Question 1

Which of the following statements about the study of auditing is NOT true?

Accepted Answer

A)   The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors.
B)   The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information.
C)   The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.
D)   The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions.

Question 2

Independence standards are required for audits of public companies, but not for audits of private companies.

Accepted Answer

A) True 
 B)False

Question 3

Explain the relationship between audit, attest and assurance services.

Accepted Answer

All three services entail the evaluation...

Question 4

On a high level, the accounting processes of a business consist of internal controls, individual transactions, and account balances.
Required:
A. A company implements internal controls as a safeguard to ensure appropriate capturing and recording of individual transactions, which are then collected into ending account balances. Ending account balances are then used to prepare the financial statements. The auditor expresses an opinion on the financial statements, which are made up of ending account balances and disclosures.
A. Describe the relationship between internal controls, individual transactions, and account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor determine if the financial statements are fairly stated.
B. The auditor can obtain evidence from all three areas of the accounting process. For instance, an auditor can directly test the account balance (e.g., by examining a bank statement reconciliation). This evidence is usually the highest-quality but costliest evidence. Alternatively, the auditor can obtain indirect information by testing the individual transactions that make up an account balance. If transactions are handled properly, this provides indirect evidence that the ending balances are more likely to be fairly stated. The least direct method of obtaining evidence is to evaluate and test the company's internal controls, which are implemented to ensure that transactions are handled properly. If a company's system of internal control is effective, transactions are more likely to be handled properly, and thus the ending balances making up a set of financial statements are more likely to be fairly stated. Auditors usually collect evidence relating to all three areas: internal control, transactions, and ending balances.

Accepted Answer

A. A company implements internal control...

Question 5

The textbook presented the concept of auditing through an analogy that involved buying a house and hiring a house inspector. Name three desirable qualities of a house inspector or an auditor and discuss how those qualities apply to an auditor and why those qualities are important for an auditor to possess.

Accepted Answer

Possible solutions:
A house inspector sh...

Question 6

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should

Accepted Answer

A)   Engage financial experts familiar with the nature of the business entity.
B)   Obtain a knowledge of matters that relate to the nature of the entity's business.
C)   Refer a substantial portion of the audit to another CPA, who will act as the principal auditor.
D)   First inform management that an unqualified opinion cannot be issued.

Question 7

Which of the following would best be described as an assurance service?

Accepted Answer

A)   Preparing a report representing a client's position during an IRS audit.
B)   Working with a company to develop a more efficient method of processing financial transactions.
C)   Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies.
D)   Assisting a company in identifying potential sources of capital for potential acquisitions. C

Question 8

You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

Accepted Answer

Student answers will vary. The following answer provides an example:
To obtain direct evidence, an auditor might physically examine and count the items included in the ending balance of the inventory account. To obtain indirect evidence, an auditor might examine invoices from suppliers relating to purchases of inventory or test whether the internal controls over the inventory process were working properly.

Question 9

Evidence is reliable if it

Accepted Answer

A)   Signals the true state of a management assertion.
B)   Applies to the period being audited.
C)   Relates to the audit assertion being tested.
D)   Is consistent with management's assertions.

Question 10

Which of the following statements best describes a relationship between sample size and other elements of auditing?

Accepted Answer

A)   If materiality increases, so will the sample size.
B)   If the desired level of assurance increases, sample sizes can be smaller.
C)   If materiality decreases, sample size will need to increase.
D)   There is no relationship between sample size and materiality or the desired level of assurance. C

Question 11

Testing all transactions that occurred during the period is cost prohibitive.

Accepted Answer

A) True 
 B)False

Question 12

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

Accepted Answer

A)   Any disputes over significant accounting issues have been settled to the auditor's satisfaction.
B)   The auditor is satisfied that Stankey will be highly profitable in the future.
C)   The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct.
D)   The auditor has determined that Stankey's management is not qualified to lead the company.

Question 13

Information asymmetry seldom occurs.

Accepted Answer

A) True 
 B)False

Question 14

Before accepting an engagement to audit a new entity, an auditor is required to

Accepted Answer

A)   Make inquiries of the predecessor auditor.
B)   Tell the company whether or not the auditor is willing to issue a "clean" opinion.
C)   Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D)   Become a member of the entity's board of directors.

Question 15

Conflicts of interest often occur between absentee owners and managers.

Accepted Answer

A) True 
 B)False

Question 16

For publicly-held companies, which of the following is integrated into the audit of financial statements?

Accepted Answer

A)   Budgetary information audit.
B)   The audit of internal controls.
C)   Audit of management forecasts.
D)   Audit of interim financial statements.

