Auditing A Risk Based Approach to Conducting a Quality Audit 10Th Edition By Johnstone – Test Bank

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Auditing A Risk Based Approach to Conducting a Quality Audit 10Th Edition By Johnstone – Test Bank

Chapter_5_Professional_Auditing_Standards_and_the_Audit_Opinion_Formulation_Process

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

2. The standards of the PCAOB consist of seven principles.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

4. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

5. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

6. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-01 – LO: 05-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Professional Audit Standards

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-01 – LO: 05-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Professional Audit Standards

 

12. 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.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-01 – LO: 05-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Professional Auditing Standards

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-03 – LO: 05-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Phases of the Audit Opinion Formulation Process

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-05 – LO: 05-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Financial Statement Assertions

 

16. Comparability is one of the five management assertions.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-05 – LO: 05-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Financial Statement Assertions

 

17. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-05 – LO: 05-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Financial Statement Assertions

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-06 – LO: 05-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Evidence and Procedures

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-08 – LO: 05-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase I Making Client Acceptance and Continuation Decisions

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-08 – LO: 05-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase I Making Client Acceptance and Continuation Decisions

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

24. Test of controls are a type of substantive procedure.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

27. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

31. Physically examining a client’s assets is an audit procedure.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

32. Audit documentation is frequently called working papers.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

33. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

34. 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.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-09 – LO: 05-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase III Performing Risk Assessment

 

36. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-10 – LO: 05-10
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase III Obtaining Evidence about Internal Control Operating Effectiveness

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-10 – LO: 05-10
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Evidence about Internal Control Operating Effectiveness

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-10 – LO: 05-10
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase III Obtaining Evidence about Internal Control Operating Effectiveness

 

40. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-10 – LO: 05-10
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase III Obtaining Evidence about Internal Control Operating Effectiveness

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-10 – LO: 05-10
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase III Obtaining Evidence about Internal Control Operating Effectiveness

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

43. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

45. Substantive analytical procedures are optional for significant tests and disclosures.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-11 – LO: 05-11
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Substantive Evidence

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-11 – LO: 05-11
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Substantive Evidence

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-11 – LO: 05-11
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Substantive Evidence

 

48. 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.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-11 – LO: 05-11
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Substantive Evidence

 

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

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-12 – LO: 05-12
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Completing the Audit and Making Reporting Decisions

 

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

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-12 – LO: 05-12
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase V Completing the Audit and Making Reporting Decisions

 

51. 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.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

52. 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.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

53. 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.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-01 – LO: 05-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Professional Auditing Standards

 

54. 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.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

55. 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.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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

  a. GAO.
  b. AICPA.
  c. GAAP.
  d. PCAOB.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

57. 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.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-03 – LO: 05-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   An Overview of the Phases in the Audit Opinion Formulation Process

 

58. 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.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

59. 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.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

60. 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

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-05 – LO: 05-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Financial Statement Assertions

 

61. 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

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-05 – LO: 05-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Financial Statement Assertions

 

62. 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

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

63. 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.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

64. 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.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

65. 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

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-06 – LO: 05-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Evidence and Audit Procedures

 

66. 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.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-06 – LO: 05-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Evidence and Audit Procedures

 

67. 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.

 

ANSWER:   e
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

68. 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.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-06 – LO: 05-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Evidence and Audit Procedures

 

69. 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.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

70. 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.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

71. 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.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

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.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

73. 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.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

74. 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.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-07 – LO: 05-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Documentation

 

75. Which of the following is not a typical accounting cycle?

  a. Revenue.
  b. Inventory.
  c. Cash.
  d. Internal Controls.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

76. 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.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

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

  a. Existence.
  b. Valuation.
  c. Disclosure.
  d. Completeness.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

78. 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.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

79. 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.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

80. What does business risk include?

  a. Economic factors.
  b. Competitive factors.
  c. Regulatory risk.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

81. At what level does the auditor assess the risk of material misstatement?

  a. The financial statement level.
  b. The company level.
  c. The assertion level.
  d. Both A and C.
  e. All of the above.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

82. What does the effectiveness of internal controls influence?

  a. Inherent risk.
  b. Control risk.
  c. Risk of material misstatement.
  d. Both B and C.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

83. Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk?

  a. Controls over significant, unusual transaction.
  b. Controls over related-party transactions.
  c. Controls related to marketable securities.
  d. Controls related to significant management estimates.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-09 – LO: 05-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase II Performing Risk Assessment

 

84. Which statement is true concerning materiality?

  a. Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements.
  b. Materiality guidelines are specifically prescribed by the PCAOB.
  c. Materiality is not a useful concept in assessing internal control effectiveness.
  d. Materiality is a concept applied to financial statement presentation but not to disclosures.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-09 – LO: 05-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase II Performing Risk Assessment

 

85. Which document is used by auditors to formally accept a new client?

  a. Management representation letter.
  b. Audit Report.
  c. Engagement Letter.
  d. Audit Contract.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

86. Which of the following items is not included in the engagement letter?

  a. The responsibilities of the auditor.
  b. The responsibilities of management.
  c. The objective of the financial statements.
  d. Identification of the applicable financial reporting framework for the preparation of the financial statements.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

87. With a substantive audit strategy, what is an auditor likely to do?

  a. Extensively tests internal controls.
  b. Limit the testing of internal controls.
  c. Not assess control risks.
  d. Issue an adverse opinion on the financial statements.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

88. Which of the following is not a question an auditor considers in deciding whether to pursue a lower control risk approach prior to substantive testing?

  a. Is the design of the control effective?
  b. Does the control promote operational efficiency?
  c. Is it cost effective to test controls?
  d. Are controls operating effectively?

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-10 – LO: 05-10
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase III Obtaining Evidence about Internal Control Effectiveness

 

89. Which of the following would not affect an auditor’s judgment concerning internal controls?

  a. The assertion being tested.
  b. The design of the control.
  c. The operation of the control.
  d. The level of inherent risk.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

90. With a dual purpose test, what is an auditor likely to do?

  a. Perform a substantive procedure concurrently with a test of a control.
  b. Perform a substantive procedure concurrently with a risk assessment test.
  c. Perform a risk assessment test concurrently with a test of a control.
  d. None of the above.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

91. Which statement is correct?

  a. Assertions affected by highly objective estimates usually require direct tests of balances.
  b. The materiality of the account totally dictates the substantive procedures to be performed.
  c. The evidence the auditor obtains from risk assessment procedures does not influence the substantive procedures to be performed.
  d. The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-11 – LO: 05-11
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Substantive Evidence about Accounts

 

92. Which of the following factors affect the substantive procedures performed in an audit?

  a. The subjectivity of accounting process.
  b. Size of the account.
  c. Effectiveness of the relevant controls.
  d. All of the above affect the substantive procedure that are performed.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

93. If the auditor’s assessment of the materiality of the account balance is high, what would be the respective effect on the extent of substantive testing and the nature of procedures performed?
Extent of Tests Nature of Procedures

  a. Less More rigorous
  b. Less Less rigorous.
  c. More Less rigorous
  d. More More rigorous

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-11 – LO: 05-11
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase IV Obtaining Substantive Evidence about Accounts

 

94. An auditor gathers evidence on internal controls for which respective time periods for the purposes of expressing an opinion on control effectiveness and for testing controls in the financial statement period?
Control Effectiveness Financial Statement

  a. As of year end As of year end
  b. As of year end Throughout the year
  c. Throughout the year As of year end
  d. Throughout the year Throughout the year

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-13 – LO: 05-13
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Example: Assessing Control Design Effectiveness

 

95. Which of the following would not be a factor in whether a control weakness would be considered to be a material weakness as opposed to a significant deficiency?

  a. The materiality of the related balance.
  b. The volume of transactions affected.
  c. The subjectivity of the account balance.
  d. The nature of the client’s industry.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-13 – LO: 05-13
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Example: Assessing Control Effectiveness

 

96. Which of the following statements is correct concerning the auditor’s opinion on internal control effectiveness?

  a. The report describes any material weaknesses and discusses actions taken by management to remediate the problems.
  b. The report does not discuss whether the control weaknesses were first identified by management or the auditor.
  c. The report does not recognize the integrated nature of the audit and the affect of the material weakness on the planning of the financial statement audit.
  d. The report identifies management’s actions to remedy the prior year’s control weaknesses.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.05-12 – LO: 05-12
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Phase V Completing the Audit and Making Reporting Decisions

 

97. The auditing standards

Under the clarified auditing standards, what is the structure of each auditing standard issued by the ASB? What is the purpose of each section?

