Deck 1: Auditing and Assurance Services

Question 1

The purpose of obtaining and evaluating evidence is to ascertain the degree of correspondence between the assertions and established criteria.

Answer 1

True

Question 2

The AICPA licenses CPAs to practice in the United States.

Answer 2

False

Question 3

The concept "professional skepticism" requires that auditors assume management is dishonest and should not be trusted.

Answer 3

False

Question 4

The PCAOB audit objective related to the completeness assertion is to establish evidence that assets,liabilities,and equities actually exist.

Question 5

Assurance services are independent professional services that improve the quality of information or its context for decision makers.

Question 6

Expanded scope governmental auditing includes economy and efficiency and program results audits.

Question 7

The ASB balance audit objective related to valuation or accuracy is to determine whether proper values have been assigned to assets,liabilities,equities,revenues,and expenses.

Question 8

Internal auditors perform only operational audits.

Question 9

Evidence consists of assertions about economic actions and events.

Question 10

The AICPA Statement on Auditing Standards defines auditing more broadly than the AAA definition of auditing.

Question 11

Four conditions that create demand for reliable information are complexity,remoteness,timeliness,and consequences.

Question 12

Financial decision makers demand reliable information that is provided by accountants.

Question 13

Independent auditors are employees of the client.

Question 14

For independent auditors of financial statements in the United States,established criteria largely consist of the generally accepted accounting principles (GAAP).

Question 15

The objective of internal auditing is to assist members of an organization to effectively perform their obligations.

Question 16

Financial decision makers obtain their accounting information from lenders of funds.

Question 17

The lending of credibility to financial information is known as certification.

Question 18

Professional skepticism is an auditor's tendency not to believe anyone.

Question 19

Government auditors perform both financial and performance audits.

Question 20

Assurance service is the systematic process of objectively obtaining and evaluating evidence.

Question 21

In order to be considered as external auditors with respect to government agencies,GAO auditors must be

A) Organizationally independent.
B) Empowered as the accounting and auditing agency by the U.S. Congress.
C) Funded by the federal government.
D) Guided by standards similar to GAAS.

Question 22

What is the term used to identify the risk that the client's financial statements may be materially false and misleading?

A) Business risk.
B) Information risk.
C) Client risk.
D) Risk assessment.

Question 23

Which of the following is an underlying condition that in part creates the demand by users for reliable information?

A) Economic transactions are numerous and complex.
B) Decisions are time sensitive.
C) Users are separated from accounting records by distance and time.
D) Financial decisions are important to investors and users.
E) All of the above.

Question 24

Which of the following is not a recommendation usually made following the completion of an operational audit?

A) Economic and efficient use of resources.
B) Effective achievement of business objectives.
C) Attesting to the fairness of the financial statements.
D) Compliance with company policies.

Question 25

The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions?

A) Occurrence.
B) Completeness.
C) Accuracy.
D) Classification.

Question 26

Which of the following best describes the main reason that independent auditors report on management's financial statements?

A) Management fraud may exist, and it is likely to be detected by independent auditors.
B) The management that prepares the statements and the persons who use the statements may have conflicting interests.
C) Misstated account balances may be corrected as the result of the independent audit work.
D) The management that prepares the statements may have a poorly designed system of internal control.

Question 27

Which of the following best describes the primary role and responsibility of the independent external auditor?

A) Produce a company's annual financial statements and notes.
B) Express an opinion on the fairness of a company's annual financial statements and footnotes.
C) Provide business consulting advice to audit clients.
D) Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.

Question 28

The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of the ASB balance assertions?

A) Existence.
B) Rights and obligations.
C) Completeness.
D) Valuation.

Question 29

Assurance services involve all of the following except

A) Relevance as well as the reliability of information.
B) Nonfinancial information as well as traditional financial statements.
C) Providing absolute rather than reasonable assurance.
D) Electronic databases as well as printed reports.

Question 30

The audit objective that all the transactions and accounts presented in the financial statements represent real assets,liabilities,revenues,and expenses is related most closely to which of the PCAOB assertions?

A) Existence or occurrence.
B) Rights and obligations.
C) Completeness.
D) Presentation and disclosure.

Question 31

The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations.When looking at the ending balance for the fixed asset account,the auditor examined all work orders,purchased materials,labor cost reports,and applied overhead that were capitalized as part of the equipment costs.Which of the following is the ASB balance assertion most closely related to the auditor's testing?

A) Existence.
B) Completeness.
C) Rights and obligations.
D) Valuation.

Question 32

Which of the following is the essential purpose of the audit function?

A) Detection of fraud.
B) Examination of individual transactions to certify their validity.
C) Determination of whether the client's financial statement assertions are fairly stated.
D) Assurance of the consistent application of correct accounting procedures

Question 33

The audit objective that footnotes in the financial statements should be clear and expressed so that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions?

A) Occurrence.
B) Rights and obligations.
C) Comprehensibility.
D) Understandability.

Question 34

The audit objective of presenting all transactions and accounts in the financial statements are in fact included is related to which of the PCAOB assertions?

