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Test Bank for Auditing and Assurance Services, 17th Edition

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    1 Auditing and Assurance Services, 17e (Arens/Elder/Beasley) Chapter 1 The Demand for Audit and Other Assurance Services 1.1 Learning Objective 1 - 1 1) In the auditing process, A) the types and amounts of evidence remain constant from audit to audit. B) the criteria for evaluating information will not vary depen ding on the information being audited. C) the audit report communicates the auditor's findings to users. D) records are gathered by the auditor to determine whether the audited information is state d in accordance with SEC standards. Answer: C Terms: Audit process Difficulty: Moderate Objective: LO 1 - 1 AACSB: Reflective thinking 2) Which of the following is considered audit evidence? A) Oral statements made by management Written Communicatio ns Auditor Observations Y N N B) Oral statements made by management Written Communications Auditor Observations N Y Y C) Oral statements made by management Written Communications Auditor Observations Y Y Y D) Oral statements made by manage ment Written Communications Auditor Observations N N Y Answer: C Terms: Audit evidence Difficulty: Easy Objective: LO 1 - 1 AACSB: Reflective thinking

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    2 3) Which of the following can be used as a criterion for evaluating information being audited? A ) International Financial Reporting Standards (IFRS) B) Generally Accepted Accounting Principles (GAAP) C) Internal Revenue Code (IRC) D) a ll of the above Answer: D Terms: Criteria by which an auditor evaluates information Difficulty: Moderate Objective : LO 1 - 1 AACSB: Reflective thinking 4) Auditors do not provide which of the following? A) assurance on financial statements B) assurance on the effectiveness of internal controls over financial reporting C) assurance on corporate sustainability reports D) absolute assurance on the financial statements including assuming responsibility for them Answer: D Terms: Nature of Objectives of Aud iting Difficulty: Moderate Objective: LO 1 - 1 AACSB: Reflective thinking 5) The accumulation and evaluation of evi dence about information to determine and report on the degree of correspondence between the information and some established criteria is de fined as A) accounting. B) financial reporting. C) tax reporting. D) auditing. Answer: D Terms: Definition of audit ing Difficulty: Moderate Objective: LO 1 - 1 AACSB: Reflective thinking 6) The criteria by which an auditor evaluates the information under audit may vary with the information being audited. Answer: TRUE Terms: Criteria by which an auditor evaluates in formation Difficulty: Easy Objective: LO 1 - 1 AACSB: Reflective thinking

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    3 7) One criterion used by an external auditor to evaluate published financial statements is known as generally accepted auditing standards. Answer: FALSE Terms: Criteria used by external auditor to evaluate published financial statements Difficulty: Easy Objective: LO 1 - 1 AACSB: Reflective thinking 8) Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports. Answer: TRU E Terms: Independence Difficulty: Easy Objective: LO 1 - 1 AACSB: Reflective thinking 9) T o perform an audit, there must be information in a verifiable form and some criteria by which the auditor can evaluate the information. Answer: TRUE Terms: Indep endence Difficulty: Easy Objective: LO 1 - 1 AACSB: Reflective thinking 10) An auditor must be competent and have an independent mental attitude. Answer: TRUE Terms: Criteria used by external auditor to evaluate published financial statements Difficult y: Easy Objective: LO 1 - 1 AACSB: Reflective thinking 11) Auditors are not allowed and should not audit subjective information like the effectiveness of computer controls or the efficiency of manufacturing - related operations. Answer: FALSE Terms: Info rmation and Established Criteria for the Performance of Audits Difficulty: M oderate Objective: LO 1 - 1 AACSB: Reflective thinking 12) In an audit of internal controls over financial reporting, the auditor may rely upon Internal Control - Integrated Fram ework issued by COSO. Answer: TRUE Terms: Information and Established Crite ria for the Performance of Audits Difficulty: Moderate Objective: LO 1 - 1 AACSB: Reflective thinking

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    4 13) In circumstances where the auditor is being asked to audit subjective t ypes of information, typically, the auditor and the entities being audited sh ould agree in writing about the criteria being audited after the audit starts. Answer: FALSE Terms: Information and Established Criteria for the Performance of Audits Difficulty : Moderate Objective: LO 1 - 1 AACSB: Reflective thinking 14) Evidence is p aramount to audit and attestation engagements. List the four basic types of audit evidence. Answer: The four types of audit and attestation evidence include 1. Electronic and doc umentary data about transactions 2. Written and electronic communications with outsiders 3. Observations by the auditor 4. Oral testimony of the auditee (client) Terms: Basic types of audit evidence Difficulty: Easy Objective: LO 1 - 1 AACSB: Reflective thinking 1.2 Learning Objective 1 - 2 1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called A) finance. B) auditing. C ) accounting. D) econ omics. Answer: C Terms: Recording, classifying, and summarizing economic events Difficulty: Easy Objective: LO 1 - 2 AACSB: Reflective thinking 2) An accountant A) must possess expertise in the accumulation of audit evidence. B) mu st decide the number and types of items to test. C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information. D) must be a CPA. Answer: C Terms: Distinguishes auditors from accountants Difficulty: Moderate Object ive: LO 1 - 2 AACSB: Reflective thinking

