Auditing & Assurance Services Assignment 01

Multiple Choice Questions: Answer all Questions

1. The use of the title Certified Public Accountant (CPA) is regulated by

medium a. the federal government through the licensing department of the Commerce Department.
b b. state law through a licensing department/agency of each state.
c. the American Institute of Certified Public Accountants (AICPA) through the licensing
departments of the tax and auditing committees.
d. the Securities and Exchange Commission (SEC).

2. 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.

3. Which of the following services provides the lowest level of assurance about a company’s
medium financial statements?
a a. Review of financial statements.
b. Audit of financial statements.
c. These services provide no assurance about a company’s financial statements.
d. These services provide the same level of assurance about a company’s financial
statements.

4. 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.

5. (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. All of above are prohibited services.

6. The generally accepted auditing standard that requires “Adequate technical training and
easy proficiency” is normally interpreted as requiring the auditor to have
d a. formal education in auditing and accounting.
b. adequate practical experience for the work being performed.
c. continuing professional education.
d. all of the above.

Page 1 of 11
7. Statements on Auditing Standards provide auditors of privately-held companies with ______
easy guidance regarding the conduct of financial statement audits.
b a. fairly extensive
b. some limited
c. practically no
d. specific and detailed

8. (SOX) The provisions of the Sarbanes-Oxley Act apply to which of the following?
medium a. All companies in the United States.
d b. Private companies only.
c. Private and public partnerships only.
d. Public companies only.

9. Which of the following statements best describes the primary purpose of Statements on
medium Auditing Standards?
d a. They are guides intended to set forth auditing procedures which are applicable to a variety
of situations.
b. They are procedural outlines which are intended to narrow the areas of inconsistency and
divergence of auditor opinion.
c. They are authoritative statements, enforced through the Code of Professional Conduct, and
are intended to limit the degree of auditor judgment.
d. They are interpretations which are intended to clarify the meaning of “generally accepted
auditing standards.”

10. International Standards on Auditing, issued by the International Auditing Practice Committee,
medium are most similar to U.S.
c a. generally accepted accounting principles.
b. rules of the AICPA Code of Professional Conduct.
c. generally accepted auditing standards.
d. interpretations of statements on auditing standards issued by the ASB.

11. To emphasize the fact that the auditor is independent, the addressee of the audit report is usually
easy a. the company’s management.
d b. the stockholders of the client company.
c. the board of directors of the client company.
d. either b or c.

12. An adverse opinion is issued when the auditor believes

easy a. some parts of the financial statements are materially misstated or misleading.
c b. the financial statements will be found to be misleading or misstated, if an adequate
investigation is performed.
c. the overall financial statements are so materially misstated or misleading as a whole that
they do not present fairly the financial position or results of operations and cash flows in
conformity with GAAP.
d. the audit firm is not independent.

Page 2 of 11
13. When the auditor evaluates the effect of a change in accounting principle, the materiality of the
medium change should be evaluated based
b a. on the prior years presented.
b. on the current year effect of the change.
c. on whatever basis the auditor considers appropriate.
d. on the effect on total assets.

14. A CPA firm is “associated with the financial statements”

medium a. only when it does a financial audit.
c b. only when it does attestation services, such as a review or an audit.
c. even if a CPA firm only assists a client in preparing financial statements, but does not
perform an audit.
d. if it performs any services at all for the client.

15. A qualified report cannot take the form of a qualification of

challenging a. the opinion alone.
b b. the scope alone.
c. both the scope and opinion.
d. all of the above.

16. Which of the following statements is not true?

challenging a. A one-paragraph report is generally used when the auditor is not independent.
c b. A three-paragraph report ordinarily indicates there are no exceptions in the audit.
c. More than three paragraphs in the report indicates there must be some type of qualification
in the audit report.
d. An unqualified opinion with modified wording has three paragraphs.

17. Society has attached a special meaning to the term “professional.” A professional is
easy a. someone who has passed a qualifying exam to enter the job market.
b b. a person who is expected to conduct himself or herself at a higher level than the
requirements of society’s laws or regulations.
c. any person who receives pay for the services performed.
d. someone who has both an education in the trade and on-the-job experience received under
an experienced supervisor.

18. “Independence” in auditing means

easy a. remaining aloof from client.
c b. not being financially dependent on client.
c. taking an unbiased viewpoint.
d. being an advocate for the client.

