Question 1

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

Accepted Answer

The auditor gathers evidence about the business transactions that have occurred (economic activity and events)and about management (the preparer of the statements).The auditor uses this evidence to compare the assertions contained in the financial statements to the criteria chosen by the user.The auditor's report communicates to the user the degree of correspondence between the assertions and the criteria.

Question 2

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. D

Question 3

You are a new employee at the accounting firm Murray & Murray,CPAs.Before you are assigned to your first audit,your supervisor tests your knowledge and asks you to explain the term "scope" in the context of a financial statement audit.
Required:
A.Provide a definition of scope.
B.Describe what influences an auditor's determination of scope.
A. Provide a definition of scope.
A. The scope of an audit is the type and amount of audit work to be performed.
B. Describe what influences an auditor's determination of scope.
B. The auditor's assessments of risk and materiality influence the scope of the audit. For instance, if an auditor sets a lower materiality amount or would like to substantially reduce audit risk, the scope of the audit would be increased. In establishing the scope of an audit, the auditor must make decisions about the nature, extent, and timing of evidence to be gathered in order to evaluate management's assertions.

Accepted Answer

A.The scope of an audit is the type and amount of audit work to be performed.
B.The auditor's assessments of risk and materiality influence the scope of the audit.For instance,if an auditor sets a lower materiality amount or would like to substantially reduce audit risk,the scope of the audit would be increased.In establishing the scope of an audit,the auditor must make decisions about the nature,extent,and timing of evidence to be gathered in order to evaluate management's assertions.

Question 4

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

The answer of You are a new staff auditor and...

Question 5

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.

Question 6

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.

Question 7

When obtaining an understanding of the entity and its environment,the auditor should obtain an understanding of internal controls primarily to

Accepted Answer

A)   Identify areas of relatively high risk of misstatement and plan the audit accordingly.
B)   Provide suggestions for improvement to the company.
C)   Serve as a basis for setting audit risk and materiality.
D)   Decide whether to perform an audit for the company.

Question 8

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.

Question 9

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.

Question 10

Why do auditors generally use a sampling approach to evidence gathering?

Accepted Answer

A)   Auditors are experts and do not need to look at much to know whether the financial statements are correct or not.
B)   Auditors must balance the cost of the audit with the need for precision.
C)   Auditors must limit their exposure to their auditee to maintain independence.
D)   The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.

Question 11

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

The answer of On a high level,the accounting processes of...

Question 12

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

The answer of The textbook presented the concept of auditing...

Question 13

Preliminary engagement activities include

Accepted Answer

A)   Evaluating internal controls.
B)   Assessing audit risk at the account balance level.
C)   Setting materiality.
D)   Performing background checks on top management.

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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.

Question 18

Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?

Accepted Answer

A)   To promote an adversarial relationship between the auditor and the corporation's management.
B)   To enhance auditor independence from the management of the corporation.
C)   To encourage a policy of rotation of the independent auditors.
D)   To give management more leverage over the auditor's decisions.

Question 19

Which of the following statements is not true with respect to assurance,attest,and audit services?

Accepted Answer

A)   These services are applied only to financial statements and financial statement accounts.
B)   These services all involve obtaining and evaluating evidence.
C)   These services all involve determining the correspondence of some information to a set of criteria.
D)   These services all involve issuing a report.

Question 20

Which of the following is not a concept that is included in the scope paragraph of the auditor's report?

Accepted Answer

A)   The conformance of the financial statements with generally accepted accounting principles.
B)   The audit was conducted in accordance with applicable auditing standards.
C)   The audit was planned and performed to obtain reasonable, rather than absolute, assurance.
D)   An audit involves examining items on a test (i.e. sampling)  basis.

Exam 1: An Introduction to Assurance and Financial Statement Auditing