Question 1

Which of the following statements best describes a relationship between sample size and other elements of auditing?

Accepted Answer

A) If materiality increases, so will the sample size. 
B) If the desired level of assurance increases, sample sizes can be smaller. 
C) If materiality decreases, sample size will need to increase. 
D) There is no relationship between sample size and materiality or the desired level of assurance. 
A) If materiality increases, so will the sample size. 
B) If the desired level of assurance increases, sample sizes can be smaller. 
C) If materiality decreases, sample size will need to increase. 
D) There is no relationship between sample size and materiality or the desired level of assurance. C

Question 2

The cost of capital can be generally defined as the rate of return expected by anyone who provides capital to a company (e.g., an investor or a bank). How can a financial statement audit reduce the cost of capital for a company?

Accepted Answer

An audit adds credibility to a company's financial statements. The audit reduces information risk, or the risk that information circulated by a company's management will be False or misleading. With reduced risk of poor information, anyone providing capital will have better information on which to base their capital decisions. This will lead to a lower cost to the company for obtaining capital.

Question 3

Information asymmetry seldom occurs.

Accepted Answer

A) True 
 B)False  False

Question 4

Testing all transactions that occurred during the period is cost prohibitive.

Accepted Answer

A) True 
 B)False

Question 5

Discuss an overview of the financial statement audit process using the terms "assertion," "evidence," and "report."

Accepted Answer

The auditor gathers evidence about the b

Question 6

Which of the following best describes the concept of audit risk?

Accepted Answer

A) The risk of the auditor being sued because of association with an auditee. 
B) The risk that the auditor will provide a "clean" opinion on financial statements that are, in fact, materially misstated. 
C) The overall risk that a material misstatement exists in the financial statements. 
D) The risk that auditors use audit procedures that are inappropriate. 
A) The risk of the auditor being sued because of association with an auditee. 
B) The risk that the auditor will provide a "clean" opinion on financial statements that are, in fact, materially misstated. 
C) The overall risk that a material misstatement exists in the financial statements. 
D) The risk that auditors use audit procedures that are inappropriate.

Question 7

Which one of the following statements best describes the concept of materiality?

Accepted Answer

A) Materiality is determined by reference to specific quantitative guidelines established by the AICPA. 
B) Materiality depends only on the dollar amount of an item relative to other items in the financial statements. 
C) Materiality depends on the nature of an item but not on the dollar amount of the item. 
D) Materiality is largely a matter of professional judgment. 
A) Materiality is determined by reference to specific quantitative guidelines established by the AICPA. 
B) Materiality depends only on the dollar amount of an item relative to other items in the financial statements. 
C) Materiality depends on the nature of an item but not on the dollar amount of the item. 
D) Materiality is largely a matter of professional judgment.

Question 8

The auditor's report is generally addressed to the:

Accepted Answer

A) chief operating officer. 
B) securities and exchange commission. 
C) stockholders of the company. 
D) chief financial officer. 
A) chief operating officer. 
B) securities and exchange commission. 
C) stockholders of the company. 
D) chief financial officer.

Question 9

Information Risk is defined as:

Accepted Answer

A) the risk that information circulated by a company's management will be false or misleading. 
B) the risk that an assertion contains a misstatement, before considering internal controls. 
C) the risk that auditor is has followed appropriate auditing standards and issued a standard unqualified opinion, and the financial statements contain a material misstatement. 
D) the risk that the internal controls will not prevent or detect a misstatement in the financial statements. 
A) the risk that information circulated by a company's management will be false or misleading. 
B) the risk that an assertion contains a misstatement, before considering internal controls. 
C) the risk that auditor is has followed appropriate auditing standards and issued a standard unqualified opinion, and the financial statements contain a material misstatement. 
D) the risk that the internal controls will not prevent or detect a misstatement in the financial statements.

Question 10

Auditors are most likely to use the most rigorous audit procedures to examine:

Accepted Answer

A) routine transactions. 
B) management assertions that are deemed to be of low risk. 
C) only the rights and obligations assertion. 
D) management assertions that are deemed to be of high risk. 
A) routine transactions. 
B) management assertions that are deemed to be of low risk. 
C) only the rights and obligations assertion. 
D) management assertions that are deemed to be of high risk.

Question 11

The basic definition of auditing states it is a process to:

Accepted Answer

A) detect fraud. 
B) examine individual transactions so that the auditor may certify as to their validity. 
C) objectively obtain and evaluate evidence regarding assertions. 
D) assure the consistent application of correct accounting procedures. 
A) detect fraud. 
B) examine individual transactions so that the auditor may certify as to their validity. 
C) objectively obtain and evaluate evidence regarding assertions. 
D) assure the consistent application of correct accounting procedures.

Question 12

During the first phase of an audit, a CPA most likely would:

Accepted Answer

A) identify specific internal control activities that are likely to prevent fraud. 
B) evaluate the reasonableness of the company's accounting estimates. 
C) evaluate the integrity of management. 
D) inquire of the company's attorney as to whether any unrecorded claims are probable or asserted. 
A) identify specific internal control activities that are likely to prevent fraud. 
B) evaluate the reasonableness of the company's accounting estimates. 
C) evaluate the integrity of management. 
D) inquire of the company's attorney as to whether any unrecorded claims are probable or asserted.

Question 13

Which of the following is true with respect to the auditor's report?