19. The CPA must not subordinate his or her professional judgment to that of others
easy a. in every engagement.
a b. in every audit engagement.
c. in every engagement except tax services.
d. in every engagement except management advisory services.

Page 3 of 11
20. (SOX) The Sarbanes-Oxley Act requires which partners of an accounting firm to rotate off the audit
medium engagement every five years?
C a. Lead partner on the engagement.
b. Partner responsible for concurring review.
c. Both a and b.
d. a or b, but not both.

21. One of the AICPA’s Ethical Principles deals with the public interest. It states that members
medium should accept the obligation to act in a way that will
D a. serve the public interest.
b. honor the public trust.
c. demonstrate commitment to professionalism.
d. do all of the above.

22. Of the various parts of the AICPA’s Code of Professional Conduct,

medium a. the Principles are enforceable.
D b. the Ethical Rulings are enforceable.
c. the Interpretations are enforceable.
d. the Rules of Conduct are enforceable.

23. Interpretations of the AICPA Code of Professional Conduct are dominated by the concept of
challenging a. independence.
A b. compliance with standards.
c. accounting.
d. acts discreditable to the profession.

24. (SOX) Which of the following statements is true of a public company’s financial statements?
easy a. Sarbanes-Oxley requires the CEO only to certify the financial statements.
c b. Sarbanes-Oxley requires the CFO only to certify the financial statements.
c. Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.
d. Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.

25. An audit process is a well-defined methodology for organizing an audit to ensure that
easy a. the evidence gathered is both sufficient and competent.
d b. all appropriate audit objectives are specified.
c. all appropriate audit objectives are met.
d. all of the above.

26. Professional skepticism requires auditors to possess a ______ mind.

easy a. introspective.
b b. questioning.
c. intelligent.
d. unbelieving.

27. Analytical procedures are those that

easy a. evaluate the accuracy of the account balances.
b b. assess the overall reasonableness of transactions and balances.
c. review the effectiveness of internal control procedures.
d. analyze the effect of management procedures on the accounting system.

Page 4 of 11
28. When the auditor believes an illegal act may have occurred, it is necessary to
medium a. inquire of management, at a level above those likely to be involved with the illegality.
d b. consult with the client’s legal counsel.
c. consider accumulating additional evidence to determine if there is actually an illegal act.
d. do all three of the above.

29. Which of the following journals would be included most often in the various audit cycles?
challenging a. Cash receipts journal.
c b. Cash disbursements journal.
c. General journal.
d. Sales journal.

30. When an auditor calculates the gross margin as a percent of sales and compares it with previous
easy periods, this type of evidence is called
b a. physical examination.
b. analytical procedures.
c. observation.
d. inquiry

31. “The detailed description of the results of the four evidence decisions for a specific audit” is
medium called an
b a. audit procedure.
b. audit program.
c. audit plan.
d. audit guide.

32. A measure of how willing the auditor is to accept that the financial statements may be
easy materially misstated after the audit is completed and an unqualified opinion has been issued is
b the
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

33. A measure of the auditor’s assessment of the likelihood that there are material misstatements in
easy an account before considering the effectiveness of the client’s internal control is
d a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

34. Most auditors assess inherent risk as high for related parties and related-party transactions
easy because
c a. of the accounting disclosure requirement.
b. of the lack of independence between the parties.
c. both a and b.
d. it is required by generally accepted accounting principles.

35. (SOX) If an auditor is requested to perform nonaudit services for a public company audit client, who is
medium responsible for agreeing to those services with the audit firm?
d a. The client’s management.
b. The client’s president.
c. The client’s board of directors.

Page 5 of 11
 d. The client’s audit committee.
36. The purpose of an engagement letter is to
medium a. document the CPA firm’s responsibility to external users of the audited financial
b statements.
b. document the terms of the engagement to writing in order to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. all of the above.

37. The official record of the meetings of the board of directors and stockholders is contained in the
medium corporate
c a. bylaws.
b. charter.
c. minutes.
d. license.

38. A tour of the client’s facilities is helpful in obtaining an understanding of the client’s operations
medium because
d a. the auditor will be able to assess the physical safeguards over assets.
b. the auditor may be better able to assess certain inherent risks.
c. the auditor obtains a broader perspective about the company as a whole.
d. all of the above.

39. The preliminary judgment about materiality is the amount by which the auditor
easy believes the statements could be misstated and still not affect the decisions of reasonable users.
b a. minimum
b. maximum
c. mean average
d. median average

40. After the preliminary judgment about materiality has been established, auditors may
easy a. not adjust it.
d b. adjust it downward only.
c. adjust it upward only.
d. adjust it either downward or upward.

