Test Bank for Auditing and Assurance Services, 17th Edition

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1Auditing and Assurance Services, 17e(Arens/Elder/Beasley)Chapter 1The Demand for Audit and Other Assurance Services1.1 Learning Objective 1-11) 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 depending on the information beingaudited.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 stated inaccordance with SEC standards.Answer: CTerms: Audit processDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking2) Which of the following is considered audit evidence?A)Oral statementsmade by managementWrittenCommunicationsAuditorObservationsYNNB)Oral statementsmade by managementWrittenCommunicationsAuditorObservationsNYYC)Oral statementsmade by managementWrittenCommunicationsAuditorObservationsYYYD)Oral statementsmade by managementWrittenCommunicationsAuditorObservationsNNYAnswer: CTerms: Audit evidenceDifficulty: EasyObjective: LO 1-1AACSB: Reflective thinking

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23) 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) all of the aboveAnswer: DTerms: Criteria by which an auditor evaluates informationDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking4) Auditors donotprovide which of the following?A) assurance on financial statementsB) assuranceon the effectiveness of internal controls over financial reportingC) assurance on corporate sustainability reportsD) absolute assurance on the financial statements including assuming responsibility for themAnswer: DTerms: Nature of Objectives of AuditingDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking5) The accumulation and evaluation of evidence about information to determine and report onthe degree of correspondence between the information and some established criteria is defined asA) accounting.B) financial reporting.C) tax reporting.D) auditing.Answer: DTerms: Definition of auditingDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking6) The criteria bywhich an auditor evaluates the information under audit may vary with theinformation being audited.Answer: TRUETerms: Criteria by which an auditor evaluates informationDifficulty: EasyObjective: LO 1-1AACSB: Reflective thinking

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37) One criterionused by an external auditor to evaluate published financial statements is knownas generally accepted auditing standards.Answer: FALSETerms: Criteria used byexternal auditor to evaluate published financial statementsDifficulty: EasyObjective: LO1-1AACSB: Reflective thinking8) Auditors strive to maintain a high level of independence to keep the confidence of usersrelying on their reports.Answer: TRUETerms: IndependenceDifficulty: EasyObjective: LO 1-1AACSB: Reflective thinking9) To perform an audit, there must be information in a verifiable form and some criteria bywhich the auditor can evaluate the information.Answer: TRUETerms: IndependenceDifficulty: EasyObjective: LO 1-1AACSB: Reflective thinking10) An auditor mustbe competent and have an independent mental attitude.Answer: TRUETerms: Criteria used by external auditor to evaluate published financial statementsDifficulty: EasyObjective: LO 1-1AACSB: Reflective thinking11) Auditors arenotallowed and shouldnotaudit subjective information like the effectivenessof computer controls or the efficiency of manufacturing-related operations.Answer: FALSETerms: Information and Established Criteria for the Performance of AuditsDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking12) In an audit of internal controls over financial reporting, the auditor may rely upon InternalControl-Integrated Framework issued by COSO.Answer: TRUETerms: Information and Established Criteria for the Performance of AuditsDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking

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413) In circumstances where the auditor is being asked to audit subjective types of information,typically, the auditor and the entities being audited should agree in writing about the criteriabeing audited after the audit starts.Answer: FALSETerms: Information and Established Criteria for the Performance of AuditsDifficulty: ModerateObjective: LO 1-1AACSB: Reflective thinking14) Evidence is paramount to audit and attestation engagements. List the four basic types of auditevidence.Answer: The four types of audit and attestation evidence include1. Electronic and documentary data about transactions2. Written and electronic communications with outsiders3. Observations by the auditor4. Oral testimony of the auditee (client)Terms: Basic types of audit evidenceDifficulty: EasyObjective: LO 1-1AACSB: Reflectivethinking1.2 Learning Objective 1-21) Recording, classifying, and summarizing economic events in a logical manner for the purposeof providing financial information for decision making is commonly calledA) finance.B) auditing.C) accounting.D) economics.Answer: CTerms: Recording, classifying, and summarizing economic eventsDifficulty: EasyObjective: LO 1-2AACSB: Reflective thinking2) An accountantA) must possess expertise in the accumulation of audit evidence.B) must decide the numberand types of items to test.C) must have an understanding of the principles and rules that provide the basis for preparing theaccounting information.D) must be a CPA.Answer: CTerms: Distinguishes auditors from accountantsDifficulty: ModerateObjective: LO 1-2AACSB: Reflective thinking

