Deck 1: What Is Auditing

Question 1

An important requirement of the auditing standards is that the auditor gather sufficient appropriate evidence to determine whether the financial statements have been prepared by competent individuals.

Answer 1

False

Question 2

The areas where management is more likely to misstate transactions are riskier for the auditor because

A)the auditor will be the subject of legal action.
B)the auditor probably will not have enough time to identify these areas.
C)failing to correct the misstatements may lead to issuing a clean opinion on materially misstated financial statements.
D)failing to correct the misstatements may lead to issuing a qualified opinion on materially misstated financial statements.

Answer 2

C

Question 3

One of the characteristics of a principal-agent relationship is:

A)The owners of the company are involved in the daily management of the company.
B)The owners of the company hire an agent to run the company for them and to make daily decisions for the company.
C)The owners have more knowledge than management about the daily operations of the company.
D)Outsiders benefit when a manager is hired by owners to protect their interests in the company because the information available to outsiders is more likely to correspond to financial accounting standards.

Answer 3

B

Question 4

Which of the following is a characteristic of the person doing the assessment of the financial statements?

A)The person completing the assessment is an employee of the company.
B)The person completing the assessment works for an accounting firm that is associated with the company only in a role of being hired to perform an audit.
C)The person performing the assessment may be a banker,current or potential stockholder,or a regulatory body.
D)The person performing the assessment makes adjustments to the decisions recorded by the firm so that outsiders have accurate information to make decisions.

Question 5

Which of the following will allow a company to report higher net income?

A)recording fictitious expenses at the beginning of the year
B)recording fictitious revenue at the end of the year
C)depreciating long lived assets
D)increasing a line of credit at a bank

Question 6

Today's auditors play a crucial role in business and society.

Question 7

For public companies,management typically prefers lower net income.

Question 8

One of the differences between a corporate form of organization and partnership form is:

A)Someone in the corporate form has personal liability.
B)Corporations can have offices in only one state.
C)Someone in the partnership form has personal liability.
D)Partnerships can have offices in only one state.

Question 9

One of the characteristics of a principal-agent relationship is:

A)The owners of the company are not involved in the daily management of the company.
B)The owners of the company hire an auditor to run the company for them and to make daily decisions for the company.
C)The owners have more knowledge than management about the daily operations of the company.
D)Outsiders benefit when a manager is hired by owners to protect their interests in the company because the information available to outsiders is more likely to correspond to financial accounting standards.

Question 10

The relationship of the audit firm to the client can be described as the framework of an employer-employee relationship.

Question 11

The Auditing Standards Board was formed in 1978 as an equal organization to the American Institute of Certified Public Accountants (AICPA).

Question 12

At the conclusion of the audit,the auditor issues an audit opinion to the SEC.

Question 13

An accounting cycle involves both balance sheet and income statement accounts and follows transactions through a process where it begins to its conclusion.

Question 14

Which of the following best describes "attest" services?

A)The auditor attests to the quality of some type information.
B)The auditor attests to the source of some type of information.
C)The auditor attests to the accuracy of some type of information.
D)The auditor attests to the quantity of some type of information.

Question 15

One of the characteristics of a principal-agent relationship is:

A)The owners of the company are involved in the daily management of the company.
B)The owners of the company hire an auditor to run the company for them and to make daily decisions for the company.
C)The owners have more knowledge than management about the daily operations of the company.
D)Outsiders benefit when an auditor is hired by owners to protect their interests in the company because the information available to outsiders is more likely to correspond to financial accounting standards.

Question 16

The auditor structures the evidence process by considering the assertions made by a consultant in preparing the financial statements of the company.

Question 17

Which of the following is a characteristic of the person doing the assessment of the financial statements?

A)The person completing the assessment is not an employee of the company.
B)The person completing the assessment works for an accounting firm that is associated with the company in a role of being hired to perform an internal audit.
C)The person performing the assessment may be a banker,current or potential stockholder,or a regulatory body.
D)The person performing the assessment makes adjustments to the decisions recorded by the firm so that outsiders have accurate information to make decisions.

Question 18

The Securities Act of 1933 and the Securities Exchange Act of 1934 were designed to restore investor confidence in the capital markets.

Question 19

Some of the services that fall under attestation standards are reports on: (1)descriptions of systems of internal controls,and (2)tax return preparation.

Question 20

Auditing is the process of reviewing the financial information prepared by the management of the company.

