AUDITING THEORY ANSWER KEY

Chapter 1.4
TRUE OR FALSE

37. The criteria by which an auditor evaluates the information under audit may vary with
easy the information being audited.
a a. True
b. False

38. The criteria used by an external auditor to evaluate published financial statements are
easy known as generally accepted auditing standards.
b a. True
b. False

39. (SOX) The Sarbanes-Oxley Act establishes standards related to the audits of privately held
easy companies.
b a. True
b. False

40. (SOX) The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to
easy auditing and financial reporting.
a a. True
b. False

41. Only companies that file annual statements with the Securities and Exchange
easy Commission are required to have an annual external audit.
b a. True
b. False

42. The financial statements most commonly audited by external auditors are the balance
easy sheet, the income statement, and the statement of changes in retained earnings.
b a. True
b. False

43. The primary purpose of a compliance audit is to determine whether the financial
medium statements are prepared in compliance with generally accepted accounting principles.
b a. True
b. False

44. Results of compliance audits are typically reported to someone within the
medium organizational unit being audited rather than to a broad spectrum of outside users.
a a. True
b. False
45. The primary role of the United States General Accounting Office is the enforcement of
medium the federal tax laws as defined by Congress and interpreted by the courts.
b a. True
b. False

46. CPA firms are never allowed to provide bookkeeping services for audit clients.
medium a. True
b b. False

47. (SOX) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external
medium auditor attest to their internal control over financial reporting.
a a. True
b. False

48. (SOX) The Sarbanes-Oxley Act requires a company’s chairman of the board of directors,
challenging CEO, and CFO to certify the company’s financial statements.
b a. True
b. False

49. (SOX) The criterion that is most likely to be used as a framework in evaluating a company’s
challenging internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act is
b the Enterprise Risk Management framework.
a. True
b. False

50. Most public companies’ audited financial statements are available on the SEC’s
challenging EDGAR database.
a a. True
b. False
36. Discuss four factors that are likely to significantly reduce information risk in the next
challenging five to ten years.

Answer:
Four factors that are likely to significantly reduce information risk in the next five to ten
years are:
 technological advances,
 more companies will go on-line, reducing the risk of investors obtaining
outdated information,
 new accounting and auditing standards, and
 auditors will find more efficient and effective audit techniques.
29. Discuss the differences and similarities between the roles of accountants and auditors.
medium What 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.

30. Discuss the similarities and differences between financial statement audits, operational
medium audits, and compliance audits. Give an example of each type.

Answer:
Financial statement audits, operational audits, and compliance audits are similar in that
each type of audit involves accumulating and evaluating evidence about information to
ascertain and report on the degree of correspondence between the information and
established criteria. The differences between each type of audit are the information being
examined and the criteria used to evaluate the information. An example of a financial
statement audit would be the annual audit of IBM Corporation, in which the external
auditors examine IBM’s financial statements to determine the degree of correspondence
between those financial statements and generally accepted accounting principles. An
example of an operational audit would be an internal auditor’s evaluation of whether the
company’s computerized payroll-processing system is operating efficiently and
effectively. An example of a compliance audit would be an IRS auditor’s examination of
an entity’s federal tax return to determine the degree of compliance with the Internal
Revenue Code.