Test Bank For Auditing And Assurance Services, 5th Edition

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Chapter 01Auditing and Assurance ServicesTrue / False Questions1.Financial decision makers demand reliable information that is provided byaccountants.TrueFalse2.Financial decision makers obtain their accounting information from lenders offunds.TrueFalse3.Four conditions that create demand for reliable information are complexity,remoteness, timeliness, and consequences.TrueFalse4.The lending of credibility to financial information is known as certification.TrueFalse5.Independent auditors are employees of the client.TrueFalse6.Assurance service is the systematic process of objectively obtaining andevaluating evidence.TrueFalse7.Evidence consists of assertions about economic actions and events.TrueFalse

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8.The purpose of obtaining and evaluating evidence is to ascertain the degree ofcorrespondence between the assertions and established criteria.TrueFalse9.The AICPA Statement on Auditing Standards defines auditing more broadly thanthe AAA definition of auditing.TrueFalse10.The PCAOB audit objective related to the completeness assertion is to establishevidence that assets, liabilities, and equities actually exist.TrueFalse11.The ASB balance audit objective related to valuation or accuracy is to determinewhether proper values have been assigned to assets, liabilities, equities,revenues, and expenses.TrueFalse12.The objective of internal auditing is to assist members of an organization toeffectively perform their obligations.TrueFalse13.Internal auditors perform only operational audits.TrueFalse14.Government auditors perform both financial and performance audits.TrueFalse15.Expanded scope governmental auditing includes economy and efficiency andprogram results audits.TrueFalse16.The AICPA licenses CPAs to practice in the United States.TrueFalse

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17.Professional skepticism is an auditor's tendency not to believe anyone.TrueFalse18.Assurance services are independent professional services that improve thequality ofinformation or its context for decision makers.TrueFalse19.The concept "professional skepticism" requires that auditors assumemanagement is dishonest and should not be trusted.TrueFalse20.For independent auditors offinancial statements in the United States, establishedcriteria largely consist of the generally accepted accounting principles (GAAP).TrueFalseMultiple Choice Questions21.The audit objective of presenting all transactions and accounts in the financialstatements are in fact included is related to which of the PCAOB assertions?A.Existence.B.Rights and obligations.C.Completeness.D.Valuation.

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22.To be proficient as an auditor, a person mustfirstbe able to accomplish which ofthese tasks in a decision-making process?A.Identify audit evidence relevant to the verification of assertions managementmakes in its unaudited financialstatements and notes.B.Formulate evidence-gathering procedures (audit plan) designed to obtainsufficient, competent evidence about assertions management makes infinancial statements and notes.C.Recognize the financial assertions made inmanagement's financial statementsand footnotes.D.Evaluate the evidence produced by the performance of procedures and decidewhether management's assertions conform to generally accepted accountingprinciples and reality.23.Which of the following is an underlying condition that in part creates the demandby users for reliable information?A.Economic transactions are numerous and complex.B.Decisions are time sensitive.C.Users are separated from accounting records bydistance and time.D.Financial decisions are important to investors and users.E.All of the above.24.Which of the following isnotincluded in The American Accounting Association(AAA) definition of auditing?A.Potential conflict of interest.B.Systematic process.C.Assertions about economic actions.D.Established criteria.

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25.What is the term used toidentify the risk that the client's financial statements maybe materially false and misleading?A.Business risk.B.Information risk.C.Client risk.D.Risk assessment.26.Which of the following isnota recommendation usually made following thecompletion of an operational audit?A.Economic and efficient use of resources.B.Effective achievement of business objectives.C.Attesting to the fairness of the financial statements.D.Compliance with company policies.27.In order to be considered as external auditors with respect to governmentagencies, GAO auditors must beA.Organizationally independent.B.Empowered as the accounting and auditing agency by the U.S. Congress.C.Funded by the federal government.D.Guided by standards similar to GAAS.28.Which of the following is the essential purpose of the audit function?A.Detection of fraud.B.Examination of individual transactions to certify their validity.C.Determination of whether the client's financial statement assertions are fairlystated.D.Assurance of the consistent application of correctaccounting procedures

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29.The audit objective that all the transactions and accounts presented in thefinancial statements represent real assets, liabilities, revenues, and expenses isrelated most closely to which of the PCAOBassertions?A.Existence or occurrence.B.Rights and obligations.C.Completeness.D.Presentation and disclosure.30.The audit objective that all transactions are recorded in the proper period isrelated most closely to which ofthe Audit Standards Board (ASB) transactionassertions?A.Occurrence.B.Completeness.C.Cutoff.D.Accuracy.31.The audit objective that all transactions are recorded in the proper account isrelated most closely to which one ofthe ASB transaction assertions?A.Occurrence.B.Completeness.C.Accuracy.D.Classification.32.The audit objective that all balances include items owned by the client is relatedmost closely to which one of the ASB balanceassertions?A.Existence.B.Rights and obligations.C.Completeness.D.Valuation.