Question 21

To obtain reasonable assurance,which is a high,but not absolute level of assurance,the auditor:

A)plans the work and properly supervises any assistants
B)assumes appropriate materiality level or levels
C)identifies and assesses risks of fraud based on an understanding of the entity and its environment,including the entity's internal control
D)obtains sufficient appropriate management representations about whether material misstatements exist

Question 22

Growth in revenue is an important factor for many companies.The desired outcome in many businesses is for revenue and possibly net income to increase at a rate at least equal to the prior year's increase.Which of the following best explains this desire?

A)If the company does not meet this level of growth,it is an indication that the company may not be able to meet the dividend expectations of investors
B)Outsiders,particularly stockholders expect this level of growth,and if companies fail to meet these targets,their stock price may drop as investors sell their stock and find other companies who can meet the growth level desired
C)Management is concerned that failure to achieve expected levels of growth may result in management not receiving anticipated bonuses
D)Management is concerned that if the company does not achieve the expected increase in growth,that the auditors will demand a higher fee and expend greater effort in attempting to find misstatements in the financial statements

Question 23

To obtain reasonable assurance,which is a high,but not absolute level of assurance,the auditor:

A)performs the work and properly supervises the client
B)assumes appropriate materiality level or levels
C)identifies and assesses risks of material misstatement,whether due to fraud or error,based on an understanding of the entity and its environment,including the entity's internal control
D)obtains sufficient appropriate management representations about whether material misstatements exist

Question 24

Throughout the planning and performance of the audit,auditors are responsible for

A)having appropriate competence and capabilities to review the audit
B)complying with relevant ethical requirements
C)complying with relevant independence and fraud detection requirements
D)maintaining professional appearance and exercising professional questioning

Question 25

To obtain reasonable assurance,which is a high,but not absolute level of assurance,the auditor:

A)performs the work and properly supervises the client
B)determines appropriate materiality level or levels
C)identifies and assesses risks of due to fraud based on an understanding of the entity and its environment,including the entity's internal control
D)obtains sufficient appropriate management representations about whether material misstatements exist

Question 26

The principle reason(s)for public companies to misstate financial statements is to

A)minimize the amount of taxes owed by the company.
B)maximize the amount of dividends paid to shareholders.
C)satisfy the requirement of a going concern.
D)keep the company's stock price from falling.

Question 27

Throughout the planning and performance of the audit,auditors are responsible for

A)having appropriate competence and capabilities to perform the audit
B)complying with client ethical requirements
C)complying with relevant independence and fraud detection requirements
D)maintaining professional appearance and exercising professional questioning

Question 28

Throughout the planning and performance of the audit,auditors are responsible for

A)having appropriate competence and capabilities to review the audit
B)complying with client ethical requirements
C)complying with relevant independence and due care requirements
D)maintaining professional appearance and exercising professional questioning

Question 29

The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of inherent limitations,which arise from

A)the structure of financial reporting
B)the nature of audit procedures
C)the client's requirement for the audit to be conducted within a reasonable period of time and at a reasonable cost
D)the fact that there is no such thing as absolute assurance

Question 30

The audit opinion states whether the financial statements have been prepared in accordance with an applicable financial reporting framework.In other words,the opinion states whether

A)the company has followed the accounting standards in supporting the audit
B)the audit was conducted in accordance with Generally Accepted Accounting Principles
C)the auditing standards required management to prepare the financial statements and to maintain a system of internal controls relevant to the financial statements
D)the audit committee provided the auditor with all the information relevant to the preparation of the financial statements and unrestricted access to those in the company from whom the auditor may need additional evidence

Question 31

To obtain reasonable assurance,which is a high,but not absolute level of assurance,the auditor:

A)performs the work and properly supervises the client
B)assumes appropriate materiality level or levels
C)identifies and assesses risks of fraud based on an understanding of the entity and its environment,including the entity's internal control
D)obtains sufficient appropriate audit evidence about whether material misstatements exist

Question 32

The three standard setting organizations that are involved in establishing auditing standards are

A)The American Association of Accountants,the Auditing Standards Board,and the Public Company Accounting Oversight Board
B)The International Auditing and Assurance Standards Board,the Auditing Standards Board,and the Public Company Accounting Oversight Board
C)The American Association of Accountants,the Auditing Standards Board,and the International Auditing and Assurance Standards Board
D)The Auditing Standards Board,the International Auditing and Assurance Standards Board,and the Public Company Accounting Oversight Board

Question 33

Which of the following is an accurate statement about the accounting profession?