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53) When auditing accounting data, auditors focus onA) determining whether recorded information properly reflects the economic events thatoccurred during the accounting period.B) determining 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: ATerms: Auditing financial accounting data primary concernDifficulty: ModerateObjective: LO 1-2AACSB: Reflective thinking4) The trait that distinguishes auditors from accountants is theA) auditor's ability to interpret accounting principles generally accepted in the United States.B) auditor's education beyond the bachelor's degree.C) auditor's ability to interpret FASB Statements.D) auditor's expertise in the accumulation and the interpretation of audit evidence.Answer: DTerms: Distinguishes auditors from accountantsDifficulty: ChallengingObjective: LO 1-2AACSB: Reflective thinking5) Auditors focus on determining whether recorded information properly reflects the economicevents that occurred during the accounting period.Answer: TRUETerms: Roles of accountants and auditorsDifficulty: EasyObjective: LO 1-2AACSB: Reflective thinking6) Both accountants and auditors must possess expertise in the accumulation and interpretationof audit evidence.Answer: FALSETerms: Roles of accountants and auditorsDifficulty: ModerateObjective: LO 1-2AACSB: Reflective thinking7) Accountants arenotdirectly responsible for developing a system that ensures the entity'seconomic events are properly recorded on a timely basis and at a reasonable cost.Answer: FALSETerms: Roles ofaccountants and auditorsDifficulty: ModerateObjective: LO 1-2AACSB: Reflective thinking

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68) Financial statement users donotconfuse auditing with accounting any longer.Answer: FALSETerms: Roles of accountants and auditorsDifficulty: ModerateObjective: LO 1-2AACSB: Reflective thinking9) Discuss the differences and similarities between the roles of accountants and auditors. Whatadditional expertise must an auditor possess beyond that of an accountant?Answer: The role of accountants is to record, classify, and summarize economic events in alogical manner for the purpose of providing financial information for decision making. Toprovide relevant information, accountants must have a thorough understanding of the principlesand rules that provide the basis for preparing the accounting information. In addition,accountants must develop a system to ensure that the entity's economic events are properlyrecorded on a timely basis and at a reasonable cost.The role of auditors is to determine whether the recorded information prepared by accountantsproperly reflects the economic events that occurred during the accounting period. Because U.S.or international accounting standards provide the criteria for evaluating whether financialinformation isproperly recorded, auditors must thoroughly understand those accountingstandards. In addition to understanding accounting, the auditor must possess expertise in theaccumulation and interpretation of audit evidence. It is this expertise that distinguishes auditorsfrom accountants. Determining the proper audit procedures, deciding the number and types ofitems to test, and evaluating the results are unique to the auditor.Terms: Roles of accountants and auditorsDifficulty: ModerateObjective: LO 1-2AACSB: Reflective thinking1.3 Learning Objective 1-31) ________ risk reflects the possibility that the information upon which the business decisionwas made was inaccurate.A) Client acceptanceB) InformationC) BusinessD) ControlAnswer: BTerms: Risk that reflects the possibilitythat information upon which business risk decision wasmadeDifficulty: ModerateObjective: LO 1-3AACSB: Reflective thinking

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72) The possibility that a business maynotbe able to repay a bank loan because of an economicdownturn is referred to asA)materiality risk.B) information risk.C) interest rate risk.D) business risk.Answer: DTerms: Business riskDifficulty: ModerateObjective: LO 1-3AACSB: Reflective thinking3) A bank loan officer istrying to decide whether the bank should make aloan to a particularcompany. 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 interestrate riskB) information riskC) the business risk for/of the customerD) All of the above are influenced by the auditor's report.Answer: BTerms: Interest rate risk/factor influenced by auditor's reportDifficulty: ModerateObjective: LO 1-3AACSB:Reflective thinking4) Auditing can have a significant effect on both information risk and business risk.Answer: FALSETerms: Business risk and information riskDifficulty: ModerateObjective: LO 1-3AACSB: Reflective thinking1.4 Learning Objective 1-41) A correct relationship among the auditor, the client, and the external users isA) 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 capital to the external users.D) the external users can rely upon the auditor's report to reduce information risk.Answer: DTerms: Relationships among auditor, client, and external usersDifficulty: ModerateObjective: LO 1-4AACSB: Reflective thinking