ANSWER:   Introduction explains the purpose and scope of the standard.

Objective defines the context in which the requirements are set.

Definitions include, where relevant, specific meanings of terms in the standards.

Requirements identify what the auditor is required to do to achieve the objective of the standard. Requirements are expressed using the words “the auditor should ” or “the auditor must.”

Application and Other Explanatory Material include cross-references to the requirements and provide further guidance for applying the requirements of the standard

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

98. What are the AICPA’s fundamental principles?

ANSWER:   In place of the ten historical standards that governed the auditing profession, as part of the clarity project the AICPA developed seven fundamental principles that govern audits. The four categories, with their specific principles, are:

Purpose of an Audit and Premise upon Which an Audit Is Conducted

1. The purpose of an audit is to enhance the degree of confidence that users can place in the financial statement. This purpose is achieved when an auditor expresses an opinion on the financial statements.

2. An audit is based on the premise that management has responsibility to prepare the financial statements, maintain internal control over financial reporting, and provide the auditor with relevant information and access to personnel.

Responsibilities

3. 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.

Performance

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

5. Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality levels, identify risks of material misstatement, and design and implement appropriate audit responses to the assessed risks.

6. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement.

Reporting

7. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be

expressed.

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

99. Audit phases

Identify at least five steps involved in an audit.

ANSWER:  
Phase I   Making Client Acceptance and Continuance Decisions
Phase II   Performing Risk Assessment
Phase III Obtaining Evidence about Internal Control Operating Effectiveness
Phase IV Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions
Phase V   Completing the Audit and Making Reporting Decisions
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of the Audit Process: A Standards-Based Approach

 

100. PCAOB Assertions

Discuss the five management financial statement assertions identified in the PCAOB Standards. Provide examples.

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

Example: Management asserts that sales recorded in the income statement represent transactions in which the exchange of goods or services with customers for cash or other consideration had occurred.

Completeness: Assertions about completeness address whether all transactions and accounts that should be included in the financial statements are included.

Example: Management asserts that notes payable in the balance sheet include all such obligations of the organization.

Valuation or Allocation: Assertions about valuation or allocation address whether accounts have been included in the financial statements at appropriate amounts.

Example: Management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value.

Rights and Obligations: Assertions about rights address whether assets are the rights of the organization, while assertions about obligations address whether liabilities are the obligations of the organization.

Example: Management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property and that the corresponding lease liability represents an obligation of the entity.

Presentation and Disclosure: Assertions about presentation and disclosure address whether components of the financial statements are properly classified, described, and disclosed.

Example: Management asserts that obligations classified as long-term liabilities in the balance sheet will not mature within one year

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Describe the Assertions Contained in Financial Statements

 

101. Write the three general auditing standards of the PCAOB.

ANSWER:   The general audit standards are:

1. Technical Training and proficiency: The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
2. Independence: An independence is mental attitude is to be maintained by the auditor or auditors.
3. Due Professional Care: Due professional care is to be exercised in the performance of the examination and the preparation of the report.
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

102. Explain the meaning of due professional care.

ANSWER:   Due professional care refers to the skill and care of a professional expected in an audit. Following Generally Accepted Auditing Standards (GAAS) is one benchmark for due professional care. However, following GAAS is not always sufficient. If a reasonably prudent person would have done more, the professional should do at least as much. Due professional care is also determined by evaluating whether someone with similar skills in a similar situation would have performed the same way as the auditor.
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

103. What are the three broad types of audit procedures? What is the purpose of each test?

ANSWER:   Risk assessment procedures. Procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion, but are used for purposes of planning the audit.

Tests of controls. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level.

Substantive procedures. Audit procedures designed to detect material misstatements in accounts which include tests of details and substantive analytical procedures.

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

104. There are nine specific actions an auditor can undertake to collect evidence. Identify each action and provide an example.

ANSWER:   Types of Audit Procedure (examples in italics)

Inspection of documentation

Examining a client document for evidence of authorization

Inspection of assets

Physically examining a client’s equipment

Observation

Looking at a process or procedure, such as observing the client use of a restricted access area

External confirmation

Obtaining a direct written response to the auditor from a third party, such the client’s customers, confirming the amount owed to the client

Recalculation

Checking the mathematical accuracy of a document or record, such as an inventory count sheet

Reperformance

Independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation

Analytical procedures

Analyzing plausible relationships among both financial and non-financial data

Scanning

Performing 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

Inquiry

Seeking information of persons within or outside of the client organization, such as communicating with the CFO or general counsel about changes in accounting policy

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Procedures

 

 

Chapter_7_Planning_the_Audit_Identifying_and_Responding_to_the_Risks_of_Material_Misstatement

1. Materiality relates to the significance or importance of an item.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

2. Auditors and management should agree on what is considered material.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

3. Clearly trivial and not material are terms that can be used interchangeably.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

4. Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

5. As detection risk increases, the amount of evidence an auditor needs to obtain decreases.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

6. When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

7. Only public companies have to be concerned with business risk.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

8. Touring a company’s plant offers much insight into potential audit issues.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

9. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain information related to client management’s integrity.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

10. News media and web searches can provide useful information related to client management’s integrity and the risk of material misstatement in the financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

11. LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

12. The purpose of the auditor‘s consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

13. Trend analysis deals with the relationship between two or more accounts within the current-year.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

14. One potential limitation to using industry data in preliminary analytical procedures is that the data from the client may not be directly comparable to the data of the industry.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

15. Brainstorming sessions should be led by the engagement team.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

16. During the process of a brainstorming session, the focus is more on the quality of ideas generated rather than the quantity of ideas generated.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-05 – LO: 07-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Analytical Procedures and Brainstorming Activities

 

17. The usual length of a brainstorming session is about four hours.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

18. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

19. Detection risk is measured on a scale of 0% to 5%.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

20. A risk of material misstatement of 100% indicates that material misstatement is highly likely.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

21. The internal controls of an organization have no impact on the efficiency of an audit.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-06 – LO: 07-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Planning Audit Procedures to Respond to Assessed Risks of Material Misstatement

 

22. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

23. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-03 – LO: 07-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Factors Affecting Inherent Risk

 

24. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

25. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-06 – LO: 07-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Responding to Identified Risks of Material Misstatement

 

26. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

27. Audit procedures have to be announced or be completed at predictable times.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

28. All audit procedures must be completed before year end.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

29. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

30. Inherent and control risks are risk controlled by the auditor.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

31. A risk factor indicating a heightened risk of fraud would be considered a significant risk.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

32. The existence of one or more risk factors means that there is a material misstatement present.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

33. In most audits, materiality is most commonly expressed as a percentage of net income.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-01 – LO: 07-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Materiality

 

34. Auditors are only concerned with materiality for the financial statements as a whole.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

35. Tolerable misstatement is always less than or equal to performance materiality.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

