Deck 2: Financial Statement Audits and

Question 1

The auditor's report should make explicit reference to the management responsibility for the financial statements.

Answer 1

True

Question 2

The auditing standards are more applicable to audits of public companies than to audits of nonpublic companies.

Answer 2

False

Question 3

The fourth reporting standard requires the auditor to express an opinion either on the financial statements taken as a whole or on selected major components of the financial statements.

Answer 3

False

Question 4

The second general standard likens the auditor's role in an audit to the role of an attorney in a legal case.

Question 5

The main purpose of the audit committee is to monitor the competence of the external auditors during the course of the engagement.

Question 6

In most cases, when disclosure in the financial statements is considered inadequate, the auditor's report must include the necessary disclosures.

Question 7

In the opinion paragraph, reference is made to the listed financial statements, but their names are not repeated.

Question 8

The internal auditor is responsible for the preparation of the financial statements.

Question 9

Auditing is not possible in the absence of verifiable data.

Question 10

In the case of a very material departure from GAAP, the best course of action is usually to disclaim an opinion.

Question 11

It is permissible under GAAS for the internal auditor to provide direct assistance to the independent auditor.

Question 12

No provisions exist for meeting the first reporting standard when a company uses a comprehensive basis of accounting other than GAAP.

Question 13

A disclaimer of opinion may be substituted for an adverse opinion.

Question 14

Compliance with "Statements on Auditing Standards" is mandatory for all auditors.

Question 15

The concept of reasonable assurance does not guarantee the accuracy of the financial statements.

Question 16

The third general standard requires the auditor to act in good faith and not to be negligent in an audit.

Question 17

Auditing procedures are the methods used and the acts performed by the auditor during an audit.

Question 18

The concepts of materiality and risk affect the application of auditing standards.

Question 19

The training called for by the first general standard comes solely from practical experience.

Question 20

The primary objective of auditing is to add credibility to the financial statements prepared by management.

Question 21

The auditors report on internal control over financial reporting that goes to the public must report material weaknesses in internal controls.

Question 22

Auditors are responsible for planning and performing an audit to obtain reasonable assurance that the financial statements are free of material misstatement.

Question 23

SAS refers to the Statements on Auditing Services.

Question 24

An audit made in accordance with GAAS provides strong assurance that all illegal acts will be detected.

Question 25

Fair presentation of financial statements in accordance with GAAP is not a guarantee of the continuation of an entity as a going concern.

Question 26

The ASB has members that represent small and large practice units, state boards of accountancy, academic, government, and the public.

Question 27

The auditor of a public company is responsible for issuing more opinions than the auditor of private company.

Question 28

The reader of a private company financial statement obtains reasonable assurance about the system of internal control over financial reporting.

Question 29

What level of assurance does the reader of a private company financial statement receive on the company's system of internal controls?

A) positive assurance
B) reasonable assurance
C) negative assurance
D) no assurance
E) limited assurance

Question 30

GAAS are applicable in each financial statement audit made by an independent auditor regardless of the entity's size, form of business organization, or type of industry.

Question 31

ASB refers to the Auditing Standards Board.

Question 32

The accounting profession is developing a narrower array of assurance services.

Question 33

How many different opinions must an auditor of a publicly held company issue?

A) 1
B) 2
C) 3
D) 4
E) 5

Question 34

When the auditor concludes that the financial statements are materially misstated and are not prepared in accordance with GAAP, the auditor should revise the financial statements.

Question 35

SAS 82 essentially makes the audit report a guarantee.

Question 36

The payment of a bribe is an example of an error.

Question 37

SAS 54, Illegal Acts by Clients, indicates that the auditor's responsibility for misstatements resulting from illegal acts having a direct and material effect on the determination of financial statement amounts is the same as for errors or fraud.

Question 38

SAS 82, Consideration of Fraud in a Financial Statement Audit, states that the auditor's interest specifically relates to fraudulent acts that cause material misstatements in financial statements.

Question 39

The auditor's responsibility for illegal acts that have an indirect effect on the financial statements is restricted to information that comes to his or her attention.