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82) The most common way for users to obtainreliable information is toA) have an internal audit.B) have an independent audit.C) verify all information individually.D) verify the information with management.Answer: BTerms: Obtain reliable informationDifficulty: ModerateObjective: LO 1-4AACSB: Reflective thinking3) External users of the financial statementsA) value the auditor's report because of the auditor's independence from the client.B) look to the auditor'sreport as an indication of the statements' reliability.C) use the audited information on the assumption that it is reasonably complete, accurate, andunbiased.D) all of the above.Answer: DTerms: Relationships among auditor, client, and external usersDifficulty: EasyObjective: LO 1-4AACSB: Reflective thinking4) Which of the following isnota 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 dataand exchange transactions.D) The biases and the motives of the information provider.Answer: ATerms: Causes of Information RiskDifficulty: EasyObjective: LO 1-4AACSB: Reflective thinking5) Large businesses, especially, have the ability to reduce information risk. Which of thefollowing isnota way for a large business to reduce information risk?A) Paying higher interest rates on loans.B) The user verifies the information they need by any possible means.C) The user of information shares information risk with management.D) Having an independent audit performed of the financial statements.Answer: ATerms: Causes of Information RiskDifficulty: ModerateObjective: LO 1-4AACSB: Reflective thinking

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96) As society becomes more complex, decision makers are more likely to receive reliableinformation.Answer:FALSETerms: Reducing information riskDifficulty: EasyObjective: LO 1-4AACSB: Reflective thinking7) Management is required by GAAP to reduce information risk, even if the costs outweigh thebenefits.Answer: FALSETerms: Reducing information riskDifficulty: ModerateObjective: LO 1-4AACSB: Reflective thinking8) 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 businessrisk 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 causesDifficulty: EasyObjective: LO 1-4AACSB: Reflective thinking1.5 Learning Objective 1-51) In the audit of historical financial statements, management asserts that the financial statementsare fairly stated in accordance with what standards?A) regulatory accounting principlesB) applicable international accounting standardsC) applicable U.S. accounting standardsD) B and CAnswer: DTerms: Audit of historical financial statementsDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking

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102) Any servicethat requires a CPA firm to issue a report about the reliability of anassertion thatis made by another party is a(n)A) accounting and bookkeeping service.B) attestation service.C) assurance service.D) tax service.Answer: BTerms: Assurance servicesDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking3) Three common types of attestation services areA) audits of historical financial statements, reviews of historical financial statements, and auditsof internal control over financial reporting.B) audits of historical financial information, verifications of historical financial information, andattestations regarding internal controls.C) reviews of historical financial information, verifications of future financial information, andattestations regarding internal controls.D) audits of historical financial information, reviews of controls related to investments, andverifications of historical financial information.Answer: ATerms: Types of attestation servicesDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking4) Which of the following services provides the lowest level of assurance on a financialstatement?A) reviewB) auditC) Neither service provides assurance on financial statements.D) Each service provides thesame level of assurance on financial statements.Answer: ATerms: Service provides lowest level of assurance on a financial statementDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking

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115) Which of the followingis an accurate statement 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) Assurance services can only beperformed on financial data.Answer: CTerms: Assurance servicesDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking6) AuditsA) are an assurance service, but not an attestation service.B) are designed to provide absolute assurance that the financial statements are free of materialmisstatement.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: CTerms: Audit assuranceDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking7) A high, butnotabsolute, level of assurance is calledA) probable assurance.B) reasonable assurance.C) limited assurance.D) incomplete assurance.Answer: BTerms: Reasonable assuranceDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking8) Which of the following is an accurate statement regarding the various types of other assuranceservices?A) Assurance services must be about the reliability of another party's assertion about compliancewith 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 ofinformation.D)The market for other forms of assurance services is open to non-CPA competitors.Answer: DTerms: Assurance servicesDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking

