Auditing & Assurance Services Assignment 01 Multiple Choice Questions: Answer all Questions

1. medium b The use of the title Certified Public Accountant (CPA) is regulated by a. the federal government through the licensing department of the Commerce Department. b. state law through a licensing department agency of each state. c. the American !nstitute of Certified Public Accountants (A!CPA) through the licensing departments of the ta" and auditing committees. d. the #ecurities and $"change Commission (#$C). An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n) a. audit of financial statements. b. compliance audit. c. operational audit. d. production audit. 'hich of the following services provides the lowest level of assurance about a company(s financial statements) a. *eview of financial statements. b. Audit of financial statements. c. These services provide no assurance about a company(s financial statements. d. These services provide the same level of assurance about a company(s financial statements. !n ,auditing- financial accounting data. the primary concern is with a. determining whether recorded information properly reflects the economic events that occurred during the accounting period. b. determining if fraud has occurred. c. determining if ta"able income has been calculated correctly. d. analy/ing the financial information to be sure that it complies with government re0uirements. The #arbanes42"ley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company) a. *eviews of 0uarterly financial statements. b. Preparation of corporate ta" returns. c. 5ost consulting services. d. All of above are prohibited services.

%. medium b

&. medium a

+. medium a

1. (#23) challenging c

6. easy d

The generally accepted auditing standard that re0uires ,Ade0uate technical training and proficiency- is normally interpreted as re0uiring the auditor to have a. formal education in auditing and accounting. b. ade0uate practical e"perience for the wor7 being performed. c. continuing professional education. d. all of the above.

Page 1 of 11

8. easy b

#tatements on Auditing #tandards provide auditors of privately4held companies with 999999 guidance regarding the conduct of financial statement audits. a. fairly e"tensive b. some limited c. practically no d. specific and detailed

:. (#23) medium d

The provisions of the #arbanes42"ley Act apply to which of the following) a. All companies in the ;nited #tates. b. Private companies only. c. Private and public partnerships only. d. Public companies only.

<. medium d

'hich of the following statements best describes the primary purpose of #tatements on Auditing #tandards) a. They are guides intended to set forth auditing procedures which are applicable to a variety of situations. b. They are procedural outlines which are intended to narrow the areas of inconsistency and divergence of auditor opinion. c. They are authoritative statements. enforced through the Code of Professional Conduct. and are intended to limit the degree of auditor =udgment. d. They are interpretations which are intended to clarify the meaning of ,generally accepted auditing standards.!nternational #tandards on Auditing. issued by the !nternational Auditing Practice Committee. are most similar to ;.#. a. generally accepted accounting principles. b. rules of the A!CPA Code of Professional Conduct. c. generally accepted auditing standards. d. interpretations of statements on auditing standards issued by the A#?.

1>. medium c

11. easy d

To emphasi/e the fact that the auditor is independent. the addressee of the audit report is usually a. the company(s management. b. the stoc7holders of the client company. c. the board of directors of the client company. d. either b or c. An adverse opinion is issued when the auditor believes a. some parts of the financial statements are materially misstated or misleading. b. the financial statements will be found to be misleading or misstated. if an ade0uate investigation is performed. c. the overall financial statements are so materially misstated or misleading as a whole that they do not present fairly the financial position or results of operations and cash flows in conformity with @AAP. d. the audit firm is not independent.

1%. easy c

Page % of 11

1&. medium b

'hen the auditor evaluates the effect of a change in accounting principle. the materiality of the change should be evaluated based a. on the prior years presented. b. on the current year effect of the change. c. on whatever basis the auditor considers appropriate. d. on the effect on total assets.

1+. medium c

A CPA firm is ,associated with the financial statementsa. only when it does a financial audit. b. only when it does attestation services. such as a review or an audit. c. even if a CPA firm only assists a client in preparing financial statements. but does not perform an audit. d. if it performs any services at all for the client. A 0ualified report cannot ta7e the form of a 0ualification of a. the opinion alone. b. the scope alone. c. both the scope and opinion. d. all of the above.

11. challenging b

16. challenging c

'hich of the following statements is not true) a. A one4paragraph report is generally used when the auditor is not independent. b. A three4paragraph report ordinarily indicates there are no e"ceptions in the audit. c. 5ore than three paragraphs in the report indicates there must be some type of 0ualification in the audit report. d. An un0ualified opinion with modified wording has three paragraphs.

18. easy b

#ociety has attached a special meaning to the term ,professional.- A professional is a. someone who has passed a 0ualifying e"am to enter the =ob mar7et. b. a person who is e"pected to conduct himself or herself at a higher level than the re0uirements of society(s laws or regulations. c. any person who receives pay for the services performed. d. someone who has both an education in the trade and on4the4=ob e"perience received under an e"perienced supervisor. ,!ndependence- in auditing means a. remaining aloof from client. b. not being financially dependent on client. c. ta7ing an unbiased viewpoint. d. being an advocate for the client. The CPA must not subordinate his or her professional =udgment to that of others a. in every engagement. b. in every audit engagement. c. in every engagement e"cept ta" services. d. in every engagement e"cept management advisory services.