Question 40

If management concludes adequate disclosures in the financial statements concerning the entity's ability to continue as a going concern, the auditor would issue a qualified opinion on the financial statements with an additional paragraph explaining the going concern uncertainty.

Question 41

Within the generally accepted auditing standards, the general standards relate primarily to:

A) qualifications of the auditor and the quality of the auditor's work.
B) qualifications of the auditor.
C) the relationship between GAAS and generally accepted accounting principles.
D) the fairness of the financial statements.
E) the general distribution of audit reports.

Question 42

Which of the following would not be found in the introductory paragraph of the standard audit report?

A) a reference to generally accepted auditing standards.
B) a list of specific financial statements audited.
C) a statement that the financial statements are the responsibility of management.
D) a statement that the auditor's responsibility is to express an opinion, based on the audit.
E) a reference to the entity audited.

Question 43

The introductory paragraph in the standard audit report identifies all of the following except:

A) the existence of the management responsibility letter.
B) the entity audited.
C) the dates of the statements.
D) the auditor's responsibility for the opinion.
E) management's responsibility for the statements.

Question 44

Which of the following is an incorrect statement concerning one of the field work standards?

A) Audit planning includes the development of audit strategies.
B) Audit planning is aimed primarily at effectiveness, with little effect on efficiency.
C) Understanding of the internal control structure is necessary in order to plan the audit.
D) Proper supervision is essential because major portions of the audit are often executed by staff assistants with limited experience.
E) The auditor must have a reasonable basis, in the form of gathered evidence, for expressing an opinion.

Question 45

Statements on auditing standards (SAS's) are interpretations of?

A) generally accepted auditing standards
B) generally accepted accounting principles
C) generally accepted accounting policies
D) generally accepted auditing services
E) AICPA code of professional conduct

Question 46

Auditing is based on the assumption that financial data are verifiable. Data are verifiable when two or more qualified individuals,

A) working together, can prove, beyond doubt, the accuracy of the data.
B) working independently, each reach essentially similar conclusions.
C) working independently, can prove, beyond reasonable doubt, the truthfulness of the data.
D) working together, can agree upon the accuracy of the data.
E) working together, each reach essentially similar conclusions.

Question 47

SAS 59 establishes auditor responsibility for evaluating whether there is any doubt about the entity's ability to continue as a going concern for a reasonable period of time. This reasonable period of time is defined as:

A) at least one year past the date of the statements under audit.
B) at least one year past the date of the audit report.
C) not to exceed two years past the date of the audit report.
D) not to exceed one year past the date of the statements under audit.
E) not to exceed one year past the date of the audit report.

Question 48

According to SAS 54, the auditor's responsibility for illegal acts having a direct and material effect on the determination of financial statement amounts is:

A) greater than for errors or fraud.
B) the same as it is for errors or fraud.
C) less than it is for errors or fraud.
D) different for direct-effect illegal acts and other types of illegal acts.
E) restricted to information that comes to his attention.

Question 49

The scope paragraph in the standard audit report uses all of the following terms except:

A) generally accepted auditing standards.
B) conclusive basis.
C) materiality.
D) significant estimates.
E) examining evidence.

Question 50

The use of the phrase "present fairly, in all material respects" in the opinion paragraph is most closely associated with which of the following concepts from the scope paragraph?

A) test basis
B) substantial guarantee
C) positive conclusion
D) basis for an opinion
E) significant estimates

Question 51

The essence of the due care standard is that the auditor should not be guilty of:

A) bias.
B) objectivity.
C) errors in judgment.
D) fraud.
E) negligence.

Question 52

Required auditor communication to the Audit Committee concerning illegal acts detected includes:

A) all material items.
B) all that are not adequately addressed by management.
C) only those that have an effect on the audit report.
D) only those that constitute management fraud.
E) any such acts.

Question 53

The public companies accounting oversight board's (PCAOB) rule making process requires the adopted rules to be submitted to ____________ for approval?