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    5 3) When auditing accounting data, auditors focus on A) determining whether recorded information properly reflects the economic events that occurred during the accounting period. B) deter mining if fraud has occurred . C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements. Answer: A Terms: Auditing financial accounting data primary con cern Difficulty: Moderate O bjective: LO 1 - 2 AACSB: Reflective thinking 4) The trait that distinguishes auditors from accountants is the A) auditor's ability to interpret accounting principles generally accepted in the United States. B) auditor's educat ion beyond the bachelor's de gree. C) auditor's ability to interpret FASB Statements. D) auditor's expertise in the accumulation and the interpretation of audit evidence. Answer: D Terms: Distinguishes auditors from accountants Difficulty: Challenging Ob jective: LO 1 - 2 AACSB: Ref lective thinking 5) Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period. Answer: TRUE Terms: Roles of accountants and auditors Di fficulty: Easy Objective: LO 1 - 2 A ACSB: Reflective thinking 6) Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence. Answer: FALSE Terms: Roles of accountants and auditors Difficulty: Moderate Objective: LO 1 - 2 AACSB: Reflecti ve thinking 7) Accountants are not directly responsible for developing a system that ensures the entity's economic events are properly recorded on a timely basis and at a reasonable cost. Answer: FALSE Terms: Roles of accountants and auditors Difficulty : Moderate Objective: LO 1 - 2 AACSB: Reflective thinking

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    6 8) Financial statement users do not confuse auditing with accounting any longer. Answer: FALSE Terms: Roles of accountants and auditors Difficulty: Moderate Objective: LO 1 - 2 AACSB: Reflectiv e thinking 9) Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant? Answer: The role of accountants is t o record, classify, and summarize ec onomic events in a logical manner for the purpose of providing financial information for decision making. To provide relevant information, accountants must have a thorough understanding of the principles and rules that p rovide the basis for preparing the a ccounting information. In addition, accountants must develop a system 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 wh ether the recorded information prepa red by accountants properly reflects the economic events that occurred during the accounting period. Because U.S. or international accounting standards provide the criteria for evaluating whether financial information is properly recorded, auditors must th oroughly understand those accounting standards. In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence. It is this expertise that distinguishe s auditors from accountants. Determi ning the proper audit procedures, deciding the number and types of items to test, and evaluating the results are unique to the auditor. Terms: Roles of accountants and auditors Difficulty: Moderate Objective: LO 1 - 2 AACSB: Reflective thinking 1.3 Le arning Objective 1 - 3 1) ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate. A) Client acceptance B) Information C) Business D) Control Answer: B Terms: Risk that reflects the possibility that information upon which business risk decision was made Difficulty: Moderate Objective: LO 1 - 3 AACSB: Reflective thinking

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    7 2) The possibility that a business may not be ab le to repay a bank loan because of an economic downturn is referred to as A) materiality risk. B) information risk. C) interest rate risk. D) business risk. Answer: D Terms: Business risk Difficulty: Moderate Objective: LO 1 - 3 AACSB: Reflective thinki ng 3) A bank loan officer is trying to decide whether the bank should make a loan to a particular company. The interest rate the bank will charge the company is determined by many factors. Which of the following factors is influenced by the auditor's report? A) the risk - free interest rate risk B) information risk C) the business r isk for/of the customer D) All of the above are influenced by the auditor's report. Answer: B Terms: Interest rate risk/factor influenced by auditor's report Difficulty: Moderate Objective: LO 1 - 3 AACSB: Reflective thinking 4) Auditing can have a sig nificant effect on both information risk and business risk. Answer: FALSE Terms: Business risk and information risk Difficulty: Moderate Objective: LO 1 - 3 AACSB: Reflective thinking 1.4 Learning Objecti ve 1 - 4 1) A correct relationship among the aud itor, the client, and the external users is A) management of a public company hires the independent auditor. B) the audit committee of a private company hires the independent auditor. C) the client provides ca pital to the external users. D) the external us ers can rely upon the auditor's report to reduce information risk. Answer: D Terms: Relationships among auditor, client, and external users Difficulty: Moderate Objective: LO 1 - 4 AACSB: Reflective thinking