36. An immaterial misstatement is defined as one that is clearly inconsequential, whether taken individually or in the aggregate and whether judged by any criteria of circumstance.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-01 – LO: 07-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Materiality

 

37. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

38. Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

39. The lower the dollar amount of the performance materiality the more audit evidence is required.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

40. A significant risk is the same as a material risk.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

41. If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

42. The purpose of tests of controls are to provide reasonable assurance that internal controls are operating effectively.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

43. The quick ratio is useful for analyzing inventory accounts.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

44. Detection risk is controllable by the client.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

45. Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

46. Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2?

  a. “amount of a misstatement or omission”
  b. “in light of surrounding circumstances”
  c. “probable that the judgement of a reasonable person”
  d. “significantly altered the total mix of information available”

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-01 – LO: 07-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Materiality

 

47. If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet, the auditor should set overall materiality at which of the following dollar amounts?

  a. $20,000
  b. $25,000
  c. $40,000
  d. $15,000

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

48. Which of the following best describes the amount of misstatement an auditor is willing to accept and still judge that an account balance is not materially misstated?

  a. Tolerable misstatement.
  b. Performance materiality.
  c. A clearly trivial amount.
  d. Significant risk.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

49. If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial material setting?

  a. They need to be reassessed.
  b. They need to be noted in the footnotes.
  c. No action is required.
  d. None of the above.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

50. Which item is correct concerning the risk of material misstatement?

  a. Risk of material misstatement arises because audit procedures have been misapplied.
  b. Risk of material misstatement can be controlled and changed by the auditor.
  c. Risk of material misstatement must be assessed in non-quantitative terms.
  d. Risk of material misstatement is controllable by the client.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

51. What is the nature of the relationship between risk of material misstatement and audit risk?

  a. Direct.
  b. None.
  c. Correlational.
  d. Inverse.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

52. Detection risk is affected by which aspects of substantive audit procedures?

  a. Nature.
  b. Timing.
  c. Extent.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

53. Which of the following factors would lead an auditor to assess inherent risk at a higher level?

  a. The account balance is easily determined without estimation.
  b. The account balance is composed of a high volume of nonroutine transactions.
  c. The account balance is composed of simple transactions.
  d. All of the above would lead the auditor to assess a higher level of inherent risk.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-03 – LO: 07-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assess Factors Affecting Inherent Risk

 

54. To learn more about a company and its inherent risks, auditors can use which of the following resources?

  a. Management inquiries.
  b. Economic statistics.
  c. Online searches.
  d. Any of the above could be used.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

55. Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor?

  a. Data is under court order.
  b. They must always respond.
  c. The client does not approve of confidential information being shared.
  d. Both A and C are correct.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

56. Which of the following factors will result in control risk being assessed at a higher level?

  a. Controls are well designed.
  b. There is a lack of supervision of accounting personnel.
  c. Accounting staff are well trained and educated.
  d. The control environment is operating effectively.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

57. Which of the following are two frequently used preliminary analytical procedures?

  a. Reasonableness tests and economic analyses.
  b. Trend analyses and reasonableness tests.
  c. Ratio analyses and economic analyses.
  d. Ratio analyses and trend analyses.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

58. Which of the following best describes year-to-year comparisons of account balances?

  a. Time analyses.
  b. Reasonableness tests.
  c. Ratio analyses.
  d. Trend analyses.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

59. Which of the following ratios provide information about liquidity?

  a. Net profit margin.
  b. Current ratio.
  c. Inventory turnover.
  d. Sales to assets.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

60. Which of the following would be a reason that industry and client data were not directly comparable?

  a. Broad industry.
  b. Use of different accounting principles.
  c. Neither of the above.
  d. Both A & B are correct.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

61. Which of the following are common brainstorming session guidelines?

  a. Freedom of expression.
  b. Respectful communication.
  c. Suspension of criticism.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

62. What is the main reason to establish guidelines for brainstorming sessions?

  a. To not hurt feelings.
  b. It is required by the SEC.
  c. To encourage interactive and constructive group dialogue and idea exchange.
  d. To pass information up to top-level management efficiently.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

63. What type of relationship exists between audit risk and detection risk?

  a. Direct.
  b. Inverse.
  c. Indirect.
  d. No relationship.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

64. What is the typical range for the setting of audit risk?

  a. 1% – 10%
  b. 1% – 5%
  c. 0% – 5%
  d. 0% – 10%

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

65. Which of the following would be the likely risk results from using a 1% level of detection risk?

  a. High detection risk and low audit risk.
  b. High detection risk and high audit risk.
  c. Low detection risk and high audit risk.
  d. Low detection risk and low audit risk.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

66. What is the typical range for the assessment of the risk of material misstatement?

  a. 0% – 100%
  b. 0% – 10%
  c. 0% – 5%
  d. 1% – 100%

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

67. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?

  a. Increases.
  b. Decreases.
  c. Stays the same.
  d. Becomes less reliable.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

68. Which of the following statements best describes what is meant by setting control risk at100%?

  a. Controls are effective.
  b. Controls are relevant.
  c. Controls are ineffective.
  d. Cannot be determined from the information given.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

69. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor?

  a. Increase in direct testing.
  b. Decrease in direct testing
  c. No change in direct testing.
  d. Direct testing is not needed.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

70. Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk?

  a. Audit risk model.
  b. Risk of misstatement model.
  c. Significance model.
  d. Materiality equation.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

71. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective, which of the following tests are eliminated?

  a. Substantive testing.
  b. Tests of controls.
  c. Tests of details of balances.
  d. Substantive analytical procedures.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

72. Which of the following terms best describes the types and appropriateness of audit procedures used?

  a. Nature of detection risk.
  b. Material misstatement risk.
  c. Nature of auditing procedures.
  d. Nature of risk response.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

73. Appropriateness addresses which aspect of audit procedures?

  a. Relevance.
  b. Reasoning.
  c. Reliability.
  d. Both A & C.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

74. Which of the following best describes what is meant by the timing of risk response?

  a. Where procedures are conducted.
  b. When procedures are conducted.
  c. How procedures are conducted.
  d. Who conducts the procedures.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

75. What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?

  a. Introduce unpredictability.
  b. Confuse the client.
  c. Gather information during different times of the year.
  d. Finish the audit sooner.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

76. Which of the following approaches can be used to introduce unpredictability into the audit?

  a. Assessing high risk accounts.
  b. Performing procedures on an unannounced basis.
  c. Performing the audit in the same location each year.
  d. Selecting items that would normally be tested.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

77. What procedure has to be completed at or after the end of the period?

  a. Assessment of control risk.
  b. Engagement letter.
  c. Evaluation of adjusting journal entries.
  d. All procedures must be completed prior to period end.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

78. An increase in the risk of material misstatement would lead to which of the following responses?

  a. Increase in the extent of auditing procedures.
  b. Decrease in the extent of auditing procedures.
  c. No change in the extent of auditing procedures.
  d. No change in the extent of audit procedures.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

79. Which of the following risk factors suggests a heightened level of risk of material misstatement?

  a. Having a stable product.
  b. The departure of key personnel of a company.
  c. Few immaterial related-party transactions.
  d. Declining a merger with another company.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

80. Which of the following terms best describes the risk that audit procedures will fail to detect misstatements exceeding tolerable misstatement?

  a. Audit risk.
  b. Control risk.
  c. Detection risk.
  d. Inherent risk.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

81. As the risk of material misstatement increases, what happens with detection risk?

  a. Medium increase.
  b. Stay the same.
  c. Decrease.
  d. Severely increase.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

82. In which of the following situations will auditors typically rely on internal controls over financial reporting?

  a. If control risk is assessed at a high level.
  b. If the controls are determined to be designed and operating effectively.
  c. If the clients asks the auditor to test controls.
  d. If the controls are sufficient to increase control risk to an acceptable level.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-04 – LO: 07-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assess Factors Affecting Control Risk

 

83. The risk of material misstatement refers to which of the following?

  a. Inherent risk.
  b. Control risk and acceptable audit risk.
  c. The combination of inherent risk and control risk.
  d. Inherent risk and audit risk.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

84. Which of the following statements is false?

  a. Inherent risk is inversely related to the level of control risk.
  b. Inherent risk is directly related to the amount of evidence required in account testing.
  c. Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls.
  d. Inherent risk and control risk are assessed by the auditor and controlled by the client.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-03 – LO: 07-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Factors Affecting Inherent Risk

 

85. Which of the following is a factor that would cause an increase in the assessment of control risk?

  a. New products have uncertain likelihood of success
  b. Little interaction between senior management and operating staff
  c. A new business strategy is improperly implemented.
  d. The industry is mature and declining.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-04 – LO: 07-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Factors Affecting Control Risk

 

86. Qualitative reasons for materiality

List the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative reasons.