A) IRS
B) FASB
C) AICPA
D) IMA
E) SEC

Question 54

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, and this fact is adequately disclosed in the notes to the financial statements, the auditor's report should express:

A) a qualified opinion due to the uncertainty.
B) an unqualified opinion, with a fourth (explanatory) paragraph.
C) the standard unqualified opinion.
D) a disclaimer of opinion.
E) an adverse opinion.

Question 55

Which of the following organizations does the Auditing and Attest Standards Team belong to?

A) IRS
B) FASB
C) AICPA
D) IMA
E) SEC

Question 56

The primary purpose of the audit is to provide reasonable assurance that the financial statements are fairly presented in accordance with

A) GAAS
B) GAAP
C) AICPA
D) FASB
E) SEC

Question 57

Which of the following best describes the relationship that should exist between the external auditor and the management of the client company?

A) adversarial relationship
B) mutual trust and respect
C) advocacy of management's position
D) mutual caution and suspicion
E) skeptical vigilance

Question 58

If the client refuses to accept an audit report that is qualified due to the known existence of an illegal act, the auditor should:

A) withdraw from the engagement and indicate the reasons to the audit committee in writing.
B) issue an adverse opinion if management agrees to fully disclose the matter.
C) withdraw from the engagement and indicate the reasons to the SEC or other regulatory body in writing.
D) issue a disclaimer of opinion instead.
E) issue an unqualified opinion if management agrees to fully disclose the matter.

Question 59

In the opinion paragraph of the standard audit report, the phrase "in our opinion," really means:

A) "we certify..."
B) "we guarantee..."
C) "we are certain..."
D) "we are reasonably satisfied..."
E) "we promise..."

Question 60

There are several paragraphs included in the auditor's standard report in internal control over financial reporting. Which paragraph defines internal control over financial reporting?

A) introductory paragraph
B) scope paragraph
C) inherent limitations paragraph
D) definition paragraph
E) explanatory paragraph

Question 61

The auditor's standard report on internal control over financial reporting includes an introductory paragraph. Identify the key elements within this introductory paragraph

Question 62

Currently, there is a significant overlap between the rules of the PCAOB and the

A) financial accounting standards board
B) statements on auditing standards
C) internal revenue service
D) financial information regulation organization
E) statements on financial information systems

Question 63

If the financial statements contain a departure from GAAP, the auditor should express:

A) an adverse opinion.
B) a qualified opinion.
C) a disclaimer of opinion.
D) either a disclaimer of opinion or a qualified opinion.
E) either a qualified opinion or an adverse opinion.

Question 64

An auditor may be required to disclose fraud outside the client entity in each one of the following situations except:

A) in response to a court subpoena.
B) to the SEC when the auditor has withdrawn from the engagement.
C) to a successor auditor who makes inquiries in accordance with professional standards.
D) to the GAO when the auditor has reported illegal acts to the audit committee.
E) to a funding agency in accordance with audit requirements for entities that receive governmental financial assistance.

Question 65

Which one of the following is an indicator that may indicate an increased risk of illegal acts?

A) failures to file income tax returns
B) authorized transactions
C) inquiries by governmental agencies
D) a substantial number of reclassifications
E) the presence of obsolete items in inventory

Question 66

The following audit report was issued by the CPA firm of Wong and Lee on a basic set of financial statements:(0) We have examined the accompanying balance sheet of X Company as of December
31, 19XX, and the related statements of (1) income and retained earnings for the year then ended. These financial statements are the responsibility of the Company's (2) board of directors. Our responsibility is to express an opinion on these financial statements based on our (3) examination.
We conducted our audit in accordance with (4) professional auditing standards. Those
standards require that we (5) plan and perform the audit to obtain reasonable assurance about whether the financial statements (6) are fairly stated. An audit includes examining, (7) on a detailed basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes (8) judging the accounting practices used and significant (9) decisions made by management, as well as evaluating the (10) completeness of the financial statement presentation. We believe that our audit provides (11) reliable evidence for our opinion.
(12) We believe the financial statements referred to above (13) present fairly, in all
respects, the financial position of X Company as of December 31, 19XX, and (14) the results of its operations and its cash flows for the year then ended (15) in conformity with promulgated accounting principles.
REQUIRED: If the wording of each numbered item is correct, enter OK. If the wording is incorrect, give the correct wording.
Answer (0) is given as an example.
(0) We have audited.

