ANSWER KEY AUDITING THEORY BY: SALOSAGCOL CHAPTER13

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CHAPTER 1 ddbbbdbaddadcbacdddcccddgdacdcdaacaabaddacccdbddbaadbaabcbbdabdbc
1. c 2.b 3.c 4.c 5.b 6.c 7.b 8.c 9.d 10.c 11.b 12.d 13.c 14.d 15.c 16.b 17.a 18.a 19.d 20.d 21.b
22.c 23.a 24.b 25.b 26.d 27.c 28.c 29.c 30.b 31.b 32.d 33.b 34.d 35.d 36.c 37.b 38.b 39.d 40.c
41.d 42.d 43.a 44.a 45.b 46.c
AUDITING and ASSURANCE SERVICES
CHAPTER 2
1. c 2.c 3.a 4.c 5.d 6.d 7.a 8.c 9.d 10.b 11.d 12.c 13.c 14.a 15.c 16.b 17.b 18.d 19.d 20.a 21.a
b 1. To become a Certified Public Accountant (CPA), an
22.b 23.c 24.a 25.a 26.c 27.a 28.a 29.c 30.c 31.c 32.b 33.b 34.b 35.c 36.b 37.d 38.b 39.c 40.d
41.c 42.d individual must pass the Uniform CPA Examination and
43.c 44.d 45.a 46.a 47.d a. Demonstrate his or her independence.
b. Comply with state education and experience
CHAPTER 3 requirements.
1.b 2.c 3.c 4.c 5.c 6.b 7.d 8.c 9.d 10.c 11.d 12.c 13.a 14.a 15.b 16.a 17.b 18.b 19.b 20.a 21.b c. Obtain employment with a public accounting firm.
22.d 23.b 24.b 25.b 26.a 27.d 28.a 29.c 30.c 31.a 32.c 33.b 34.d 35.c 36.b 37.a 38.a 39.d 40.a
d. Become a member of the AICPA.
41.a 42.b 43.d 44.c 45.a 46.a 47.b 48.b 49.d 50.d 51.c 52.b 53.b 54.d 55.d 56.c 57.a 58.b 59.c
60.b 61.c 62.d 63.b 64.a 65.a b 2. Which of the following statements is an example of an assertion made by management in
an entity's financial statements?
CHAPTER4 a. The financial statements were prepared in an unbiased manner.
babcddbdddaaacddacacbddbcccdbbbbdadaccccddba b. Reported inventory balances reflect all related transactions for the period.
c. Reported accounts receivable do not include any uncollectible accounts.
CHAPTER5 d. The scope of the auditors' investigation was not
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limited in any way by management.
CHAPTER6 d 3. Statements on Auditing Standards
cbcdbcbacbbddbaccadbbdaaabdbaaacdadcdbdbccddddacddaabdacbdbadcdb a. Relate to the filing requirements and enforcement activities of the SEC.
b. Describe procedures to be applied in specific areas of audit activity to
CHAPTER7 eliminate inconsistencies in audit practice.
cdbacbccdcbbbccdacabdcaabbbdcbcdcccdbdaaaacbbdbadcccdbbbad c. Are intended to limit the degree of auditor judgment needed to fulfill the attest
function.
CHAPTER8 d. Interpret standards that provide guidelines or measures of quality for an
cdccdcdbadddccaacccbdddabddaacddaaaaacbadcdbbacbbdddcadbccbbdbddcccdaacbddb independent audit.
d 4. The primary purpose of an independent financial statement audit is to
CHAPTER9 a. Provide a basis for assessing management's performance.
acdaadcaabcbbaccdaababdabbdccaacdbbdbbcccbacbccaaa b. Comply with state and federal regulatory requirements.
CHAPTER10
aabacdacddadadccccdacaddbbdabdbabacbadcbbbabd c. Assure management that the financial statements are unbiased and free from material error.

CHAPTER11 d. Provide users with an unbiased opinion about the fairness of information
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(AICPA ADAPTED)
CHAPTER12 b 5. Independent auditing can best be described as a
ccabdddcbbdbdadcaaadadcadaacdbbdbdbcddadccdbdb a. Branch of accounting.
b. Discipline that attests to the results of accounting
 and other operations and data.
c. Professional activity that measures and communicates
financial and business data.
d. Regulatory function that prevents the issuance of
improper financial information.
b 6. An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy of management's financial
representations.
b. Lends credibility to the financial statements.
c. Guarantees that financial data are fairly presented.
d. Assures the readers of financial statements that any
fraudulent activity has been corrected.