Question 17

Assurance services may improve all of the following except

Accepted Answer

A)   Relevance.
B)   Credibility.
C)   Periodicity.
D)   Reliability.

Question 18

The auditor's report is generally addressed to the

Accepted Answer

A)   Chief operating officer.
B)   Securities and Exchange Commission.
C)   Stockholders of the company.
D)   Chief financial officer.

Question 19

Auditors are most likely to use the most rigorous audit procedures to examine

Accepted Answer

A)   Routine transactions.
B)   Management assertions that are deemed to be of low risk.
C)   Only the rights and obligations assertion.
D)   Management assertions that are deemed to be of high risk.

Question 20

The basic purpose of a financial statement audit is to

Accepted Answer

A)   Detect fraud.
B)   Examine individual transactions so that the auditor may certify as to their validity.
C)   Provide assurance regarding whether the auditee's financial statements are fairly stated.
D)   Assure the consistent application of correct accounting procedures.

Exam 1: An Introduction to Assurance and Financial Statement Auditing

Which of the following statements about the study of auditing is NOT true?

Correct Answer
verified

Independence standards are required for audits of public companies, but not for audits of private companies.

Correct Answer
verified

Explain the relationship between audit, attest and assurance services.

Correct Answer
verified
All three services entail the evaluation...
View Answer

Correct Answer
verified
A. A company implements internal control...
View Answer

Correct Answer
verified
Possible solutions:
A house inspector sh...
View Answer

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should

Correct Answer
verified

Which of the following would best be described as an assurance service?

Correct Answer
verified
C

You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

Evidence is reliable if it

Correct Answer
verified

Which of the following statements best describes a relationship between sample size and other elements of auditing?

Correct Answer
verified
C

Testing all transactions that occurred during the period is cost prohibitive.

Correct Answer
verified

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

Correct Answer
verified

Information asymmetry seldom occurs.

Correct Answer
verified

Before accepting an engagement to audit a new entity, an auditor is required to

Correct Answer
verified

Conflicts of interest often occur between absentee owners and managers.

Correct Answer
verified

For publicly-held companies, which of the following is integrated into the audit of financial statements?

Correct Answer
verified

Assurance services may improve all of the following except

Correct Answer
verified

The auditor's report is generally addressed to the

Correct Answer
verified

Auditors are most likely to use the most rigorous audit procedures to examine

Correct Answer
verified

The basic purpose of a financial statement audit is to

Correct Answer
verified

Exam 1: An Introduction to Assurance and Financial Statement Auditing

Which of the following statements about the study of auditing is NOT true?

Correct AnswerverifiedShow Answer

Independence standards are required for audits of public companies, but not for audits of private companies.

Correct AnswerverifiedShow Answer

Explain the relationship between audit, attest and assurance services.

Correct AnswerverifiedAll three services entail the evaluation...View AnswerShow Answer

Correct AnswerverifiedA. A company implements internal control...View AnswerShow Answer

Correct AnswerverifiedPossible solutions:A house inspector sh...View AnswerShow Answer

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should

Correct AnswerverifiedShow Answer

Which of the following would best be described as an assurance service?

Correct AnswerverifiedC

You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

Evidence is reliable if it

Correct AnswerverifiedShow Answer

Which of the following statements best describes a relationship between sample size and other elements of auditing?

Correct AnswerverifiedC

Testing all transactions that occurred during the period is cost prohibitive.

Correct AnswerverifiedShow Answer

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

Correct AnswerverifiedShow Answer

Information asymmetry seldom occurs.

Correct AnswerverifiedShow Answer

Before accepting an engagement to audit a new entity, an auditor is required to

Correct AnswerverifiedShow Answer

Conflicts of interest often occur between absentee owners and managers.

Correct AnswerverifiedShow Answer

For publicly-held companies, which of the following is integrated into the audit of financial statements?

Correct AnswerverifiedShow Answer

Assurance services may improve all of the following except

Correct AnswerverifiedShow Answer

The auditor's report is generally addressed to the

Correct AnswerverifiedShow Answer

Auditors are most likely to use the most rigorous audit procedures to examine

Correct AnswerverifiedShow Answer

The basic purpose of a financial statement audit is to

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
verified
All three services entail the evaluation...
View Answer

Correct Answer
verified
A. A company implements internal control...
View Answer

Correct Answer
verified
Possible solutions:
A house inspector sh...
View Answer

Correct Answer
verified

Correct Answer
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C

Correct Answer
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Correct Answer
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C

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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