41. Which of the following might not be a signal of a lack of integrity in management?
easy a. Prior criminal conviction of an assembly line foreman.
a b. Frequent turnover of key internal audit personnel.
c. Frequent disagreements with previous auditors.
d. Frequent turnover of key financial personnel.

42. Which of the following statements regarding inherent risk is correct?

easy a. The inherent risk assigned in the audit risk model is unaffected by the auditor’s experience
c with client’s organization.
b. Most auditors set a low inherent risk in the first year of an audit and increase it if
experience shows that it was incorrect.
c. Most auditors set a high inherent risk in the first year of an audit and reduce it in
subsequent years as they gain experience, even when there is inherent risk.
d. The inherent risk assigned in the audit risk model is dependent upon the strengths in
client’s internal control system.

Page 6 of 11
43. Inherent risk is _______ related to detection risk and _______ related to the amount of audit
medium evidence.
d a. directly, inversely.
b. directly, directly.
c. inversely, inversely.
d. inversely, directly.

44. When management has an adequate level of integrity for the auditor to accept the engagement
medium but cannot be regarded as completely honest in all dealings, auditors normally
a a. reduce acceptable audit risk and increase inherent risk.
b. reduce inherent risk and control risk.
c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.

45. When the auditor has the same level of willingness to risk that material errors will exist after the
challenging audit is finished for all five cycles,
a a. a different extent of evidence is needed for various cycles.
b. the same amount of evidence will be gathered for each cycle.
c. he/she has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire audit does not exceed
10%.

46. (Public) The PCAOB states that reasonable assurance allows for
easy a. a nominal likelihood of ineffective internal controls.
b b. a remote likelihood that material misstatements will not be prevented or detected by
internal control.
c. a likelihood that material misstatements will not be prevented or detected by
internal control.
d. a high likelihood that material misstatements will not be prevented or detected by
internal control.

47. An act of two or more employees to steal assets or misstate records is frequently referred to as
easy a. collusion.
a b. a material weakness.
c. a control deficiency.
d. Any of the above.

48. (SOX) Sarbanes-Oxley requires management to issue an internal control report that includes two
easy specific items. Which of the following is one of these two requirements?
a a. A statement that management is responsible for establishing and maintaining an adequate
internal control structure and procedures for financial reporting.
b. A statement that management and the board of directors are responsible for establishing
and maintaining an adequate internal control structure and procedures for financial
reporting.
c. A statement that management, the board of directors, and the external auditors for
establishing and maintaining an adequate internal control structure and procedures for
financial reporting.
d. None of the above is correct.

Page 7 of 11
49. (Public) Auditor’s tests of operating effectiveness of internal controls might include which of the
easy following types of procedures?
d a. Inspection of relevant documentation
b. Inquiries of personnel
c. Reperformance of the application of controls
d. All of the above

50. Which of the following audit tests would be regarded as a test of a control?
easy a. Tests of the specific items making up the balance in a given general ledger account.
c b. Tests of the inventory pricing to vendors’ invoices.
c. Tests of the signatures on canceled checks to management’s authorizations.
d. Tests of the additions to property, plant, and equipment by physical inspections.

51. Internal controls can never be regarded as completely effective. Even if company personnel
medium could design an ideal system, its effectiveness depends on the
d a. adequacy of the computer system.
b. proper implementation by management.
c. ability of the internal audit staff to maintain it.
d. competency and dependability of the people using it.

52. (Public) To issue a report on internal control over financial reporting for a public company, an auditor
medium must
c a. evaluate management’s assessment process.
b. independently assess the design and operating effectiveness of internal control.
c. evaluate management’s assessment process and independently assess the design and
operating effectiveness of internal control.
d. test controls over significant account balances.

53. It is important for the CPA to consider the competence of the audit clients’ employees because
medium their competence bears directly and importantly upon the
b a. cost/benefit relationship of the system of internal control.
b. achievement of the objectives of internal control.
c. comparison of recorded accountability with assets.
d. timing of the tests to be performed.

54. The primary emphasis by auditors is on controls over

challenging a. classes of transactions.
a b. account balances.
c. both a and b, because they are equally important.
d. both a and b, because they vary from client to client.

