CHAPTER 2

MULTIPLE CHOICE
a. 1. Due professional care requires
a. A critical review of the work done at every level of supervision.
b. The examination of all corroborating evidence available.
c. The exercise of error-free udgment.
d. A consideration of internal control structure that includes tests of controls.
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c '. The first general standard requires that the audit of financial statements be performed by a person
or persons having adequate technical training and
a. "ndependence with respect to the financial statements and supplementary disclosures.
b. %xercising professional care as udged by peer reviewers.
c. $roficiency as an auditor( which likely has been acquired from previous experience.
d. )bectivity as an auditor( as verified by proper supervision. !A"#$A ADA$T%D&
d *. An auditor( while performing an audit( strives to achieve the appearance of independence in order
to
a. +educe risk and liability.
b. #omply with the generally accepted standards of fieldwork.
c. ,ecome independent in fact.
d. -aintain public confidence in the profession. !A"#$A ADA$T%D&

d .. Adequate technical training and proficiency as an auditor encompasses an ability to understand a
computer system sufficiently to identify and evaluate
a. The processing and imparting of information.
b. %ssential accounting control features.
c. All control procedures.
d. The degree to which programming conforms to the application of generally accepted accounting
principles. !A"#$A ADA$T%D&
c /. #ompetence as a certified public accountant includes all of the following except
a. 0aving the technical qualifications to perform an engagement.
b. $ossessing the ability to supervise and evaluate the quality of staff work.
c. 1arranting the infallibility of the work performed.
d. #onsulting others if additional technical information is needed. !A"#$A ADA$T%D&
a 2. 3ltimately( the decision about whether or not an auditor is independent must be made by the
a. Auditor.
b. #lient.
c. Audit committee.
d. $ublic. !A"#$A ADA$T%D&
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c 4. -adison #orporation has a few large accounts receivable that total 51(666(666. 7assau
#orporation has a great number of small accounts receivable that also total 51(666(666. The
importance of an error in any one account is( therefore( greater for -adison than for 7assau. This
is an example of the auditor8s concept of
a. Account bias.
b. Audit risk.
c. -ateriality.
d. +easonable assurance. !A"#$A ADA$T%D&
b 9. 1hich of the following best describes what is meant by generally accepted auditing standards:
a. Acts to be performed by the auditor.
b. -easures of the quality of an auditor8s performance.
c. $rocedures used to gather evidence to support financial statements.
d. Audit obectives generally determined on audit engagements. !A"#$A ADA$T%D&
b ;. There is an inverse relationship between the effectiveness of an entity8s internal control structure
and the
a. +eliability of financial statements.
b. %xtent of detailed audit tests required.
c. Degree of staff supervision required in the performance of an audit.
d. <airness of management assertions in the financial statements.
a 16. 1hich of the following best describes the character of the three generally accepted auditing
standards classified as general standards:
a. #riteria for competence( independence( and professional care of individuals performing the audit.
b. #riteria for the content of the financial statements and related footnote disclosures.
c. #riteria for the content of the auditor8s report.
d. The requirements for planning and supervision. !A"#$A ADA$T%D&
c 11. The generally accepted standards of fieldwork relate to
a. The competence( independence( and professional care of persons performing the audit.
b. #riteria for the content of the auditor8s report on financial statements.
c. Audit planning and evidence gathering.
d. The need to maintain independence in mental attitude. !A"#$A ADA$T%D&
d 1'. 1hich of the following statements is correct concerning the concept of materiality:
a. -ateriality is determined by reference to A"#$A guidelines.
b. -ateriality depends only on the dollar amount involved.
c. -ateriality depends on the nature of an item rather than on the dollar amount.
d. -ateriality is a matter of professional udgment. !A"#$A ADA$T%D&
a 1*. The generally accepted standards of reporting encompass all of the following except
a. #onsideration of an entity8s internal control structure.
b. #onsistent application of accounting principles.
c. "nformative disclosures.
d. #onformity of financial statements with =AA$.
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c 1.. An obective of the fourth generally accepted standard of reporting( relating to the expression of
an opinion( is to
$rohibit the auditor from issuing a report that does not include an opinion on the financial statements
taken as a whole.
"nform users that the financial statements and related notes are the oint responsibility of the auditor and
management.
$revent users of financial statements from misinterpreting the degree of responsibility assumed by the
auditor.
