Test bank auditing and assurance principlesch01 auditing, attestation, and assurance

Internal auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, an

1 The single feature that most clearly distinguishes auditing,

attestation, and assurance is

a Type of service b Training required to perform the service

c Scope of services

d CPA’s approach to the service

ANSWER: C 2 The primary goal of the CPA in performing the attest function is to a Detect fraud

b Examine individual transactions so that the auditor may certify as to their validity

c Determine whether the client's assertions are fairly stated

d Assure the consistent application of correct

accounting procedures

ANSWER: C 3 Internal auditing often extends beyond examinations

leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and

a Internal control

b Evaluation

c Accuracy

d Compliance

ANSWER: D 4 Which of the following best describes the operational audit? a It requires the constant review by internal auditors of the administrative controls as they relate to

operations of the company

b It concentrates on implementing financial and

accounting control in a newly organized company

c It attempts and is designed to verify the fair

presentation of a company's results of operations d It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction

of controls ANSWER: D

5 The auditor's judgment concerning the overall fairness of

the presentation of financial position, results of

operations, and changes in financial position is applied within the framework of

a Generally accepted accounting principles

b Generally accepted auditing standards

c Internal control

d Information systems control

ANSWER: A

formulated by the Auditing Standards Board?

ANSWER: B

7 Which of the following is not a distinguishing feature of risk-based auditing?

statement errors

the highest risk of financial statement errors

ANSWER: C

should report to the

ANSWER: A

9 The auditor communicates the results of his or her work through the medium of the

d Financial statements.

ANSWER: C

10 The best description of the scope of internal auditing is

that it encompasses

existence of such assets

ANSWER: B

11 A typical objective of an operational audit is to determine

whether an entity's

a Financial statements fairly present financial position and cash flows

b Financial statements present fairly the results of operations

c Financial statements fairly present financial position,

results of operations, and cash flows

d Specific operating units are functioning efficiently and effectively ANSWER: D

12 The scope and nature of an auditor's contractual obligation

to a client is ordinarily set forth in the

b Opinion paragraph of the auditor’s report

c Management letter

d Engagement letter

ANSWER: D

a Testing internal controls

b Audit report

c Planning

d Testing transactions and balances

The proper sequence in applying the above steps is:

a cadb

b cdab

c bcda

d adcb ANSWER: A

13 Which of the following statements is not true regarding the competence of audit evidence?

system

relevant

information system

ANSWER: A

describes "assertions"?

the reliability of the information system

communicated in the audit report

the fairness of the financial statements

financial statements

ANSWER: C

between independent auditing and internal auditing?

external to the auditee entity, whereas internal auditors report directly to management

and relevance of evidence, internal auditors are concerned almost exclusively with validity

independent auditors are independent contractors

d The internal auditor's span of coverage goes

beyond financial auditing to encompass operational and performance auditing

ANSWER: B

engagement letter?

a The engagement letter relieves the auditor of some

responsibility for the exercise of due care

engagement letter helps to avoid and resolve misunderstandings between CPA and client regarding the precise nature of the work to be performed and the type

of report to be issued

detailed steps to be applied in the audit process

client and the CPA and should be used only for independent audits

ANSWER: B

following except

transactions

internal control

transactions completed by the client

operates

ANSWER: A

the final audit?

equipment

fairness of inventory values

ANSWER: C

COMPLETION

highest probability of financial statement errors and

allocate audit resources to those areas is known as

_ - _ auditing

ANSWER: RISK-BASED

21 Because is the standard for measuring fairness,

independent auditors must be expert in accounting matters ANSWER: GAAP

22 Independent auditing is considered necessary because

managers and stockholders have attitudes toward financial reporting

ANSWER: DIVERGENT (CONFLICTING)

23 The most important characteristics contributing to

effective auditing are the ability of the auditor to

exercise and

ANSWER: DUE CARE, SOUND JUDGMENT

transactions have been omitted from the financial statements

is known as the assertion

ANSWER: COMPLETENESS

MATCHING:

25 Match each of the listed procedures with the primary

assertion that is satisfied by the procedure

1 Calculated depreciation expense for the year

2 Test counted client’s year end inventory of materials and finished goods

3 Examined vehicle title applicable to new truck purchased

during the current year

4 Considered need for a footnote describing a lawsuit

pending against the client 5 Conducted a search for unrecorded liabilities

6 Advised client of the need to reclassify the current

portion of a long term mortgage note 7 Performed tests to determine that overhead had been

properly applied to ending inventory and cost of sales 8 Reconciled client’s bank accounts as of year end

9 Examined appraisal reports applicable to land donated by

the city

10 Obtained written confirmation from customers

regarding year end balances in selected accounts

receivable SOLUTION:

1 d

2 a

3 c

4 e

5 b

6 e

7 d

8 d

9 d

10.d

Problem/Essay

26 George & Washington, CPAs, has just accepted an engagement

to audit Ginger and Cinnamon, a small manufacturer of spice

products Julia Jenkins has been selected as the in-charge

auditor for the engagement, and Josh Lukins will be her

assistant In planning the audit field work, Jenkins makes the following assignments of audit tasks:

Julia Jenkins Josh Lukins

Interim Audit

Test internal control over cash Audit property, plant, and receipts equipment balances

Audit accounts receivable Test internal control over balances cash disbursements

Final Audit

Test internal control over Audit cash balances

sales

Obtain signed copy of engagement Audit inventory balances letter

Required:

a Identify the steps to be followed in completing an audit

b What is meant by the term "systematic process" as

contained in the definition of auditing?

c Explain the strengths and weaknesses in Jenkins’ audit planning

SOLUTION:

report

tests the system of internal control before testing the substance of transactions and balances Strong

internal control increases the level of confidence and decreases the extent of transaction and balance

testing

cash receipts and disbursements before auditing cash balances

Weaknesses: 1 Jenkins and Lukins audited property, plant, and equipment balances and accounts receivable balances during the interim audit These procedures are typically applied on the final audit Moreover, internal controls over sales and property transactions were not tested and evaluated prior to auditing the balances 2 Either Jenkins or Lukins should have tested internal controls over both cash receipts and disbursements transactions Dividing these duties was inappropriate and failed to maximize efficiency and effectiveness 3 Internal control over sales transactions should have been performed during the interim audit 4 A signed copy of the engagement letter should have been obtained as a first step in the acceptance process prior to conducting any

of the audit field work 5 There is no indication that internal controls over property or inventory transactions were ever tested 6 Internal control

over sales should have been tested on the interim, rather than on the final audit