Test Bank for Auditing: A Practical Approach with Data Analytics, 2nd Edition (Chapters 1-15)

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TEST BANK FORAUDITING: A PRACTICALAPPROACH WITH DATAANALYTICS, RAYMOND N.JOHNSON, LAURA DAVISWILEY, ROBYNMORONEY, FIONACAMPBELL, JANEHAMILTON

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Table of ContentsChapter 1: Introduction and Overview of Audit and AssuranceChapter 2: Professionalism and Professional ResponsibilitiesChapter 3: Risk Assessment Part I: Audit Risk and Audit StrategyChapter 4: Risk Assessment Part II: Understanding the ClientChapter 5: Audit EvidenceChapter 6: Gaining an Understanding of the Client's System of InternalControlChapter 7: Audit Data AnalyticsChapter 8: Risk Response: Performing Tests of ControlsChapter 9: Risk Response: Performing Substantive ProceduresChapter 10: Risk Response: Evaluating Audit Data Analytics and AuditSamplingChapter 11: Auditing the Revenue ProcessChapter 12: Auditing the Purchasing and Payroll ProcessesChapter 13: Auditing Various Balance Sheet Accounts (and RelatedIncome Statement Accounts)Chapter 14: Completing the AuditChapter 15: Reporting on the Audit

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Chapter 1Introduction and Overview of Auditand AssuranceQuestion Type: True or False1.GAAP and IFRS are examples of applicable financial reporting framework.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: Theapplicable financial reportingframeworkrefers to the set of standards used in preparing the historical financial statements,such as GAAP, IFRS or a Federal Income Tax Basis of Accounting.2.Review of financial forecasts falls under attestation services.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Attestation services (underthe umbrella of assurance services) include review of historical financial statements, review offinancial forecasts, and examination of internal control.3.Within a U.S. context, the applicable financial reporting framework is typically GenerallyAccepted Accounting Principles (GAAP).A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: Within a U.S. context, theapplicable financial reporting framework is typically generally accepted accounting principles(GAAP).1

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4.Private companies, or non-issuers, are not required by the U.S. government to have anannual financial statement auditA. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.2, Solution: Private companies, or non-issuers, are not required by theU.S. government to have an annual financial statement audit, but often other interested users,such as a bank or lender, may request that a private company provide audited financialstatements.5.One of the reasons there is a demand for financial statement audits is that users offinancial statements often lack accounting and legal knowledge to fully understandcomplex accounting and disclosure choices.A. TrueB. FalseAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA PC: Communication, AACSB:Analytic, Learning Objective: LO1.3, Solution: Complexity: Financial statements are complex, theamounts are often affected by significant estimates, and the disclosures often require significantknowledge and experience to evaluate. Most financial statement users do not have theaccounting and legal knowledge to assess the reasonableness of complex accounting anddisclosure choices being made by the company.6.In financial accounting, the balance sheet is a statement of financial positionA. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA PC: Communication, AACSB: Analytic,Learning Objective: LO1.3, Solution: In financial accounting, the financial statements include thebalance sheet (statement of financial position), income statement (statement of comprehensiveincome), statement of cash flows, statement of changes in equity and accompanying notes.7.Business valuation falls within the purview of non-assurance services.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Analytic, Learning Objective: LO1.4, Solution: Many of these accountingfirms provide non-assurance (or non-audit) services as well as assurance services. These non-assurance services include management consulting, business valuation, mergers andacquisitions, insolvency, tax and accounting services.2

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8.Securities Exchange Act of 1934 regulates the ongoing trading of securities after theinitial public offering and requires the annual audit of a public company’s financialstatements.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:Ethics, Learning Objective: LO1.5, Solution: The Securities Exchange Act of 1934 regulates theongoing trading of securities after the initial public offering and requires the annual audit of apublic company’s financial statements.9.The Securities Act of 1933 enhances annual financial disclosures for public companiesand placed more emphasis on corporate responsibility.A. TrueB. FalseAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:Ethics, Learning Objective: LO1.5, Solution: The Securities Act of 1933 regulates the disclosureof financial information in a company’s initial public offering of stock and requires that the financialinformation be audited.10.Neither client characteristics nor actions of the auditor affect the audit risk.A. TrueB. FalseAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics,Learning Objective: LO1.6, Solution: Audit risk is affected by client characteristics as well asactions of the auditor.11.Materiality is a relative concept, and it differs from company to company and from yearto year for a given company.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics,Learning Objective: LO1.6, Solution: Materiality is a relative concept, and it differs from companyto company and from year to year for a given company. Auditors design an audit to providereasonable assurance that the financial statements are free of material misstatement. However,auditors donotdesign an audit to look forimmaterialmisstatements because they would notinfluence a financial statement user.3