A)Recent audit failures have increased the public reputation of the accounting profession.
B)Public scrutiny of the profession prompts auditors to become more careful and efficient in their fundamental tasks.
C)The value of clear and accurate financial disclosure is less important in the current business environment.
D)The auditor's responsibility to management to provide financial information consistent with accounting regulations has never been more important.

Question 34

The Auditing Standards Board gets its authority to write auditing regulations from

A)the misapplication of auditing procedures
B)rule 3001 of the PCAOB Code of Professional Conduct
C)rule 202 of the AICPA Code of Professional Conduct
D)the Securities and Exchange Commission

Question 35

The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of inherent limitations,which arise from

A)the nature of financial reporting
B)the selection of audit procedures
C)the client's requirement for the audit to be conducted within a reasonable period of time and at a reasonable cost
D)the fact that there is no such thing as absolute assurance

Question 36

Which of the following is an incorrect statement about auditors' professional duties?

A)In their professional duties,they will be watched by federal and state regulators and interested outsiders
B)Attention will be focused on the auditors' responsibility to determine whether the financial statements present fairly the financial position of the firm and the results of operations
C)Auditors must understand the importance of presenting unbiased information to outsiders
D)The auditor is expected to approach an audit with an independent mind and to recognize that he or she is hired to protect the interests of management

Question 37

Which of the following is not an important part of the audit process?

A)understanding incentives of the company to misstate the financial statements
B)identifying the financial statement accounts with the greatest potential for misstatements
C)documenting management's efforts to achieve the necessary requirements to gain a bank loan
D)designing audit procedures to determine that the accounts are fairly presented according to the applicable financial reporting framework

Question 38

Which of the following is not an example of auditors' strong bargaining position with management?

A)The high financial and social costs reflect both public interest and business necessity
B)The public value of the audit cannot be too highly emphasized
C)Audit firms can be use the audit process as a "loss leader."
D)The negative impact of failed audits is apparent to observers of the profession,loss of public confidence,and an investors' trust

Question 39

The Preface to the Auditing Standards describes the fundamental principles that govern an audit.According to these principles,the purpose of an audit is

A)to provide reasonable assurance that there are no misstatements in the financial statements
B)to plan the audit to provide reasonable assurance of detecting fraud
C)to ensure that the financial statements are fairly presented
D)to increase the level of confidence that outsiders place in the financial statements

Question 40

Throughout the planning and performance of the audit,auditors are responsible for

A)having appropriate competence and capabilities to review the audit
B)complying with client ethical requirements
C)complying with relevant independence and fraud detection requirements
D)maintaining professional skepticism and exercising professional judgment

Question 41

Which of the following is correct about the PCAOB?

A)The PCAOB receives its authority from the SEC
B)Auditing standards issued by the PCAOB must be approved by the U.S.Congress
C)Anyone who wants to purchase stock on a U.S.stock exchange must follow the rules of the SEC
D)All audit firms performing audits of public companies are registered with and agree to comply with the auditing standards established by the PCAOB

Question 42

Which of the following is correct about the PCAOB?

A)The PCAOB receives its authority from U.S.Federal Law
B)Auditing standards issued by the PCAOB must be approved by the U.S.Congress
C)Anyone who wants to purchase stock on a U.S.stock exchange must follow the rules of the SEC
D)All audit firms performing audits of public companies are registered with and agree to comply with the auditing procedures established by the PCAOB

Question 43

Which of the following would not be considered audit evidence?

A)the information in the accounting records
B)the records of initial entries
C)supporting documents
D)general and subsidiary worksheets of the company

Question 44

A practicing auditor uses the material contained in the auditing standards to determine all but which of the following?

A)the procedures performed
B)the risk assessed
C)the evidence gathered
D)the audit report issued

Question 45

Which of the following would not be considered audit evidence?

A)the information in the accounting notes
B)the records of initial entries
C)supporting documents
D)general and subsidiary ledgers of the company

Question 46

The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of inherent limitations,which arise from

A)the structure of financial reporting
B)the selection of audit procedures
C)the need for the audit to be conducted within a reasonable period of time and at a reasonable cost
D)the fact that there is no such thing as absolute assurance

Question 47

The PCAOB is required to

A)conduct continuing inspections of public accounting firms registered with the SEC
B)inspect firms with more than 1000 public clients on an annual basis
C)inspect firms with fewer than 1000 clients at least every three years
D)post the inspection reports on the website for the PCAOB and are available to the public

Question 48

The Public Companies Accounting Oversight Board (PCAOB)is

A)a for profit public company
B)a government entity
C)private sector non profit organization
D)a non profit public company

Question 49

Before the creation of the PCAOB,the auditing standards of the Auditing Standards Board were used to audit all companies.Which statement best describes the PCAOB and auditing standards?

