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Revision of Chapter 1
 Multiple-Choice Questions
1. Recording, classifying, and summarizing economic events in a logical manner for the purpose 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 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 ‫ دقه‬of an assertion that is 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:
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. The organization that is responsible for providing oversight for auditors of public companies is called
the________.
d a. Auditing Standards Board.
b. American Institute of Certified Public Accountants.
c. Public Oversight Board.
d. Public Company Accounting Oversight Board.

7. Providing quantitative information that management and others can use to make decisions is the function of:
d a. management information systems.
b. auditing.
c. finance.
d. accounting.

8. An audit of historical financial statements most commonly includes the:

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 in U.S.
treasury notes for the same length as the length of a business loan.
c a. nominal
b. stated

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 c. risk-free interest
d. prevailing
10 The use of the Certified Public Accountant title is regulated by:
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:
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:
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 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 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?
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?
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?
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:
a a. determining whether recorded information properly reflects the economic events that occurred during
the accounting period.
b. determining if fraud has occurred.

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 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 of the
following is not a common reason for this?
d a. Complex business transactions.
b. Large amounts of data.
c. Lack of first-hand 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?
a. Online privacy.
d b. Availability.
c. Processing integrity.
d. Operational integrity.
21 Which one of the following is more difficult to evaluate objectively?
c a. Presentation of financial statements in accordance with generally accepted accounting principles.
b. Compliance with government regulations.
c. Efficiency and effectiveness of operations.
d. All three of the above are equally difficult.
22 The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing 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?
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?
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:
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 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.

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In the normal course of performing their responsibilities, auditors often conduct audits
or reviews of the following:
1. Federal income tax returns of an officer of the corporation to determine whether he
or she has included all taxable income in his or her return.
2. Financial statements for use by stockholders when there is an internal audit staff.
3. A bond indenture ‫ سند‬agreement to make sure a company is following all requirements
of the contract.
4. Internal controls at a casino to ensure the casino is in compliance with federal and
state regulations.
5. Computer operations of a corporation to evaluate whether the computer center is
being operated as efficiently as possible.
6. Annual statements for the use of management.
7. Operations of the IRS to determine whether the internal revenue agents are using
their time efficiently in conducting audits.
8. Statements for bankers and other creditors when the client is too small to have an
audit staff.
9. Financial statements of a branch of the federal government to make sure that the
statements present fairly the actual disbursements‫ مدفوعات‬made during a period of time.
10. Federal income tax returns of a corporation to determine whether the tax laws
have been followed.
11. The computer operations of a large corporation to evaluate whether the internal
controls are likely to prevent misstatements in accounting and operating data.
12. Disbursements of a branch of the federal government for a special research
project to determine whether the expenditures were consistent with the legislative
bill ‫ تشريع قانوني‬that authorized the project.

a . For these 12 examples, state the most likely type of auditor (CPA, GAO, IRS, or
internal) to perform each.
b . In each example, state the type of audit (financial statement audit, operational
audit, or compliance audit).

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 Answer
EXAMPLE a. TYPE OF AUDITOR b. TYPE OF AUDIT
1. IRS Compliance
2. CPA Financial statements
3. Internal auditor or CPA Compliance
4. CPA or Internal auditor Compliance
5. Internal auditor or CPA Operational
6. CPA or internal auditor Financial statements
7. GAO Operational
8. CPA Financial statements
9. GAO Financial statements
10. IRS Compliance
11. Internal auditor or CPA Financial statements or operational
12. GAO Compliance
1) Match the engagement described to the (A) type of audit and (B) auditor that would perform
the engagement. Each engagement will have an answer from List-A and List-B. An answer
can be used once, more than once, or not at all.

List A - Type of Audit: List B - Type of Auditor:

A. Financial Statement D. Internal
B. Compliance E. External
C. Operational F. Government
G. IRS
Engagement:
1. Evaluate a company's payroll processing for economy.
2. Evaluate/determine if bank covenants are being met.
3. Evaluate financial statements that are to be submitted to a bank.
4. Evaluate the promptness of materials inspection in a manufacturer's receiving department.
5. Determine if Medicare reimbursements are in accordance with the Healthcare Financing Administration
(HCFA).
6. Determine if the tax return of a multinational corporation is in accordance with the tax code.
7. Determine if a public school is properly applying their reimbursement for the payment-in-kind program.
8. Determine the effectiveness of a Department of Defense project.
Answer:
1. C, d
2. B, d
3. A, e
4. C, d
5. B, f
6. B, g
7. B, e
8. C, f