Deck 6: Audit Responsibilities and Objectives

Question 1

When an auditor believes that an illegal act may have occurred,the auditor should first

A)obtain an understanding of the nature and circumstances of the act.
B)consult with legal counsel or others knowledgeable about the illegal act.
C)discuss the matter with the audit committee.
D)withdraw from the engagement.

Answer 1

A

Question 2

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

Answer 2

False

Question 3

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected.

A)important to the financial statements
B)statistically significant to the financial statements
C)material to the financial statements
D)identified by the client

Answer 3

C

Question 4

The auditors determine which disclosures must be presented in the financial statements.

Question 5

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.

Question 6

The annual reports of many public companies include a statement about management's responsibilities and relationship with the CPA firm.

Question 7

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 classes of transactions

Question 8

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?

A)The auditor commonly examines a sample,rather than the entire population of transactions.
B)Accounting presentations contain complex estimates which involve uncertainty.
C)Fraudulently prepared financial statements are often difficult to detect.
D)Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

Question 9

Which of the following statements is the most correct regarding errors and fraud?

A)An error is unintentional,whereas fraud is intentional.
B)Frauds occur more often than errors in financial statements.
C)Errors are always fraud and frauds are always errors.
D)Auditors have more responsibility for finding fraud than errors.

Question 10

The auditor's best defense when material misstatements are not uncovered is to have conducted the audit

A)in accordance with generally accepted auditing standards.
B)as effectively as reasonably possible.
C)in a timely manner.
D)only after an adequate investigation of the management team.

Question 11

Which of the following statements is True of a public company's financial statements?

A)Sarbanes-Oxley requires only the CEO to certify the financial statements.
B)Sarbanes-Oxley requires only the CFO to certify the financial statements.
C)Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.
D)Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.

Question 12

In certifying their annual financial statements,the CEO and CFO of a public company certify that the financial statements comply with the requirements of

A)GAAP.
B)the Sarbanes-Oxley Act.
C)the Securities Exchange Act of 1934.
D)GAAS.

Question 13

Auditors accumulate evidence to

A)defend themselves in the event of a lawsuit.
B)determine if the financial statements are correct.
C)satisfy the requirements of the Securities Acts of 1933 and 1934.
D)reach a conclusion about the fairness of the financial statements.

Question 14

If management insists on financial statement disclosures that the auditor finds unacceptable,the auditor can withdraw from the engagement or

A)
B)
C)
D)

Question 15

Because they operate the business on a daily basis,a company's management knows more about the company's transactions and related assets,liabilities,and equity than the auditors.

Question 16

The objective of an audit of the financial statements is an expression of an opinion on

A)the fairness of the financial statements in all material respects.
B)the accuracy of the financial statements.
C)the accuracy of the annual report.
D)the accuracy of the balance sheet and income statement.

Question 17

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

Question 18

If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence,the auditor

A)should withdraw from the engagement.
B)should request an increase in audit fees so that more resources can be used to conduct the audit.
C)has the responsibility of notifying financial statement users through the auditor's report.
D)should notify regulators of the circumstances.

Question 19

The Sarbanes-Oxley Act provides for criminal penalties.

Question 20

The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the

A)board of directors.
B)company management.
C)financial statement auditor.
D)company's internal audit department.

Question 21

An auditor discovers that the company's bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales.This is an example of

A)employee fraud.
B)an error.
C)misappropriation of assets.
D)a defalcation.

Question 22

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?

A)The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.
B)The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.
C)The auditor is responsible for detecting material financial statement fraud,but not a material misappropriation of assets.
D)The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

Question 23

In comparing management fraud with employee fraud,the auditor's risk of failing to discover the fraud is

A)greater for management fraud because managers are inherently more deceptive than employees.
B)greater for management fraud because of management's ability to override existing internal controls.
C)greater for employee fraud because of the higher crime rate among blue collar workers.
D)greater for employee fraud because of the larger number of employees in the organization.

Question 24

If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct,

A)bankruptcies could no longer occur.
B)bankruptcies would be reduced to a very small number.
C)audits would be much easier to complete.
D)audits would not be economically practical.

Question 25

An auditor has a duty to

A)provide reasonable assurance that material misstatements will be detected.
B)be a guarantor of the fairness in the statements.
C)be equally responsible with management for the preparation of the financial statements.
D)be an insurer of the fairness in the statements.

Question 26

Misappropriation of assets

A)is generally committed by company management.
B)harms the users of the financial statements by providing them incorrect financial data for their decision making.
C)causes harm to stockholders because the assets are no longer available to their rightful owners.
D)causes the financial statements to be misstated since the misappropriation usually involves material amounts.

Question 27

Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?

