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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: 2. C
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
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
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
The auditor's judgment concerning the overall fairness of the presentation of financial position, results of
Audit committee. C The best description of the scope of internal auditing is that it encompasses a. d. ANSWER: B 7. d. and Assurance operations. Engagement letter. The auditor communicates the results of his or her work through the medium of the a. ANSWER: 10. b. Generally accepted accounting principles. Which of the following is not considered an assertion as formulated by the Auditing Standards Board? a. d. b.2 Chapter 1 Auditing. C auditing To maximize independence. Valuation or allocation. b. Identifying areas posing the highest risk of financial statement errors. d. c. Information systems control. Controller. c. c. Audit report. . b. c. Mathematical accuracy. Which of the following is not a distinguishing feature of risk-based auditing? a. d. c. b. Internal control. Analysis of internal control. ANSWER: A 9. Primarily operational auditing. Management letter. ANSWER: A 6. Financial statements. the director of internal should report to the a. Director of information systems. Collecting and evaluating evidence. Attestation. Concentrating audit resources in those areas presenting the highest risk of financial statement errors. Generally accepted auditing standards. and changes in financial position is applied within the framework of a. Chief financial officer. Rights and obligations. Presentation and disclosure. ANSWER: 8.
adcb ANSWER: A 13. Both financial and operational auditing. Specific operating units are functioning efficiently and effectively. b. A typical objective of an operational audit is to determine whether an entity's a. d. ANSWER: D 13. c. ANSWER: D 12. cadb b. Engagement letter. The a. Financial statements fairly present financial position. c. b. four major steps in conducting an audit are: Testing internal controls Audit report Planning Testing transactions and balances The proper sequence in applying the above steps is: a. Scope paragraph of the auditor’s report. c. Financial statements fairly present financial position and cash flows. cdab c. Management letter. bcda d.Chapter 1 Auditing. B 3 ANSWER: 11. Primarily financial auditing. Relevance is enhanced by an effective information system. Attestation. . b. d. results of operations. c. and cash flows. evidence must be both valid and relevant. d. Which of the following statements is not true regarding the competence of audit evidence? a. Primarily the safeguarding of assets and verifying the existence of such assets. To be competent. and Assurance b. Financial statements present fairly the results of operations. b. Opinion paragraph of the auditor’s report. d. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the a.
Assertions are the representations of management as to the fairness of the financial statements.4 Chapter 1 Auditing. ANSWER: C 16. The engagement letter conveys to management the detailed steps to be applied in the audit process. Which of the following best describes the purpose of the engagement letter? a. Although independent auditors strive for both validity and relevance of evidence. the 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. d. d. Independent auditors represent third party users external to the auditee entity. and Assurance c. c. As used in auditing. . internal auditors are concerned almost exclusively with validity. Assertions are the auditor's findings to be communicated in the audit report. whereas independent auditors are independent contractors. Relevance must always relate to audit objectives. ANSWER: B 17. b. d. Which of the following statements is not a distinction between independent auditing and internal auditing? a. The engagement letter relieves the auditor of some responsibility for the exercise of due care. Validity is related to the quality of the client’s information system. d. The engagement letter should be signed by both the client and the CPA and should be used only for independent audits. which of the following statements best describes "assertions"? a. Assertions are the representations of management as to the reliability of the information system. Assertions are found only in the footnotes to the financial statements. c. By clearly defining the nature of the engagement. Attestation. whereas internal auditors report directly to management. b. b. Internal auditors are employees of the auditee. A ANSWER: 15. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and performance auditing. c.
ANSWER: C COMPLETION 20. Obtain an understanding of the client's system of internal control. Attestation. b. c.Chapter 1 Auditing. plant. Testing internal control. B 5 In assessing audit risk. ANSWER: 21. . An audit approach that attempts to identify areas posing the highest probability of financial statement errors and allocate audit resources to those areas is known as _________ . Which of the following tasks should be performed prior to the final audit? a. Independent auditing is considered necessary because managers and stockholders have attitudes toward financial reporting. c. RISK-BASED Because is the standard for measuring fairness. the CPA needs to do all of the following except a. independent auditors must be expert in accounting matters. Understand the entity and the industry in which it operates.___________ auditing. The most important characteristics contributing to effective auditing are the ability of the auditor to exercise and . b. and Assurance ANSWER: 18. Collecting and evaluating evidence supporting the fairness of inventory values. ANSWER: GAAP 22. d. Understand the economic substance of significant transactions completed by the client. and equipment. Gather audit evidence in support of recorded transactions. ANSWER: A 19. Determining the fairness of property. Confirming accounts receivable. d. ANSWER: DIVERGENT (CONFLICTING) 23.
SOUND JUDGMENT 24. Conducted a search for unrecorded liabilities ____ 6. Obtained written confirmation from customers regarding year end balances in selected accounts receivable SOLUTION: 1. Performed tests to determine that overhead had been properly applied to ending inventory and cost of sales ____ 8. Test counted client’s year end inventory of materials and finished goods ____ 3. c. The assertion stating that no assets. 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. ANSWER: COMPLETENESS MATCHING: 25. Calculated depreciation expense for the year ____ 2. Match each of the listed procedures with the primary assertion that is satisfied by the procedure a. equities. b.6 Chapter 1 Auditing. Advised client of the need to reclassify the current portion of a long term mortgage note ____ 7. existence or occurrence completeness rights and obligations valuation or allocation presentation and disclosure ____ 1. e. d . Examined appraisal reports applicable to land donated by the city ____ 10. Reconciled client’s bank accounts as of year end ____ 9. or transactions have been omitted from the financial statements is known as the ____________ assertion. and Assurance ANSWER: DUE CARE. d. Attestation.
b 6. d 8. b. has just accepted an engagement to audit Ginger and Cinnamon. and Josh Lukins will be her assistant. a 3. audit report. c 4. e 7.d Problem/Essay 26. e 5. What is meant by the term "systematic process" as contained in the definition of auditing? c. a small manufacturer of spice products. Systematic auditing means that the auditor studies and tests the system of internal control before testing the substance of transactions and balances. Audit planning. and Assurance 2. Audit cash balances Audit inventory balances Josh Lukins Audit property. George & Washington. d 10. interim audit. Jenkins makes the following assignments of audit tasks: Julia Jenkins Interim Audit Test internal control over cash receipts Audit accounts receivable balances Final Audit Test internal control over sales Obtain signed copy of engagement letter Required: a. Explain the strengths and weaknesses in Jenkins’ audit planning. Strong . CPAs. final audit. plant. d 9. In planning the audit field work. Attestation. Identify the steps to be followed in completing an audit. and equipment balances Test internal control over cash disbursements 7 SOLUTION: a. b. Julia Jenkins has been selected as the in-charge auditor for the engagement.Chapter 1 Auditing.
Weaknesses: 1. These procedures are typically applied on the final audit. Internal control over sales should have been tested on the interim. internal controls over sales and property transactions were not tested and evaluated prior to auditing the balances. c. and Assurance internal control increases the level of confidence and decreases the extent of transaction and balance testing. There is no indication that internal controls over property or inventory transactions were ever tested. Moreover. 3. 4. Internal control over sales transactions should have been performed during the interim audit. Attestation. and equipment balances and accounts receivable balances during the interim audit.8 Chapter 1 Auditing. plant. rather than on the final audit. Strengths: The auditors tested internal control over cash receipts and disbursements before auditing cash balances. 5. . Either Jenkins or Lukins should have tested internal controls over both cash receipts and disbursements transactions. 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. 2. 6. Dividing these duties was inappropriate and failed to maximize efficiency and effectiveness. Jenkins and Lukins audited property.