ANSWER:   The SEC provides guidance when a quantitatively small misstatement may still be considered material due to qualitative reasons. These reasons include:

∙ The misstatement hides a failure to meet analysts’ consensus expectations for the company.

∙ The misstatement changes a loss into income, or vice versa.

∙ The misstatement concerns a segment or other portion of the company’s business that plays a significant role in the company’s operations or profitability.

∙ The misstatement affects the company’s compliance with regulatory requirements.

∙ The misstatement affects the company’s compliance with loan covenants or other contractual requirements.

∙ The misstatement has the effect of increasing management’s compensation.

∙ The misstatement involves the concealment of an unlawful transaction.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

87. Inherent risk

List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level.

ANSWER:   Factors that would lead an auditor to assess inherent risk relating to operations at a higher level include:

∙ The company lacks personnel or expertise to deal with the changes in the industry.

∙ New products and service offerings have uncertain likelihood of successful introduction and acceptance by the market.

∙ The use of information technology is incompatible across systems and processes.

∙ Expansion of the business for which the demand for the company’s products or services has not been accurately estimated.

∙ A new business strategy is incompletely or improperly implemented.

∙ Financing is lost due to the company’s inability to meet financing requirements.

∙ New regulatory requirements increase legal exposure.

∙ Alternative products, services, competitors, or providers pose a threat to current business.

∙ There are significant supply chain risks.

∙ The production and delivery processes are complex.

∙ The industry is mature and declining.

∙ The organization lacks ability to control costs with the possibility of unforeseen costs.

∙ The organization produces products that have multiple substitutes.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

88. Brainstorming

What are the steps of the brainstorming process?

ANSWER:   The steps of the brainstorming process are:

1. Review prior year client information.

2. Consider client information, particularly with respect to the fraud triangle.

3. Integrate information from steps 1 and 2 into an assessment of the likelihood of fraud in the engagement.

4. Identify audit responses to fraud risks.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

89. Risk Responses

When considering risk responses, what steps should the auditor take?

ANSWER:   An auditor should do the following when considering risk responses:

1. Evaluate the reasons for the assessed risk of material misstatement.

2. Estimate the likelihood of material misstatement due to the inherent risks of the client.

3. Consider the role of internal controls, and determine whether control risk is relatively high or low, thereby determining whether the auditor should rely on controls (thereby necessitating tests of controls) or whether the auditor needs to conduct a more substantive audit.

4. Obtain more relevant and reliable audit evidence as the auditor’s assessment of the risk of material misstatement increases.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

90. Importance of materiality judgments

Explain the differences between performance materiality and tolerable misstatement.

ANSWER:   Performance materiality refers to the amount or amounts set by the auditor at less than the materiality level for the financial statements as a whole or for particular classes of transactions, account balances, or disclosures. If the auditor plans the audit only to detect individual material misstatements, the auditor would be overlooking the fact that the aggregate of individually immaterial misstatements can cause the financial statements as a whole to be materially misstated. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. If performance materiality is set too high, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. If performance materiality is set too low, the auditor might perform more substantive procedures than necessary. Performance materiality is different from, but relates to, the concept of tolerable misstatement.

Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated. Tolerable misstatement is the application of performance materiality to a particular sampling procedure, so it is always less than or equal to performance materiality.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

91. Relationships between risks

Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will affect planned audit evidence.
Audit risk,

∙ Inherent risk,
∙ Control risk,
∙ Detection risk,
∙ Tolerable misstatement

ANSWER:   An increase in audit risk decreases planned evidence.

An increase in inherent risk increases planned evidence.

An increase in control risk increases planned evidence.

An increase in detection risk decreases planned evidence.

An increase in tolerable misstatement decreases planned evidence.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

92. Predecessor auditor

Discuss the required communications between predecessor and successor auditors.

ANSWER:   Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the initiation of communication rests with the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements that related to confidentiality, the predecessor must obtain the former client’s permission prior to providing information.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

 

Chapter_17_Other_Services_Provided_by_Audit_Firms

1. The International Auditing and Assurance Standards Board’s term assurance engagement means the same as The American Institute of Certified Public Accountants’ term attestation engagement.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

2. The subject matter of an attestation engagement has to be as of a point in time.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

3. The IAASB and the AICPA identify three levels of assurance that can be provided in an attestation engagement.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

4. In limited assurance engagements, practitioners perform limited procedures (usually analysis of an issue but without significant testing) and checks to see if anything comes to their attention indicating a problem.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

5. An example of the subject matter of a non-audit attestation engagement is management’s assertions about historical financial information and associated disclosures.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

6. The subject matter of a non-audit attestation engagement can be quite varied.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

7. Review reports issued by auditors give positive assurance as to the fair presentation of financial statements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

8. Negative assurance infers that nothing has come to the reviewer’s attention that requires change.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

9. Review engagements provide limited assurance on financial statements and are less in scope than audits.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

10. An auditor does not express an opinion on the fairness of the financial statements when issuing a standard compilation report.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

11. One procedure that is common to an audit engagement, as well as to both the compilation and review engagement, is obtaining an engagement letter.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

12. The auditor need not be independent to perform a review engagement as it has a scope that is far less than that of an audit.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

13. The performance of inquiry and analytical review procedures to provide a reasonable basis for expressing limited assurance is required for a review service.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

14. A compilation performed in accordance with AICPA standards may be performed by CPAs or accountants who are not certified or licensed.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

15. It is common for an auditor to issue a compilation report on financial statements that omit all of the disclosures required by GAAP.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

16. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued, but does not require that the auditor’s review report be included with the quarterly information, although many companies do include the auditor’s report.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

17. The auditor should perform review procedures (a) on the quarterly information contained in the annual report to shareholders and (b) when engaged to review the quarterly information issued at the end of each of the first three quarters of the fiscal year.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

18. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

19. Regarding interim financial statement reviews, the standards do not require auditors to understand the client’s accounting and financial reporting practices and its related internal controls over the preparation of annual and quarterly reports, since they are not expressing an opinion.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

20. The standard report on a review of separately issued interim financial statements of public companies identifies the information reviewed, indicates that the standards of the PCAOB were followed in performing the review, explains the nature of a review, disclaims an opinion, and provides negative assurance that the auditor is not aware of any material departures from GAAP.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

21. The SEC requires public filers to have quarterly financial information reviewed by independent auditors.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

22. A review report issued by a public accounting firm on a public client’s interim financial statements includes reference to adherence to the standards of the Public Company Accounting Oversight Board.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

23. Accruals, such as estimates of bad debt and income tax expenses, are not usually as precise on interim financial reports as they are on year-end financial reports.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

24. A special purpose framework can use a cash basis financial reporting framework.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