A)Generally,the auditor is under no obligation to notify parties other than personnel within the client's organization.
B)Generally,the auditor is under an obligation to inform the PCAOB.
C)Generally,the auditor is obligated to disclose the relevant facts in the auditor's report.
D)Generally,the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

Question 28

When the auditor identifies or suspects noncompliance with laws and regulations,the auditor

A)should discuss the matter with those whom they believe committed the illegal act.
B)begin communication with the FASB in accordance with PCAOB regulations.
C)may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.
D)should withdraw from the engagement.

Question 29

If there is collusion among management,the chance a normal audit would uncover such acts is

A)very low.
B)very high.
C)zero.
D)none of the above.

Question 30

Which of the following statements is usually True?

A)Materiality is easy to quantify.
B)Fraudulent financial statements are often easy for the auditor to detect,especially when there is collusion among management.
C)Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement.
D)An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

Question 31

When reporting identified or suspected noncompliance,

A)the auditor must report inconsequential noncompliance to the audit committee.
B)the auditor should communicate all material noncompliance matters to those charged with governance.
C)any intentional noncompliance must be reported to local law enforcement.
D)all noncompliance,whether material or not,must result in a disclaimer of opinion.

Question 32

Auditing standards make ________ distinction(s)between the auditor's responsibilities for searching for errors and fraud.

A)little
B)a significant
C)no
D)various

Question 33

When dealing with laws and regulations that do not have a direct effect on the financial statements,the auditor

A)should inquire of management about whether the entity is in compliance with such laws and regulations.
B)has no responsibility to determine if any violations of these laws has occurred.
C)must report all violations,including inconsequential violations,to the audit committee.
D)should perform the same procedures as for violations having a direct effect on the financial statements.

Question 34

When the auditor becomes aware of or suspects noncompliance with laws and regulations

A)the auditor should evaluate the effects of the noncompliance on other aspects of the audit.
B)the auditor should discuss the matter with management at a level above those suspected of the noncompliance.
C)the auditor should obtain additional information to evaluate the possible effects on the financial statements.
D)all of the above

Question 35

Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?

A)Auditors can follow an easy,step-by-step procedure to determine how laws and regulations impact the financial statements.
B)The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.
C)It is the responsibility of the auditor to determine if an act constitutes noncompliance.
D)The auditor must inform an outside party if management has knowingly not complied with a law or regulation.

Question 36

Which of the following would most likely be deemed a direct effect illegal act?

A)violation of federal employment laws
B)violation of federal environmental regulations
C)violation of federal income tax laws
D)violation of civil rights laws

Question 37

When an auditor knows that an illegal act has occurred,she must

A)report it to the proper governmental authorities.
B)consider the effects on the financial statements,including the adequacy of disclosure.
C)withdraw from the engagement.
D)issue an adverse opinion.

Question 38

Which of the following is the auditor least likely to do when aware of an illegal act?

A)discuss the matter with the client's legal counsel
B)obtain evidence about the potential effect of the illegal act on the financial statements
C)contact the local law enforcement officials regarding potential criminal wrongdoing
D)consider the impact of the illegal act on the relationship with the company's management

Question 39

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors,the profession has placed the responsibility

A)more on discovering errors than employee fraud.
B)more on discovering employee fraud than errors.
C)equally on discovering errors and employee fraud.
D)on the senior auditor for detecting errors and on the manager for detecting employee fraud.

Question 40

The concept of reasonable assurance indicates that the auditor is

A)not a guarantor of the correctness of the financial statements.
B)not responsible for the fairness of the financial statements.
C)responsible only for issuing an opinion on the financial statements.
D)responsible for finding all misstatements.

Question 41

An audit generally provides no assurance that illegal acts that do not have a direct effect on the financial statements will be detected.

Question 42

The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company's financial position and results of operations.

Question 43

Errors are usually more difficult for an auditor to detect than frauds.

Question 44

Which of the following is an accurate statement about professional skepticism?

A)Professional skepticism involves a critical assessment of the evidence.
B)Professional skepticism is easy to implement in practice.
C)It is easy for auditors to understand that their clients may try to deceive them throughout the audit process.
D)Professional skepticism is only necessary for the audits of public companies.

Question 45

Another term for misappropriation of assets is

A)management fraud.
B)collusion.
C)employee fraud.
D)illegal acts.

Question 46

Discuss the actions an auditor should take when an illegal act is identified or suspected.

Question 47

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.

Question 48

If a client has violated federal tax laws,

A)the auditor must notify the IRS.
B)and the amount is significant,the auditor should communicate with those charged with governance.
C)the noncompliance generally will not impact the financial statements.
D)the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.

Question 49

Discuss the differences between errors,frauds,and illegal acts.Give an example of each.

Question 50

Audits are expected to provide a higher degree of assurance for the detection of material frauds than is provided for an equally material error.

Question 51

The provisions of many laws and regulations affect the financial statements

A)directly.
B)only indirectly.
C)both directly and indirectly.
D)materially if direct;immaterially if indirect.