A)In 2003,the PCAOB adopted certain auditing standards of the ASB as interim standards
B)In 2003,the PCAOB developed over 100 new auditing standards
C)In 2003,the PCAOB developed audit standards to audit all companies,private and public
D)In 2003,the PCAOB adopted all the standards of the AICPA to save time in the development of new standards

Question 50

The International Auditing and Assurance Standards Board

A)is the standard-setting board for the International Federation of Accountants
B)is a committee of the AICPA
C)reports directly to the SEC
D)adjusts international standards to U.S.GAAP

Question 51

Which of the following would not be considered audit evidence?

A)the information in the accounting records
B)the records of initial entries
C)supporting explanations
D)general and subsidiary ledgers of the company

Question 52

Which of the following is correct about the PCAOB?

A)The PCAOB receives its authority from the SEC
B)Auditing standards issued by the PCAOB must be approved by the SEC
C)Anyone who wants to purchase stock on a U.S.stock exchange must follow the rules of the SEC
D)All audit firms performing audits of public companies are registered with and agree to comply with the auditing procedures established by the PCAOB

Question 53

The PCAOB is required to

A)conduct continuing inspections of public accounting firms registered with the SEC
B)inspect firms with more than 100 public clients on an annual basis
C)inspect firms with fewer than 100 clients at least every four years
D)post the inspection reports on the SEC website and are available to the public

Question 54

An important requirement of the auditing standards is that the auditor

A)have no contact with the audit committee of the board of directors
B)use the work of the internal audit staff
C)assist management in the preparation of the financial statements
D)gather sufficient appropriate evidence

Question 55

The PCAOB is required to

A)conduct continuing inspections of public accounting firms registered with the PCAOB
B)inspect firms with more than 1000 public clients on an annual basis
C)inspect firms with fewer than 1000 clients at least every three years
D)post the inspection reports on the SEC website and are available to the public

Question 56

Which of the following is correct about the PCAOB?

A)The PCAOB receives its authority from the SEC
B)Auditing standards issued by the PCAOB must be approved by the U.S.Congress
C)The PCAOB requires companies with stock listed on a U.S.stock exchange to have an integrated audit by an auditor registered with the PCAOB
D)All audit firms performing audits of public companies are registered with and agree to comply with the auditing procedures established by the PCAOB

Question 57

The PCAOB is required to

A)conduct continuing inspections of public accounting firms registered with the SEC
B)inspect firms with more than 100 public clients on a semi-annual basis
C)inspect firms with fewer than 100 clients at least every three years
D)post the inspection reports on the SEC website and are available to the public

Question 58

The Securities Exchange Commission (SEC)has oversight authority over the PCAOB.Which of the following is not within the SEC's oversight authority?

A)The SEC approves the PCAOB's rules
B)The members of the PCAOB are appointed by the SEC
C)The SEC approves the PCAOB's budget
D)The SEC determines which audit firms will be inspected by the PCAOB

Question 59

Which of the following would not be considered audit evidence?

A)the information in the accounting records
B)the estimates of initial entries
C)supporting documents
D)general and subsidiary ledgers of the company

Question 60

The Auditing Standards Board

A)each year issues a new "Codification of Statements of Auditing Standards"
B)issues new financial accounting standards
C)evaluates complaints about violations of the standards
D)issues new auditing standards as "Statements on Auditing Standards"

Question 61

In the gathering of evidence,several concepts are important.At the beginning of the audit,the auditor presents his credentials to the client as

A)an individual with training and knowledge in accounting and auditing
B)an individual who will be sensitive to good client relations
C)someone with the knowledge to make good business decisions
D)someone who will exercise good judgment

Question 62

Which of the following is not a type of evidence gathered by the auditor?

A)substantive evidence
B)internal control evidence
C)factual evidence
D)analytical procedure evidence

Question 63

Substantive tests of transactions are done to gather evidence on

A)income statement accounts
B)balance sheet accounts
C)accounts receivable
D)inventory

Question 64

If the controls are not working,the auditor is most likely to

A)request the client to make the necessary adjustment
B)perform a substitute test
C)perform more substantive tests
D)perform more tests of controls

Question 65

Which of the following statements describe an analytical procedure?