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12.When auditors determine that the financial statements of a public company arepresented fairly in accordance with the applicable financial reporting framework, theyissue a type of report that PCAOB standards call “the standard clean report.”A. TrueB. FalseAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics,Learning Objective: LO1.6, Solution: If auditors have determined the financial statements arepresented fairly in accordance with the applicable financial reporting framework, they issue thestandardunqualifiedreport. The PCAOB standards use the term “unqualified” report.13.In an unqualified audit report on the financial statements of a public company, theconcluding statement of the scope paragraph mentions reasonable basis for the auditfirm’s opinion.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics,Learning Objective: LO1.6, Solution: The scope paragraph explains, in brief terms, the process ofconducting an audit. It mentions the concept of reasonable assurance about whether the financialstatements are free of material misstatement. It includes an explicit statement that PCAOB auditstandards were followed because the audit pertains to a public company. The scope paragraphalso includes a brief discussion of the professional judgments made during the audit. Finally, itconcludes with a statement that the audit firm believes that its audit provides a reasonable basisfor its opinion.14.In an audit report on the effectiveness of ICFR for a public company, the scopeparagraph states the different responsibilities of management and auditors.A. TrueB. FalseAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:Communication, Learning Objective: LO1.7, Solution: In an audit report on the effectiveness ofICFR for a public company, the basis for opinion paragraph states the different responsibilities ofmanagement and auditors. Like the audit report on the financial statements, this paragraphreferences registration with the PCAOB and independence requirements of the SEC and otherfederal securities laws.4

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15.In an audit report on the effectiveness of ICFR for a public company, the scopeparagraph mentions that auditors are only required to obtain reasonable assuranceabout whether the company maintained, in all material respects, effective ICFR.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:Communication, Learning Objective: LO1.7, Solution: In an audit report on the effectiveness ofICFR for a public company, the scope paragraph explains that auditors conducted their audit inaccordance with the standards of the PCAOB. In brief terms, it explains the process of conductingan audit of the effectiveness of ICFR. It mentions that auditors are only required to obtainreasonable assurance about whether the company maintained, in all material respects, effectiveICFR. It concludes with a statement that the audit firm believes its audit provides a reasonablebasis for its opinion.16.A financial statement user’s expectations are only impacted by legislation.A. TrueB. FalseAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Communication, Learning Objective: LO1.8, Solution: A financialstatement user’s expectations are often impacted by audit standards, ethical standards,regulations, legislation, and firm policy and procedures.17.The audit expectation gap is caused by user expectations such as: The auditor willcatch all instances of fraud.A. TrueB. FalseAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.8, Solution: The audit expectation gap is caused byunrealistic user expectations such as: the auditor is providing complete assurance; the auditor isguaranteeing the future viability of the entity; an unmodified audit opinion is an indicator ofcomplete accuracy of the financial statements; the auditor will definitely find any and all fraud; andthat the auditor has checked all transactions.5

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Question Type: Multiple choice18.Identify a service that falls under audit services.A. examination of historical financial statementsB. compilation of historical financial statementsC. inspection of website securityD. review of financial forecastAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Examination of historicalfinancial statements comes under audit services.19.Examination of internal controls is a service that comes under _______ services, whichfall under _______ services.A. attestation; assuranceB. assurance; attestationC. acceptable; assuranceD. attestation; auditAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Attestation services (underthe umbrella of assurance services) include review of historical financial statements, review offinancial forecast, and examination of internal control.20.Compared to an audit of historical financial statements, a review engagement is_______.A. less extensive and also less expensiveB. more extensive and also more expensiveC. less extensive but more expensiveD. more extensive but less expensiveAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: In a review engagement, thepractitioner expresseslimited assurancethat no material modifications need to be made to thefinancial statements. So a review of historical financial statements is a less extensive, andtherefore, less expensive service that can be very useful for smaller private companies.6