25. Reporting on a specified account is a form of special report that an auditor may issue in relation to a specific basis of accounting.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

26. Special reports would include compliance with contractual agreements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

27. When forming an opinion on special purpose financial statements, the auditor should evaluate whether the financial statements include a summary of significant accounting policies.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

28. An other-matter paragraph restricting the use of the auditor’s report is a reporting requirement for a cash basis special purpose financial statement.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

29. When auditing only a single financial statement or a specific element, account, or item of a financial statement, the auditor will have a better understanding of the entity than if the auditor audited the entity’s complete set of financial statements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

30. When a public accounting firm issues a report on financial statements that are issued on an other comprehensive basis of accounting, this special report includes an opinion paragraph identical to an adverse opinion.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

31. A report on compliance with a contractual agreement typically involves the use of negative assurance by the auditor in a separate report.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

32. A state insurance commission requires an insurance company to prepare its financial statements in accordance with Statutory Accounting Principles. This situation may prevent an auditor from issuing a special report on the financial statements as the Statutory Accounting Principles are not a recognized alternative comprehensive basis.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

33. A company issuing prospective financial statements can receive a compilation on the statements but not an examination.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

34. A report on agreed-upon procedures issued by accountants provides a form of attestation assurance.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

35. Attestation standards require that the practitioner evaluate whether there is reasonable criteria capable of reasonably consistent estimation by which to judge the assertions being made in a financial forecast.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

36. Pro forma financial information shows what the significant effects might have been had a consummated or proposed transaction or event occurred at an earlier date.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

37. In agreed-upon procedure engagements, the practitioner does not perform a review, and does not provide an opinion or negative assurance.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

38. One aspect of forensic accounting focuses on identifying the person who has perpetrated the fraud and having that person confess to the fraud.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
TOPICS:   Forensic Accounting

 

39. Forensic accountants need to have excellent interviewing and people skills.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Forensic Accounting

 

40. The focus of forensic accounting is similar to financial statement auditing in that it is directed to the fairness of financial statements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Forensic Accounting

 

41. Many corporate websites now include sustainability reports, and the placement on those websites is usually quite prominent.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
TOPICS:   Sustainability Reporting and Assurance

 

42. Currently, there are various frameworks and standards to assist companies in producing relevant and reliable sustainability data for external users.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
TOPICS:   Sustainability Reporting and Assurance

 

43. Some companies choose to provide no objective assurance regarding their sustainability reports.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
TOPICS:   Sustainability Reporting and Assurance

 

44. Which of the following is not subject matter that would be attested to in a non-audit attestation engagement?

  a. Historical events such as the price of a market basket of goods on a certain date.
  b. Corporate governance, compliance with law and regulations, or human resource practices.
  c. Management’s assertions about historical financial information and associated disclosures.
  d. Prospective financial information, performance measurements, or backlog data.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

45. Which of the following is not a critical component of attestation services?

  a. Information or process (the subject matter) on which the assurance service is provided.
  b. Criteria for evaluation, such as compliance with regulations.
  c. Sufficient appropriate evidence.
  d. Two parties involved, the practitioner (or the CPA) and the intended users of the report.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

46. What are the two levels of assurance that can be provided in an attestation engagement?

  a. Risk assurance and reduction assurance.
  b. Professional assurance and compliance assurance.
  c. Sufficient assurance and appropriate assurance.
  d. Reasonable assurance and limited assurance.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

47. What are the two topics that attestation standards provide guidance on?

  a. They provide a plan for the engagement and criteria about who can participate in the engagement.
  b. They provide guidance about gathering evidence regarding specific assertions and communicate an opinion on the fairness of the presentation to a third party.
  c. They provide sufficient assurance on subject matter and appropriate assurance about reporting.
  d. They provide guidance on reviewing evidence and compiling evidence.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

48. Which of the following is not an AICPA standard of reporting for attestation engagements?

  a. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement in the report.
  b. The practitioner must state the practitioner’s conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated in the report.
  c. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusions that is expressed in the report.
  d. The practitioner must state all of the practitioner’s significant reservations about the engagement, the subject matter, and if applicable, the assertion related thereto in the report.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

49. Which of the following is not an AICPA general standard for attestation engagements?

  a. The practitioner must have adequate technical training and proficiency to perform the attestation engagement.
  b. The practitioner must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.
  c. The practitioner must adequately plan the work and must properly supervise any assistants.
  d. The practitioner must exercise due professional care in the planning and performance of the engagement and the preparation of the report.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

50. Which one of the following statements is false regarding a review?

  a. A review involves assessing fraud risk.
  b. A review does not involve obtaining an understanding of the entity’s internal control.
  c. A review does not involve testing accounting records by obtaining sufficient appropriate evidence through inspection, observation, confirmation, or examining source documents.
  d. A review does not involve a practitioner obtaining assurance that he or she will become aware of all significant matters that would be investigated in an audit.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

51. Which of the following standards represents the standards followed by CPAs providing a review of a client’s financial statements?

  a. Statements on Standards for Accounting and Review Services.
  b. Statements on Auditing Standards.
  c. Statements on Standards for Consulting and Review Services.
  d. Statements on Accounting Principles.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

52. What types of companies can have a compilation performed in accordance with the AICPA standards?

  a. Public Companies: Yes; Nonpublic Companies: Yes
  b. Public Companies:  No; Nonpublic Companies: No
  c. Public Companies:  No; Nonpublic Companies: Yes
  d. Public Companies: Yes; Nonpublic Companies: No

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

53. When an accountant is asked to compile financial statements that omit substantially all of the required disclosures, which of the following actions is appropriate?

  a. The CPA cannot accept the engagement.
  b. The CPA may accept the engagement.
  c. The CPA may accept the engagement if the CPA believes the omission is not undertaken to mislead users.
  d. The CPA must express an adverse opinion.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

54. When the CPA is not independent with respect to a compilation client, what should the CPA do?

  a. The CPA must not accept the engagement.
  b. The CPA must include a separate paragraph in the report stating the lack of independence.
  c. The CPA must change the engagement to a review engagement.
  d. The CPA must issue a disclaimer.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

55. What does the review service provided by the CPA firm require?

  a. It requires the CPA to make inquiries concerning matters affecting the financial statements.
  b. It requires the CPA to confirm accounts receivable.
  c. It requires the CPA to test internal controls.
  d. It requires the CPA to provide reasonable assurance.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

56. For which of the following services must a CPA be independent?

  a. Audits: Yes; Reviews: Yes; Compilations: Yes
  b. Audits: Yes; Reviews: Yes; Compilations: No
  c. Audits: Yes; Reviews: No; Compilations: No
  d. Audits: Yes; Reviews: No; Compilations: Yes

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

57. Which of the following is an accounting service that involves performing inquiry and analytical procedures as a reasonable basis for expressing limited assurance that no material modifications need to be made to the financial statements in order for the financial statements to conform to GAAP?

  a. A compilation.
  b. An audit.
  c. A review.
  d. An agreed upon procedure.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

58. A review report provides the user with which one of the following types of assurance?

  a. Reasonable assurance.
  b. Basic assurance.
  c. Absolute assurance.
  d. Limited assurance.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

59. A compilation report provides the user with which one of the following types of assurance?

  a. No assurance.
  b. Absolute assurance.
  c. Limited assurance.
  d. Negative assurance.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

60. Which of the following engagements requires less evidence than a review of financial statements?

  a. A compilation.
  b. An audit.
  c. An examination.
  d. Attestation.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

61. Which of the following services provides limited assurance?

  a. Review.
  b. Audit.
  c. Examination.
  d. Compilation.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

