Deck 5: Professional Auditing Standards and the Audit Opinion Formulation Process

Question 1

The common purpose of audit standards created by the various authorities is to provide reasonable assurance that audits are conducted in a quality manner.

Answer 1

True

Question 2

The PCAOB requires the audit be conducted with due professional care, which is a standard of care that would be expected of a reasonably prudent auditor.

Answer 2

True

Question 3

An auditor should give equal emphasis to all management assertions when testing accounts.

Answer 3

False

Question 4

Comparability is one of the five management assertions.

Question 5

The standards of the PCAOB consist of seven principles.

Question 6

The AICPA's fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results.

Question 7

The ten standards of auditing, adopted by the PCAOB encompass three broad categories including: general standards, fieldwork standards and reporting standards.

Question 8

The Clarity Project is an initiative of the PCAOB to clarify the links between the standards of the PCAOB and the AICPA.

Question 9

An audit must be performed by persons who can make sound judgments relating to complex accounting issues.

Question 10

The nature of an audit procedure indicates when the procedure is performed during the audit.

Question 11

Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit.

Question 12

The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement.

Question 13

The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA.

Question 14

The PCAOB's second fieldwork standard requires auditors develop an understanding of the client's controls as an important prerequisite to developing specific audit tests.

Question 15

The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining reasonable assurance that the statements are free from misstatement.

Question 16

Within each cycle, the audit is designed around the specific audit procedures required by the PCAOB general standards.

Question 17

The PCAOB's general standards provide guidance to audit firms in selecting and training their professionals.

Question 18

An auditor typically indicates in the engagement letter that the audit will result in an unqualified report on the financial statements.

Question 19

The reporting standards of the ten generally accepted audit standards of the PCAOB includes consistency, disclosure, and due professional care.

Question 20

If controls are effective, there is a higher likelihood that the financial statements are free of material misstatement.

Question 21

Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Question 22

Recalculation involves independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation.

Question 23

The auditor is not required to test every control related to relevant assertions in a significant account.

Question 24

For an integrated audit, the auditor's opinion about internal control effectiveness is based on control effectiveness at year-end as opposed to throughout the year.

Question 25

Test of controls are a type of substantive procedure.

Question 26

The first stage in an audit is performing a risk assessment.

Question 27

Audit procedures can be classified as risk assessment procedures, test of controls or substantive tests.

Question 28

The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work.

Question 29

The effectiveness of entity-wide controls may reduce the extent of testing of transaction controls.

Question 30

Developing an understanding of the client's business and industry is essential to proficiency as discussed in the PCAOB's general standards.

Question 31

Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred

Question 32

The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies.

Question 33

Physically examining a client's assets is an audit procedure.

Question 34

Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for audit conclusions.

Question 35

When assessing the effectiveness of controls for relevant assertions the auditor tests only transaction controls.

Question 36

Scanning is a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance.

Question 37

Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls.

Question 38

There is an inverse relationship between the assessment of risk of material misstatement in an account and the amount of evidence required.

Question 39

U.S. auditing standards recommend that a successor auditor on an initial audit obtain client permission to communicate with the predecessor auditor.

Question 40

Audit documentation is frequently called working papers.

Question 41

Which of the following is the primary assertion related to testing inventory on hand to see if it includes consignment goods ?

A) Existence
B) Completeness
C) Valuation
D) Rights and Obligations

Question 42

If the auditor's assessment is that there is high risk due to the subjectivity of the accounting process, substantive procedures should be more rigorous.

Question 43

If the auditor assesses internal controls to be effective, less substantive testing is likely.

Question 44

What is the scope of applicability of the auditing standards of the AICPA?

A) Nonpublic companies traded in non-U.S. markets.
B) Nonpublic companies in the U.S.
C) Public companies traded in non-U.S. markets.
D) Public companies traded in the U.S.

Question 45

Which one of the following has the most affect on the reliability of financial statements?

A) The size of the client
B) The industry of the client
C) The client's internal control structure.
D) The client's trend of earnings.

Question 46

Which auditing standards apply to private companies?

A) The AICPA Standards.
B) The IASSB Standards.
C) The Standards of the PCAOB.
D) All of the above.

Question 47

The AICPA Principles Governing an Audit include which of the following categories that guide the conduct of an audit?

A) Purpose of an audit and premise upon which an audit is conducted.
B) Responsibilities.
C) Performance.
D) All of the above.

Question 48

Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.

Question 49

Presentation and disclosure assertions imply that all transactions and balances are properly presented, disclosures represent what actually happened, and the footnote disclosures are appropriate and adequate.

Question 50

In performing substantive tests on account balances, the auditor performs tests for all five assertions.

Question 51

To satisfy the fieldwork standards, what must an auditor do?

A) Act with due care.
B) Gather sufficient appropriate evidence.
C) Be independent in mental attitude.
D) Have adequate knowledge about the client's industry.
E) All of the above.

Question 52

Research indicates that weaknesses in control components other than control activities do not cause fraud and other misstatements in financial statements.

