CHAPTER 1

MULTIPLE CHOICE
b 1. To become a Certified Public Accountant (CPA), an individual must pass the Uniform CPA
Examination and
a. emonstrate his or her independence.
b. Compl! "ith state education and experience re#uirements.
c. $btain emplo!ment "ith a public accountin% firm.
d. &ecome a member of the A'CPA.
b (. )hich of the follo"in% statements is an example of an assertion made b! mana%ement in an
entit!*s financial statements+
a. The financial statements "ere prepared in an unbiased manner.
b. ,eported inventor! balances reflect all related transactions for the period.
c. ,eported accounts receivable does not include an! uncollectible accounts.
d. The scope of the auditors* investi%ation "as not limited in an! "a! b! mana%ement.
d -. .tatements on Auditin% .tandards
a. ,elate to the filin% re#uirements and enforcement activities of the .EC.
b. escribe procedures to be applied in specific areas of audit activit! to eliminate inconsistencies in
audit practice.
c. Are intended to limit the de%ree of auditor /ud%ment needed to fulfill the attest function.
d. 'nterpret standards that provide %uidelines or measures of #ualit! for an independent audit.
d 0. The primar! purpose of an independent financial statement audit is to
a. Provide a basis for assessin% mana%ement*s performance.
b. Compl! "ith state and federal re%ulator! re#uirements.
c. Assure mana%ement that the financial statements are unbiased and free from material error.
d. Provide users "ith an unbiased opinion about the fairness of information reported in the financial
statements.
b 1. 'ndependent auditin% can best be described as a
a. &ranch of accountin%.
b. iscipline that attests to the results of accountin% and other operations and data.
c. Professional activit! that measures and communicates financial and business data.
d. ,e%ulator! function that prevents the issuance of improper financial information.
(A'CPA AAPTE)
b 2. An independent audit aids in the communication of economic data because the audit
a. Confirms the accurac! of mana%ement*s financial representations.
b. 3ends credibilit! to the financial statements.
c. 4uarantees that financial data are fairl! presented.
d. Assures the readers of financial statements that an! fraudulent activit! has been corrected.
(A'CPA
AAPTE)
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c 5. )hich of the follo"in% t!pes of audits are most similar+
a. $perational audits and compliance audits.
b. 'ndependent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
d. 'nternal audits and independent financial statement audits.
c 6. The Auditin% .tandards &oard
a. .ets rules and re%ulations that %overn public accountin% firms.
b. 's an arm of the 7inancial Accountin% .tandard &oard.
c. 's a senior technical bod! of the A'CPA desi%nated to issue authoritative auditin%
pronouncements.
d. ,eports directl! to the .ecurities and Exchan%e Commission.
c 8. The essence of the attest function is to
a. etect fraud.
b. Examine individual transactions so that the auditor can certif! as to their validit!.
c. etermine "hether the client*s financial statements are fairl! stated.
d. Ensure the consistent application of correct accountin% procedures.
(A'CPA AAPTE)
d 19. )hich of the follo"in% criteria is uni#ue to the independent auditor*s attest function+
a. 4eneral competence.
b. 7amiliarit! "ith the particular industr! of each client.
c. ue professional care.
d. 'ndependence. (A'CPA AAPTE)
c 11. The definition of auditin% contained "ithin A Statement of Basic Auditing Concepts reco%ni:es
that auditin% includes both a(an)
a. ocumentation process and an evaluation process.
b. Evaluation process and a reportin% process.
c. 'nvesti%ative process and a reportin% process.
d. ocumentation process and a reportin% process.
a 1(. An operational audit is desi%ned to
a. Assess the efficienc! and effectiveness of mana%ement*s operatin% procedures.
b. Assess the presentation of mana%ement*s financial statements in accordance "ith %enerall!
accepted accountin% principles.
c. etermine "hether mana%ement has complied "ith applicable la"s and re%ulations.
d. etermine "hether the audit committee of the board of directors is effectivel! dischar%in% its
responsibilit! to oversee mana%ement*s operations.
b 1-. The mar;et for auditin% services is driven b!
a. The re%ulator! authorit! of the .ecurities and Exchan%e Commission.
b. A demand b! external users of financial statements.
c. Pronouncements issued b! the Auditin% .tandards &oard.
d. Con%ress at the federal level and elected le%islative bodies at the state level.