A) Existence.
B) Rights and obligations.
C) Completeness.
D) Valuation.

Question 35

The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations.The auditor reviewed all work orders that were capitalized as part of the equipment costs.Which of the following is the ASB transaction assertion most closely related to the auditor's testing?

A) Occurrence.
B) Completeness.
C) Accuracy.
D) Classification.

Question 36

The auditor's judgment concerning the overall fairness of the presentation of financial position,results of operations,and cash flows is applied within the framework of

A) Quality control.
B) Generally accepted auditing standards, which include the concept of materiality.
C) The auditor's evaluation of the audited company's internal control.
D) The applicable financial reporting framework (i.e., GAAP in the United States).

Question 37

To be proficient as an auditor,a person must first be able to accomplish which of these tasks in a decision-making process?

A) Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes.
B) Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes.
C) Recognize the financial assertions made in management's financial statements and footnotes.
D) Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality.

Question 38

The audit objective that all transactions are recorded in the proper period is related most closely to which of the Audit Standards Board (ASB)transaction assertions?

A) Occurrence.
B) Completeness.
C) Cutoff.
D) Accuracy.

Question 39

The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions?

A) Existence.
B) Rights and obligations.
C) Completeness.
D) Valuation.

Question 40

Which of the following is not included in The American Accounting Association (AAA)definition of auditing?

A) Potential conflict of interest.
B) Systematic process.
C) Assertions about economic actions.
D) Established criteria.

Question 41

The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial statements.Certification means that the company CEO and CFO must sign a statement indicating

A) They have read the financial statements.
B) They are not aware of any false or misleading statements (or any key omitted disclosures)
C) They believe that the financial statements present an accurate picture of the company's financial condition.
D) All of the above.

Question 42

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about the PCAOB assertion of

A) Completeness.
B) Existence.
C) Presentation.
D) Valuation.
E) Rights and obligations.

Question 43

The accounting,auditing,and investigating agency of the U.S.Congress that is headed by the U.S.Comptroller General is known as

A) The Federal Bureau of Investigation (FBI).
B) The U.S. General Accountability Office (GAO).
C) The Internal Revenue Service (IRS).
D) The United States Legislative Auditors (USLA).

Question 44

Which of the following best describes assurance services?

A) Independent professional services that report on the client's financial statements.
B) Independent professional services that improve the quality of information for decision makers.
C) Independent professional services that report on specific written management assertions.
D) Independent professional services that improve the client's operations.

Question 45

The process by which a CPA obtains a certificate and license in a state other than the state in which the CPA's certificate was originally obtained is referred to as

A) Substantial equivalency.
B) Quid pro quo.
C) Relicensing.
D) Re-examination

Question 46

In performing an attestation engagement,a CPA typically

A) Supplies litigation support services.
B) Assesses control risk at a low level.
C) Expresses a conclusion on an assertion about some type of subject matter.
D) Provides management consulting advice.

Question 47

Which of the following is not a PCAOB assertion about inventory related to presentation and disclosure?

A) Inventory is properly classified as a current asset on the balance sheet.
B) Inventory is properly stated at its cost on the balance sheet.
C) Major inventory categories and their valuation bases are adequately disclosed in notes.
D) All of the above are PCAOB presentation and disclosure assertions about inventory.

Question 48

The probability that the information circulated by a company will be false or misleading is referred to as

A) Business risk.
B) Information risk.
C) Assurance risk.
D) Audit risk.

Question 49

Which of the following would be considered an assurance engagement?

A) Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes awarded in the past.
B) Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles.
C) Giving an opinion on the fair presentation of a newspaper's circulation data.
D) Giving assurance about the average drive length achieved by golfers with a client's golf balls.
E) All of the above.

Question 50

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of

A) Presentation.
B) Completeness.
C) Rights.
D) Existence.

Question 51

The four basic requirements for becoming a CPA in most states relate to

A) Education, the CPA Examination, experience, and substantial equivalency.
B) The CPA Examination, experience, continuing professional education, and a state certificate.
C) Continuing professional education, the CPA Examination, experience, and an AICPA certificate.
D) Education, the CPA Examination, experience, and a state certificate.

Question 52

The risk that an entity will fail to meet its objectives is referred to as

A) Business risk.
B) Information risk.
C) Assurance risk.
D) Audit risk.

Question 53

An attestation engagement is one in which a CPA is engaged to

A) Issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party.
B) Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.
C) Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts.
D) Assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.

Question 54

The underlying conditions that create demand by users for reliable information include all of the following except

A) Transactions are numerous and complex.
B) Users lack professional skepticism.
C) Users are separated from accounting records by distance and time.
D) Financial decisions are important to investors and users.
E) Decisions are time sensitive.

Question 55

In an attestation engagement,a CPA practitioner is engaged to

A) Compile a company's financial forecast based on management's assumptions without expressing any form of assurance.
B) Prepare a written report containing a conclusion about the reliability of a management assertion.
C) Prepare a tax return using information the CPA has not audited or reviewed.
D) Give expert testimony in court on particular facts in a corporate income tax controversy.