62. Which one of the following procedures is not a standard procedure when performing a review?

  a. Assess the internal control over financial reporting.
  b. Read the financial statements to determine whether they appear to conform to GAAP.
  c. Obtain or prepare a trial balance of the general ledger and foot and reconcile it to the general ledger.
  d. Trace the financial statement amounts to the trial balance.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

63. How many paragraphs does the standard review report for U.S. nonpublic companies or development stage companies have?

  a. One.
  b. Two.
  c. Three.
  d. Four.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

64. Which of the following engagements is sometimes referred to as bookkeeping services?

  a. Reviews.
  b. Special reports.
  c. Compilations.
  d. Audits.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

65. Which of the following statements is false regarding compilation procedures?

  a. The practitioner should have a general knowledge of the organization’s industry, the nature of its accounting records, the accounting basis to be used (GAAP or a special purpose framework other than GAAP), and the form and content of the financial statements.
  b. The practitioner is required to make inquiries or perform procedures to verify, corroborate, or review information provided by the client.
  c. The practitioner is not required to obtain an understanding of internal control over financial reporting.
  d. The practitioner should read the financial statements, including footnotes, to make sure that they are appropriate in form and free from obvious material misstatement.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

66. Which of the following situations is not one where the practitioner will modify the standard compilation report?

  a. There is an omission of disclosures for the compilation.
  b. A compilation report is not required
  c. The practitioner lacks independence.
  d. An understanding of internal controls cannot be obtained.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

67. What are the performance standards required for interim review engagements on the quarterly financial information of public companies?

  a. Statements on Standards for Accounting and Review Services.
  b. Standards of the Public Company Accounting Oversight Board.
  c. Statements on Reviews for Public Registrants and Securities Acts.
  d. Standards set by the Public Oversight Board of the Enforcement Division of the SEC.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

68. When are publicly owned companies required to file a Form 10Q with the SEC?

  a. Within 10 to 15 days (depending on the company size) after the end of each of the first three quarters of the fiscal year
  b. Within 30 to 45 days (depending on the company size) after the end of each of the first three quarters of the fiscal year
  c. Within 40 to 45 days (depending on the company size) after the end of each of the first three quarters of the fiscal year
  d. Within 45 to 60 days (depending on the company size) after the end of each of the first three quarters of the fiscal year

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

69. Which of the following procedures is not a review procedure for interim financial information?

  a. Making inquiries.
  b. Performing analytical procedures.
  c. Reading the minutes of the board of directors’ meetings
  d. Obtaining oral assurance from management that there are no subsequent events.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

70. Which of the following items is not contained in the standard report on a review of separately issued interim financial statements of public companies?

  a. A description of the information reviewed.
  b. A statement indicating that the standards of the PCAOB were followed in performing the review.
  c. A description of the nature of the review.
  d. Positive assurance that the auditor is not aware of any material departures from GAAP.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

71. Which of the following is not a way that the disclosure and reporting requirements for interim financial statements differ from those for annual financial statements?

  a. Accruals for estimates of bad debt are not usually as precise on interim dates as they are at year end.
  b. Information disclosed in the latest annual statements does not have to be repeated in the interim statements except for continuing contingencies and other uncertainties.
  c. Accruals for estimates of income tax expenses are not usually as precise on interim dates as they are at year end.
  d. The interim information does not have to be filed with the SEC for public companies.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Providing Assurance on Interim Financial Information

 

72. Craig Marks, CPA performs an audit of Treasure, Inc., which keeps its financial statements on the tax basis of accounting. Craig is aware of this fact and audits the financial statements on the criteria of the tax basis. What type of engagement is this?

  a. This engagement is not permitted by the AICPA.
  b. This engagement is an audit that will result in the issuance of a special report.
  c. This engagement is a compilation.
  d. This engagement is only performed by tax accountants who do not provide attest services.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

73. Which one of the following reports is not a special report issued as a result of an examination?

  a. Report on a specified financial statement element.
  b. Report on compliance with contractual agreements.
  c. Agreed upon procedures.
  d. Report on information presented in prescribed forms.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

74. Other comprehensive bases of accounting do not include which of the following?

  a. Cash basis.
  b. Tax basis.
  c. Regulatory basis.
  d. Intended basis.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

75. When forming an opinion on special purpose financial statements, which of the following items does the auditor not need to evaluate?

  a. Whether the financial statements adequately describe the applicable financial reporting framework.
  b. Whether the financial statements have the appropriate title.
  c. Whether the financial statements include a summary of significant accounting policies.
  d. Whether the financial statements differ in GAAS presentation.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

76. For which of the following special purpose financial statements is a dual opinion on a special purpose framework and GAAP required?

  a. Cash basis.
  b. Tax basis.
  c. Regulatory basis for general use.
  d. Contractual basis.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

77. For which of the following special purpose financial statements is an emphasis-of-matter paragraph alerting readers about the preparation in accordance with the special purpose framework not required?

  a. Cash basis.
  b. Tax basis.
  c. Regulatory basis for general use.
  d. Contractual basis.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

78. For which of the following special purpose financial statements is a description of purpose for which special purpose financial statements are prepared not required?

  a. Cash basis.
  b. Regulatory basis for use by management and the regulator only.
  c. Regulatory basis for general use.
  d. Contractual basis.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

79. For which of the following special purpose financial statements is an other-matter paragraph restricting the use of the auditor’s report required?

  a. Cash basis.
  b. Tax basis.
  c. Regulatory basis for general use.
  d. Contractual basis.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

80. In which of the following cases should the auditor’s report on compliance not include a statement that nothing came to the auditor’s attention that caused the auditor to believe that the entity failed to comply with specified aspects of the contractual agreements or regulatory requirements?

  a. When the auditor has not identified any instances of noncompliance.
  b. When the auditor has expressed an unmodified or qualified opinion on the financial statements to which the applicable covenants of such contractual agreements or regulatory requirements relate.
  c. When the applicable covenants or regulatory requirements relate to accounting matters that have been subjected to the audit procedures applied in the audit of financial statements.
  d. When the auditor needs to obtain further evidence to corroborate audit evidence acquired from management and the accounting records.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

81. Which of the following statements is false regarding agreed-upon procedures engagements?

  a. In this type of engagement, the independent practitioner is engaged to assist in evaluating subject matter or an assertion.
  b. In this type of engagement, the nature, timing, and extent of agreed-upon procedures is the same for all engagements.
  c. In this type of engagement, the practitioner does not perform a review, and does not provide an opinion or negative assurance.
  d. In this type of engagement, the report should indicate that it is restricted in its use to specified parties.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

82. Which of the following statements is false regarding responsibilities associated with agreed-upon procedures engagements?

  a. The responsibility of the practitioner is to conduct the procedures and report the findings in accordance with applicable professional standards.
  b. The practitioner must have adequate knowledge of the subject matter.
  c. The practitioner is required to determine if there exists a difference between the agreed-upon procedures requested by the specified parties and the procedures that the practitioner would have decided to conduct if the practitioner would have been engaged to perform another form of engagement.
  d. The practitioner should not agree to perform agreed-upon procedures that are overly subjective.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

83. Which of the following procedures is an appropriate agreed-upon procedure?

  a. Evaluating the competency or objectivity of another party.
  b. Performing of mathematical computations.
  c. Obtaining an understanding about a particular subject.
  d. Reading the work performed by others solely to describe their findings.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

84. Which of the following procedures is an inappropriate agreed-upon procedure?

  a. Comparison of documents, schedules, or analyses.
  b. Performance of mathematical computations.
  c. Confirmation of specific information with third parties.
  d. Evaluation of the competency or objectivity of another party.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