Accepted Answer

A) The report indicates that the company's financial statements were audited in accordance with generally accepted accounting standards. 
B) The report indicates that the company's financial statements were audited in accordance with applicable auditing standards. 
C) The report indicates that the company's financial statements were audited in accordance with the auditor's best judgment. 
D) The report indicates that the company's financial statements were audited in accordance with statements issued by the FASB. 
A) The report indicates that the company's financial statements were audited in accordance with generally accepted accounting standards. 
B) The report indicates that the company's financial statements were audited in accordance with applicable auditing standards. 
C) The report indicates that the company's financial statements were audited in accordance with the auditor's best judgment. 
D) The report indicates that the company's financial statements were audited in accordance with statements issued by the FASB.

Question 14

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should:

Accepted Answer

A) engage financial experts familiar with the nature of the business entity. 
B) obtain a knowledge of matters that relate to the nature of the entity's business. 
C) refer a substantial portion of the audit to another CPA, who will act as the principal auditor. 
D) first inform management that an unqualified opinion cannot be issued. 
A) engage financial experts familiar with the nature of the business entity. 
B) obtain a knowledge of matters that relate to the nature of the entity's business. 
C) refer a substantial portion of the audit to another CPA, who will act as the principal auditor. 
D) first inform management that an unqualified opinion cannot be issued.

Question 15

Sally Thompson's company, Sally's Shoes, is a successful shoe retail business with one store. Sally would like to expand to two locations, but the bank has asked for an independent audit before it will provide financing. Sally hires her brother-in-law, George Thompson, to perform the audit. George has experience in auditing non-profit organizations and he decides to perform the audit the same way as his other audits. After completing all the steps of the audit process, George issues an unqualified opinion indicating that he is certain that the company's financial statements contain no misstatements. Comment on any potential problems with George's audit of Sally's Shoes.

Accepted Answer

Independence: Because George is Sally's

Question 16

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?

Accepted Answer

A) A management fraud may exist and it is more likely to be detected by auditors if they are independent. 
B) Different interests may exist between the company preparing the statements and the parties using the statements. 
C) A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated. 
D) A poorly designed internal control system may be in place. 
A) A management fraud may exist and it is more likely to be detected by auditors if they are independent. 
B) Different interests may exist between the company preparing the statements and the parties using the statements. 
C) A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated. 
D) A poorly designed internal control system may be in place.

Question 17

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

Accepted Answer

A) It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor. 
B) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. 
C) The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. 
D) It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business. 
A) It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor. 
B) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. 
C) The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. 
D) It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

Question 18

Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information.

Accepted Answer

A) True 
 B)False

Question 19

The textbook presented the concept of auditing through an analogy that involved buying a house and hiring a house inspector. Name three desirable qualities of a house inspector or an auditor and discuss how those qualities apply to an auditor and why those qualities are important for an auditor to possess.

Accepted Answer

A house inspector should be competent, w

Question 20

An auditor would issue an adverse opinion if:

Accepted Answer

A) the auditor encounters adverse attitudes toward the auditor on the part of company management. 
B) a qualified opinion cannot be given because the auditor is not qualified to do so. 
C) an immaterial misstatement is present. 
D) the statements taken as a whole do not fairly present the financial condition and results of operations of the company. 
A) the auditor encounters adverse attitudes toward the auditor on the part of company management. 
B) a qualified opinion cannot be given because the auditor is not qualified to do so. 
C) an immaterial misstatement is present. 
D) the statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Which of the following statements best describes a relationship between sample size and other elements of auditing?

The cost of capital can be generally defined as the rate of return expected by anyone who provides capital to a company (e.g., an investor or a bank). How can a financial statement audit reduce the cost of capital for a company?

Information asymmetry seldom occurs.

Testing all transactions that occurred during the period is cost prohibitive.

Discuss an overview of the financial statement audit process using the terms "assertion," "evidence," and "report."

Which of the following best describes the concept of audit risk?

Which one of the following statements best describes the concept of materiality?

The auditor's report is generally addressed to the:

Information Risk is defined as:

Auditors are most likely to use the most rigorous audit procedures to examine:

The basic definition of auditing states it is a process to:

During the first phase of an audit, a CPA most likely would:

Which of the following is true with respect to the auditor's report?

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should:

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information.

An auditor would issue an adverse opinion if:

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

Filters

Exam 1: An Introduction to Assurance and Financial Statement Auditing

Which of the following statements best describes a relationship between sample size and other elements of auditing?

The cost of capital can be generally defined as the rate of return expected by anyone who provides capital to a company (e.g., an investor or a bank). How can a financial statement audit reduce the cost of capital for a company?

Information asymmetry seldom occurs.

Testing all transactions that occurred during the period is cost prohibitive.

Discuss an overview of the financial statement audit process using the terms "assertion," "evidence," and "report."

Which of the following best describes the concept of audit risk?

Which one of the following statements best describes the concept of materiality?

The auditor's report is generally addressed to the:

Information Risk is defined as:

Auditors are most likely to use the most rigorous audit procedures to examine:

The basic definition of auditing states it is a process to:

During the first phase of an audit, a CPA most likely would:

Which of the following is true with respect to the auditor's report?

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should:

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

Auditing focuses on rules, techniques, and computations required to prepare and analyze financial information.

An auditor would issue an adverse opinion if:

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

Filters