1:. easy c

1<. easy a

Page & of 11

%>. (#23) medium C

The #arbanes42"ley Act re0uires which partners of an accounting firm to rotate off the audit engagement every five years) a. Aead partner on the engagement. b. Partner responsible for concurring review. c. ?oth a and b. d. a or b. but not both. 2ne of the A!CPA(s $thical Principles deals with the public interest. !t states that members should accept the obligation to act in a way that will a. serve the public interest. b. honor the public trust. c. demonstrate commitment to professionalism. d. do all of the above. 2f the various parts of the A!CPA(s Code of Professional Conduct. a. the Principles are enforceable. b. the $thical *ulings are enforceable. c. the !nterpretations are enforceable. d. the *ules of Conduct are enforceable. !nterpretations of the AICPA Code of Professional Conduct are dominated by the concept of a. independence. b. compliance with standards. c. accounting. d. acts discreditable to the profession.

%1. medium D

%%. medium D

%&. challenging A

%+. (#23) easy c

'hich of the following statements is true of a public company(s financial statements) a. #arbanes42"ley re0uires the C$2 only to certify the financial statements. b. #arbanes42"ley re0uires the CB2 only to certify the financial statements. c. #arbanes42"ley re0uires the C$2 and CB2 to certify the financial statements. d. #arbanes42"ley neither re0uires the C$2 nor the CB2 to certify the financial statements. An audit process is a well4defined methodology for organi/ing an audit to ensure that a. the evidence gathered is both sufficient and competent. b. all appropriate audit ob=ectives are specified. c. all appropriate audit ob=ectives are met. d. all of the above. Professional s7epticism re0uires auditors to possess a 999999 mind. a. introspective. b. 0uestioning. c. intelligent. d. unbelieving. Analytical procedures are those that a. evaluate the accuracy of the account balances. b. assess the overall reasonableness of transactions and balances. c. review the effectiveness of internal control procedures. d. analy/e the effect of management procedures on the accounting system.

%1. easy d

%6. easy b

%8. easy b

Page + of 11

%:. medium d

'hen the auditor believes an illegal act may have occurred. it is necessary to a. in0uire of management. at a level above those li7ely to be involved with the illegality. b. consult with the client(s legal counsel. c. consider accumulating additional evidence to determine if there is actually an illegal act. d. do all three of the above. 'hich of the following =ournals would be included most often in the various audit cycles) a. Cash receipts =ournal. b. Cash disbursements =ournal. c. @eneral =ournal. d. #ales =ournal. 'hen an auditor calculates the gross margin as a percent of sales and compares it with previous periods. this type of evidence is called a. physical e"amination. b. analytical procedures. c. observation. d. in0uiry ,The detailed description of the results of the four evidence decisions for a specific audit- is called an a. audit procedure. b. audit program. c. audit plan. d. audit guide. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an un0ualified opinion has been issued is the a. inherent ris7. b. acceptable audit ris7. c. statistical ris7. d. financial ris7. A measure of the auditor(s assessment of the li7elihood that there are material misstatements in an account before considering the effectiveness of the client(s internal control is a. control ris7. b. acceptable audit ris7. c. statistical ris7. d. inherent ris7. 5ost auditors assess inherent ris7 as high for related parties and related4party transactions because a. of the accounting disclosure re0uirement. b. of the lac7 of independence between the parties. c. both a and b. d. it is re0uired by generally accepted accounting principles. !f an auditor is re0uested to perform nonaudit services for a public company audit client. who is responsible for agreeing to those services with the audit firm) a. The client(s management. b. The client(s president. c. The client(s board of directors.