(AICPA ADAPTED)
c 7. Which of the following types of audits are most similar?
a. Operational audits and compliance audits.
b. Independent financial statements audits and operational
audits.
c. Compliance audits and independent financial statements
audits.
d. Internal audits and independent financial statements
audits.
c 8. The Auditing Standards Board
a. Sets rules and regulations that govern public accounting
firms.
b. Is an arm of the Financial Accounting Standards Board.
c. Is a senior technical body of the AICPA designated to
issue authoritative auditing pronouncements.
d. Reports directly to the Securities and Exchange
Commission.
c 9. The essence of the attest functions is to
a. Detect fraud.
b. Examine individual transactions so that the auditor can
certify as to their validity.
c. Determine whether the client's financial statements are
fairly stated.
d. Ensure the consistent application of correct accounting
procedures.
d 10. Which of the following criteria is unique tot he independent auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. Independence.
c 11. The definition of auditing contained within A Statement of Basic Auditing concepts
recognizes that auditing includes both a(n)
a. Documentation process and an evaluation process.
b. Evaluation process and a reporting process.
c. Investigative process and a reporting process.
d. Documentation process and a reporting process.
a 12. An operational audit is designed to
a. Assess the efficiency and effectiveness of management's
operating procedures.
b. Assess the presentation of management's financial
statements in accordance with generally accepted
accounting principles.
c. Determine whether management has complied with applicable
laws and regulations.
d. Determine whether the audit committee of the board of
directors is effectively discharging its responsibility to
oversee management's operations.
b 13. The market for auditing services is driven by
a. The regulatory authority of the Securities and Exchange
Commission.
b. A demand by external users of financial statements.
c. Pronouncements issued by the Auditing Standards Board.
d. Congress at the federal level and elected legislative
bodies at the state level.
c 14. The first contemporary audit related legislation was the
a. Securities Act of 1933.
b. Securities Exchange Act of 1934.
c. British Joint Stock Companies Act of 1844.
d. Companies Act of 1942.
c 15. The first authoritative auditing pronouncement in the U.S.
was
a. Statement on Auditing Procedures No 1. "Extensions of
Auditing Procedures."
b. Statement on Auditing Standards No 1. "Codification of SaSS."
c. "Uniform Accounting: A Tentative Proposal Submitted by the Federal Reserve
Board (1917)"
d. "Examination of Financial Statements by Independent Public Accounts
(1936)."
c 16. The first authoritative audit standards setting body empowered to issue auditing
pronouncements in the U.S. was the
a. Committee on Auditing Procedure.
b. Auditing Standards Executive committee.
 c. Auditing Standards Board. (
d. Accounting and Review Services Committee. AICPA ADAPTED)
c 17. Which of the following incorrectly matches the authoritative body with its authoritative c 23. An independent audit is important to readers of financial statements because it
pronouncements? a. Provides a measure of management's stewardship
a. Accounting and Review Services Committee: "Statements on Standards for function.
Accounting and Review Services" b. Measures and communicates the financial data included
b. Auditing Standards Board: "Statements on Auditing Standards." in financial statements.
c. Auditing Standards Executive Committee: "Statements on Auditing c. Objectively examines and reports on management's
Procedure." financial statements.
d. Securities and Exchange Commission: "Financial Reporting Releases." d. Reports on the accuracy of information in the
c 18. A license to practice as a certified public accountant is granted by financial statements. (AICPA ADAPTED)
a. The board of accountancy a 24. The reason an independent auditor gathers evidence is to
b. PICPA a. Form an opinion on the financial statements.
c. PRC b. Detect fraud.
d. SEC c. Evaluate management.
b 19. The purpose of a compliance audit for a governmental entity is to determine whether d. Evaluate internal controls.
a. Financial statements comply with GAAP and whether the entity is operating
efficiently. c 1. An auditor's report contains the following:
b. Financial statements comply with GAAP and the entity has complied with We did not audit the financial statements of B Company, a
applicable laws and regulations. consolidated subsidiary, which statements reflect total assets and revenues
c. The entity has complied with applicable laws and regulations. constituting 20 percent and 22 percent, respectively, of the related consolidated
d. Financial statements comply with GAAP. totals. These statements were audited by other auditors, whose report has been
a 20. The audit process is furnished to us, and our opinion insofar as it relates to the amounts included for
a. A special application of the scientific method of inquiry. B Company, is based solely upon the report of the other auditors.