85. Which of the following activity is not part of the compilation of prospective financial statements?

  a. Assembling prospective financial statements based on the responsible party’s assumptions.
  b. Performing compilation procedures, including reading the prospective financial statements, along with their assumptions and accounting policies, and considering whether they appear to be presented in conformity with AICPA presentation guidelines and that they are not obviously inappropriate.
  c. Issuing a compilation report.
  d. Providing assurance on the prospective financial statements.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

86. Which of the following activities is not part of the examination of prospective financial statements?

  a. Evaluating the support underlying the assumptions.
  b. Evaluating the preparation of the prospective financial statements.
  c. Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines.
  d. Assembling the prospective financial statements.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

87. Pro forma financial information is often used to illustrate the effects of various types of transactions. Pro forma financial information would be least likely to be used with which of the following transactions?

  a. Setting up a bond sinking fund.
  b. Disposing of a significant segment of a business.
  c. Proposing the sale of securities and applying the proceeds to a project.
  d. Business combinations.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

88. Which of the following guidelines is not a presentation that pro forma financial information should adhere to?

  a. It should describe the transaction or event that is reflected in the pro forma financial information.
  b. It should describe significant assumptions used to develop the pro format adjustments.
  c. It should make clear that the pro forma financial information is indicative of results that would have been achieved had the transaction or event actually taken place at an earlier time.
  d. It should describe any significant uncertainties about those assumptions.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

89. Which of the following procedures is not appropriate for examining or reviewing pro forma financial information?

  a. Obtaining less evidence in an examination engagement than in a review engagement.
  b. Obtaining an understanding of the underlying transaction or event.
  c. Discussing management’s assumptions regarding the effects of the transaction or event.
  d. Evaluating whether pro forma adjustments are completely recorded.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

90. Which of the following statements best describes the primary difference between an audit and forensic accounting?

  a. An audit has the focused responsibility to detect fraud in the client organization, while forensic accounting sets out to prevent fraud.
  b. An audit has no responsibility for detecting fraud, while forensic accounting provides an audit specific to material fraud discovery.
  c. An audit must follow Generally Accepted Auditing Standards, while the forensic accountant is bound to Generally Accepted Fraud Standards.
  d. An audit utilizes sampling techniques to detect material misstatements, while forensic accounting examines the entire population of fraudulent transactions.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Forensic Accounting

 

91. Which of the following statements is false regarding forensic accounting?

  a. Forensic accounting builds support for legal action against the person committing the fraud by identifying the fraud, calculating the damages caused by the fraud, and building both factual and testimonial evidence of the fraud.
  b. Forensic accountants rely on sampling of fraud-related documents to accurately measure the cost of the fraud.
  c. One aspect of forensic accounting focuses on identifying the person who has perpetrated the fraud and having that person confess to the fraud.
  d. Interviewing is one of the most important forensic accounting skills.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Forensic Accounting

 

92. Which of the following situations is least likely to initiate a forensic accounting engagement?

  a. Where management suspects a fraud is occurring within the organization.
  b. Where strong internal controls exist.
  c. Where an auditor recommends a separate forensic engagement due to hints of fraud uncovered during an audit.
  d. Where auditors deem there are situations of heightened fraud risk.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Forensic Accounting

 

93. Which of the following descriptions is not a key priority to support the work of professional accountants in embedding sustainable practices?

  a. Raising awareness and facilitating sharing and collaboration across the global accountancy community.
  b. Incorporating accounting for sustainability within professional training and education.
  c. Using traditional ways of thinking about organizational performance.
  d. Establishing an international integrated reporting committee to develop a new reporting model that will better reflect the interconnected impact of financial, environmental, social, and governance factors on the long-term performance and condition of an organization.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Sustainability Reporting and Assurance

 

94. Which of the following descriptions best explains triple bottom line reporting?

  a. It is reporting on assets, liabilities, and stockholders’ equity.
  b. It is reporting on financial, environmental and social performance.
  c. It is reporting on auditing, accounting, and ethics.
  d. It is reporting with respect to laws, norms, and performance standards.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Sustainability Reporting and Assurance

 

95. Which of the following statements is false regarding reporting on sustainability activities and outcomes?

  a. Investor interest, socially responsible investment funds, and the Dow Jones Sustainability Index have increased demand for these sustainability disclosures.
  b. Specific sustainability disclosures that companies make vary little from company to company.
  c. Many corporate websites now include sustainability reports, and the placement on those websites is usually quite prominent.
  d. Regarding sustainability, companies determine what to report and how to report it by using various available guidelines, the most prominent of which is the Global Reporting Initiative (GRI) G3 Reporting Framework.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Sustainability Reporting and Assurance

 

96. Which of the following is not considered a part of external assurance over sustainability reporting, as stated by the Global Reporting Initiative (GRI) Reporting Framework?

  a. External assurance engagements should be conducted by those with competence in the subject matter and assurance practices
  b. External assurance engagements should assess whether the sustainability report is reasonable, balanced, and appropriately inclusive.
  c. External assurance engagements should assess the extent to which the report preparer has applied the GRI Reporting Framework in reaching its conclusions.
  d. External assurance engagements can be issued by the CFO of the company issuing the sustainability report.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Sustainability Reporting and Assurance

 

97. Types of Assurance Engagements

What is the difference between reasonable assurance engagements and limited assurance engagements?

ANSWER:   According to the IAASB, reasonable assurance engagements are those whose objective “is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion” (International Standards on Assurance Engagements, ISAE, paragraph 11). According to the IAASB, limited assurance engagements are those whose objective “is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion” (ISAE paragraph 11). In limited assurance engagements, the practitioner performs limited procedures (usually analysis of an issue but without significant testing) and checks to see if anything comes to their attention indicating a problem.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-01 – LO: 17-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Non-Audit Attestation Services Provided by Audit Firms

 

98. Compilation Reporting

For a compilation report, identify:

A. for what type of organization the report may be performed;
B. the procedures the auditor performs;
C. the type of assurance provided;
D. the requirements for auditor independence.

 

ANSWER:   For a compilation report:

A. The compilation report can be performed only for nonpublic entities.
B. The CPA should have a general knowledge of the client’s accounting records, the accounting basis to be used, and the form and content of the financial statements. The CPA is not required to make inquiries or perform substantive procedures.
C. The compilation report provides no assurance.
D. The auditor need not be independent to perform a compilation, but if the auditor is not independent, then the lack of independence should be disclosed in the report issued by the auditor.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

99. Compilation Reporting

A banker friend and you were discussing compiled financial statements. He said,” When CPAs associate their name with compiled financial statements, their only responsibility is to the client and that is limited to the proper summarization and presentation on the financial statement information provided by the client. The opinion clearly states that the auditor has not conducted an audit and does not express an opinion on this fair presentation. Therefore, if users rely on compiled financial statements, they do so at their own peril and can never hold the CPA responsible for inadequate performance. Users should interpret the financial statements as if they had been prepared by management.”

REQUIRED: How would you respond to your friend?

ANSWER:   The accountant is responsible for the care in the preparation of compiled financial statements. As such, the accountant must perform the following steps with due care:

< Know something about the accounting principles and practices of the client’s industry.

< Know the client, the nature of its business transactions, accounting records and employees, and the basis, form, and content of the financial statements.

< Make inquiries to determine if the client’s information is satisfactory.

< Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and generally accepted accounting principles.

< Disclose in the report any omissions or departures from generally accepted accounting principles of which the accountant is aware. This requirement does not apply to a compilation that omits substantially all disclosures.

Therefore, the report must also be properly prepared and reflect the findings of the accountant. Users other than management are not prohibited from using compiled financial statements. They can expect the accountant to meet the standards set by the profession.

The courts have not established the responsibilities of accountants for compilations. Presumably, the responsibilities should be far less than for audits and somewhat less than for reviews. Responsibilities exist, but the level has yet to be finalized in the opinion of the courts.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

100. Review reports

For a review report, identify:

A. for whom what type of the organization the report may be performed;
B. the procedures the auditor performs;
C. the type of assurance provided;
D. the requirement for auditor independence.

