Auditing, Attestation, and Assurance

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. CPAs approach to the service. A S!"#$ %. C

The primary goal of the CPA in performing the attest function is to a. &etect fraud. b. "'amine individual transactions so that the auditor may certify as to their validity. c. &etermine (hether the client)s assertions are fairly stated. d. Assure the consistent application of correct accounting procedures. A S!"#$ C

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+nternal auditing often e'tends beyond e'aminations leading to the e'pression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and a. +nternal control. b. "valuation. c. Accuracy. d. Compliance. A S!"#$ &

4.

!hich of the follo(ing best describes the operational audit, a. +t requires the constant revie( by internal auditors of the administrative controls as they relate to operations of the company. b. +t concentrates on implementing financial and accounting control in a ne(ly organi-ed company. c. +t attempts and is designed to verify the fair presentation of a company)s results of operations.

Chapter 1 Auditing, Attestation, and Assurance d. +t concentrates on see.ing out aspects of operations in (hich (aste (ould be reduced by the introduction of controls. &

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The auditor)s /udgment concerning the overall fairness of the presentation of financial position, results of operations, and changes in financial position is applied (ithin the frame(or. of a. 0enerally accepted accounting principles. b. 0enerally accepted auditing standards. c. +nternal control. d. +nformation systems control. A S!"#$ A

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!hich of the follo(ing is not considered an assertion as formulated by the Auditing Standards 2oard, a. 3aluation or allocation. b. 4athematical accuracy. c. #ights and obligations. d. Presentation and disclosure. A S!"#$ 2

7.

!hich of the follo(ing is not a distinguishing feature of ris.5based auditing, a. +dentifying areas posing the highest ris. of financial statement errors. b. Analysis of internal control. c. Collecting and evaluating evidence. d. Concentrating audit resources in those areas presenting the highest ris. of financial statement errors. A S!"#$ C

6.

To ma'imi-e independence, the director of internal auditing should report to the a. Audit committee. b. Controller. c. Chief financial officer. d. &irector of information systems. A S!"#$ A

Chapter 1 Auditing, Attestation, and Assurance

9.

The auditor communicates the results of his or her (or. through the medium of the a. "ngagement letter. b. 4anagement letter. c. Audit report. d. 7inancial statements. A S!"#$ C

18.

The best description of the scope of internal auditing is that it encompasses a. Primarily operational auditing. b. 2oth financial and operational auditing. c. Primarily the safeguarding of assets and verifying the e'istence of such assets. d. Primarily financial auditing. A S!"#$ 2

11. A typical ob/ective of an operational audit is to determine (hether an entity)s a. 7inancial statements fairly present financial position and cash flo(s. b. 7inancial statements present fairly the results of operations. c. 7inancial statements fairly present financial position, results of operations, and cash flo(s. d. Specific operating units are functioning efficiently and effectively. A S!"#$ &

12. The scope and nature of an auditor)s contractual obligation to a client is ordinarily set forth in the a. Scope paragraph of the auditors report. b. 9pinion paragraph of the auditors report. c. 4anagement letter. d. "ngagement letter. A S!"#$ 1*. The a. b. c. &

four ma/or steps in conducting an audit are$ Testing internal controls Audit report Planning

Chapter 1 Auditing, Attestation, and Assurance d. Testing transactions and balances

The proper sequence in applying the above steps is$ a. cadb b. cdab c. bcda d. adcb A S!"#$ A

13. !hich of the follo(ing statements is not true regarding the competence of audit evidence, a. #elevance is enhanced by an effective information system. b. To be competent, evidence must be both valid and relevant. c. 3alidity is related to the quality of the clients information system. d. #elevance must al(ays relate to audit ob/ectives. A S!"#$ 1:. A

As used in auditing, (hich of the follo(ing statements best describes "assertions", a. Assertions are the representations of management as to the reliability of the information system. b. Assertions are the auditor)s findings to be communicated in the audit report. c. Assertions are the representations of management as to the fairness of the financial statements. d. Assertions are found only in the footnotes to the financial statements. A S!"#$ C

16.

!hich of the follo(ing statements is not a distinction bet(een independent auditing and internal auditing, a. +ndependent auditors represent third party users e'ternal to the auditee entity, (hereas internal auditors report directly to management. b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost e'clusively (ith validity. c. +nternal auditors are employees of the auditee, (hereas independent auditors are independent contractors. d. The internal auditor)s span of coverage goes

Chapter 1 Auditing, Attestation, and Assurance beyond financial auditing to encompass operational and performance auditing. A S!"#$ 1;. 2

!hich of the follo(ing best describes the purpose of the engagement letter, a. The engagement letter relieves the auditor of some responsibility for the e'ercise of due care. b. 2y clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings bet(een CPA and client regarding the precise nature of the (or. to be performed and the type of report to be issued. c. The engagement letter conveys to management the detailed steps to be applied in the audit process. d. The engagement letter should be signed by both the client and the CPA and should be used only for independent audits. A S!"#$ 2

16.