b. Regulated by the AICPA. These sentences
c. The only service a CPA is allowed to perform by law. a. Disclaim an opinion.
d. Performed only CPAs. b. Qualify the opinion.
d 21. Which of the following has historically had the least influence on the practice of public c. Divide responsibility.
accounting? d. Should not be part of the audit report.
a. The Governmental Accounting Standards Board. (AICPA ADAPTED)
b. The Institute of Internal Auditors. c 2. In which of the following situations would the auditor appropriately issue a standard
c. The Securities and Exchange Commission. unqualified report with no explanatory paragraph concerning consistency?
d. The U.S. Congress. a. A change in the method of accounting for specific subsidiaries that comprise
b 22. Independent auditing can best be described as a the group of companies for which consolidated statements are presented.
a. Subset of accounting. b. A change from an accounting principle that is not generally accepted to one
b. Professional activity that attests to the fair that is generally accepted.
presentation of financial statements. c. A change in the percentage used to calculate the provision for warranty
c. Professional activity that measures and communicates expense.
financial accounting data. d. Correction of mistake in the application of a generally accepted accounting
d. Regulatory activity that prevents the issuance of principle.
improper financial information. (
AICPA ADAPTED)
b 3. When financial statements are presented that are not in conformity with generally
accepted accounting principles, an auditor may issue a(n) Qualified Opinion
Adverse Opinion c 8. An auditor's report includes a statement that "the financial statements do not present fairly
a. Yes No the financial position in conformity with generally accepted accounting
b. Yes Yes principles." This auditor's report was probably issued in conection with financial
c. No Yes statements that were
d. No No a. Prepared on a comprehensive basis for accounting other than GAAP.
b. Restricted for use by management.
c. Misleading.
a 4. The management of a client company believes that the statement of cash flow is not a d. Condensed. (AICPA ADAPTED)
useful document and refuses to include one in the annual report to stockholders. c 9. If the auditor believes there is minimal likelihood that resolution of an uncertainty will
As a result, the auditor's opinion should be have a material effect on the financial statements, the auditor would issue a(n)
a. Qualified due to inadequate disclosure. a. Qualified opinion.
b. Qualified due to a scope limitation. b. Adverse opinion.
c. Adverse c. Unqualified opinion.
d. Unqualified. d. Disclaimer of opinion.
d 5. An auditor would issue an adverse opinion if b 10. If an accounting change has no material effect on the financial statements in the current
a. The audit was begun by other independent auditors who withdrew from the year but the change is reasonably certain to have a material effect in laer years,
engagement. the change should be
b. A qualified opinion cannot be given because the auditor lacks independence. a. Treated as a consistency modification in the auditor's report for the current
c. The restriction on the scope of the audit was significant. year.
d. The statements taken as a whole do not fairly present the financial position, b. Disclosed in the notes to the financial statements of the current year.
results of operations, and cash flows of the company. (AICPA c. Disclosed in the notes to the financial statements and referred to in the
ADAPTED) auditor's report for the current year.
d 6. The fourth reporting standard requires that the auditor's report contain either an expression d. Treated as a subsequent event. (AICPA ADAPTED)
of opinion regarding the financial statements taken as a whole or an assertion c 11. When comparative financial statements are presented, the fourth reporting standard,
that an opinion cannot be expressed. The objective of the fourth standard is to which refers to financial statements "taken as a whole", should be considered to
prevent apply to the financial statements of the
a. An auditor from reporting on one basic financial statement and not the others. a. Periods presented plus one preceding period.
b. An auditor from expressing different opinions on each of the basic financial b. Current period only.
statements. c. Current period and those of the other periods presented.
c. Management from reducing its responsibility for the basic financial d. Current and immediately preceding period only.
statements. b 12. An auditor's standard report expressed an unqualified opinion and includes an
d. Misinterpretations about the degree of responsibility the auditor assumes. explanatory paragraph that emphasizes a matter included in the notes to the
(AICPA ADAPTED) financial statements. The auditor's report would be deficient if the explanatory
d 7. An auditor's opinion read as follows: "In our opinion, except for the above-mentioned paragraph states that the entity
limitation on the scope of our audit.." This is an example of a(n) a. Is a component at a larger business enterprise.
