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

Question 1

The activities performed by the auditor throughout the opinion formulation process are determined by whether the auditor is conducting a financial statement audit only or an integrated audit.

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

Comparability is one of the five management assertions.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

An audit firm's portfolio management includes client acceptance and continuance decisions that occur before the audit opinion formation process is initiated.

Question 10

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

Question 11

The PCAOB is committed to merging its standards with those of the AICPA and the IAASB.

Question 12

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 13

Making client acceptance and continuance decisions is the first phase of the audit opinion formulation process.

Question 14

In some circumstances,the auditor will not express an opinion on the financial statements but will instead state that an opinion cannot be expressed.

Question 15

Auditors in the U.S.follow guidance issued by the PCAOB,AICPA,and the IAASB.

Question 16

An auditor would follow the PCAOB's guidance when auditing a company whose stock is traded on the London Stock Exchange if the company conducts operations in multiple U.S.cities.

Question 17

The revenue cycles includes transactions related to revenue such as sales,receivables,and gain or loss from disposal of equipment.

Question 18

PCAOB guidance includes standards on certain auditor responsibilities related to SEC filings.

Question 19

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

Question 20

The cycle approach to auditing is a convenient way to break the audit into manageable time periods.

Question 21

Audit documentation would not include analyses prepared by the client.

Question 22

Developing an understanding of the client's business and industry is essential to the auditor's assessment of risk.

Question 23

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

Question 24

Audit documentation is frequently referred to as working papers.

Question 25

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 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

Tests of controls are a type of substantive procedure.

Question 32

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

Question 33

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 34

Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction,account balance,or disclosure,and which 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 35

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

Question 36

Tests of controls are procedures are procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements.

Question 37

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

Question 38

The first phase in the audit opinion formulation process is performing a risk assessment.

Question 39

The auditor performs substantive procedures to detect material misstatements in account balances.

Question 40

Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for the auditor's opinion.

Question 41

A controls reliance audit includes substantive procedures and does not include tests of controls.

Question 42

The PCAOB's General Auditing Standards 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 having the appropriate professional qualifications.
C)An auditor with adequate technical and leadership skills.
D)All of the above.

Question 43

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 44

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 45

Substantive analytical procedures are optional for significant accounts and disclosures.

Question 46

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

Question 47

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 48

Which of the following factors has the greatest effect 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 49

If the auditor assesses internal controls to be effective,substantive testing likely will be performed for some,but not all,significant accounts and disclosures.

Question 50

Which of the following assertions address whether accounts have been included in the financial statements at appropriate amounts?

A)Completeness assertion.
B)Valuation or allocation assertion.
C)Rights and obligations assertion.
D)None of the above.

Question 51

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

Question 52

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 53

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

Question 54

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

Question 55

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

Question 56

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 57

Which of the following is not required by the PCAOB's General Auditing Standards category?

A)Exercise due professional care.
B)Obtain reasonable assurance as to whether internal controls are effective.
C)Maintain an independence in mental attitude.
D)Exercise professional skepticism.

Question 58

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

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

Question 59

Presentation and disclosure assertions address whether components of the financial statements are properly classified,described,and disclosed.

Question 60

What is management's responsibility with respect to the conduct of an audit?

A)Preparing financial statements.
B)Maintaining internal control over financial reporting.
C)Providing the auditor with relevant information and access to personnel.
D)All of the above.

Question 61

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

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

Question 62

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 63

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 64

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

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

Question 65

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 66

Which of the following is not a typical accounting cycle?

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

Question 67

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 68

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 69

Which of the following statements accurately describes the auditor's reporting responsibility for a financial statement audit?

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 reasonably 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 70

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 71

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 72

When testing accounts receivable,which of the following audit procedures would an auditor likely use with respect to accounts with unusual sales terms?

A)Inquiries.
B)Confirmation.
C)Contract review.
D)Aging of receivables.

Question 73

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

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

Question 74

What does business risk include?

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

Question 75

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

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

Question 76

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 professional auditing standards.
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 77

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 78

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 79

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 80

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.