%<. challenging c

&>. easy b

&1. medium b

&%. easy b

&&. easy d

&+. easy c

&1. (#23) medium d

Page 1 of 11

&6. medium b

d. The client(s audit committee. The purpose of an engagement letter is to a. document the CPA firm(s responsibility to e"ternal users of the audited financial statements. b. document the terms of the engagement to writing in order to minimi/e misunderstandings. c. notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. d. all of the above. The official record of the meetings of the board of directors and stoc7holders is contained in the corporate a. bylaws. b. charter. c. minutes. d. license. A tour of the client(s facilities is helpful in obtaining an understanding of the client(s operations because a. the auditor will be able to assess the physical safeguards over assets. b. the auditor may be better able to assess certain inherent ris7s. c. the auditor obtains a broader perspective about the company as a whole. d. all of the above. The preliminary =udgment about materiality is the amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. a. minimum b. ma"imum c. mean average d. median average After the preliminary =udgment about materiality has been established. auditors may a. not ad=ust it. b. ad=ust it downward only. c. ad=ust it upward only. d. ad=ust it either downward or upward. 'hich of the following might not be a signal of a lac7 of integrity in management) a. Prior criminal conviction of an assembly line foreman. b. Bre0uent turnover of 7ey internal audit personnel. c. Bre0uent disagreements with previous auditors. d. Bre0uent turnover of 7ey financial personnel. 'hich of the following statements regarding inherent ris7 is correct) a. The inherent ris7 assigned in the audit ris7 model is unaffected by the auditor(s e"perience with client(s organi/ation. b. 5ost auditors set a low inherent ris7 in the first year of an audit and increase it if e"perience shows that it was incorrect. c. 5ost auditors set a high inherent ris7 in the first year of an audit and reduce it in subse0uent years as they gain e"perience. even when there is inherent ris7. d. The inherent ris7 assigned in the audit ris7 model is dependent upon the strengths in client(s internal control system.

&8. medium c

&:. medium d

&<. easy b

+>. easy d

+1. easy a

+%. easy c

Page 6 of 11

+&. medium d

!nherent ris7 is 9999999 related to detection ris7 and 9999999 related to the amount of audit evidence. a. directly. inversely. b. directly. directly. c. inversely. inversely. d. inversely. directly. 'hen management has an ade0uate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings. auditors normally a. reduce acceptable audit ris7 and increase inherent ris7. b. reduce inherent ris7 and control ris7. c. increase inherent ris7 and control ris7. d. increase acceptable audit ris7 and reduce inherent ris7. 'hen the auditor has the same level of willingness to ris7 that material errors will e"ist after the audit is finished for all five cycles. a. a different e"tent of evidence is needed for various cycles. b. the same amount of evidence will be gathered for each cycle. c. he she has not followed generally accepted auditing standards. d. the level for each cycle must be no more than %C so that the entire audit does not e"ceed 1>C. The PCA2? states that reasonable assurance allows for a. a nominal li7elihood of ineffective internal controls. b. a remote li7elihood that material misstatements will not be prevented or detected by internal control. c. a li7elihood that material misstatements will not be prevented or detected by internal control. d. a high li7elihood that material misstatements will not be prevented or detected by internal control. An act of two or more employees to steal assets or misstate records is fre0uently referred to as a. collusion. b. a material wea7ness. c. a control deficiency. d. Any of the above. #arbanes42"ley re0uires management to issue an internal control report that includes two specific items. 'hich of the following is one of these two re0uirements) a. A statement that management is responsible for establishing and maintaining an ade0uate internal control structure and procedures for financial reporting. b. A statement that management and the board of directors are responsible for establishing and maintaining an ade0uate internal control structure and procedures for financial reporting. c. A statement that management. the board of directors. and the e"ternal auditors for establishing and maintaining an ade0uate internal control structure and procedures for financial reporting. d. Done of the above is correct.

++. medium a

+1. challenging a

+6. (Public) easy b

+8. easy a

+:. (#23) easy a

Page 8 of 11

+<. (Public) easy d

Auditor(s tests of operating effectiveness of internal controls might include which of the following types of procedures) a. !nspection of relevant documentation b. !n0uiries of personnel c. *eperformance of the application of controls d. All of the above 'hich of the following audit tests would be regarded as a test of a control) a. Tests of the specific items ma7ing up the balance in a given general ledger account. b. Tests of the inventory pricing to vendors( invoices. c. Tests of the signatures on canceled chec7s to management(s authori/ations. d. Tests of the additions to property. plant. and e0uipment by physical inspections. !nternal controls can never be regarded as completely effective. $ven if company personnel could design an ideal system. its effectiveness depends on the a. ade0uacy of the computer system. b. proper implementation by management. c. ability of the internal audit staff to maintain it. d. competency and dependability of the people using it. To issue a report on internal control over financial reporting for a public company. an auditor must a. evaluate management(s assessment process. b. independently assess the design and operating effectiveness of internal control. c. evaluate management(s assessment process and independently assess the design and operating effectiveness of internal control. d. test controls over significant account balances. !t is important for the CPA to consider the competence of the audit clients( employees because their competence bears directly and importantly upon the a. cost benefit relationship of the system of internal control. b. achievement of the ob=ectives of internal control. c. comparison of recorded accountability with assets. d. timing of the tests to be performed. The primary emphasis by auditors is on controls over a. classes of transactions. b. account balances. c. both a and b. because they are e0ually important. d. both a and b. because they vary from client to client. The most important difference in a nonpublic company in assessing control ris7 is the ability to assess control ris7 at 9999999 for any or all control4related ob=ectives. a. low b. medium c. high d. none of the above