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a 10. The first contemporar! audit related le%islation "as the
a. .ecurities Act of 18--.
b. .ecurities Exchan%e Act of 18-0.
c. &ritish <oint .toc; Companies Act of 1600.
d. Companies Act of 1805.
a 11. The first authoritative auditin% pronouncement in the U... "as
a. .tatement on Auditin% Procedures =o. 1, >Extensions of Auditin% Procedures.>
b. .tatement on Auditin% .tandards =o. 1, >Codification of .A.s.>
c. >Uniform Accountin%? A Tentative Proposal .ubmitted b! the 7ederal ,eserve &oard (1815).>
d. >Examination of 7inancial .tatements b! 'ndependent Public Accountants (18-2).>
a 12. The first authoritative audit standards@settin% bod! empo"ered to issue auditin% pronouncements
in the U... "as the
a. The Committee on Auditin% Procedure.
b. The Auditin% .tandards Executive Committee.
c. The Auditin% .tandards &oard.
d. The Accountin% and ,evie" .ervices Committee.
c 15. )hich of the follo"in% incorrectl! matches the authoritative bod! "ith its authoritative
pronouncements+
a. Accountin% and ,evie" .ervices Committee? >.tatements on .tandards for Accountin% and
,evie" .ervices>
b. Auditin% .tandards &oard? >.tatements on Auditin% .tandards>
c. Auditin% .tandards Executive Committee? >.tatements on Auditin% Procedure>
d. .ecurities and Exchan%e Commission? >7inancial ,eportin% ,eleases>
a 16. A license to practice as a certified public accountant is %ranted b!
a. .tate boards of accountanc!.
b. The A'CPA.
c. .tate societies of CPAs.
d. The .EC.
b 18. The purpose of a compliance audit for a %overnmental entit! is to determine "hether
a. 7inancial statements compl! "ith 4AAP and "hether the entit! is operatin% efficientl!.
b. 7inancial statements compl! "ith 4AAP and the entit! has complied "ith applicable la"s and
re%ulations.
c. The entit! has complied "ith applicable la"s and re%ulations.
d. 7inancial statements compl! "ith 4AAP.
a (9. The audit process is
a. A special application of the scientific method of in#uir!.
b. ,e%ulated b! the A'CPA.
c. The onl! service a CPA is allo"ed to perform b! la".
d. Performed onl! b! CPAs.
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d (1. )hich of the follo"in% has historicall! had the least influence on the practice of public
accountin%+
a. The 4overnmental Accountin% .tandards &oard.
b. The 'nstitute of 'nternal Auditors.
c. The .ecurities and Exchan%e Commission.
d. The U... Con%ress.
b ((. 'ndependent auditin% can best be described as
a. A subset of accountin%.
b. A professional activit! that attests to the fair presentation of financial statements.
c. A professional activit! that measures and communicates financial accountin% data.
d. A re%ulator! activit! that prevents the issuance of improper financial information.
(A'CPA AAPTE)
c (-. An independent audit is important to readers of financial statements because it
a. Provides a measure of mana%ement*s ste"ardship function.
b. Aeasures and communicates the financial data included in financial statements.
c. $b/ectivel! examines and reports on mana%ement*s financial statements.
d. ,eports on the accurac! of information in the financial statements.
(A'CPA AAPTE)
a (0. The reason an independent auditor %athers evidence is to
a. 7orm an opinion on the financial statements.
b. etect fraud.
c. Evaluate mana%ement.
d. Evaluate internal controls. (A'CPA AAPTE)
SHORT ANSWER
1. )hat measure of self@re%ulation is in place to monitor the performance of the public
accountin% profession in the area of assurance services+
Answer?
The Public $versi%ht &oard (P$&) is an autonomous bod! that monitors the performance of the
public accountin% firms that audit publicl! traded U... companies. The P$& is comprised of five
members "hich meets ei%ht times a !ear and oversees peer revie"s, and issues status reports that
recommend improvements in the self@re%ulation process.
(. escribe t"o attestation services that are common performed b! public accountin% firms.
Answer:
(1) Agreed-upon procedures? An en%a%ement "here the attestor (or auditin% firm) is en%a%ed to
examine an item usin% procedures a%reed upon b! the contractin% parties.
(() Revews? An attestation service for financial statements "here the public accountin% firm
%ives limited assurance about "hether an entit!Bs financial statements conform to %enerall!
accept accountin% principles.
0
-. )hat is the economic value of a financial statement audit+
Answer:
7inancial statement audits reduce the information ris; (the ris; that information in financial
statements is misstated materiall!), and reductions in information ris; "hich in turn reduce a
compan!Bs cost of capital (the cost a compan! endures to issue e#uit! or incur debt).
0. efine the attestation service of auditin%.
Answer:
Auditin% is a s!stematic process of ob/ectivel! obtainin% and evaluatin% evidence re%ardin%
assertions about economic actions and events to ascertain the de%ree of correspondence bet"een
those assertions and established criteria and communicatin% the results to interested users.