Question 52

Auditors have a higher degree of responsibility for detecting illegal acts that have a direct effect on the financial statements than illegal acts that do not have a direct effect on the financial statements.

Question 53

Discuss the differences in the auditor's responsibilities for discovering (1)material errors,(2)material fraud (3)illegal acts having a direct effect on the financial statements,and (4)illegal acts that do not have a direct effect on the financial statements.

Question 54

In obtaining reasonable assurance that the financial statements are free of material misstatement,the auditor does not need to take into account the applicable legal and regulatory framework relevant to the client.

Question 55

The auditor's first course of action when an illegal act is uncovered should be to immediately notify the appropriate authorities,including but not limited to,law enforcement and the Securities and Exchange Commission.

Question 56

As the impact from noncompliance is further removed from affecting the financial statements,the less likely the auditor is to become aware of or recognize noncompliance when auditing the financial statements.

Question 57

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.

Question 58

Other than inquiring of management about policies they have established to prevent illegal acts and whether management knows of any laws or regulations that the company has violated,the auditor should not search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they may exist.

Question 59

Discuss three reasons why auditors are responsible for "reasonable" but not "absolute" assurance.

Question 60

Auditing standards indicate that reasonable assurance is a moderate,but not absolute,level of assurance that the financial statements are free of material misstatement.

Question 61

When the auditor considers whether he understands the form and substance of the transaction or event,and whether the relevant authoritative literature has been applied consistently by the client,he is performing which step in the professional judgment process?

A)identifying and defining the issue
B)performing the analysis and identifying potential alternatives
C)making the decision
D)gathering the facts

Question 62

Why does the auditor divide the financial statements into smaller segments?

A)Using the cycle approach makes the audit more manageable.
B)Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces.
C)The cycle approach is used because auditing standards require it.
D)All of the above are correct.

Question 63

A questioning mindset

A)means the auditor must prove every statement that management makes to them.
B)means the auditor should approach the audit with a "do not trust anyone" mental outlook.
C)assures that the auditor will only accept honest clients.
D)means the auditor should approach the audit with a "trust but verify" mental outlook.

Question 64

The starting point to effective professional judgment begins with

A)gathering the facts.
B)identifying alternatives.
C)identifying relevant literature.
D)identifying and defining the issue.

Question 65

An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should

A)plan and perform the engagement with an attitude of professional skepticism.
B)not rely on internal controls that are designed to prevent or detect errors or fraud.
C)design audit tests to detect unrecorded transactions.
D)extend the work to audit the majority of the recorded transactions and records of an entity.

Question 66

________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions.

A)Self-esteem
B)Interpersonal understanding
C)Suspension of judgment
D)Autonomy

Question 67

Auditors often convince themselves that they only accept clients they can trust and who have high integrity.

Question 68

When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process,auditors will

A)consider the accounting and auditing standards relevant to the issues.
B)articulate in written form the rationale of their judgment.
C)identify the issue.
D)gather the facts.

Question 69

One of the characteristics of professional skepticism is ________,which is the conviction to decide for oneself,rather than accepting the claims of others.

A)interpersonal understanding
B)autonomy
C)suspension of judgment
D)self-esteem

Question 70

Which of the following is not a step in the professional judgment process?

A)make the decision
B)perform the analysis
C)determine the type of audit opinion
D)review and document the rationale for the conclusion

Question 71

________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value.

A)Anchoring
B)Availability
C)Overconfidence
D)Confirmation

Question 72

Auditors should be alert for potential judgment tendencies,traps,and biases that may impact their decision making process.Identify and define four of these judgment tendencies.Then,for each judgment tendency,suggest a way to avoid or mitigate the tendency.

Question 73

Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism.List and briefly describe each of these characteristics.

Question 74

Overconfidence is the tendency to put more weight on information that is consistent with the initial beliefs or preferences.

Question 75

A suspension of judgment is the recognition that people's motivations and perceptions can lead them to provide biased or misleading information.

Question 76

During the professional judgment process,the analysis may identify only one appropriate response to the issue.

Question 77

One of the characteristics of professional skepticism is_______,which is a desire to investigate beyond the obvious.

A)self-esteem
B)an interpersonal understanding
C)a search for knowledge
D)a questioning mindset

Question 78

The profession has developed professional judgment frameworks that illustrate an effective decision-making process.

Question 79

In order to mitigate availability,the auditor should consult with others and make the opposing case.

Question 80

Why does the auditor divide the financial statements into segments around the financial statement cycles?

A)Most auditors are trained to audit cycles as opposed to entire financial statements.
B)The approach aids in the assignment of tasks to different members of the audit team.
C)The cycle approach is required by auditing standards.
D)The cycle approach allows the auditor to detect illegal acts.