55. The most important difference in a nonpublic company in assessing control risk is the ability to
challenging assess control risk at _______ for any or all control-related objectives.
c a. low
b. medium
c. high
d. none of the above

Page 8 of 11
Short essay questions. Answer all questions

1. Discuss the three primary requirements for becoming a CPA.

easy
Answer:
The three primary requirements for becoming a CPA are:
 Educational requirement. An undergraduate degree with a major in accounting is
required. Most states now require 150 semester hours for licensure and some states
require 150 semester hours before taking the CPA exam.
 Uniform CPA examination requirement. This is a four part exam that is comprised of
components on auditing and attestation, financial accounting and reporting,
regulation, and business environment and concepts.
 Experience requirement. The experience requirement varies from state to state with
some states requiring no experience, while other states require up to two years of audit
experience.

2. Discuss the differences and similarities between the roles of accountants and auditors. What
medium additional expertise must an auditor possess beyond that of an accountant?

Answer:
The role of accountants is to record, classify, and summarize economic events in a logical
manner for the purpose of providing financial information for decision-making. To do this,
accountants must have a sound understanding of the principles and rules that provide the
basis for preparing the financial information. In addition, accountants are responsible for
developing systems to ensure that the entity’s economic events are properly recorded on a
timely basis and at a reasonable cost.
The role of auditors is to determine whether the financial information prepared by
accountants properly reflects the economic events that occurred. To do this, the auditor
must not only understand the principles and rules that provide the basis for preparing
financial information, but must also possess expertise in the accumulation and evaluation
of audit evidence. It is this latter expertise that distinguishes auditors from accountants.

3. Distinguish between generally accepted auditing standards (GAAS) and generally accepted
easy accounting principles (GAAP). What professional organization establishes GAAS? What
professional organization establishes GAAP?

Answer:
Generally accepted auditing standards are general guidelines to help auditors meet their
professional responsibilities in the audit of historical financial statements. They are
considered to be the minimum standards of performance for auditors to follow and are
established by the Auditing Standards Board of the American Institute of Certified Public
Accountants for private companies and by the Public Company Accounting Oversight
Board for public companies. Generally accepted accounting principles are the guidelines
an entity’s management normally follows when preparing historical financial statements.
GAAP are established by the Financial Accounting Standards Board.

Page 9 of 11
4. (SOX) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board
medium (PCAOB). What are the PCAOB’s primary functions? Who performed these functions prior to
the PCAOB?
Answer:
The PCAOB has responsibility for providing oversight for auditors of public companies,
establishing auditing and quality control standards for public company audits and
performing inspections of the quality controls at audit firms performing those audits.
These functions were formerly the responsibility of the American Institute of Certified
Public Accountants.

5. Explain why there is a special need for ethical conduct in the auditing profession.
easy
Answer:
Since users (e.g., the general public) of services provided by an auditor generally cannot
evaluate the quality of the auditor’s performance, it is critical to the auditing profession
that the public have a high degree of confidence in the quality of the services provided by
the auditor. Public confidence in the quality of professional services is enhanced when the
profession encourages high standards of performance and ethical conduct by all its
members. If users of auditing services were to lack confidence in the quality of those
services, then the value of CPA firms’ audits would be diminished, as would the demand
for audits.

6. Discuss the factors an auditor should consider before accepting a company as an audit client.
easy
Answer:
The auditor should investigate and consider the prospective client’s standing in the
business community, financial stability, management’s integrity, and relations with its
bankers, attorneys, and previous CPA firm. The auditor should also determine whether
he or she possesses the required competence and independence to do the audit.

7. Explain why it is necessary to allocate the preliminary judgment about materiality to individual
medium accounts (segments) in the financial statements. Also explain why allocating to balance sheet
accounts is more common than allocating to income statement accounts.

Answer:
Allocating the preliminary judgment about materiality to individual segments is
necessary because evidence is accumulated for segments rather than for the financial
statements as a whole. Allocating to segments establishes a tolerable misstatement
amount for each segments, which helps the auditor decide the appropriate audit
evidence to accumulate for each segments. Most practitioners allocate materiality to
balance sheet accounts rather than income statement accounts because there are fewer
balance sheet than income statement accounts.

8. (Public) There are four steps in the auditor’s process of understanding internal control and assessing
medium control risk for a public company. Step one is obtain and document an understanding of
internal control: design and operation. What are the remaining three steps?

Answer:

Page 10 of 11
The remaining three steps are:
 Assess control risk.
 Design, perform and evaluate tests of controls.
 Decide planned detection risk and substantive tests.

Page 11 of 11