Question 1

Which of the following would best be described as an assurance service?

Accepted Answer

A)  Preparing a report representing a client's position during an IRS audit. 
B)  Working with a company to develop a more efficient method of processing financial transactions. 
C)  Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies. 
D)  Assisting a company in identifying potential sources of capital for potential acquisitions. 
A)  Preparing a report representing a client's position during an IRS audit. 
B)  Working with a company to develop a more efficient method of processing financial transactions. 
C)  Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies. 
D)  Assisting a company in identifying potential sources of capital for potential acquisitions. C

Question 2

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 3

You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

Accepted Answer

Student answers will vary. The following answer provides an example:
To obtain direct evidence, an auditor might physically examine and count the items included in the ending balance of the inventory account. To obtain indirect evidence, an auditor might examine invoices from suppliers relating to purchases of inventory or test whether the internal controls over the inventory process were working properly.

Question 4

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 5

Before accepting an engagement to audit a new entity, an auditor is required to

Accepted Answer

A)  Make inquiries of the predecessor auditor. 
B)  Tell the company whether or not the auditor is willing to issue a "clean" opinion. 
C)  Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. 
D)  Become a member of the entity's board of directors. 
A)  Make inquiries of the predecessor auditor. 
B)  Tell the company whether or not the auditor is willing to issue a "clean" opinion. 
C)  Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. 
D)  Become a member of the entity's board of directors.

Question 6

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

Possible solutions:
A house inspector sh

Question 7

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 8

Conflicts of interest often occur between absentee owners and managers.

Accepted Answer

A) True 
 B)False

Question 9

Assurance services may improve all of the following except

Accepted Answer

A)  Relevance. 
B)  Credibility. 
C)  Periodicity. 
D)  Reliability. 
A)  Relevance. 
B)  Credibility. 
C)  Periodicity. 
D)  Reliability.

Question 10

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

Accepted Answer

A)  Any disputes over significant accounting issues have been settled to the auditor's satisfaction. 
B)  The auditor is satisfied that Stankey will be highly profitable in the future. 
C)  The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct. 
D)  The auditor has determined that Stankey's management is not qualified to lead the company. 
A)  Any disputes over significant accounting issues have been settled to the auditor's satisfaction. 
B)  The auditor is satisfied that Stankey will be highly profitable in the future. 
C)  The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct. 
D)  The auditor has determined that Stankey's management is not qualified to lead the company.

Question 11

For publicly-held companies, which of the following is integrated into the audit of financial statements?

Accepted Answer

A)  Budgetary information audit. 
B)  The audit of internal controls. 
C)  Audit of management forecasts. 
D)  Audit of interim financial statements. 
A)  Budgetary information audit. 
B)  The audit of internal controls. 
C)  Audit of management forecasts. 
D)  Audit of interim financial statements.

Question 12

The basic purpose of a financial statement audit is to

Accepted Answer

A)  Detect fraud. 
B)  Examine individual transactions so that the auditor may certify as to their validity. 
C)  Provide assurance regarding whether the auditee's financial statements are fairly stated. 
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)  Provide assurance regarding whether the auditee's financial statements are fairly stated. 
D)  Assure the consistent application of correct accounting procedures.

Question 13

Independence standards are required for audits of public companies, but not for audits of private companies.

Accepted Answer

A) True 
 B)False

Question 14

Evidence is reliable if it

Accepted Answer

A)  Signals the true state of a management assertion. 
B)  Applies to the period being audited. 
C)  Relates to the audit assertion being tested. 
D)  Is consistent with management's assertions. 
A)  Signals the true state of a management assertion. 
B)  Applies to the period being audited. 
C)  Relates to the audit assertion being tested. 
D)  Is consistent with management's assertions.

Question 15

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 16

On a high level, the accounting processes of a business consist of internal controls, individual transactions, and account balances.
Required:
A. A company implements internal controls as a safeguard to ensure appropriate capturing and recording of individual transactions, which are then collected into ending account balances. Ending account balances are then used to prepare the financial statements. The auditor expresses an opinion on the financial statements, which are made up of ending account balances and disclosures.
A. Describe the relationship between internal controls, individual transactions, and account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor determine if the financial statements are fairly stated.
B. The auditor can obtain evidence from all three areas of the accounting process. For instance, an auditor can directly test the account balance (e.g., by examining a bank statement reconciliation). This evidence is usually the highest-quality but costliest evidence. Alternatively, the auditor can obtain indirect information by testing the individual transactions that make up an account balance. If transactions are handled properly, this provides indirect evidence that the ending balances are more likely to be fairly stated. The least direct method of obtaining evidence is to evaluate and test the company's internal controls, which are implemented to ensure that transactions are handled properly. If a company's system of internal control is effective, transactions are more likely to be handled properly, and thus the ending balances making up a set of financial statements are more likely to be fairly stated. Auditors usually collect evidence relating to all three areas: internal control, transactions, and ending balances.

Accepted Answer

A. A company implements internal control

Question 17

Explain the relationship between audit, attest and assurance services.

Accepted Answer

All three services entail the evaluation

Question 18

Which of the following statements about the study of auditing is NOT true?

Accepted Answer

A)  The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors. 
B)  The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information. 
C)  The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements. 
D)  The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions. 
A)  The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors. 
B)  The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information. 
C)  The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements. 
D)  The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Information asymmetry seldom occurs.

Accepted Answer

A) True 
 B)False

Which of the following would best be described as an assurance service?

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

You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

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

Before accepting an engagement to audit a new entity, an auditor is required to

The auditor's report is generally addressed to the

Conflicts of interest often occur between absentee owners and managers.

Assurance services may improve all of the following except

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

For publicly-held companies, which of the following is integrated into the audit of financial statements?

The basic purpose of a financial statement audit is to

Independence standards are required for audits of public companies, but not for audits of private companies.

Evidence is reliable if it

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

Explain the relationship between audit, attest and assurance services.

Which of the following statements about the study of auditing is NOT true?

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

Information asymmetry seldom occurs.

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 Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing 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 would best be described as an assurance service?

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

You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

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

Before accepting an engagement to audit a new entity, an auditor is required to

The auditor's report is generally addressed to the

Conflicts of interest often occur between absentee owners and managers.

Assurance services may improve all of the following except

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

For publicly-held companies, which of the following is integrated into the audit of financial statements?

The basic purpose of a financial statement audit is to

Independence standards are required for audits of public companies, but not for audits of private companies.

Evidence is reliable if it

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

Explain the relationship between audit, attest and assurance services.

Which of the following statements about the study of auditing is NOT true?

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

Information asymmetry seldom occurs.

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 Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing 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