100 test bank for auditing a business risk approach 7th edition

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100 Test Bank for Auditing A Business Risk Approach 7th Edition

Multiple Choice Questions

Congress authorized which of the following organizations to

establish generally accepted accounting principles?

1 the audit standard setting process.

2 regulation and enforcement of the audit profession.

3 education and administration of the CPA exam.

4 promulgation of accounting standards.

Which one of the following statements is not true about internal

auditing?

1 Internal auditing is an objective evaluation function.

2 Internal auditing is established within an organization.

3 Internal auditing's purpose is to provide assurance regarding the company's

compliance with stated policies and procedures.

4 Internal auditing is established as an independent service to regulatory bodies and creditors.

Which type of auditor may perform a financial statement audit?

1 external auditor.

2 internal auditor.

3 governmental auditor.

4 Both A and C.

5 All of the above.

As it relates to an audit, materiality is

1 not taken into consideration.

2 related only to the sufficiency of procedures performed.

3 based upon audit fees.

4 determined based upon the importance to a user of the financial statements.

An expectation of the public is that the auditor will recognize

that the primary users of audit assurance are

1 the clients.

2 the Public Company Accounting Oversight Board.

3 members of management.

4 third-party users.

The objective of an operational audit is to

1 evaluate whether laws have been broken by management.

2 evaluate fairness of presentation of financial statements.

3 evaluate compliances with company rules and regulations.

4 evaluate the effectiveness and efficiency with which resources are employed.

Which one of the following is a potential problem with

management's communication of financial information that causes third parties to desire the independent auditor's assessment of the financial statement

presentation?

1 complexity of transactions affecting the financial statements

2 lack of criteria on which to base information

3 remoteness of the user from the organization

4 A and C

5 A and B

Which one of the following is not a provider of assurance

3 state's board of accountancy.

4 state's society of CPAs.

Which one of the following is not part of the attest process?

1 gathering evidence about assertions

2 proving the accuracy of the books and records

3 evaluating evidence against objective criteria

4 communicating the conclusions reached

Third-party users of the audit report expect the auditor to do all

of the following except:

1 to evaluate measurements and disclosures made by management

2 to provide a biased evaluation of the financial statements

3 to determine whether financial statements are presented in accordance with GAAP

4 to gather sufficient evidence to support their opinion

Which of the following services is the broadest and most

Which type of auditor may perform an operational audit?

1 external auditor.

2 internal auditor.

3 governmental auditor.

4 Both B and C.

5 All of the above.

Which one of the following is not a critical component of

assurance services?

1 a process on which service is provided

2 an assurance service provider

3 a user who derives value

4 a CPA

A service provided by practitioners that always involves a

report that goes to a third party is

1 an outside source of expertise on accounting matters

2 individuals who perform tests and draw conclusions on assertions

3 a participant in management decision making

4 a provider of a written communication

Results of the financial statement audit are communicated to

users through a(n)

1 financial statement.

2 written management assertion.

3 audit report.

4 none of the above.

The primary governing board that performs quality reviews on

registered CPA firms that audit public companies is the

1 PCAOB

2 GAO

3 AICPA

4 FASB

The auditor of financial statements must make very difficult

interpretations regarding authoritative literature

Additionally, the auditor must

1 proceed beyond GAAP to assess how the economic activity is portrayed in the financial statements.

2 force management to make certain decisions regarding their financial statements.

3 disregard independence in order to find the underlying truth of the evidence.

4 establish new criteria by which financial statements may be compared.

Auditing is important in a free market society because

1 the public requires CPAs functioning as divisions of regulatory bodies.

2 auditors detect all errors and fraud made by company employees.

3 it provides reliable information based upon which to judge economic performance.

4 the auditor is an amiable insurance policy for investors.

5 all of the above are true.

What is the criteria used in an operational audit?

1 GAAP.

2 effectiveness and efficiency.

3 rules and regulations.

4 company policies.

5 Both B and C.

Auditing is a systematic process that includes all of the

following except:

1 communicating results to users

2 procuring and evaluating evidence

3 providing important managerial decisions for a client

4 comparing evidence regarding assertions to certain established criteria

Which one of the following is an example of management

expectations for independent auditors?