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    8 2) The most common way for users to obtain reliable information is to A) have an internal audit. B) have an independent audit. C) verify all information individually. D) verify the information with management. Answer: B Terms : Obtain reliable information Difficulty: Moderate Objective: LO 1 - 4 AACSB: Reflective thinking 3) External users of the financial statements A) value the auditor's report because of the auditor's independence from the client. B) look to the auditor's report as an indication of the statements' reliability. C) use the audi ted information on the assumption that it is reasonably complete, accurate, and unbiased. D) all of the above. Answer: D Terms: Relationships among auditor, client, and external user s Difficulty: Easy Objective: LO 1 - 4 AACSB: Reflective thinking 4) W hich of the following is not a cause of information risk? A) Society, today, is not as complex as it used to be. B) Remoteness of information. C) The volume and the complexity of data and exchange transactions. D) The biases and the motives of the informat ion provider. Answer: A Terms: Causes of Information Risk Difficulty: Easy Objective: LO 1 - 4 AACSB: Reflective thinking 5) Large businesses, especially, have the ability to reduce information risk. Which of the following is not a way for a large bus iness to reduce information risk? A) Paying higher interest rates on loans. B) The user verifies the information they need by a ny possible means. C) The user of information shares information risk with management. D) Having an independent audit performed o f the financial statements. Answer: A Terms: Causes of Information Risk Difficulty: Moderate Objective: LO 1 - 4 AACSB: Ref lective thinking

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    9 6) As society becomes more complex, decision makers are more likely to receive reliable information. Answer: FALSE Terms: Reducing information risk Difficulty: Easy Objective: LO 1 - 4 AACSB: Reflective thinking 7) Management is requ ired by GAAP to reduce information risk, even if the costs outweigh the benefits. Answer: FALSE Terms: Reducing information ris k Difficulty: Moderate Objective: LO 1 - 4 AACSB: Reflective thinking 8) Explain what is meant by information risk, and list the four causes of this risk. Answer: Information risk reflects the possibility that the information upon which the business ris k decision was made was inaccurate. Four causes of information risk are • remoteness of information, • biases and motives of the provider, • voluminous data, and • complex exchange transactions. Terms: Information risk definition and causes Difficulty: E asy Objective: LO 1 - 4 AACSB: Reflective thinking 1.5 Learning Object ive 1 - 5 1) In the audit of historical financial statements, management asserts that the financial statements are fairly stated in accordance with what standards? A) regulatory account ing principles B) applicable international accounting standards C) appli cable U.S. accounting standards D) B and C Answer: D Terms: Audit of historical financial statements Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thinking

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    10 2) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n) A) accounting and bookkeeping service. B) attestation service. C) assurance service. D) tax service. Answer: B Terms: Assurance servic es Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thinking 3) Three common types of attestation services are A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial r eporting. B) audits of historical financ ial information, verifications of historical financial information, and attestations regarding internal controls. C) reviews of historical financial information, verifications of future financial information, and at testations regarding internal controls. D) audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information. Answer: A Terms: Types of attestation services Difficulty: Easy Obj ective: LO 1 - 5 AACSB: Reflective think ing 4) Which of the following services provides the lowest level of assurance on a financial statement? A) review B) audit C) Neither service provides assurance on financial statements. D) Each service provides the same level of assurance on financial sta tements. Answer: A Terms: Service provides lowest level of assurance on a financial statement Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking

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    11 5) Which of the following is an accurate statemen t regarding assurance services? A) Assurance services must be performed by a CPA. B) An attestation service is not a type of assurance service. C) Assurance services improve the quality of information for decision makers. D) Assuranc e services can only be performed on financial data. Answer: C Terms: Assurance services Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking 6) Audits A) are an assurance service, but not an attestation service. B) are designed to provid e absolute assurance th at the financial statements are free of material misstatement. C) are required for publicly traded companies in the United States. D) do not require the auditor to express their opinion in a written report. Answer: C Terms: Audit a ssurance Difficulty: M oderate Objective: LO 1 - 5 AACSB: Reflective thinking 7) A high, but not absolute, level of assurance is called A) probable assurance. B) reasonable assurance. C) limited assurance. D) incomplete assurance. Answer: B Terms: Reasonable assurance Difficu lty: Easy Objective: LO 1 - 5 AACSB: Reflective thinking 8) Which of the following is an accurate statement regarding the various types of other assurance services? A) Assurance services must be about the reliability o f another party's assertion about co mpliance with specified criteria. B) Other assurance services must meet the definition of an attestation service. C) The primary purpose of a management consulting engagement is to improve the quality of information. D) The market for other forms of assura nce services is open to non - CPA competitors. Answer: D Terms: Assurance services Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking