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129) CPA firms are never allowed to provide bookkeeping services forclients.Answer: FALSETerms: CPAservices provided to clientsDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking10) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditorattest to their internalcontrol over financial reporting.Answer: TRUETerms: Section 404 of the Sarbanes-Oxley ActDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking11) Most public companies' audited financial statements are available on the SEC's EDGARdatabase.Answer: TRUETerms: Publiccompanies' audited financial statements: SEC's EDGAR databaseDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking12) The primary purpose of a management consulting engagement is to generate arecommendation to management.Answer: TRUETerms: Nonassurance services provided by CPAs; management consultingDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking13) The primary purpose of a management consulting engagement is to generate arecommendation to management.Answer: TRUETerms: Nonassurance services provided by CPAs; management consultingDifficulty: EasyObjective: LO 1-5AACSB: Reflectivethinking14) Audits and some types of attestation services are no longer limited by regulation to licensedCPAs.Answer: FALSETerms: Who can provide audits and certain types of attestation servicesDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking

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1315) Evaluating internal controls at third-party service providers, such as cloud computingsuppliers, isnotan attestation type of service which a CPA is allowed to perform today.Answer: FALSETerms: Who can provide other types of attestation servicesDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking16) It is increasingly important for companies toask their third-party service provider ofservices, including payroll and other types of transaction processing, for attestation reportscovering a review of the effectiveness of internal controls in place at the third-party serviceprovider.Answer: TRUETerms: Who can provide other types of attestation servicesDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking17) Two types of attestation services provided by CPA firms are audits and reviews. Discuss thesimilarities and differences between these two types of attestation services. Which type providesthe least assurance?Answer: In both the review and audit of the historical financial statements, management assertsthat the statements are fairly stated in accordance with accounting standards. The CPA providesa lower level of assurance for reviews of financial statements compared to the high level foraudits, therefore less evidence is needed. A review is often adequate to meet financial statementusers' needs. It can be providedby a CPAfirm at a much lower fee than an audit because lessevidence is needed.An audit is the most common assurance service provided by CPA firms. Publicly tradedcompanies in the U.S. are required to have audits under the federal securities acts. Manynonpublic companies have a review to limit audit fees.Terms: Attestation services; Audits and reviews of historical financial statementsDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking

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1418) What is an audit of internal control over financial reporting?Answer: For an audit of internal control over financial reporting, management asserts thatinternal controls have been developed and implemented following well established criteria.Section 404 of the Sarbanes-Oxley Act requires public companies to report management'sassessment of the effectiveness of internal control. The Act also requires auditors for largerpublic companies to attest to the effectiveness of internal control over financial reporting. Thisevaluation, which is integratedwith the audit of financial statements, increases user confidenceabout future financial reporting, because effective internal controls reduce the likelihood offuture misstatements in the financial statements.Terms: Engagement to attest on internal control over financial reportingDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking19) What are the four categories of attestation services?Answer: The four categories of attestation services include•Audit of historical financial statements•Audit of internal control over financial reporting•Review of historical financial statements•Other attestation services that may be applied to a broad range of subject matter.Terms: Categories of attestation servicesDifficulty: ModerateObjective: LO 1-5AACSB: Reflective thinking20) CPA firms perform numerous services that generally fall outside the scope of assuranceservices. Give three examples of such services.Answer: Three specific examples of services performed by CPAs that generally fall outside thescope of assurance services are•accounting and bookkeeping services•tax services•management and consulting services.Terms: Nonassurance services provided by CPAsDifficulty: EasyObjective: LO 1-5AACSB: Reflective thinking

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151.6 Learning Objective 1-61) One objective of an operational audit is toA) determine whether the financial statements fairly present the entity's operations.B) determine if the auditee is in compliance with GAAP.C) make recommendations for improving performance.D) report on the entity's relative success in attaining profit maximization.Answer: CTerms: Objective of operational auditDifficulty: ModerateObjective: LO 1-6AACSB: Reflective thinking2) An examination of part of an organization's procedures and methods for the purpose ofevaluating efficiency and effectiveness is what type of audit?A) operational auditB) compliance auditC) financial statement auditD) production auditAnswer: ATerms: Examination of part of an organization's procedures and method to evaluate efficiencyand effectivenessDifficulty: ModerateObjective: LO 1-6AACSB: Reflective thinking3) An audit to determine whether an entity is following specific procedures or rules set down bysome higher authorityis classified as a(n)A) audit of financial statements.B) compliance audit.C) operational audit.D) production audit.Answer: BTerms: Audit to determine whether entity followed specific procedures or rulesDifficulty: ModerateObjective: LO 1-6AACSB: Reflective thinking

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