 

ANSWER:   For a review report:

A. Review reports may be performed for both public and nonpublic companies.
B. The review requires more knowledge and evidence than does a compilation, but is significantly less in scope than an audit. The CPA should obtain a general understanding of the entity’s organization, operating characteristics, types of transactions, assets, liabilities, compensation methods, types of product and services, operating locations, and related parties. The auditor performs the review principally through inquiries and analytical procedures. The auditor is not required to perform any substantive testing of transactions or account balances, unless evidence obtained from inquiries and analytical procedures does not support the financial statements.
C. The review report provides limited assurance.
D. The auditor is required to be independent to perform a review.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

101. Compilation reports and disclosures

You have been engaged to perform a compilation service for Raven Company. Management informs you that it will not include the required disclosures in the financial statements. What effect will this have on the engagement?

ANSWER:   The request by the client to omit substantially all of the required disclosures may be honored if the CPA believes that such omission is not undertaken to mislead the users. Such omission implies that the CPA is familiar with the users and knows enough about the financial statements to conclude that the omission is not intended to mislead the users. The compilation report should include a paragraph that indicates that the disclosures have been omitted.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-02 – LO: 17-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Review and Compilation Engagements

 

102. Review of Interim Financial Information

What are some common procedures that the auditor will complete when performing a review of interim financial information?

ANSWER:   Interim financial information is reported in quarterly financial statements. The SEC requires publicly owned companies to (1) file quarterly financial information with the SEC on Form 10-Q within 40 to 45 days (depending on the company size) after the end of each of the first three quarters of the fiscal year and provide their shareholders with quarterly reports and (2) include certain quarterly information in the annual reports to the SEC (Form 10-K) and in the annual reports to shareholders. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued, but does not require that the auditor’s review report be included with the quarterly information, although many companies do include the auditor’s report. The term auditor is used in this discussion not because the auditor is performing an audit but because this section concerns the review of interim financial information performed by the auditor of the annual financial statements of the company.

The AICPA’s AU-C Section 930 “Interim Financial Information” and the IAASB’s ISRE (paragraphs 43-63) contain the relevant professional guidance on this topic.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-03 – LO: 17-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication

 

103. Special Reports

AU-C Section 805 provides guidance on audits of single financial statements and specific elements, accounts, or items of a financial statement. What are some examples of these types of situations?

ANSWER:   The following are examples of single financial statements, each of which would include related notes:

• Balance sheet

• Statement of income or statement of operations

• Statement of retained earnings

• Statement of cash flows

• Statement of assets and liabilities

• Statement of changes in owner’s equity

• Statement of revenues and expenses

• Statement of operations by product lines

The following are examples of specific elements, accounts, or items of a financial statement:

• Accounts receivable; allowance for doubtful accounts receivable; inventory; the liability for accrued benefits of a private benefit plan; the recorded value of identified intangible assets; or the liability for incurred but not reported claims in an insurance portfolio, including related notes

• A schedule of externally managed assets and income of a private benefit plan, including related notes

• A schedule of disbursements regarding a lease property, including related notes

• A schedule of profit participation or employee bonuses, including related notes

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-04 – LO: 17-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Special Considerations for Reporting

 

104. Pro Forma Financial Information

What is the difference between historical financial information and pro forma financial information? Discuss the guidelines that should be adhered to when presenting pro forma financial information.

ANSWER:   Historical financial information describes actual results of financial information. In contrast, pro forma financial information shows “what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date” (AT 401, paragraph .04).

The presentation of pro forma financial information should adhere to the following guidelines:

• It should describe the transaction or event that is reflected in the pro forma financial information.

• It should describe the source of historical financial information upon which the pro forma financial information is based.

• It should describe significant assumptions used to develop the pro format adjustments.

• It should describe any significant uncertainties about those assumptions.

• It should indicate that pro format financial information should be considered in conjunction with the historical financial information upon which the pro forma financial information is based.

• It should make clear that the pro forma financial information is not necessarily indicative of results that would have been achieved had the transaction or event actually taken place at an earlier time.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

105. Star Appliance Corp. has requested that Malfie Thomas, CPA provide a report, including a debt compliance letter, to Great Northern Bank about the existence or nonexistence of certain loan conditions. The conditions to be reported on are the working capital ratio, dividends paid on preferred stock, aging of accounts receivable, and the competence of management. This is Malfie’s first experience with Star appliance. Should Malfie accept this engagement? Provide justification for your answer.

ANSWER:   It would be appropriate for Malfie to provide a report to Great Northern Bank on all of the conditions except the competency of management. Reports on the working capital ratio, dividends paid on preferred stock, and aging of accounts receivable are factual matters within a normal auditor’s competence. Reporting on the competence of management is highly subjective and should not ordinarily be in a debt compliance letter.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-05 – LO: 17-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
TOPICS:   Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

 

106. Forensic accounting

Contrast the financial statement auditor’s consideration of fraud to that of a forensic accountant.

ANSWER:   A financial statement auditor is focused on drawing conclusions relative to the fair presentation of financial statements in accordance with GAAP utilizing the concept of materiality. The financial statement auditor samples population and tests balances and transactions after consideration of certain risks.

Forensic accounting is auditing in the sense that procedures are performed in situations where fraud has already been discovered. Forensic professionals not only determine the extent of the fraud, but also focus on the finding the individual who perpetrated the fraud. This form of professional services assists the courts in building a case against the person committing the fraud by giving the details of the audit findings.

Unlike a financial statement auditor, forensic accountants will examine 100 percent of certain populations. They do this to determine the full extent of the fraud. Financial statement auditors may expand their procedures if fraud is suspected or detected, but they follow the concept of reasonable assurance.

A financial statement auditor uses testing and procedures, utilizing sampling and analytics to perform an audit. The forensic accountant, on the other hand, utilizes inquiry and interviews to perform extensive procedures.

The scope and nature of the financial statement audit is always the assertions related to the financial statements under audit. Forensic accounting ranges to more specific engagements from financial reporting fraud, to hidden assets, court testimony and divorce cases.

The deliverable of a financial statement is the written report, or opinion related to the audit of the financial statements. The end product of forensic accounting is a summary of evidence gathered and testimonial evidence for court cases.

Arguably, the skills of both the financial statement auditor and the forensic accountant must be similar in nature. Such skill-sets should include interviewing and listening skills, data gathering and analysis, accounting, auditing and computer skills. The notable differences in skills are those of objectivity for the auditor and the need for reconstruction of balances and electronic data for the forensic accountant.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-06 – LO: 17-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Forensic Accounting

 

107. Sustainability Reporting

Why is there a demand for independent assurance on sustainability reporting? Describe the features of external assurance over sustainability provided in the Global Reporting Initiative Reporting Framework.

ANSWER:   There is a demand for independent assurance on sustainability reporting because such assurance enhances the credibility of the reported information. And this might be information that management would have incentives for misstating.

The Global Reporting Initiative (GRI) Reporting Framework states that external assurance over sustainability reports should:

• Be conducted by those with competence in the subject matter and assurance practices

• Be performed in a systematic manner that is evidence-based and includes adequate documentation

• Assess whether the sustainability report is reasonable, balanced, and appropriately inclusive

• Be issued by individuals or organizations that are independent of the company issuing the sustainability report

• Assess the extent to which the report preparer has applied the GRI Reporting Framework in reaching its conclusions

• Report results in a report that is publicly available, written in form, and that states the relationship between the preparer of the report and the issuer of the report

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.17-07 – LO: 17-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
TOPICS:   Sustainability Reporting and Assurance

 

 

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