Question 1

During the first phase of an audit, a CPA most likely would
A) Identify specific internal control activities that are likely to prevent fraud.
B) Evaluate the reasonableness of the company's accounting estimates.
C) Evaluate the integrity of management.
D) Inquire of the company's attorney as to whether any unrecorded claims are probable or asserted.

Accepted Answer

During the first phase of an audit, the CPA would typically focus on gaining an understanding of the company's internal control systems and evaluating the integrity of management. This would involve reviewing policies and procedures, conducting interviews with key personnel, and assessing the overall tone at the top of the organization. While the other choices may be important components of an audit, they are typically addressed in later phases of the process.

Question 2

The basic purpose of a financial statement audit is to
A) Detect fraud.
B) Examine individual transactions so that the auditor may certify as to their validity.
C) Provide assurance regarding whether the auditee's financial statements are fairly stated.
D) Assure the consistent application of correct accounting procedures.

Accepted Answer

The primary objective of a financial statement audit is to provide assurance to stakeholders that the auditee's financial statements are fairly stated in all material respects. While fraud detection and assurance of correct accounting procedures are important, they are not the primary purpose of an audit. Examining individual transactions is also not the main goal of an audit, as auditors rely on sampling and testing procedures to gather sufficient evidence to support their opinion on the financial statements as a whole.

Question 3

Decision makers demand reliable information that is provided by accountants.

Accepted Answer

Decision makers rely on accountants to provide accurate and trustworthy financial information to make informed decisions.

Question 4

Why do auditors generally use a sampling approach to evidence gathering?
A) Auditors are experts and do not need to look at much to know whether the financial statements are correct or not.
B) Auditors must balance the cost of the audit with the need for precision.
C) Auditors must limit their exposure to their auditee to maintain independence.
D) The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.

Accepted Answer

Auditors must balance the cost of the audit with the need for precision. Conducting a full examination of all transactions and accounts can be time consuming, expensive and often unnecessary. Thus, auditors use a sampling approach to reduce the cost of the audit while still obtaining sufficient evidence to support their opinion.

Question 5

Which of the following statements about the study of auditing is NOT true?
A) The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors.
B) The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information.
C) The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.
D) The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions.

Accepted Answer

The statement that "the study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements" is not entirely accurate. While auditing does involve analyzing financial statements, it is more focused on evaluating the effectiveness of internal controls, testing transactions and balances, and forming an opinion on the fairness of the financial statements. The statement in choice C implies that auditing is solely focused on the technical aspects of financial reporting, which is not the case.

Question 6

Information asymmetry seldom occurs.

Accepted Answer

Information asymmetry is quite common in many situations, especially in business transactions where one party may have more information than the other. It can also occur in situations where one person has expertise or knowledge that the other does not.

Question 7

Which of the following best describes the concept of audit risk?
A) The risk of the auditor being sued because of association with an auditee.
B) The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.
C) The overall risk that a material misstatement exists in the financial statements.
D) The risk that auditors use audit procedures that are inappropriate.

Accepted Answer

Audit risk is the risk that the auditor may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated.

Question 8

In the context of agency theory, information asymmetry refers to the idea that
A) Information can vary in its reliability.
B) Information can vary in its relevance.
C) Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).
D) Management likely will not act in the best interests of the absentee owners.

Accepted Answer

The answer of In the context of agency theory, information...

Question 9

Independence standards are required for audits of public companies, but not for audits of private companies.

Accepted Answer

The answer of Independence standards are required for audits of...

Question 10

Evidence is reliable if it
A) Signals the true state of a management assertion.
B) Applies to the period being audited.
C) Relates to the audit assertion being tested.
D) Is consistent with management's assertions.

Accepted Answer

The answer of Evidence is reliable if it
A) Signals the...

Question 11

Testing all transactions that occurred during the period is cost prohibitive.

Accepted Answer

Testing all transactions would likely require significant resources and cost, making it impractical for most organizations. Instead, auditors typically use sampling techniques to select a representative sample of transactions to test.

Question 12

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should
A) Engage financial experts familiar with the nature of the business entity.
B) Obtain a knowledge of matters that relate to the nature of the entity's business.
C) Refer a substantial portion of the audit to another CPA, who will act as the principal auditor.
D) First inform management that an unqualified opinion cannot be issued.

Accepted Answer

The auditor should obtain knowledge of matters that relate to the nature of the entity's business to enhance the effectiveness of the audit. Referring the audit to another CPA or informing management that an unqualified opinion cannot be issued should only be considered if the lack of expertise poses a significant risk to the financial statements. Engaging financial experts may also be an option, but it is not the best choice in this case since it can be expensive and time-consuming.