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21.Who are the onlylicensedaccounting professionals in the United States?A. Certified Public Accountants (CPA)B. Chartered Accounts (CA)C. Financial Accountants (FA)D. Chief financial and operating officer (CFOO)Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Certified Public Accountants(CPA) are the onlylicensedaccounting professionals in the United States.22.As attestation services encompass more than just the inspection of historical financialstatements, the term _______ is used rather than _______.A.practitioner; auditorB.auditor; practitionerC.intended user; auditorD. intended user; practitionerAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: In attestation services, the term practitioneris used rather than auditor because attestation services encompass more than just the audit ofhistorical financial statements.23.What services are defined as independent professional services that improve the qualityof information, or its context, for decision makers?A. assurance servicesB. attestation servicesC. absolute assuranceD. audit servicesAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: Assurance services are defined asindependent professional services that improve the quality of information, or its context, fordecision makers.7

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24.The most common assurance service is the ________.A. audit of a company’s historical financial statementsB. compilation of financial statementsC. review of a company’s financial controlsD. review of a company’s historical financial statementsAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: The audit of a company’s historical financialstatements is the most common assurance service.25.Areviewof historical financial statements is an example of ________.A. attestation serviceB. absolute assuranceC. financial forecastD. applicable financial reporting frameworkAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: An example of an attestation service is areview of historical financial statements.26.Assurance, attestation, and auditing are similar because all three represent a commonprocess of _______.A. taking information prepared by someone else and comparing that informationto an established set of criteria.B. compiling and reviewing historical financial statements and providing non-financial information.C. compiling historical financial statements and providing non-financialinformation and web security.D. reviewing financial forecast, examining internal controls, and providing websitesecurity.Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: The terms assurance, attestation, andauditing are sometimes used interchangeably, but they actually represent different types ofservices. They are similar because they all represent a common process of an independentaccounting firm taking information prepared by someone else and comparing that information toan established set of criteria.8

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27.Which of the following is true of assurance services?A. Both attestation and auditing services fall under the term of assuranceservices.B. The terminformationrefers to subject matter that is an entire system, notstandalone data.C. The services are performed by someone who was involved with the creationof the information.D. Theintended useris an independent Certified Public Accountant qualified toperform the auditing service.Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: Both attestation and auditing services fallunder the term of assurance services. The termindependentimplies that the service is performedby someone who was not involved with the creation of the information and who is objective in theevaluation of the information. The terminformationrefers to subject matter that can bestandalone data or entire systems. Theauditorrefers to an independent Certified PublicAccountant, or CPA, who is qualified to perform the auditing service.28.When CPAs are hired to report on the integrity of financial forecasts and reports onfinancial reporting processes, it is called an ______________.A. attestation serviceB. absolute assuranceC. applicable financial reporting frameworkD. audit serviceAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: Companies produce financial informationthat goes beyond historical financial statements. Examples include financial forecasts and reportson financial reporting processes. When CPAs are hired to report on the integrity of this type offinancial information, it is called an attestation service.9

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29.In assurance services, the term “information”refers to subject matter that is_____________.A. historical or prospectiveB. created by independent or in-house servicesC. financial and outside the purview of the non-financialD. internal to a company onlyAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:Communication, Learning Objective: LO1.1, Solution: In the assurance services, the terminformationrefers to subject matter that can be financial or non-financial, historical or prospective,or standalone data or entire systems, internal or external to a company.30.Which terms does the textbook claim are used interchangeably, but actually representdifferent types of services?A. assurance, attestation, and auditingB. accounting, auditing, and assuranceC. accounting, attestation, and auditingD. assurance, attestation, and accountingAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Assurance, attestation and auditing are usedinterchangeably but represent different services.31.Which of the following is included as a focus of assurance services?A. Compilation of historical financial statementsB. Examination of internal controlsC. Review of historical financial statementsD. Review of financial forecastAnswer: C, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: A review is a type of assurance service.10