Question 53

Which one of the following organizations provides auditing standards for public companies?

A) GAO.
B) AICPA.
C) GAAP.
D) PCAOB.

Question 54

What are the PCAOB standards that present guidance in testing assertions and planning for the audit are known as?

A) General standards.
B) Fieldwork standards.
C) Reporting standards.
D) None of the above.

Question 55

The standards of competence, independence, and due professional care are covered by which section of the generally accepted auditing standards?

A) General standards.
B) Standards of fieldwork.
C) Reporting standards.
D) None of the above.

Question 56

An Integrated Audit requires the issuance of separate reports for the opinions expressed on the financial statements and on internal control.

Question 57

In an integrated audit, the auditor issues an opinion on both the financial statements and internal control.

Question 58

The PCAOB does not currently have a mandate for convergence with other auditing standards.

Question 59

The first general standard of the PCAOB requires that an audit be performed by which type of person?

A) An auditor with seasoned judgment in varying degrees of supervision and review.
B) An auditor with appropriate technical training and proficiency.
C) An auditor with adequate knowledge of the standards of field work and reporting.
D) An auditor satisfying the independence standards.

Question 60

Substantive analytical procedures are optional for significant tests and disclosures.

Question 61

Which of the following factors influence the risk of material misstatement?

A) The business risks.
B) Management incentives.
C) IT risks.
D) All of the above.

Question 62

Which of the following assertions would the auditor usually consider most relevant for accounts payable?

A) Existence.
B) Valuation.
C) Disclosure.
D) Completeness.

Question 63

Which of the following is not a reason why an auditor obtains an understanding of internal controls?

A) Understanding the entity's internal control is a requirement of GAAS.
B) The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control.
C) It is the primary basis for the audit report.
D) It assists the auditor in designing the nature, timing and extent of further audit procedures.

Question 64

Which of the following is a procedure which analyzes plausible relationships among financial and nonfinancial data?

A) Analytical procedures.
B) Scanning.
C) Reviewing.
D) Observation.

Question 65

Which assertion is most closely related to the determination of the adequacy of the allowance for doubtful accounts?

A) Existence
B) Valuation
C) Rights and Obligations
D) Presentation and Disclosure

Question 66

What does the quality of the evidence an auditor collects depend upon?

A) The nature of the procedures.
B) The extent of the procedures.
C) The timing of the procedures.
D) Both A and C.
E) All of the above.

Question 67

Which type of audit documentation is required by PCAOB standards?

A) Flowcharts
B) Narratives
C) Questionnaires
D) A specific form of documentation is not required.

Question 68

Which one of the following is a requirement pf the reporting standards included in the generally accepted auditing standards?

A) The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.
B) The auditor will identify in the auditor's report, those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period.
C) The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate, the auditor must so state in the auditor's report.
D) The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an opinion can be expressed.

Question 69

Which of the following statements about assertions is true?

A) All assertions are equally important for all accounts.
B) The importance of an assertion depends upon the account.
C) Assertions are not related to accounts.
D) None of the above.

Question 70

Which of the following terms describes procedures designed to detect material misstatements in accounts ?

A) Substantive procedures.
B) Control Tests
C) Risk assessment procedures
D) Business risk procedures.

Question 71

The proper supervision of audit assistants is a requirement found in which section of the Generally Accepted Auditing Standards?

A) General Standards.
B) Standards of Fieldwork.
C) Standards of Reporting.
D) Standards of Quality Control.

Question 72

Which of the following is a reason why an auditor needs an understanding of internal controls?

A) To provide individual comments on internal control non-compliance.
B) To become comfortable that the client will pay its audit bills.
C) To assess materiality.
D) To assess the risk of possible misstatements in the financial statements.

Question 73

Which of the following statements about the auditing standards issued by the AICPA is true?

A) The auditing standards issued by the AICPA are no longer recognized by the PCAOB.
B) The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of existence.
C) The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies.
D) The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

Question 74

Which of the following is a use of audit documentation?

A) Assisting the engagement team in planning and performing the audit.
B) Assisting members of the engagement team responsible for supervising and reviewing the audit work.
C) Retaining a record of matters of continuing significance to future audits of the same organization.
D) All of the above.

Question 75

Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included?

A) Existence.
B) Valuation.
C) Completeness.
D) Rights and Obligations

Question 76

What does business risk include?

A) Economic factors.
B) Competitive factors.
C) Regulatory risk.
D) All of the above.

Question 77

Which assertion addresses whether the financial statements items are properly classified in the financial statements?

A) Completeness.
B) Existence.
C) Valuation.
D) Presentation and Disclosure.

Question 78

Which of the following is a procedure that requests a direct written response to the auditor form a third party?

A) Inquiry
B) Confirmation
C) Inspection
D) Observation

Question 79

Which of the following groups are committed to the convergence of the auditing standards?

A) IAASB.
B) PCAOB.
C) AICPA.
D) Both A and C.
E) All of the above.

Question 80

Which of the following is not a typical accounting cycle?

A) Revenue.
B) Inventory.
C) Cash.
D) Internal Controls.