Question 67

Identify the specific generally accepted auditing standard for each one of the following descriptions.
1.The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed.
2.In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.
3.Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
4.Due professional care is to be exercised in the performance of the audit and the preparation of the report.
5.The work is to be adequately planned, and assistants, if any, are to be properly supervised.
6.The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
7.The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
8.Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
9.A sufficient understanding of the internal control structure is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.
10.The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.

Question 68

The ten generally accepted auditing standards are listed below in paraphrased form. Indicate the category to which each statement belongs by placing the following letters in the spaces provided:G:General,
F:Field work, or
R:Reporting,
1.An understanding of the internal control structure is to be obtained.
2.The auditor should be unbiased during the examination.
3.The financial statements should be in conformity with GAAP.
4.The financial statements contain adequate disclosures.
5.The auditor should have adequate technical training and proficiency as an
auditor.
6.Sufficient competent evidential matter is to be obtained.
7.Due professional care is to be exercised by the auditor.
8.The work should be adequately planned and assistants should be properly
supervised.
9.The report shall contain an expression of opinion.
10.Circumstances in which GAAP have not been consistently observed should be
identified.

Question 69

Which one of the following terms relates to the embezzling of receipts?

A) manipulation
B) misrepresentation
C) misappropriation
D) misapplication
E) misleading

Question 70

The auditors report on internal control over financial reporting that goes to the public must report material weaknesses in

A) financial statement format
B) internal affairs
C) internal control
D) management
E) supervision

Question 71

It is important for the auditor to be independent, neutral, and ____________ in performing an audit.

A) unemotional
B) unbiased
C) unaware
D) silent
E) alone

Question 72

A disclaimer of opinion really states that:

A) no opinion can be formed.
B) no audit was attempted.
C) except for some minor errors the statements are fair.
D) the financial statements are wrong.
E) the audit was aborted.

Question 73

In the standard audit report, the auditor's opinion on fairness pertains:

A) only to the complete set of financial statements.
B) to individual accounts.
C) to each financial statement taken as a whole.
D) to major components of each financial statement.
E) only to material aspects of each financial statement.

Question 74

If an extremely material scope limitation exists, the auditor should express:

A) an adverse opinion.
B) a qualified opinion.
C) a disclaimer of opinion.
D) either a disclaimer of opinion or a qualified opinion.
E) either a qualified opinion or an adverse opinion.

Question 75

During a financial statement audit, the auditor maintains professional relationships with four important groups. Briefly explain each of these relationships.

Question 76

When a user sees that a standard unqualified opinion has been expressed by an external auditor, he or she may correctly infer that:

A) no material errors were found during the engagement.
B) no embezzlements remain undetected.
C) any system defects encountered during the engagement have been corrected to the auditor's satisfaction.
D) any differences between management and the auditor on material accounting matters have been resolved to the auditor's satisfaction.
E) any detected management fraud is immaterial.

Question 77

The second standard of field work requires the auditor to "understand the entity and its environment, including internal control." List the five different areas this standard requires the auditor to understand.

Question 78

Which one of the following is not an example of fraud?

A) the falsification of accounting records
B) the intentional omission from the financial statements of transactions
C) the intentional misapplication of accounting principles relating to amounts
D) the stealing of assets
E) the payment of a bribe

Question 79

SAS 54 lists a number of items that may provide evidence concerning possible illegal acts. They include which one of the following?

A) authorized transactions
B) investigations by governmental agencies
C) failure to file statements with the SEC
D) failure to amend tax returns
E) related party transactions

Question 80

A significant aspect of conducting an audit with due professional care is the auditor's attitude of professional:

A) pessimism
B) skepticism
C) optimism
D) courtesy
E) decorum