1>. easy c

11. medium d

1%. (Public) medium c

1&. medium b

1+. challenging a

11. challenging c

Page : of 11

Short essay questions. Answer all questions

1. easy Discuss the three primary re0uirements for becoming a CPA. AnswerE The three primary re0uirements for becoming a CPA areE Educational requirement. An undergraduate degree with a ma=or in accounting is re0uired. 5ost states now re0uire 11> semester hours for licensure and some states re0uire 11> semester hours before ta7ing the CPA e"am. Uniform CPA examination requirement. This is a four part e"am that is comprised of components on auditing and attestation. financial accounting and reporting. regulation. and business environment and concepts. Experience requirement. The e"perience re0uirement varies from state to state with some states re0uiring no e"perience. while other states re0uire up to two years of audit e"perience.

%. medium

Discuss the differences and similarities between the roles of accountants and auditors. 'hat additional e"pertise must an auditor possess beyond that of an accountant) AnswerE The role of accountants is to record. classify. and summari/e economic events in a logical manner for the purpose of providing financial information for decision4ma7ing. To do this. accountants must have a sound understanding of the principles and rules that provide the basis for preparing the financial information. !n addition. accountants are responsible for developing systems to ensure that the entity(s economic events are properly recorded on a timely basis and at a reasonable cost. The role of auditors is to determine whether the financial information prepared by accountants properly reflects the economic events that occurred. To do this. the auditor must not only understand the principles and rules that provide the basis for preparing financial information. but must also possess e"pertise in the accumulation and evaluation of audit evidence. !t is this latter e"pertise that distinguishes auditors from accountants.

&. easy

Distinguish between generally accepted auditing standards (@AA#) and generally accepted accounting principles (@AAP). 'hat professional organi/ation establishes @AA#) 'hat professional organi/ation establishes @AAP) AnswerE @enerally accepted auditing standards are general guidelines to help auditors meet their professional responsibilities in the audit of historical financial statements. They are considered to be the minimum standards of performance for auditors to follow and are established by the Auditing #tandards ?oard of the American !nstitute of Certified Public Accountants for private companies and by the Public Company Accounting 2versight ?oard for public companies. @enerally accepted accounting principles are the guidelines an entity(s management normally follows when preparing historical financial statements. @AAP are established by the Binancial Accounting #tandards ?oard.

Page < of 11

+. (#23) medium

The #arbanes42"ley Act established the Public Company Accounting 2versight ?oard (PCA2?). 'hat are the PCA2?(s primary functions) 'ho performed these functions prior to the PCA2?) AnswerE The PCA2? has responsibility for providing oversight for auditors of public companies. establishing auditing and 0uality control standards for public company audits and performing inspections of the 0uality controls at audit firms performing those audits. These functions were formerly the responsibility of the American !nstitute of Certified Public Accountants.

1. easy

$"plain why there is a special need for ethical conduct in the auditing profession. AnswerE #ince users (e.g.. the general public) of services provided by an auditor generally cannot evaluate the 0uality of the auditor(s performance. it is critical to the auditing profession that the public have a high degree of confidence in the 0uality of the services provided by the auditor. Public confidence in the 0uality of professional services is enhanced when the profession encourages high standards of performance and ethical conduct by all its members. !f users of auditing services were to lac7 confidence in the 0uality of those services. then the value of CPA firms( audits would be diminished. as would the demand for audits.

6. easy

Discuss the factors an auditor should consider before accepting a company as an audit client. AnswerE The auditor should investigate and consider the prospective client(s standing in the business community. financial stability. management(s integrity. and relations with its ban7ers. attorneys. and previous CPA firm. The auditor should also determine whether he or she possesses the re0uired competence and independence to do the audit.

8. medium

$"plain why it is necessary to allocate the preliminary =udgment about materiality to individual accounts (segments) in the financial statements. Also e"plain why allocating to balance sheet accounts is more common than allocating to income statement accounts. AnswerE Allocating the preliminary =udgment about materiality to individual segments is necessary because evidence is accumulated for segments rather than for the financial statements as a whole. Allocating to segments establishes a tolerable misstatement amount for each segments. which helps the auditor decide the appropriate audit evidence to accumulate for each segments. 5ost practitioners allocate materiality to balance sheet accounts rather than income statement accounts because there are fewer balance sheet than income statement accounts.

:. (Public) medium

There are four steps in the auditor(s process of understanding internal control and assessing control ris7 for a public company. #tep one is obtain and document an understanding of internal control: design and operation. 'hat are the remaining three steps) AnswerE

Page 1> of 11

The remaining three steps areE Assess control ris7. Design. perform and evaluate tests of controls. Decide planned detection ris7 and substantive tests.

Page 11 of 11