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    12 9) CPA firms are never allowed to provide bookkeeping services for clients. Answer: FALSE Terms: CPA services provided to clients Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking 10) Section 404 of the Sarbanes - Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting. An swer: TRUE Terms: Section 404 of the Sarbanes - Oxley Act Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking 11) Most public companies' audited financial statements are available on the SEC's EDGAR database. Answer: TRUE Terms: Public companies' audited financial statements: SEC's EDGAR database Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinki ng 12) The primary purpose of a management consulting engagement is to generate a recommendation to management. Answer: TRUE T erms: Nonassurance services provided by CPAs; management consulting Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thi nking 13) The primary purpose of a management consulting engagement is to generate a recommendation to management. Answer: TRU E Terms: Nonassurance services provided by CPAs; management consulting Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thinking 14) Audits and some types of attestation services are no longer limited by regulation to licensed CPAs. Answer: FALSE Terms: Who can provide audits and certain types of attestation services Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflectiv e thinking

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    13 15) Evaluating internal controls at third - party service providers, such as cloud computing suppliers, is not an atte station type of service which a CPA is allowed to perform today. Answer: FALSE Terms: Who can provide other types of attestation services Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thinking 16) It is increasingly important for compa nies to ask their third - party service provider of services, including payroll and other types of transaction processing, for attestation reports covering a review of the effectiveness of internal controls in place at the third - party service provider. Answe r: TRUE Terms: Who can provide other types of attestation services Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thinking 17) Two types of attestation services provided by CPA firms are audits and reviews. Discuss the similarities and differen ces betw een these two types of attestation services. Which type provides the least assurance? Answer: In both the review and audit of the historical financial statements, management asserts that the statements are fairly stated in accordance with accounti ng stand ards. The CPA provides a lower level of assurance for reviews of financial statements compared to the high level for audits, therefore less evidence is needed. A review is often adequate to meet financial statement users' needs. It can be provided by a CPA firm at a much lower fee than an audit because less evidence is needed. An audit is the most common assurance service provided by CPA firms. Publicly traded companies in the U.S. are required to have audits under the federal securities acts. Man y nonpub lic companies have a review to limit audit fees. Terms: Attestation services; Audits and reviews of historical financial statements Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking

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    14 18) What is an audit of internal control ove r financ ial reporting? Answer: For an audit of internal control over financial reporting, management asserts that internal controls have been developed and implemented following well established criteria. Section 404 of the Sarbanes - Oxley Act requires pu blic com panies to report management's assessment of the effectiveness of internal control. The Act also requires auditors for larger public companies to attest to the effectiveness of internal control over financial reporting. This evaluation, which is int egrated with the audit of financial statements, increases user confidence about future financial reporting, because effective internal controls reduce the likelihood of future misstatements in the financial statements. Terms: Engagement to attest on inte rnal con trol over financial reporting Difficulty: Moderate Objective: LO 1 - 5 AACSB: Reflective thinking 19) What are the four categories of attestation services? Answer: The four categories of attestation services include • Audit of historical financial state ments • Audit of internal control over financial reporting • Review of historical financial statements • Other attestation services that may be applied to a b road range of subject matter. Terms: Categories of attestation services Difficulty: Moderate Obj ective: LO 1 - 5 AACSB: Reflective thinking 20) CPA firms perform numerous services that generally fall outside the scope of assurance services. Give three e xamples of such services. Answer: Three specific examples of services performed by CPAs that gene rally fall outside the scope of assurance services are • accounting and bookkeeping services • tax services • management and consulting services. Terms: Non assurance services provided by CPAs Difficulty: Easy Objective: LO 1 - 5 AACSB: Reflective thinki ng

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    15 1.6 Learning Objective 1 - 6 1) One objective of an operational audit is to A) determine whether the financial statements fairly present the entity's ope rations. B) determine if the auditee is in compliance with GAAP. C) make recommendations for impro ving performance. D) report on the entity's relative success in attaining profit maximization. Answer: C Terms: Objective of operational audit Difficulty: Moderate Objective: LO 1 - 6 AACSB: Reflective thinking 2) An examination of part of an organizat ion's procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of au dit? A) operational audit B) compliance audit C) financial statement audit D) production audit Answer: A Terms: Examination of part of an organizati on's procedures and method to evaluate efficiency and effectiveness Difficulty: Moderate Objective: LO 1 - 6 AACSB: Reflective thinking 3) 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) pro duction audit. Answer: B Terms: Audit to determine whether entity followed specific procedures or rules Difficulty: Moderate Objective: LO 1 - 6 AAC SB: Reflective thinking

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