AUDITING THEORY PART 1

1. In determining the primary responsibility of the external auditor for an audit of a company‟s

financial statements, the auditor owes primary allegiance to:

A. the management of the audit client because the auditor is hired and paid by

management.

B. the audit committee of the audit client because that committee is responsible for

coordinating and reviewing all audit activities within the company.

C. stockholders, creditors, and the investing public.

D. the Auditing and Assurance Standards Council, because it determines auditing

standards and auditor‟s responsibility.

2. Which of the following would not represent one of the primary problems that would lead the

users to demand for independent audits of a company‟s financial statements?

A. Management bias in preparing financial statements.

B. The downsizing of business and financial markets.

C. The complexity of transactions affecting financial statements.

D. The remoteness of the user from the organization and thus the inability of the user to

directly obtain financial information from the company.

3. Assurance services involve all the following except:

A. improving the quality of information for decision purposes.

B. improving the quality of the decision model used.

C. improving the relevance of information.

D. implementing a system that improves the processing of information.

4. Which of the following is the broadest and most inclusive concept?

A. Audits of financial statements.

B. Internal control audit.

C. Assurance services.

D. Compilation services.

5. Which of the following is a correct statement?

A. An audit provides limited assurance by attesting to the fairness of the client‟s

assertions.

B. A review provides positive assurance by attesting the reliability of the client‟s

assertions.

C. Management consulting services provide attestation in all cases.

D. Accounting services do not provide attestation.

6. Unlike consulting services, assurance services:

A. make recommendation to management

B. report on how to use information

C. report on the quality of information

D. are two-party contracts.

7. Financial statements audits:

A. reduce the cost of capital

B. report on compliance with laws and regulations

C. assess management„s efficiency

D. overlook information risk

8. A summary of findings rather than assurance is most likely to be included in a(n):

A. Agreed-upon procedures report

B. Compilation report

C. Examination report

D. Review report
9. The risk associated with a company's survival and profitability is referred to as:

A. Business Risk

B. Information Risk

C. Detection Risk

D. Control Risk

10. An engagement in which a CPA firm arranges for a critical review of its practices by another

CPA firm is referred to as a(n):

A. Peer Review Engagement

B. Quality Control Engagement

C. Quality Assurance Engagement

D. Attestation Engagement