AUDITING THEORY ANSWER KEY

Chapter 1.2
Multiple-Choice Questions

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
medium down by 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
a that 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
medium companies. Which 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.
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
medium investing 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.