PRO!LEMS
1. 'n !our role of Chief 7inancial $fficer, !ou are re#uested to explain to the &oard of irectors
"h! audits of the compan! are made b! (a) internal auditors, (b) independent auditors, and (c)
%overnmental auditors. The &oard has voiced an opinion that it mi%ht be better if the compan!Bs
internal auditors completed all audits. )hat are the issues that !ou "ould need to explain to the
&oard+
Answer:
't is important to explain the differences in the roles of the three t!pes of accountants and the
purpose of each different form of audit?
'. In"ern#$ #ud"ors are auditors emplo!ed b! the compan! to assess the efficienc! and
effectiveness of mana%ementBs operations. 'nternal auditors perform oper#"on#$ #ud"s.
$perational audits focus on information s!stems and operatin% procedures, not on
recorded dollar amounts or reported financial information, and address an entit!Bs entire
scope of operations or selected procedures.
''. Independen" #ud"ors or govern%en"#$ #ud"ors perform compliance audits.
Co%p$#nce #ud"s ma! be desi%ned to determine "hether an entit!Bs statements are
presented fairl! in accordance "ith 4AAP and ma! also be desi%ned to determine "hether
the entit! has complied "ith applicable la"s and re%ulations that ma! have a material
effect on financial statements.
'''. Independen" #ud"ors perform financial statement audits. &n#nc#$ s"#"e%en" #ud"s are
an attestation service in "hich an independent auditor offers assurance about
mana%ementBs "ritten financial statement assertions.
't is imperative that the &oard of irectors understands that the different t!pes of auditors have
different areas of professional expertise and authorit!. The value of each form of audit "ould be
ne%ated if completed b! the inappropriate audit professional.
(. The A'CPABs CPA Vision Project: 2011 and Beyond, contemplates values and competencies
that improve an assurerBs abilit! to /ud%e the #ualit! of information assured. 3ist and define the
elements outlined "ithin the CPA Vision Project.
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I' Core (#$ues:
Con"nung Educ#"on #nd L)e$ong Le#rnng * CPAs believe in continuin%
education be!ond certification and believe it is important to continuall! ac#uire ne"
s;ills and ;no"led%e.
Co%pe"ence * CPAs are able to perform hi%h@#ualit! "or; in a capable, efficient,
and appropriate manner.
In"egr"+ * CPAs conduct themselves "ith honest! and professional ethics.
A""uned "o !ro#d !usness Issues C CPAs are in tune "ith the overall realities of
the business environment.
O,-ec"v"+ C CPAs are able to deal "ith information free of distortions, personal
bias, or conflicts of interest.
II' Core Co%pe"ences:
Co%%unc#"ons #nd Le#ders.p S/$$s C Able to %ive and exchan%e information
"ithin meanin%ful context and "ith appropriate deliver! and interpersonal s;ills. Able
to influence, inspire, and motivate others to achieve results.
S"r#"egc #nd Cr"c#$ T.n/ng S/$$s C Able to lin; data, ;no"led%e, and insi%ht
to%ether to provide #ualit! advice for strate%ic decision ma;in%.
&ocus on ".e Cus"o%er0 C$en"0 #nd M#r/e" * Able to anticipate and meet the
chan%in% needs of clients, emplo!ers, customers, and mar;ets better than competitors.
In"erpre"#"on o) Convergng In)or%#"on * Able to interpret and provide a broader
context usin% financial and nonfinancial information.
Tec.no$ogc#$$+ Ad#p" * Able to utili:e and levera%e technolo%! in "a!s that add
value to clients, customers, and emplo!ees.
III' Core Servces:
Assur#nce #nd In)or%#"on In"egr"+ * Provide a variet! of services that improve
and assure the #ualit! of information, or its context, for business decision ma;in%.
M#n#ge%en" Consu$"ng #nd Per)or%#nce M#n#ge%en" * Provide advice and
insi%ht on the financial and nonfinancial performance of an or%ani:ationBs operational
and strate%ic process throu%h broad business ;no"led%e and /ud%ment.
Tec.no$og+ Servces * Provide services that levera%e technolo%! to improve
ob/ectives and decision ma;in%, includin% business application processes, s!stem
inte%rit!, ;no"led%e mana%ement, s!stem securit!, and inte%ration of ne" business
processes and practices.
&n#nc#$ P$#nnng * Provide a variet! of services to or%ani:ations and individuals
that interpret and add value b! utili:in% a "ide ran%e of financial information. These
include ever!thin% from tax plannin% and financial statement anal!sis to structurin%
investment portfolios and complex financial statements.
In"ern#"on#$ Servces * Provide services to support and facilitate commerce in the
%lobal mar;et.
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