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32.A key similarity between assurance, attestation, and auditing services is ________.A. the comparison of information prepared by someone else against anestablished set of criteriaB. the comparison of actual output to projected outputC. the comparison of financial accounting data to managerial accounting dataD. the comparison of financial audit data to tax audit dataAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Assurance, attestation, and auditing services involve thecomparison of information prepared by someone else against an established set of criteria.33.The purpose of audit services is to provide ________.A.financial statement users with an opinion as to the fair presentation of thefinancial reportingB. management with an opinion as to the fairness of the company’s managerialaccounting proceduresC. investment advice to the companyD. limited assurance that no material modifications need to be made to thefinancial statementsAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: The purpose of an audit is to provide financial statementusers with an opinion as to the fair presentation of the financial reporting.34.Which are the most specific services provided by the auditor?A. Compilation servicesB. Audit servicesC. Attestation servicesD. Assurance servicesAnswer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Audit services are the most specific.11

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35.Which is the most inclusive or broadest service provided by the auditor?A. Audit servicesB. Attestation servicesC. Assurance servicesD. A review of historical financial statementsAnswer: C, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Assurance services are the broadest service.36.The only professional who can audit a set of historical financial statements for a publicor private company in the United States is ________.A. a Certified Public Accountant (CPA)B. a Certified Fraud Examiner (CFE)C. the IRSD. a loan officerAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: A CPA is the only professionalin the United States whocan audit a set of historical financial statements for a public or private company.37.The set of standards used in preparing the historical financial statements, such asGAAP or IFRS, is referred to as ________.A. the applicable financial reporting frameworkB. Generally Accepted Auditing Standards (GAAS)C. material modificationsD. a review of historical financial statementsAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: The set of standards used in preparing the historicalfinancial statements is referred to as the applicable financial reporting framework.12

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38.Any group that will be using the financial statements to make decisions, such asinvestors and creditors, is known as ________.A. intended usersB. groups of standingC. decision-makersD. practitionersAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Intended users are any group that will be using the financialstatements to make decisions.39.Which of the following is not one of the three E’s needed to become a licensed CPA?A. EducationB. ExaminationC. ExperienceD. EfficiencyAnswer: D, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: The three E’s are education, examination, and experience.40.The only licensed accounting professionals in the United States are:A. Certified Public AccountantsB. Chartered AccountantsC. Certified Internal AuditorsD. Certified Fraud ExaminersAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: CPAs are the only licensed accounting professionals in theUnited States.13

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41.Assurance services are defined as ________.A. independent professional services that improve the quality of information, orits context, for decision makersB. individual provisional services to improve internal controls for financialstatement usersC. individual prospective financial statement qualityD. independent information improvementAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Assurance services are independent professional servicesthat improve the quality of information, or its context, for decision makers.42.Which type of entity generally finds a review of historical financial statements to be themost useful?A. Large public corporationsB. Small public corporationsC. Large private corporationsD. Small private corporationsAnswer: D, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Small private corporations typically find reviews to be themost useful.43.Which of the following is a characteristic of an audit of historical financial statements?A.It provides limited assurance that no material modifications need to be madeto the financial statements.B.It expresses an opinion on the fair presentation of the financial statements.C. It is the same as an examination of internal controls.D. It is broader than a review engagement.Answer: B, Taxonomy: Comprehension Application, Difficulty: Easy, AICPA FC: Reporting,AACSB: Analytic, Learning Objective: LO1.1, Solution: An audit expresses an opinion on the fairpresentation of the financial statements.14

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44.Which of the following is not one of the four sections tested on the CPA exam?A. Auditing and AttestationB. Business Environment and ConceptsC. RegulationD. Internal ControlsAnswer: D, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Internal controls are not one of the four parts of the CPAexam.45.What is the final step in becoming a licensed CPA?A. Taking the CPA examB. Meeting the educational requirementsC.Work experienceD. Evidence of personal integrityAnswer: C, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: The final step is getting the required work experience.46.Independent professional attestation services improve the quality of information. Qualityis best described as an improvement in informational ________.A. relevance and reliability.B. financial and nonfinancial qualitiesC. historical and prospective qualitiesD. internal and external qualitiesAnswer: A, Taxonomy: Comprehension : Application, Difficulty: Easy, AICPA FC: Reporting,AACSB: Analytic, Learning Objective: LO1.1, Solution: Relevance and reliability improve thequality of information.15