+n assessing audit ris., the CPA needs to do all of the follo(ing e'cept a. 0ather audit evidence in support of recorded transactions. b. 9btain an understanding of the client)s system of internal control. c. <nderstand the economic substance of significant transactions completed by the client. d. <nderstand the entity and the industry in (hich it operates. A S!"#$ A

19.

!hich of the follo(ing tas.s should be performed prior to the final audit, a. &etermining the fairness of property, plant, and equipment. b. Confirming accounts receivable. c. Testing internal control. d. Collecting and evaluating evidence supporting the fairness of inventory values. A S!"#$ C

COMPLETION

Chapter 1 Auditing, Attestation, and Assurance

%8.

An audit approach that attempts to identify areas posing the highest probability of financial statement errors and allocate audit resources to those areas is .no(n as ========= 5 =========== auditing. A S!"#$ #+S>52AS"&

%1.

2ecause is the standard for measuring fairness, independent auditors must be e'pert in accounting matters. A S!"#$ 0AAP

22.

+ndependent auditing is considered necessary because managers and stoc.holders have attitudes to(ard financial reporting. A S!"#$ &+3"#0" T ?C9 7@+CT+ 0A

23.

The most important characteristics contributing to effective auditing are the ability of the auditor to e'ercise and . A S!"#$ &<" CA#", S9< & B<&04" T

%C.

The assertion stating that no assets, equities, or transactions have been omitted from the financial statements is .no(n as the ============ assertion. A S!"#$ C94P@"T" "SS

MATCHING: %:. 4atch each of the listed procedures (ith the primary assertion that is satisfied by the procedure a. b. c. d. e. e'istence or occurrence completeness rights and obligations valuation or allocation presentation and disclosure

==== 1. Calculated depreciation e'pense for the year ==== %. Test counted clients year end inventory of materials and finished goods

Chapter 1 Auditing, Attestation, and Assurance ==== *. "'amined vehicle title applicable to ne( truc. purchased during the current year ==== C. Considered need for a footnote describing a la(suit pending against the client ==== :. Conducted a search for unrecorded liabilities ==== 1. Advised client of the need to reclassify the current portion of a long term mortgage note ==== ;. Performed tests to determine that overhead had been properly applied to ending inventory and cost of sales ==== 6. #econciled clients ban. accounts as of year end ==== D. "'amined appraisal reports applicable to land donated by the city ==== 18. 9btained (ritten confirmation from customers regarding year end balances in selected accounts receivable S9@<T+9 $ 1. d %. a *. c C. e :. b 1. e ;. d 6. d D. d 18.d Problem/Essay 26. 0eorge E !ashington, CPAs, has /ust accepted an engagement to audit 0inger and Cinnamon, a small manufacturer of spice products. Bulia Ben.ins has been selected as the in5charge auditor for the engagement, and Bosh @u.ins (ill be her assistant. +n planning the audit field (or., Ben.ins ma.es the follo(ing assignments of audit tas.s$

Chapter 1 Auditing, Attestation, and Assurance Josh Lukins Audit property, plant, and equipment balances Test internal control over cash disbursements

Julia Jenkins +nterim Audit Test internal control over cash receipts Audit accounts receivable balances 7inal Audit Test internal control over sales 9btain signed copy of engagement letter #equired$

Audit cash balances Audit inventory balances

a. +dentify the steps to be follo(ed in completing an audit. b. !hat is meant by the term Fsystematic processF as contained in the definition of auditing, c. "'plain the strengths and (ea.nesses in Ben.ins audit planning. S9@<T+9 $ a. Audit planningG interim auditG final auditG audit report. b. Systematic auditing means that the auditor studies and 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 e'tent of transaction and balance testing. c. Strengths$ The auditors tested internal control over cash receipts and disbursements before auditing cash balances. !ea.nesses$ 1. Ben.ins and @u.ins audited property, plant, and equipment balances and accounts receivable balances during the interim audit. These procedures are typically applied on the final audit. 4oreover, internal controls over sales and property transactions (ere not tested and evaluated prior to auditing the balances. %. "ither Ben.ins or @u.ins should have tested internal controls over both cash receipts and disbursements transactions. &ividing these duties (as inappropriate and failed to ma'imi-e efficiency and effectiveness. *. +nternal control

Chapter 1 Auditing, Attestation, and Assurance over sales transactions should have been performed during the interim audit. C. 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 (or.. :. There is no indication that internal controls over property or inventory transactions (ere ever tested. 1. +nternal control over sales should have been tested on the interim, rather than on the final audit.