Question 56

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about the ASB balance assertion of

A) Completeness.
B) Existence.
C) Presentation.
D) Valuation.
E) Rights and obligations.

Question 57

The study of business operations for the purpose of making recommendations about the efficient use of resources,effective achievement of business objectives,and compliance with company policies is referred to as

A) Environmental auditing.
B) Financial auditing.
C) Compliance auditing.
D) Operational auditing.

Question 58

Which of the following is not an ASB assertion about inventory related to presentation and disclosure?

A) Inventory is properly classified as a current asset on the balance sheet.
B) Inventory is properly stated at cost on the balance sheet.
C) Major inventory categories and their valuation bases are adequately disclosed in notes.
D) All of the above are ASB presentation and disclosure assertions about inventory.

Question 59

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that

A) A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.
B) In audits of financial statements, the auditor acts exclusively in the capacity of an auditor.
C) The professional status of the independent auditor imposes commensurate professional obligations.
D) Financial statements and financial data are verifiable.

Question 60

Because of the risk of material misstatement,an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of

A) Objective judgment.
B) Independent integrity.
C) Professional skepticism.
D) Impartial conservatism.

Question 61

The Sarbanes-Oxley Act of 2002 generally prohibits professional service firms from

A) Acting in a managerial decision-making role for an audit client.
B) Auditing the firm's own work on an audit client.
C) Providing tax consulting to an audit client without audit committee approval.
D) All of the above.

Question 62

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?

A) Cutoff.
B) Existence.
C) Valuation and allocation.
D) Rights and obligations.
E) Occurrence.

Question 63

When an auditor reviews additions to the equipment (fixed asset)account to make sure that repair and maintenance expenses are not understated,she wants to obtain evidence as to management's assertion regarding

A) Completeness.
B) Existence.
C) Valuation and allocation.
D) Rights and obligations.
E) Occurrence.

Question 64

Which of the following best describes the focus of the following engagements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 65

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

A) Auditing is a subset of attestation engagements that focuses on the certification of financial statements.
B) Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement.
C) Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support.
D) Attestation is a subset of auditing that improves the quality of information, or its context, for decision makers.

Question 66

The risk to investors that a company's financial statements may be materially misleading is called

A) Client acceptance risk.
B) Information risk.
C) Moral hazard.
D) Business risk.

Question 67

The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's financial statement assertion about

A) Completeness.
B) Existence.
C) Valuation and allocation.
D) Rights and obligations.
E) Occurrence.

Question 68

The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?

A) Bookkeeping services.
B) Internal audit services.
C) Valuation services.
D) All of the above.

Question 69

The organization primarily responsible for ensuring that public officials are using public funds efficiently,economically,and effectively is the

A) Governmental Internal Audit Agency (GIAA).
B) Central internal auditors (CIA).
C) Securities and Exchange Commission (SEC).
D) Government Accountability Office (GAO).

Question 70

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

A) The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards.
B) The operational auditor is seeking to help management use resources in the most effective manner possible.
C) The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them.
D) The operational auditor can use analytical skills and tools that are not necessary in financial auditing.

Question 71

The primary objective of compliance auditing is to

A) Give an opinion on financial statements.
B) Develop a basis for a report on internal control.
C) Perform a study of effective and efficient use of resources.
D) Determine whether auditee personnel are following laws, rules, regulations, and policies.

Question 72

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

A) Successful completion of the Uniform CPA Examination.
B) Experience in the accounting field.
C) Education.
D) All of the above.

Question 73

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

A) Environmental auditing.
B) Financial auditing.
C) Compliance auditing.
D) Operational auditing.

Question 74

Substantial equivalency refers to

A) An auditor's tendency not to believe management's assertions without sufficient corroboration.
B) Providing consulting work for another firm's audit client in exchange for the other firm's providing consulting services to one of your clients.
C) The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization.
D) Permitting a CPA to practice in another state without having to obtain a license in that state.

Question 75

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

A) Is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses.
B) Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's completeness assertion.
C) Should be disregarded because it is not in writing.
D) Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

Question 76

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?

A) Completeness.
B) Existence.
C) Valuation and allocation.
D) Rights and obligations.
E) Occurrence.

Question 77

Independent auditors of financial statements perform audits that reduce

A) Business risks faced by investors.
B) Information risk faced by investors.
C) Complexity of financial statements.
D) Timeliness of financial statements.

Question 78

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because

A) Financial statements are too complex to analyze themselves.
B) They are too far away from company headquarters to perform accounting and auditing themselves.
C) The consequences of making a bad loan are very undesirable.
D) 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.

Question 79

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

A) Enhance the degree of confidence that intended users can place in the financial statements.
B) Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board.
C) Express an opinion on the fairness with which they present financial position, result of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission.
D) Obtain systematic and objective evidence about financial assertions and report the results to interested users.

Question 80

Performance audits usually include

A) Financial audits.
B) Economy and efficiency audits.
C) Compliance audits.
D) Program audits.