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47.The term practitioner would be least likely to be used when referring to the performanceof ________.A. audit servicesB. attestation servicesC. assurance servicesD. bookkeeping servicesAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: The term practitioner would least likely be used whenreferring to an audit because it is so specific that professionals who perform audits are calledauditors.48.A review of historical financial statements as compared to an audit of historical financialstatements ________.A. is more extensive in terms of the work product requiredB. is typically less expensiveC. provides greater assuranceD. provides an opinionAnswer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: A review is typically less expensive than an audit becausemuch less time and effort are involved.49.The term independent with respect to assurance services implies that the service is________.A. performed by someone who was not involved with the creation of theinformation.B. performed by someone who was involved with the creation of the informationand, therefore, fully understands it.C. performed by a company employee.D. is subjective.Answer: A Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: LO1.1, Solution: Independence implies that the service is performed bysomeone who was not involved with the creation of the information.16

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50.Examination of non-financial information falls under _______ services and outsideof_______ services.A. assurance; auditB. attestation; assuranceC. audit; assuranceD. attestation; auditAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Assurance services includecompilation of historical statements, website security, IT operations, and non-financial information.Attestation services (under the umbrella of assurance services) include review of historicalfinancial statements, review of financial forecast, and examination of internal control. Historicalfinancial statements come under audit services.51.Among the various processes relating to auditing and assurance standards, the largestumbrella represents ________ services.A. assuranceB. attestationC. auditD. reviewAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Among the various processesrelating to auditing and assurance standards, the largest umbrella represents assurance services:independent professional services that improve the quality of information, or its context, fordecision makers.52.Within a U.S. context, the applicable financial reporting framework is typically _______.A. Generally Accepted Accounting Principles (GAAP)B. International Standard on Quality Control (ISQC)C. Auditing and Assurance Standards Board (AASB)D. International Financial Reporting Standards (IFRS)Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: Within a U.S. context, theapplicable financial reporting framework is typically generally accepted accounting principles(GAAP).17

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53.Which two audits does an integrated audit combine?A. A financial statement audit and an audit of the effectiveness of ICFRB. A financial statement audit and a compliance auditC. A compliance audit and an audit of the effectiveness of ICFRD. A performance audit and an environmental auditAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: An integrated audit is an auditthat combines the financial statement audit with an audit of the effectiveness of ICFR.54.The audit related to which of the following is specifically meant to express an opinion onthe effectiveness of the company’s system of internal controls over financial reporting?A. ICFRB. GAAPC. FASBD. AICPAAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: Public companies in the U.S.are also required to have an audit of internal controls over financial reporting (ICFR). Theobjective in an audit of ICFR is to express an opinion on the effectiveness of the company’ssystem of internal controls over financial reporting (AS 2201.03) following section 404(b) of theSarbanes Oxley Act of 2002.55.Which audit involves gathering evidence to determine whether the person or entityunder review has followed the rules, policies, procedures, laws and regulations withwhich they must conform?A. A compliance auditB. A performance auditC. An integrated auditD. An internal auditAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: A compliance audit involvesgathering evidence to determine whether the person or entity under review has followed the rules,policies, procedures, laws and regulations with which they must conform.18

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56.What is a compliance audit?A. an audit to determine whether the entity has conformed with regulations, rulesor processesB. an assessment of the economy, efficiency and effectiveness of anorganization’s operationsC. an evaluation and improvement of risk management, internal controlprocedures and elements of the governance processD. an assessment of the company’s financial statementsAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: A compliance audit is an auditto determine whether the entity has conformed to regulations, rules, or processes.57.What is the applicable financial reporting framework in the U.S. known as?A. GAAPB. GAASC. IFRSD. The Internal Revenue CodeAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: GAAP is the applicable financial reporting framework in the U.S.58.Public companies, or issuers, in the U.S. are ________.A. required by the federal government to have quarterly financial statementauditsB. required by the federal government to have annual financial statement auditsC. required by the federal government to have semi-annual financial statementauditsD. not required by the federal government to have financial statement auditsAnswer: B : Knowledge: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: Public companies in the U.S. are required to have annualfinancial statement audits.19

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59.Private companies, or non-issuers, in the U.S. are ________.A. required by the federal government to have quarterly financial statementauditsB. required by the federal government to have annual financial statement auditsC. required by the federal government to have semi-annual financial statementauditsD. not required by the federal government to have financial statement auditsAnswer: D, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: Private companies in the U.S. are not required by the federalgovernment to have financial statement audits.60.Which of the following statements is true?A. Often interested users, like banks, ask private companies or non-users toprovide audited financial statements.B. Public users are required to have three audits a year.C. Public users are required to have an audit of internal financial forecast reports(IFFRs).D. For efficiency purposes, the three required audits for public companies areperformed at the same time.Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: Often interested users, like banks, ask private companies ornon-users to provide audited financial statements.61.ICFR stands for:A. internal controls over financial reporting.B. internal controls for reporting.C. international controls over financial reporting.D. internal controls over forecast reports.Answer: A Taxonomy, TAXONOMY: K, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: ICFR stands for internal control over financial reporting.20