A)Analytical procedures are a form of evidence gathered by the auditor
B)Analytical procedures are calculations of financial amounts
C)Analytical procedures are a comparison of last year's unaudited financial statements with the current year's audited statements
D)Analytical procedures are a form of internal control audit procedure

Question 66

Tests of controls are typically done on transactions

A)for the entire year for an audit of the financial reporting process
B)at the end of the year for a Sarbanes-Oxley financial statement audit
C)at the end of the year for a Sarbanes-Oxley financial reporting process
D)of balances on the year-end balance only

Question 67

Substantive tests of balances are performed to gather evidence on

A)income statement accounts
B)balance sheet accounts
C)depreciation expense
D)salaries expense

Question 68

Substantive tests of transactions are typically done on transactions

A)for the entire year for a financial statement audit
B)at the end of the year for a Sarbanes-Oxley financial statement audit
C)at the end of the year for a Sarbanes-Oxley financial reporting process
D)of balances for the entire year

Question 69

Which of the following statements describe an analytical procedure?

A)Analytical procedures are a form of evidence gathered by the client
B)Analytical procedures are calculations of financial ratios
C)Analytical procedures are a comparison of last year's unaudited financial statements with the current year's audited statements
D)Analytical procedures are a form of internal control audit procedure

Question 70

The auditor is responsible for

A)the preparation of the financial statements
B)preparing adjustments to the accounting records
C)gathering sufficient appropriate evidence
D)advising management on accounting matters

Question 71

Which of the following statements describe an analytical procedure?

A)Analytical procedures are a form of evidence gathered by the client
B)Analytical procedures are calculations of financial amounts
C)Analytical procedures are a comparison of last year's audited financial statements with the current year's unaudited statements
D)Analytical procedures are a form of internal control audit procedure

Question 72

Tests of controls for non public companies are typically done on transactions

A)for the entire year for a financial statement audit
B)at the end of the year for a Sarbanes-Oxley financial statement audit
C)at the end of the year for a Sarbanes-Oxley financial reporting process
D)of balances on the year-end balance only

Question 73

The auditor must gather evidence guided by the standard of due professional care.Due professional care requires

A)the auditor to perform audit duties with skill comparable to that of any other client
B)to gather evidence and interpret evidence in a manner that any other auditor would have done
C)the auditor to know accounting and auditing requirements
D)the auditor to be knowledgeable about the economy

Question 74

If the financial statements do not present fairly the financial condition of the firm in accordance with applicable financial reporting framework,the auditor should

A)calculate the correct number and make an adjustment to the financial statements
B)advise management of the discrepancy and stop auditing until the discrepancy is corrected
C)gather sufficient evidence to arrive at the correct financial statement number
D)review the risk assessment and make any necessary revisions

Question 75

Management is responsible for

A)gathering sufficient evidence
B)the preparation of the financial statements
C)determining that the financial statements have been prepared in accordance with the applicable financial reporting framework
D)approving the audit plan

Question 76

Which of the following statements is an analytical procedure?

A)Analytical procedures are a form of evidence gathered by the client
B)Analytical procedures are calculations of financial amounts
C)Analytical procedures are a comparison of last year's unaudited financial statements with the current year's audited statements
D)Analytical procedures are a form of substantive audit procedure

Question 77

Tests done by the auditor that are referred to as internal control tests determine whether

A)the financial statements are materially misstated
B)the balance sheet is materially misstated
C)the internal controls are the responsibility of management
D)the internal controls of the company prevent or detect misstatements in the financial statements

Question 78

Substantive tests of balances are typically done on transactions

A)for the entire year for a financial statement audit
B)at the end of the year for a Sarbanes-Oxley financial statement audit
C)at the end of the year for a Sarbanes-Oxley financial reporting process
D)of balances on the year-end balance only

Question 79

The auditor must gather evidence guided by the standard of due professional care.Due professional care requires the auditor

A)to perform audit duties with skill comparable to that of any other auditor
B)to gather statements and interpret statements in a manner that any other professional would have done
C)to know accounting and auditing requirements
D)to be knowledgeable about the economy

Question 80

Substantive tests answer the question

A)Do the financial statement accounts present fairly the financial condition of the firm?
B)Is the amount stated in the account accurate?
C)Are all transactions included in the account?
D)Are all transactions in the account in the proper period?