Question 13

For publicly-held companies, which of the following is integrated into the audit of financial statements?
A) Budgetary information audit.
B) The audit of internal controls.
C) Audit of management forecasts.
D) Audit of interim financial statements.

Accepted Answer

The audit of internal controls is required for publicly-held companies as part of the Sarbanes-Oxley Act. This is integrated into the audit of financial statements to ensure the reliability and accuracy of financial reporting. Budgetary information audit, audit of management forecasts, and audit of interim financial statements may also be conducted but are not necessarily integrated into the audit of financial statements for publicly-held companies.

Question 14

Auditing services and attestation services are the same.

Accepted Answer

Auditing services and attestation services are similar but not identical. Auditing services involve examining financial statements and providing an independent opinion on whether they are presented fairly in accordance with accounting principles. Attestation services are broader in scope and can include examining and providing assurance on a wide range of information such as internal controls, compliance with laws and regulations, and sustainability reports.

Question 15

Assurance services may improve all of the following except
A) Relevance.
B) Credibility.
C) Periodicity.
D) Reliability.

Accepted Answer

Assurance services provide additional credibility and reliability to the information being reported. They can also enhance the relevance of the information by ensuring it meets the needs of the intended users. However, assurance services do not directly affect the periodicity of the information being reported.

Question 16

Which of the following statements best describes a relationship between sample size and other elements of auditing?
A) If materiality increases, so will the sample size.
B) If the desired level of assurance increases, sample sizes can be smaller.
C) If materiality decreases, sample size will need to increase.
D) There is no relationship between sample size and materiality or the desired level of assurance.

Accepted Answer

There is a direct relationship between materiality and sample size, where if materiality decreases, sample size will need to increase. This is because a lower materiality means that smaller misstatements will be considered material, so a larger sample size will be needed to increase the likelihood of detecting these smaller misstatements. There is also an inverse relationship between the desired level of assurance and sample size, where if the desired level of assurance increases, sample sizes will need to be larger to increase the likelihood of detecting material misstatements.

Question 17

Auditing is a type of attest service.

Accepted Answer

Auditing is a type of attest service, as it involves providing assurances about the reliability and accuracy of financial information.

Question 18

Conflicts of interest often occur between absentee owners and managers.

Accepted Answer

Absentee owners may not have a clear understanding of the day-to-day operations of the business and may prioritize their own interests over the interests of the company or its employees, which can lead to conflicts with managers who are more familiar with the business operations.

Question 19

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?
A) A management fraud may exist and it is more likely to be detected by auditors if they are independent.
B) Different interests may exist between the company preparing the statements and the parties using the statements.
C) A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated.
D) A poorly designed internal control system may be in place.

Accepted Answer

The fundamental reason for demand of an independent auditor to report on financial statements is because there may be different interests between the company preparing the statements and the parties using the statements. This creates a potential conflict of interest that requires an independent third party to verify the accuracy and reliability of the financial statements. A, C, and D are all potential risks that an independent auditor should consider during an audit, but they do not fully explain the underlying reason for why there is demand for an independent auditor.

Question 20

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
A) It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor.
B) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
C) The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
D) It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

Accepted Answer

An independent auditor is asked to express an opinion on the fair presentation of financial statements because a company is not likely to be considered objective with respect to its own financial statements. The opinion of an independent party is needed to provide assurance to stakeholders that the financial statements have been prepared fairly and accurately. The auditor's independence from the company also helps ensure that any potential conflicts of interest are avoided.

Quiz 1: An Introduction to Assurance and Financial Statement Auditing

During the first phase of an audit, a CPA most likely would

The basic purpose of a financial statement audit is to

Decision makers demand reliable information that is provided by accountants.

Why do auditors generally use a sampling approach to evidence gathering?

Which of the following statements about the study of auditing is NOT true?

Information asymmetry seldom occurs.

Which of the following best describes the concept of audit risk?

In the context of agency theory, information asymmetry refers to the idea that

Independence standards are required for audits of public companies, but not for audits of private companies.

Evidence is reliable if it

Testing all transactions that occurred during the period is cost prohibitive.

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should

For publicly-held companies, which of the following is integrated into the audit of financial statements?

Auditing services and attestation services are the same.

Assurance services may improve all of the following except

Which of the following statements best describes a relationship between sample size and other elements of auditing?

Auditing is a type of attest service.

Conflicts of interest often occur between absentee owners and managers.

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?