1 An expert providing a written communication as the product of the engagement.

2 Individuals who perform day-to-day accounting functions on behalf of the company.

3 An active participant in management decision making.

4 An internal source of expertise on financial and other matters.

The need for assurance services arises for all of the following

reasons EXCEPT:

1 potential bias in providing information.

2 Closeness between a user and the organization.

3 complexity of the processing systems.

4 remoteness between a user and the organization.

Management of a company is responsible for

1 hiring the auditor.

2 preparing the financial statements.

3 the audit workpapers.

4 independence and obtaining evidence.

The organization that issued the Internal Control, Integrated

Framework which serves as the primary criterion for evaluating the quality of a company’s internal control system is

1 PCAOB

3 AICPA

4 GAO

CPA firms performing public financial statement audits must

1 register with the American Institute of Certified Public Accountants.

2 register with the Institute of Internal Auditors.

3 register with the U.S General Accounting Office.

4 register with the Public Company Accounting Oversight Board.

The public expects auditors to

1 understand and enforce principles that best portray the spirit of FASB concepts.

2 be neutral to preparers and users of financial information.

3 recognize that the public are the primary users of audit services.

4 take more responsibility for the discovery of fraud.

5 all of the above are expectations of the public.

Internal auditors may perform all of the following types of audits

except

1 operational audits.

2 compliance audits.

3 computer system audits.

4 all of the above may be performed by internal auditors.

An audit which has as its purpose the evaluation of the

economy and efficiency with which resources are

employed is known as a(n)

1 financial audit.

2 compliance audit.

3 operational audit.

4 governmental audit.

Independent professional services that are provided on

financial or other information that improve the quality of decision making are known as

1 internal auditing.

2 effectiveness and efficiency.

3 rules and regulations.

4 company policies.

5 Both C and D.

Which of the following is not a component of assurance

services?

1 information or a process on which the assurance services is provided.

2 report to a third party.

3 a user or a group of users who derive value from the service provided.

4 a service provider.

Users of the audit report can reasonably expect the audited

financial statements to be

1 complete and contain many of the important financial disclosures.

2 presented fairly according to the substance of GAAP.

3 free from all errors.

4 all of the above.

5 none of the above.

Users can reasonably expect audited financial statements to be

1 complete and contain all important financial disclosures, be free from material

misstatements and be presented fairly.

2 complete and contain all important financial disclosures, be free from material

misstatements and be presented fairly according to GAAP.

3 complete, be accurate and be presented fairly according to GAAP.

4 complete and contain all important financial disclosures, be free from all misstatements and be presented fairly according to the substance of GAAP.

The criteria against which the auditor measures the fairness of

financial statement presentation are known as

1 auditing standards.

2 generally accepted accounting principles.

3 generally accepted accounting standards.

4 governmental accounting principles.

Assurance services may include which of the following?

1 attesting to financial statements

2 examination of the economy and efficiency of governmental operations

3 evaluation of a division's performance for management

4 tax preparation services

An “integrated audit” includes an audit of

1 the company’s internal controls.

2 the company’s financial statements.

3 the company’s compliance with its rules and policies.

4 Both A and B.

The Certified Internal Auditor program is administered by the

1 AICPA.

2 IIA.

3 state's board of accountancy.

4 state's society of CPAs.

Which one of the following is not a key attribute needed to

The internal audit profession has emerged and has become

active for all of the following reasons except:

1 management's need for an objective appraisal of organizational or departmental performance

2 increased internal and external emphasis on effective procedures to detect or prevent fraud

3 compliance with Section 404 of the Sarbanes-Oxley Act of 2002

4 the efforts of the American Public Accounting Board

Which of the following are part of the attest process?

1 communicating the conclusions reached to a third party

2 guaranteeing the accuracy of the books and records

3 evaluating evidence against objective criteria

4 A and C

5 B and C

The audit committee of the board of directors of a company is

responsible for

1 hiring the auditor.

2 preparing the financial statements.

3 the audit workpapers.

4 independence and obtaining evidence.

True-False Questions

Users rely on auditors' independent assessment of financial

statement presentation because few users have direct knowledge of the company's operations

Auditing is the process of attesting to assertions about

economic actions and events.