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62.The limitations of an audit are NOT caused by ________.A. the nature of financial reporting.B. the nature of audit procedures.C. the need for the audit to be conducted within a reasonable period of time at areasonable cost.D. a guarantee that the financial statements are free from errorAnswer: D, Taxonomy: C, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, LearningObjective: 1.2 Solution: Limitations of an audit are caused by the nature of financial reporting, thenature of audit procedures, and the need for an audit to be conducted within a reasonable periodof time.63.The nature of audit procedures refers to the ________.A. reliance on evidence provided by the client and its managementB. use of judgment when preparing financial statements due to the subjectivityrequired when arriving at accounting estimatesC. materiality of misstatementD. pressures auditors face to complete their audit within a certain time frame at areasonable costAnswer: A, Taxonomy: C, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, LearningObjective: 1.2 Solution: The nature of audit procedures refers to the reliance on evidenceprovided by the client and its management.64.A financial statement audit is conducted to ________.A. enhance the reliability and credibility of the information included in thefinancial statementsB. guarantee that the financial statements are free from error or fraudC. determine whether financial documents were altered by those committing afraudD. focus on finding all misstatements in the financial recordsAnswer A Taxonomy, Taxonomy: C, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: A financial statement audit is conducted to enhance thereliability and credibility of the information included in the financial statements.21

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65.An integrated audit refers to two audits performed at the same time, or ________.A. an audit on the effectiveness of internal controls and an audit of the financialstatements for external purposes.B. an internal audit and an external audit with the same identical objectives.C. an audit for intentional material misstatements and an audit for errors.D. an audit based on time constraints and an audit based on cost constraints.Answer A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.2 Solution: An integrated audit refers to an audit on the effectiveness ofinternal controls and an audit of the financial statements for external purposes.66.The nature of audit procedures can refer to the concept of ________.A. consistencyB. timelinessC. effectivenessD. materialityAnswer: D, Taxonomy: C, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, LearningObjective: 1.2 Solution: The nature of audit procedures can refer to the concept of materiality.67.Pressures of time and money may affect the audit due to all of the following EXCEPT________.A. clients want to issue their financial statements by a certain dateB. clients refusing to pay additional fees for additional audit effort and timeC. pressures within the CPA firm to complete all audits on a timely basis to avoidincurring costs that may not be recoveredD. pressures by shareholders to find all misstatements in the financial reportsAnswer: D, Taxonomy: Comprehension, Difficulty:Easy, AICPA FC: Reporting, AACSB:Analytic, Learning Objective: 1.2 Solution: Pressures by shareholders to find allmisstatements in the financial reports do not affect the pressures of time and money inand audit.22

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68.If the auditors do not have access to all the information relevant to the audit, this isknown as a(an) ________.A. material misstatementB. limitation in scopeC. estimateD. sampling techniqueAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic,Learning Objective: 1.6 Solution: A limitation in scope occurs when the auditors do not haveaccess to all the information relevant to the audit.69.What type of audit involves gathering evidence to determine whether the person orentity under review has followed the rules?A. A compliance auditB. An operational auditC. A financial statement auditD. An integrated auditAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Analytic, Learning Objective: 1.2 Solution: A compliance audit involves gatheringevidence to determine whether a person or entity under review has followed the rules.70.What type of audit is concerned with the economy, efficiency and effectiveness of anorganization’s activities?A. A compliance auditB. An operational auditC. A financial statement auditD. An integrated auditAnswer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Analytic, Learning Objective: 1.2 Solution: An operational audit is concerned with theeconomy, efficiency and effectiveness of an organization’s activities.23