a. Review opinion. b. Has changed from the completed contract method to the percentage of
b. Emphasis on matter. completion method to account for long term construction contracts.
c. Qualified opinion. c. Has had a significant subsequent event.
d. Unacceptable reporting practice. d. Has accounting reclassifications that enhance the comparability between
(AICPA ADAPTED) years. (AICPA ADAPTED)
d 13. Raider, Inc. uses the last-in, first-out method to value half of its inventory and the first-
in, first-out method to value the other half. Assuming the auditor is satisfied in
all other respects, under these circumstances the auditor will issue a(n)
a. Opinion modified due to inconsistency.
b. Unqualified opinion with an explanatory middle paragraph.
c. Qualified or adverse opinion, depending on materiality.
d. Unqualified opinion. (AICPA ADAPTED)
d 14. Under which of the following sets of circumstances might an auditor disclaim an
opinion?
a. The financial statements contain a departure from GAAP, the effect of which
is material.
b. The principal auditor decides to make reference to the report of another
auditor who audited a subsidiary.
c. There has been a material change between periods in the method of the
application of accounting principles.
d. There were significant limitations on the scope of the audit.
a 15. An auditor includes an explanatory paragraph in an otherwise unqualified report in order
to emphasize that the entity being reported on is a subsidiary of another business
enterprise. The inclusion of this paragraph
a. Is appropriate and would not negate the unqualified opinion.
b. Is a qualification.
c. Is a violation of generally accepted reporting standards if this information is
disclosed in footnotes to the financial statements.
d. Necessitates a revision of the opinion paragraph to include the phrase "with
the foregoing explanation."
c 16. In which of the following circumstances would an adverse opinion be appropriate?
a. The auditor is not independent with respect to the enterprise being audited.
b. An uncertainty prevents the issuance of an unqualified report.
c. The statements are not in conformity with authoritative statements regarding
accounting for pension plans.
d. A client imposed scope limitation prevents the auditor from complying with
generally accepted auditing standards.
b 17. An audit report should be dated as of the
a. Date the report is delivered to the entity audited.
b. Date of the last day of fieldwork.
c. Balance sheet date of the latest period reported on.
d. Date a letter of audit inquiry is received from the entity's attorney of record.
d 18. An auditor completed field work on February 10, 2002 for a December 31, 2001 year-
end client. A significant subsequent event occurred on February 22, 2002. In this
case, which of the following report dates would not be appropriate?
a. February 10, 2002.
b. February 10, except Note 1, February 22, 2002.
c. February 22, 2002.
d. December 31, 2001.
d 19. Which of the following statements indicates a qualified opinion?
a. The financial statements do not present fairly in all material respects the
financial position, results of operations, and cash flows in conformity
with GAAP.
b. The auditor does not express an opinion on the financial statements.
c. The financial statements present fairly in all material respects the financial
position, results of operations, and cash flows in conformity with GAAP.
d. Except for the effects of a matter, the financial statements present fairly in all
material respects the financial position, results of operations, and cash
flows in conformity with GAAP.
b 20. Under Statement on Auditing Standards No. 59, "The Auditor's consideration of an
Entity's Ability to continue as a Going Concern," an independent auditor is
responsible for
a. Predicting whether the entity will be in business one year from the balance
sheet date.
b. Evaluating whether there is substantial doubt about the entity's ability to
continue as a going concern.
c. Weighing mitigating factors against contrary information about the entity's
ability to continue as a going concern.
d. Reporting the entity's ability to continue as a going concern to senior
management and to the board of directors.
c 21. Does an auditor make the following representations explicitly or implicitly in a standard
audit report on comparative financial statements?
