP)
C)Internal Revenue Code (IRC)
D)all of the above

Question 15

The trait that distinguishes auditors from accountants is the

A)auditor's ability to interpret accounting principles generally accepted in the United States.
B)auditor's education beyond the bachelor's degree.
C)auditor's ability to interpret FASB Statements.
D)auditor's expertise in the accumulation and interpretation of audit evidence.

Question 16

Which of the following is considered audit evidence?

A)
B)
C)
D)

Question 17

________ risk reflects the possibility that the information upon which the business decision was made was inaccurate.

A)Client acceptance
B)Information
C)Business
D)Control

Question 18

To perform an audit,there must be information in a verifiable form and some criteria by which the auditor can evaluate the information.

Question 19

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

Question 20

An accountant

A)must possess expertise in the accumulation of audit evidence.
B)must decide the number and types of items to test.
C)must have an understanding of the principles and rules that provide the basis for preparing the accounting information.
D)must be a CPA.

Question 21

CPA firms are never allowed to provide bookkeeping services for clients.

Question 22

What is an audit of internal control over financial reporting?

Question 23

Three common types of attestation services are

A)audits of historical financial statements,reviews of historical financial statements,and audits of internal control over financial reporting.
B)audits of historical financial information,verifications of historical financial information,and attestations regarding internal controls.
C)reviews of historical financial information,verifications of future financial information,and attestations regarding internal controls.
D)audits of historical financial information,reviews of controls related to investments,and verifications of historical financial information.

Question 24

Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n)

A)accounting and bookkeeping service.
B)attestation service.
C)assurance service.
D)tax service.

Question 25

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

Question 26

What are the four categories of attestation services?

Question 27

Management is required by GAAP to reduce information risk,even if the costs outweigh the benefits.

Question 28

In the audit of historical financial statements,management asserts that the financial statements are fairly stated in accordance with what standards?

A)regulatory accounting principles
B)applicable international accounting standards
C)applicable U.S.accounting standards
D)B and C

Question 29

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.

Question 30

Audits

A)are an assurance service,but not an attestation service.
B)are designed to provide absolute assurance that the financial statements are free of material misstatement.
C)are required for publicly traded companies in the United States.
D)do not require the auditor to express their opinion in a written report.

Question 31

Most public companies' audited financial statements are available on the SEC's EDGAR database.

Question 32

External users of the financial statements

A)value the auditor's report because of the auditor's independence from the client.
B)look to the auditor's report as an indication of the statements' reliability.
C)use the audited information on the assumption that it is reasonably complete,accurate,and unbiased.
D)all of the above.

Question 33

A high,but not absolute,level of assurance is called

A)probable assurance.
B)reasonable assurance.
C)limited assurance.
D)incomplete assurance.

Question 34

Which of the following is an accurate statement regarding the various types of other assurance services?

A)Assurance services must be about the reliability of another party's assertion about compliance with specified criteria.
B)Other assurance services must meet the definition of an attestation service.
C)The primary purpose of a management consulting engagement is to improve the quality of information.
D)The market for other forms of assurance services is open to non-CPA competitors.

Question 35

CPA firms perform numerous services that generally fall outside the scope of assurance services.Give three examples of such services.

Question 36

Explain what is meant by information risk,and list the four causes of this risk.

Question 37

Two types of attestation services provided by CPA firms are audits and reviews.Discuss the similarities and differences between these two types of attestation services.Which type provides the least assurance?

Question 38

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

Question 39

Which of the following is an accurate statement regarding assurance services?

A)Assurance services must be performed by a CPA.
B)An attestation service is not a type of assurance service.
C)Assurance services improve the quality of information for decision makers.
D)Assurance services can only be performed on financial data.

Question 40

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

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

Question 41

Discuss the similarities and differences between financial statement audits,operational audits,and compliance audits.Give an example of each type.

Question 42

An integrated approach to auditing considers both the risk of misstatements and operating controls intended to prevent misstatements.

Question 43

Which one of the following is more difficult to evaluate objectively?

A)presentation of financial statements in accordance with generally accepted accounting principles
B)compliance with government regulations
C)efficiency and effectiveness of operations
D)All three of the above are equally difficult.

Question 44

In a financial statement audit,the auditor

A)gathers evidence to determine whether the statements contain material errors or other misstatements.
B)must have a thorough understanding of the entity and its environment.
C)determines whether the financial statements are stated in accordance with specified criteria.
D)all of the above.

Question 45

Which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to Congress?

A)internal auditor
B)revenue agent
C)independent auditor
D)GAO auditor

Question 46

To perform an audit,it is necessary for the information to be in a verifiable form and there must be some criteria by which the auditor can evaluate the information.Detail the information and criteria that would be used when
(A)an independent CPA firm audits a company's historical financial statements.
(B)an Internal Revenue Service auditor audits that same company's tax return.
(C)an internal auditor performs an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively.

Question 47

The use of the Certified Public Accountant title is regulated by

A)the federal government.
B)state law through the licensing departments of each state.
C)the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees.
D)the Securities and Exchange Commission.

Question 48

The primary purpose of a management consulting engagement is to generate a recommendation to management.

Question 49

Which of the following audits can be regarded as generally being a compliance audit?

A)IRS agents' examinations of taxpayer returns
B)GAO auditor's evaluation of the computer operations of governmental units
C)an internal auditor's review of a company's payroll authorization procedures
D)a CPA firm's audit of a public company

Question 50

Discuss the similarities and differences between the roles of independent auditors,GAO auditors,internal revenue agents,and internal auditors.

Question 51

Which of the following are required to have a written report regarding the assertion of another party?

A)
B)
C)
D)

Question 52

Internal auditors

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

Question 53

The three requirements for becoming a CPA include all but which of the following?

A)uniform CPA examination requirement
B)education requirements
C)character requirements
D)experience requirement

Question 54

An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n)

A)audit of financial statements.
B)compliance audit.
C)operational audit.
D)production audit.

Question 55

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

Question 56

An examination of part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit?

A)operational audit
B)compliance audit
C)financial statement audit
D)production audit

Question 57

Match the engagement described to the (A)type of audit and (B)auditor that would most likely perform the engagement.Each engagement will have an answer from List-A and List-B.An answer can be used once,more than once,or not at all.

Engagement:
1.Evaluate a company's payroll processing for economy.
2.Evaluate/determine if bank covenants are being met.
3.Evaluate financial statements that are to be submitted to a bank.
4.Evaluate the promptness of materials inspection in a manufacturer's receiving department.
5.Determine if Medicare reimbursements are in accordance with the Healthcare Financing Administration (HCFA).
6.Determine if the tax return of a multinational corporation is in accordance with the tax code.
7.Determine if a public school is properly applying their reimbursement for the payment-in-kind program.
8.Determine the effectiveness of a Department of Defense project.

Question 58

Results of compliance audits are typically reported to the company's management rather than to a broad spectrum of outside users.

Question 59

One objective of an operational audit is to

A)determine whether the financial statements fairly present 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.

Question 60

The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts.

Question 61

List and discuss the three primary requirements to become a CPA.