%nsure adequate informative disclosures in the financial statements.
d 1/. The least important evidence of a public accounting firm8s evaluation of its system of quality
controls would concern the firm8s policies and procedures with respect to
a. %mployment !hiring&.
b. #onfidentiality of audit engagements.
c. Assigning personnel to audit engagements.
d. Determination of audit fees. !A"#$A ADA$T%D&
a 12. 1hich of the following is not an element of quality control:
a. Documentation.
b. "nspection.
c. >upervision.
d. #onsultation. !A"#$A ADA$T%D&
d 14. 1illiams ? #o.( a large international public accounting firm( is due to have a peer review. The
peer review will most likely be performed by
a. %mployees and partners of 1illiams ? #o. who are not associated with the particular audit being
reviewed.
b. Audit review staff of the >ecurities and %xchange #ommission.
c. Audit review staff of the A"#$A.
d. %mployees and partners of another firm. !A"#$A ADA$T%D&
b 19. "n a financial statement audit( audit risk represents the probability that
a. "nternal control fails and the failure is not detected by the auditor8s procedures.
b. The auditor unknowingly fails to modify an opinion on materially misstated financial statements.
c. "nherent and control risk cause errors that could be material to the financial statements.
d. The auditor is not retained to conduct a financial statement audit in the succeeding year.
a 1;. "n a financial statement audit( inherent risk represents
a. The susceptibility of an account balance to error that could be material.
b. The risk that error could occur and not be prevented or detected by the internal control structure.
c. The risk that error could occur and not be detected by the auditor8s procedures.
d. The risk that the auditor fails to modify materially misstated financial statements.
d '6. 1hat is the magnitude of audit risk if inherent risk is ./6( control risk ..6( and detection risk .16:
a. .'6.
b. .16.
c. .6..
d. 7ot determinable from the facts given.
;
c '1. The @hallmark@ of auditing is
a. Available audit technology.
b. =enerally accepted auditing standards.
c. $rofessional udgment.
d. -ateriality and audit risk.
d ''. An auditor is most likely to refer to one or more of the three general auditing standards in
determining
a. The nature of a report qualification.
b. The scope of auditing procedures.
c. +equirements for the consideration of internal control.
d. 1hether the auditor should undertake an audit engagement. !A"#$A ADA$T%D&
a '*. 1hich of the following is mandatory if the auditor is to comply with the general standards of the
A"#$AAs generally accepted auditing standards:
a. Adequate technical training
b. 3se analytical procedures.
c. 3se statistical sampling when feasible on an audit engagement.
d. #onfirmation of material accounts receivable balances. !A"#$A ADA$T%D&
b '.. The first general standard requires that a person or persons have adequate technical training and
proficiency as an auditor. This standard is met by
a. 3nderstanding business and finance.
b. %ducation and experience in auditing.
c. #ontinuing professional education.
d. Bnowledge of >tatements of Auditing >tandards. !A"#$A ADA$T%D&
a '/. 1hat is the meaning of the generally accepted auditing standard that requires that the auditor be
independent:
a. The auditor must be without bias with respect to the client audited.
b. The auditor must adopt a critical attitude during the audit.
c. The auditor8s sole obligation is to third parties.
d. The auditor may have a direct ownership interest in the client8s business if it is not material.
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d '2. The third general standard states that due care is to be exercised in the performance of an audit(
and should be interpreted to mean that an auditor who undertakes an engagement assumes a duty
to perform
a. 1ith reasonable diligence and without fault or error.
b. As a professional who will assume responsibility for losses consequent upon error of udgment.
c. To the satisfaction of the client and third parties.
d. As a professional possessing the degree of skill commonly possessed by others in the field.
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a '4. The first standard of fieldwork( which states that the work is to be adequately planned( and
assistants( if any( are to be properly supervised( recogniCes that
a. %arly appointment of the auditor is advantageous both to the auditor and to the client.
b. Acceptance of an audit engagement after the close of the client8s fiscal year is generally not
permissible.
c. Appointment of the auditor subsequent to the physical count of inventories requires a disclaimer
of opinion.
d. $erformance of substantial parts of the engagement is necessary at interim dates.
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b '9. "n connection with the third generally accepted auditing standard of fieldwork( an auditor
examines corroborating evidential matter that includes all of the following except
a. #lient accounting manuals.
b. 1ritten client representations.
c. Dendor invoices.
d. -inutes of board meetings. !A"#$A ADA$T%D&
a ';. 1hich of the following underlies the application of generally accepted auditing standards(
particularly the standards of fieldwork and reporting:
a. The elements of materiality and risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance. !A"#$A ADA$T%D&
c *6. The fourth generally accepted auditing standard of reporting requires an auditor to render a report
whenever an auditor8s name is associated with financial statements. The overall purpose of the
fourth standard of reporting is to require that reports
a. Assure that the auditor is independent with respect to the financial statements audited.
b. >tate that the audit has been conducted in accordance with generally accepted auditing standards.
c. "ndicate the character of the engagement and the degree of responsibility assumed by the auditor.
d. %xpress whether the accounting principles used in preparing the financial statements have been
applied consistently in the period audited. !A"#$A ADA$T%D&
d *1. The auditor8s udgment concerning the overall fairness of the presentation of financial positions(
results of operations( and cash flows is applied within the framework of
a. Euality control.
b. =enerally accepted auditing standards that include the concept of materiality.
c. The auditor8s evaluation of the audited company8s internal controls.
d. =enerally accepted accounting principles. !A"#$A ADA$T%D&
d *'. The concept of materiality would be least important to an auditor in determining
a. Transactions that should be reviewed.
b. The need for disclosing a particular transaction or event.
c. The extent of audit work planned for particular accounts.
