Chapter 1

Multiple-Choice Questions

1. Recording, classifying, and summarizing economic events in a logical manner for the purpose easy of
providing financial information for decision making is commonly called: c
a. finance.
b. auditing.
c. accounting.
d. economics.

2. In the audit of historical financial statements, which of the following accounting bases is the easy most
common? c a. Regulatory accounting principles.
b. Cash basis of accounting.
c. Generally accepted accounting principles.
d. Liquidation basis of accounting.

3. Any service that requires a CPA firm to issue a report about the reliability of an assertion that is easy made by
another party is a(n):
b a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.

4. Three common types of attestation services are: easy

a. audits, reviews, and “other” attestation services.
a b. audits, verifications, and “other” attestation services.
c. reviews, verifications, and “other” attestation services.
d. audits, reviews, and verifications.

5. (SOX) The organization that is responsible for providing oversight for auditors of public companies is easy called
the ________.
d a. Auditing Standards Board.
b. American Institute of Certified Public Accountants.
c. Public Oversight Board.
d. Public Company Accounting Oversight Board.

6. (SOX) The Sarbanes-Oxley Act applies to which of the following companies? easy a.
All companies.
c b. Privately held companies.
c. Public companies.
d. All public companies and privately held companies with assets greater than $500 million.

7. Providing quantitative information that management and others can use to make decisions is the medium
function of:
d a. management information systems.
b. auditing.
c. finance.
d. accounting.
8. An audit of historical financial statements most commonly includes the: medium a.
balance sheet, the income statement, and the statement of cash flows.
d b. income statement, the statement of cash flows, and the statement of net working capital.
c. statement of cash flows, the balance sheet, and the retained earnings statement.
d. balance sheet, the income statement, and the statement of cash flows.

9. The ___________ rate may be defined as approximately the rate a bank could earn by investing medium in U.S.
treasury notes for the same length as the length of a business loan.
c a. nominal
b. stated
c. risk-free
d. prevailing

10. The use of the Certified Public Accountant title is regulated by:
medium a. the federal government.
b b. state law through a licensing department or agency of each state.
c. the American Institute of Certified Public Accountants through the licensing departments of
the tax and auditing committees.
d. the Securities and Exchange Commission.

11. An operational audit has as one of its objectives to:

medium a. determine whether the financial statements fairly present the entity’s operations.
c b. evaluate the feasibility of attaining the entity’s operational objectives.
c. make recommendations for improving performance.
d. report on the entity’s relative success in attaining profit maximization.

12. An audit of historical financial statements is most often performed to determine whether the:
medium a. organization is operating efficiently and effectively.
d b. entity is following specific procedures or rules set down by some higher authority.
c. management team is fulfilling its fiduciary responsibilities to shareholders.
d. none of these choices.

13. An examination of part of an organization’s procedures and methods for the purpose of medium
evaluating efficiency and effectiveness is what type of audit? a a. Operational
audit.
b. Compliance audit.
c. Financial statement audit.
d. Production audit.

14. An audit to determine whether an entity is following specific procedures or rules set down by
medium some higher authority is classified as a(n): b a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.

15. Which of the following is a type of audit evidence?

medium a. Oral responses to the auditor from employees of the company under audit.
d b. Written communications from company employees or outsiders.
c. Observations made by an auditor.
d. Evidence may take any of the above forms.
16. Which of the following services provides the lowest level of assurance on a financial statement?
medium a. A review. a b. An audit.
 c. Neither service provides assurance on financial statements.
d. Each service provides the same level of assurance on financial statements.

17. The three requirements for becoming a CPA include all but which of the following?
medium a. Uniform CPA examination requirement.
c b. Educational requirements.
c. Character requirements.
d. Experience requirement.

18. In “auditing” financial accounting data, the primary concern is with: medium a. determining whether recorded
information properly reflects the economic events that a occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies with government requirements.

19. Financial statement users often receive unreliable financial information from companies. Which medium of
the following is not a common reason for this?
d a. Complex business transactions.
b. Large amounts of data.
c. Lack of firsthand knowledge about the business.
d. Each of these choices is a common reason for unreliable financial information.

20. Which of the following is not a Trust Services principle as defined by the AICPA or CICA?
challenging a. Online
privacy. d b. Availability.
c. Processing integrity.
d. Operational integrity.

21. Which one of the following is more difficult to evaluate objectively?

challenging a. Presentation of financial statements in accordance with generally accepted accounting c
principles.
b. Compliance with government regulations.
c. Efficiency and effectiveness of operations.
d. All three of the above are equally difficult.

22. (SOX) The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing
challenging which of the following types of services to that company?
c a. Reviews of quarterly financial statements.
b. Preparation of corporate tax returns.
c. Most consulting services.
d. Tax services.

23. Which of the following audits can be regarded as generally being a compliance audit?
challenging a. IRS agents’ examinations of taxpayer returns.
a b. GAO auditor’s evaluation of the computer operations of governmental units.
c. An internal auditor’s review of a company’s payroll authorization procedures.
d. A CPA firm’s audit of the local school district.

24. Which of the following can be significantly affected by an audit?

challenging a. Business risk.
b b. Information risk.
c. The risk-free interest rate.
 d. Inherent risk.

25. The trait that distinguishes auditors from accountants is the: challenging a. auditor’s ability to
interpret accounting principles generally accepted in the United States. d
b. auditor’s education beyond the Bachelor’s degree.
c. auditor’s ability to interpret FASB Statements.
d. auditor’s accumulation and interpretation of evidence related to a company’s financial
statements.

26. Attestation services on information technology include WebTrust services and SysTrust challenging services.
Which of the following statements most accurately describes SysTrust services?
B a. SysTrust services provide assurance on business processes, transaction integrity and
information processes.
b. SysTrust services provide assurance on system reliability in critical areas such as security
and data integrity.
c. ysTrust services provide assurance on internal control over financial reporting.
d. SysTrust services provide assurance as to whether accounting personnel are following
procedures prescribed by the company controller.