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71.What type of audit provides an opinion by the auditor about whether the financialstatements are presented fairly in accordance with an applicable financial reportingframework?A. A compliance auditB. An operational auditC. A financial statement auditD. An audit on the effectiveness of ICFRAnswer: C, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB:Analytic, Learning Objective: 1.2 Solution: A financial statement audit provides anopinion about whether the financial statements are presented fairly in accordance withan applicable financial reporting framework.72.What type of audit is conducted to provide assurance about various aspects of anorganization’s activities rather than the reliability of financial statements? a(an)A. compliance auditB. operational auditC. financial statement auditD. internal auditAnswer: D, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:Analytic, Learning Objective: 1.2 Solution: An internal audit is conduced to provideassurance about various aspects of an organization’s activities.1.Those charged with governance are the________.A. CEO, CFO, and COOB.board of directors and management of an entityC. stockholdersD. auditorsAnswer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:Analytic, Learning Objective: 1.2 Solution: The board of directors and management of an entityare those charged with governance.24

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73.In the United States, what entities are required by the federal government to have anannual financial statement audit?A. public companies or issuersB. private companies or issuersC. public companies or non-issuersD. private companies or non-issuersAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: Public companies, or issuers,in the U.S. are required by the federal government to have an annual financial statement audit.Private companies, or non-issuers, are not required by the U.S. government to have an annualfinancial statement audit, but often other interested users request that a private company provideaudited financial statements.74.Who among the following users of the financial statement of a company may beparticularly interested in evaluating whether the company is paying a fair amount oftaxes given its reported earnings, and to gain a better understanding of the company’sactivities?A. governmentB. general pubicC. employeesD. investorsAnswer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Analytic, Learning Objective: LO1.3, Solution: Governments may readfinancial statements to determine whether the company is complying with regulations, to evaluateif the company is paying a fair amount of taxes given its reported earnings, and to gain a betterunderstanding of the company’s activities. A company in receipt of government grants often mustprovide a copy of its audited financial statements when applying for a grant and when reportingon how grant funds have been spent.25

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75.Since users of financial statements make financial decisions that have realconsequences, it is very important that users can depend on the information containedin the financial statements. What term captures this problem?A. reliabilityB. competing incentivesC. complexityD. remotenessAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Analytic, Learning Objective: LO1.3, Solution: Financial statement usersare concerned with the reliability of the information contained in the financial statements. Sincethey use that information to make decisions that have real consequences, it is very important thatusers can rely on the information contained in the financial statements.76.Most financial accounting and disclosure choices being made by the company arecomplicated and often require significant technical knowledge and experience in orderto understand. What term captures this problem?A. ComplexityB. RemotenessC. Competing incentivesD. ReliabilityAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Ethics, Learning Objective: LO1.3, Solution: Financial statements arecomplex, the amounts are often affected by significant estimates, and the disclosures oftenrequire significant knowledge and experience to evaluate. Most financial statement users do nothave the accounting and legal knowledge to assess the reasonableness of complex accountingand disclosure choices being made by the company.26

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77.Among the reasons why users demand an audit of financial statements, what is theproblem of competing incentives?A. The company has a reason to disclose information in a way that presents it infavorable light.B. Financial statement users lack accounting and legal knowledge to understandaccounting and disclosure choices.C. Financial statement users to not have access to the company under reviewand thus face difficulty in determining whether the statements are fair.D. Financial statement users need reliable information in order to make decisionsthat have real consequences.Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA PC: Communication, AACSB:Analytic, Learning Objective: LO1.3, Solution: Competing incentives: Company managers havean incentive to disclose the information contained in the financial statements in a way thatpresents their performance in the best possible light. Users may find it difficult or impossible toidentify when management is presenting biased information.78.Which of the following falls within the purview of financial accounting?A. Changes in equityB. Management consultingC. Business valuationD. Mergers and acquisitionsAnswer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Measurement Analysis andInterpretation, AACSB: Analytic, Learning Objective: LO1.4, Solution: Financial accounting looksinto statements that include the balance sheet (statement of financial position), income statement(statement of comprehensive income), statement of cash flows, statement of changes in equityand accompanying notes.79.Which of the following comes under the purview of the Public Company AccountingOversight Board?A. Auditing Standards (AS)B. Statements on Auditing Standards (SAS)C. Statements on Standards for Attestation Engagement (SSAE)D. Statements on Quality Control Standards (SQCS)Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:Ethics, Learning Objective: LO1.5, Solution: Standards issued by the PCAOB are called AuditingStandards (AS), which provide minimum requirements and guidance for auditing services.27

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