1 True

2 False

The execution of solutions to issues brought to light by internal

auditors are the responsibility of management of the

Audited financial statements should be presented fairly

according to the substance of GAAS

1 True

2 False

Though often relying on the FASB, the SEC has authority to

establish GAAP for publicly traded companies

1 True

2 False

The internal auditor is a primary provider of operational audits

Auditors of public companies need not adhere to the

requirements of statutory or regulatory organizations

Audited financial statements should be presented fairly

according to the substance of GAAP

Businesses that use independent auditors do not need the use

of internal auditors.

1 True

2 False

The American Institute of Certified Public Accountants has the

primary authority to set auditing standards

1 True

2 False

Attestation services are a subset of assurance services and

always involve a report that goes to a third party

1 True

2 False

The need for assurance services arises because the interests of

the users of information may be different from that of the interests of those responsible for providing information

Auditors need only understand the rules of accounting as the

principles are outdated

1 True

2 False

Governmental audit standards are developed by the Public

Company Accounting Oversight Board

1 True

2 False

The American Institute of CPAs sets auditing standards for

non-publicly traded companies

Auditing exists because users need unbiased information on

which to assess management performance and make

economic decisions

1 True

2 False

When the auditor has no reservations about management’s

financial statements, then the report issued is called a qualified report

1 True

2 False

Public Company Accounting Oversight Board provides the

criteria against which the auditor measures the fairness of financial statement presentation

Generally accepted accounting principles provide the criteria

against which the auditor measures the fairness of

financial statement presentation

A bank using Milton Company's financial statements to

determine the creditworthiness of a potential loan to

Milton is a good example of the need for unbiased

Users prefer management's financial statements over audited

financial statements because few users have direct

knowledge of the company's operations and management

is the most knowledgeable about operations

1 True

2 False

The Public Company Accounting Oversight Board was

established by the AICPA in response to Securities law

1 True

2 False

An assertion is a positive statement about an action, event,

condition, or performance over a specified time period

1 True

2 False

An auditor must have a good understanding of the risks

associated with a client's industry in order to ensure that the financial statements reflect the underlying substance

of accounting transactions and the economic effects of such transactions.

The audit function is unique because it exists to perform

services on a "client" on behalf of shareholders, directors and other parties

1 True

2 False

Attestation is confined to an audit of client financial statements

1 True

2 False

Operational audits are designed to determine if the company’s

financial statements are prepared in compliance with GAAP

1 True

2 False

The internal audit profession adheres exclusively to standards

set by the Public Company Accounting Oversight Board

1 True

2 False

The purpose of assurance services is to improve the quality of

the information provided

Management is required to comment on the fairness of the

company's financial presentation This reduces the

auditor's legal responsibility for the opinion rendered on the financial statements

1 True

2 False

Free Text Questions

Discuss the three or more attributes that an assurance

professional must possess in order to maintain

credibility Explain the importance of these attributes to the assurance process.

Answer Given

1) Subject Matter Knowledge - The assurance provider must be an expert in the area

of service provided Expertise in a complex body of knowledge sets the assurance professional apart from others 2) Independence - The assurance provider must be unbiased, free from conflict of interest, objective and independent of the company receiving assurance services This allows the professional to remain neutral and free from influence by parties with a vested interest in the outcome of assurance services 3) Agreed Upon Criteria - Clear criteria must be available for the assurance provider to measure objectives and results against In a financial statement assurance

engagement, the criteria are represented by Generally Accepted Accounting

Principles 4) Process Expertise - Evidence is obtained and evaluated during the

course of an assurance engagement Professionals providing these services must be able to draw accurate conclusions based upon the results of testing competent,

sufficient evidence obtained

Identify three reasons for the rise of assurance services.

Answer Given

Three potential reasons for the rise of assurance services are: The party who provides information may bias that information to convey a better impression than the real circumstances merit; Remoteness between an information user and the organization; The complexity of transactions, information or processing systems may make it difficult

to determine a proper presentation without an independent review; There is a need to minimize financial surprises Material errors and fraud must be found and corrected prior to the release of audited financial statements

Compare and contrast the work of an internal and an

independent external auditor.

Answer Given

The independent external auditor is engaged to perform an audit of the financial

statements for the purpose of expressing a professional opinion thereon The internal auditor is an employee of the company who provides an active appraisal function within an organization to evaluate its activities as a service to the audit committee or board of directors The work of external and internal auditors is often very similar in form, but the purpose and uses of the work are different Both groups conform to