Accounting Application of Examination of Evidence
Accounting Principles on a Test Basis
------------------------- -----------------------
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly
a 22. an auditor is unable to determine the amounts associated with illegal acts committed by a
client. The auditor would most likely issue
a. Either a qualified opinion or a disclaimer of opinion.
b. An adverse opinion.
c. Either a qualified opinion or an adverse opinion.
d. A disclaimer of opinion. (AICPA ADAPTED)
b 23. A principal auditor is satisfied both with the independence and professional reputation of
another auditor who audited a subsidiary, but wants to share responsibility with
the other auditor in the audit report. The principal auditor should
a. Modify the scope and opinion paragraphs of the report.
 b. Modify the introductory and opinion paragraph of the A Disclaimer of Opinion A qualifed Opinion
report. ----------------------- ------------------
c. Not modify the report except for including in explanatory paragraph. a. Yes Yes
d. Modify the opinion paragraph of the report. b. No No
(AICPA ADAPTED) c. No Yes
a 24. An auditor may issue a qualified opinion forInadequate ScopeDisclosure Limitation d. Yes No
---------- ---------- a 29. Keller, CPA, was about to issue an unqualified opinion on the financial statements of
a. Yes Yes Lupton Television Broadcasting company when a letter was received from
b. Yes No Lupton's independent counsel. The letter stated that the Federal Communications
c. No Yes Commission has notified Lupton that its broadcasting license will not be
d. No No renewed because of alleged irregularities in its broadcasting practices. Lupton
a 25. An explanatory paragraph following an opinion paragraph describes an uncertainty as cannot continue to operate without the license. Keller has also learned that
follows: Lupton and its independent counsel plan to take all necessary legal action to
As discussed in Note X to the financial statements, the company is a retain the license. The letter from independent counsel, however, states that a
defendant in a lawsuit alleging infringement of certain patent rights and favorable outcome of any legal action is highly uncertain. On the basis of this
claiming damages. Discovery proceedings are in progress. The ultimate outcome information, what action should Keller take?
of the litigation cannot presently be determined. Accordingly, no provision for a. Issue an unqualified opinion, with an explanatory paragraph that describes the
any liability that may result upon adjudication has been made in the matter giving rise to the uncertainty.
accompanying financial statements. b. Issue an unqualified opinion if full disclosure is made of the matter in a note
What type of opinion should the auditor express in this circumstance? to the financial statements.
a. Unqualified c. Disclaimer c. Issue an adverse opinion and disclose all reasons why.
b. Qualified d. Adverse d. Issue a piecemeal opinion with full disclosure made of the license dispute in a
(AICPA ADAPTED) note to the financial statements. (AICPA ADAPTED)
d 26. An auditor's report that refers to a departure form generally accepted accounting d 30. If the auditor believes that required disclosures are omitted from the financial statements,
principles includes the language. "In our opinion, with the foregoing the auditor should decide between issuing a(n)
explanation, the financial statements referred to above present fairly...." This is a. Qualified opinion or an adverse opinion.
a(n) b. Disclaimer of opinion or a qualified opinion.
a. Adverse opinion. c. Adverse opinion or a disclaimer of opinion.
b. Qualified opinion. d. Unqualified opinion or a qualified opinion.
c. Unqualified opinion with an explanatory paragraph b 31. An auditor's report on comparative financial statements should be dated as of the date the
d. Example of inappropriate reporting. a. Report is issued.
(AICPA ADAPTED) b. Auditor's field work is completed.
b 27. When management prepares financial statements on the basis of a going concern and the c. Fiscal year ends.
auditor believes the company may not continue as a going concern, the auditor d. Last subsequent event occurred. (AICPA ADAPTED)
should issue a(n) b 32. An auditor is confronted with an exception sufficiently material to warrant departing
a. Qualified opinion. from the standard wording of an unqualified report. If the exception relates to a
b. Unqualified opinion with an explanatory paragraph. departure from generally accepted accounting principles, the auditor must decide
c. Disclaimer of opinion. between a(n)
d. Adverse opinion. (AICPA ADAPTED) a. Adverse opinion and an unqualified opinion.
b 28. An auditor concludes that there is substantial doubt about an entity's ability to continue b. Adverse opinion and a qualified opinion.
as a going concern. If the entity's disclosures about continued existence are c. Adverse opinion and a disclaimer of opinion.
adequate, the audit report may include d. Disclaimer of opinion and a qualified opinion.
 (AICPA ADAPTED)
a 33. An auditor had expressed a qualified opinion on the financial statements of a prior period
because of the client's financial statements departed from generally accepted
accounting principles. The prior-period statements are restated in the current
period to conform with generally accepted accounting principles. The auditor's
updated report on the prio-period statements should
a. Express an unqualified opinion about the restated financial statements.
b. Be accompanied by the auditor's original report on the prior period.
c. Bear the same date as the auditor's original report on the prior period.
d. Qualify the opinion concerning the restated financial statements because of a
change in accounting principles. (AICPA ADAPTED)