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.
ANSWER:

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:

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:

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:

5.

Chapter 1 Auditing, Attestation, and Assurance

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:

6.

Which of the following is not considered an assertion as

formulated by the Auditing Standards Board?
a.
Valuation or allocation.
b.
Mathematical accuracy.
c.
Rights and obligations.
d.
Presentation and disclosure.
ANSWER:

7.

To maximize independence, the director of internal

should report to the
a.
Audit committee.
b.
Controller.
c.
Chief financial officer.
d.
Director of information systems.
ANSWER:

9.

Which of the following is not a distinguishing feature of

risk-based auditing?
a.
Identifying areas posing the highest risk of financial
statement errors.
b.
Analysis of internal control.
c.
Collecting and evaluating evidence.
d.
Concentrating audit resources in those areas presenting
the highest risk of financial statement errors.
ANSWER:

8.

auditing

The auditor communicates the results of his or her work

through the medium of the
a.
Engagement letter.
b.
Management letter.
c.
Audit report.

Chapter 1 Auditing, Attestation, and Assurance

d.

Financial statements.

ANSWER:
10.

The best description of the scope of internal auditing is

that it encompasses
a.
Primarily operational auditing.
b.
Both financial and operational auditing.
c.
Primarily the safeguarding of assets and verifying the
existence of such assets.
d.
Primarily financial auditing.
ANSWER:

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:

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.
Opinion paragraph of the auditors report.
c.
Management letter.
d.
Engagement letter.
ANSWER:
13.

The
a.
b.
c.
d.

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. cadb
b. cdab
c. bcda

Chapter 1 Auditing, Attestation, and Assurance

d.
ANSWER:

adcb
A

13. Which of the following statements is not true regarding the

competence of audit evidence?
a.
Relevance is enhanced by an effective information
system.
b.
To be competent, evidence must be both valid and
relevant.
c.
Validity is related to the quality of the clients
information system.
d.
Relevance must always relate to audit objectives.
ANSWER:
15.

As used in auditing, which of the following 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.
ANSWER:

16.

Which of the following statements is not a distinction

between independent auditing and internal auditing?
a.
Independent auditors represent third party users
external to the auditee entity, whereas internal
auditors report directly to management.
b.
Although independent auditors strive for both validity
and relevance of evidence, internal auditors are
concerned almost exclusively with validity.
c.
Internal auditors are employees of the auditee, whereas
independent auditors are independent contractors.
d.
The internal auditor's span of coverage goes
beyond financial auditing to encompass operational
and performance auditing.
ANSWER:

17.

Which of the following best describes the purpose of the

engagement letter?

Chapter 1 Auditing, Attestation, and Assurance

a.

The engagement letter relieves the auditor of some

responsibility for the exercise of due care.
By clearly defining the nature of the engagement, 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.
The engagement letter conveys to management the
detailed steps to be applied in the audit process.
The engagement letter should be signed by both the
client and the CPA and should be used only for
independent audits.

b.

c.
d.

ANSWER:
18.

In assessing audit risk, the CPA needs to do all of the

following except
a.
Gather audit evidence in support of recorded
transactions.
b.
Obtain an understanding of the client's system of
internal control.
c.
Understand the economic substance of significant
transactions completed by the client.
d.
Understand the entity and the industry in which it
operates.
ANSWER:

19.

Which of the following tasks should be performed prior to

the final audit?
a.
Determining 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.
ANSWER:

COMPLETION
20.

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
_________ - ___________ auditing.
ANSWER:

RISK-BASED

21.

Chapter 1 Auditing, Attestation, and Assurance

Because
is the standard for measuring fairness,
independent auditors must be expert in accounting matters.
ANSWER:

22.

Independent auditing is considered necessary because

managers and stockholders have
attitudes
toward financial reporting.
ANSWER:

23.

DIVERGENT (CONFLICTING)

The most important characteristics contributing to

effective auditing are the ability of the auditor to
exercise
and
.
ANSWER:

24.

GAAP

DUE CARE, SOUND JUDGMENT

The assertion stating that no assets, equities, or

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
a.
b.
c.
d.
e.

existence or occurrence
completeness
rights and obligations
valuation or allocation
presentation and disclosure

____ 1. Calculated depreciation expense for the year

____ 2. Test counted clients 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

Chapter 1 Auditing, Attestation, and Assurance

____ 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 clients 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
Interim Audit
Test internal control over cash
receipts
Audit accounts receivable
balances

Josh Lukins
Audit property, plant, and
equipment balances
Test internal control over
cash disbursements

Chapter 1 Auditing, Attestation, and Assurance

Final Audit
Test internal control over
sales
Obtain signed copy of engagement
letter

Audit cash balances

Audit inventory balances

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:
a.
Audit planning; interim audit; final audit; 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 extent of transaction and balance
testing.
c.
Strengths: The auditors tested internal control over
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

Chapter 1 Auditing, Attestation, and Assurance

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