d. The effects of an auditor8s direct financial interest in a client. !A"#$A ADA$T%D&
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b **. The obective of quality control mandates that a public accounting firm should establish policies
and procedures for professional development that provide reasonable assurance that all
entry-level personnel
a. $repare working papers that are standardiCed in form and content.
b. 0ave the knowledge required to enable them to fulfill responsibilities assigned.
c. 1ill advance within the organiCation.
d. Develop specialties in specific areas of public accounting. !A"#$A ADA$T%D&
b *.. "n pursuing its quality control obectives with respect to assigning personnel to engagements( a
public accounting firm may use policies and procedures such as
a. +otating employees from assignment to assignment on a random basis to aid in the staff training
effort.
b. +equiring timely identification of the staffing requirements of specific engagements so that
enough qualified personnel can be made available.
c. Allowing staff to select the assignments of their choice to promote better client relationships.
d. Assigning a number of employees to each engagement in excess of the number required so as not
to overburden the staff and interfere with the quality of the audit work performed.
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d */. A public accounting firm studies its personnel advancement experience to determine whether
individuals meeting stated criteria are assigned increased degrees of responsibility. This is
evidence of the firm8s adherence to
a. =enerally accepted auditing standards.
b. Attestation standards.
c. >upervision and review.
d. Euality control standards. !A"#$A ADA$T%D&
d *2. 1hich of the following statements best describes the primary purpose of >tatements on Auditing
>tandards:
a. =uides intended to set forth auditing procedures that are applicable to a variety of situations.
b. )utlines intended to narrow the areas of inconsistency and divergence of auditor opinion.
c. Authoritative statements( enforced through the code of professional conduct( and intended to limit
the degree of auditor udgment.
d. "nterpretations intended to clarify the meaning of generally accepted auditing standards.
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SHORT ANSWER
1. Describe what is meant by planned detection risk and what effect planned detection risk would
have on evidence.
Answer:
Detection risk is the likelihood that error could occur and not be detected by the auditorAs
procedures. Detection risk is inversely related to the amount of audit evidence an auditor would
plan to gather. As detection risk goes up( the amount of evidence gathered goes down.
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'. Define inherent risk and name two examples of factors that may increase inherent risk.
AnswerF
"nherent risk is the susceptibility of an account balance to error that could be material assuming
there are no related internal controls. %xamples will vary among students( includingF the client8s
business or industry( management8s predisposition to manage earnings( and insights obtained from
prior engagements.
*. 1hat is the importance of internal controls to an auditor in an audit engagement:
Answer:
The second standard of fieldwork within =AA>( requires that an auditor obtain an understanding
of an entity8s internal controls to help in planning the audit and designing audit tests.
.. 1hat is the demand for due care within an audit or attestation engagement:
Answer:
#ompetent professional staff should plan attestation and audit engagements( and the work of all
assistants assigned to the engagement should be supervised.
/. Differentiate between independence in fact and independence in appearance.
AnswerF
"ndependence of fact is a state of mind( an attitude of impartiality( which underlies both an
attestation standard and a =AA>. "ndependence in appearance is the ability to demonstrate
independence by remaining free of any overt interest in a client that would damage the
appearance of independence.
PROBLEMS
1. Gist and describe the ten =AA>.
Answer:
General Standards
1. The audit is to be performed by a person or persons having adequate technical training and
proficiency as an auditor.
'. "n all matters relating to the assignment( independence in mental attitude is to be maintained
by the auditor or auditors.
*. Due professional care is to be exercised in the performance of the audit and the preparation of
the report.
Standards of !eld Wor"
.. The work is to be adequately planned and assistants( if any( are to be properly supervised.
/. A sufficient understanding of internal control is to be obtained to plan the audit and to
determine the nature( timing( and extent of tests to be performed.
2. >ufficient competent evidential matter is to be obtained through inspection( observation(
inquiries( and confirmation to afford a reasonable and basis for an opinion regarding the
financial statements under audit.
Standards of Re#ort!n$
4. The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.
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9. The report shall identify those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.
;. "nformative disclosures in the financial statements are to be regarded as reasonably adequate
unless otherwise stated in the report.
16. The report shall either contain an expression of opinion regarding the financial statements
taken as a whole( or an assertion to the effect that an overall opinion cannot be expressed.
1hen an overall opinion cannot be expressed( the reasons( therefore( should be stated. "n all
cases where an auditorAs name is associated with financial statements( the report should
contain a clear-cut indication of the character of the auditorAs work( if any( and the degree of
responsibility the auditor is taking.
'. The following four situations involve the process of planning audit evidence requirements.
#alculate the planned detection risk for each different situation.

Situations
+isk 1 ' * .
Acceptable Audit +isk /H /H 1H 1H
"nherent +isk 166H 26H /6H .6H
#ontrol +isk 166H .6H /6H 26H
$lanned Detection +isk : : : :
Answer:
>ituation I1 $lanned Detection +isk .6/
>ituation I' $lanned Detection +isk .'69*
>ituation I* $lanned Detection +isk .6.
>ituation I. $lanned Detection +isk .6.14
1.