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33.The audit objective that all balances include all items that should be recorded inthat account is related most closely to which one of the ASBbalance assertions?A.Existence.B.Rights and obligations.C.Completeness.D.Valuation.34.The audit objective that footnotes in the financial statements should be clear andexpressed so that the information is easilyconveyed to the readers of thefinancial statements is related most closely with which of the ASB presentationand disclosure assertions?A.Occurrence.B.Rights and obligations.C.Comprehensibility.D.Understandability.35.The engineering department at Omni Company built a piece of equipment in thecompany's own shop for use in the company's operations. The auditor reviewedall work orders that were capitalized as part of the equipment costs. Which of thefollowing is the ASB transaction assertion most closely related to the auditor'stesting?A.Occurrence.B.Completeness.C.Accuracy.D.Classification.

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36.The engineering department at Omni Company built a piece of equipment in thecompany's own shop for use in the company's operations. When looking at theending balance for the fixed asset account, the auditor examined all work orders,purchased materials, labor cost reports, and applied overhead that werecapitalized as part of the equipment costs. Which of the following is the ASBbalance assertion most closely related to the auditor's testing?A.Existence.B.Completeness.C.Rights andobligations.D.Valuation.37.Which of the following best describes the primary role and responsibility of theindependent external auditor?A.Produce a company's annual financial statements and notes.B.Express an opinion on thefairness of a company's annual financial statementsand footnotes.C.Provide business consulting advice to audit clients.D.Obtain an understanding of the client's internal control structure and givemanagement a report about control problems and deficiencies.38.Which of the following best describes the main reason that independent auditorsreport on management's financial statements?A.Management fraud may exist, and it is likely to be detected by independentauditors.B.The management that prepares the statements and the persons who use thestatements may have conflicting interests.C.Misstatedaccount balances may be corrected as the result of the independentaudit work.D.The management that prepares the statements may have a poorly designedsystem of internal control.

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39.The auditor's judgment concerning the overall fairness of the presentation offinancial position, results of operations, and cash flows is applied within theframework ofA.Quality control.B.Generally accepted auditing standards, which include the concept ofmateriality.C.The auditor's evaluation of the audited company's internal control.D.The applicable financial reporting framework (i.e., GAAP in the United States).40.Assurance services involve all of the followingexceptA.Relevance as well as the reliability of information.B.Nonfinancial information as well as traditional financial statements.C.Providing absolute rather than reasonableassurance.D.Electronic databases as well as printed reports.41.Because of the risk of material misstatement, an audit of financial statements inaccordance with generally accepted auditing standards should be planned andperformed with an attitude ofA.Objective judgment.B.Independent integrity.C.Professional skepticism.D.Impartial conservatism.42.Which of the following best describes assurance services?A.Independent professional servicesthat report on the client's financialstatements.B.Independent professional services that improve the quality of information fordecision makers.C.Independent professional services that report on specific written managementassertions.D.Independent professional services that improve the client's operations.

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43.Which of the following isnota PCAOB assertion about inventory related topresentation and disclosure?A.Inventory is properly classified as a current asset on the balance sheet.B.Inventory is properly stated at its cost on the balance sheet.C.Major inventorycategories and their valuation bases are adequately disclosedin notes.D.All of the above are PCAOB presentation and disclosure assertions aboutinventory.44.Which of the following isnotan ASB assertion about inventory related topresentation and disclosure?A.Inventory is properly classified as a current asset on the balance sheet.B.Inventory is properly stated at cost on the balance sheet.C.Major inventory categories and their valuation bases are adequately disclosedin notes.D.All of the above are ASB presentation and disclosure assertions aboutinventory.45.In performing an attestation engagement, a CPA typicallyA.Supplies litigation supportservices.B.Assesses control risk at a low level.C.Expresses a conclusion on an assertion about some type of subject matter.D.Provides management consulting advice.

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46.An attestation engagement is one in which a CPA is engaged toA.Issue a report on subject matter or an assertion about the subject matter that isthe responsibility of another party.B.Provide tax advice or prepare a tax return based on financial information theCPA has not audited or reviewed.C.Testify as an expert witness in accounting, auditing, or tax matters, givencertain stipulated facts.D.Assemble prospective financial statements based on the assumptions of theentity's management without expressing any assurance.47.The underlying conditions that create demand by users for reliable informationinclude all of the followingexceptA.Transactions are numerous and complex.B.Users lack professional skepticism.C.Users are separated from accounting records by distance and time.D.Financial decisions are important to investors and users.E.Decisions are timesensitive.48.Cutoff tests designed to detect credit sales made before the end of the year thathave been recorded in the subsequent year provide assurance about the PCAOBassertion ofA.Presentation.B.Completeness.C.Rights.D.Existence.

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49.Inquiries of warehouse personnel concerning possible obsolete or slow-movinginventory items provide assurance about the PCAOB assertion ofA.Completeness.B.Existence.C.Presentation.D.Valuation.E.Rights andobligations.50.Inquiries of warehouse personnel concerning possible obsolete or slow-movinginventory items provide assurance about the ASB balance assertion ofA.Completeness.B.Existence.C.Presentation.D.Valuation.E.Rights and obligations.51.The probability that the information circulated by a company will be false ormisleading is referred to asA.Business risk.B.Information risk.C.Assurance risk.D.Audit risk.

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52.The Sarbanes-Oxley Act of 2002 requires that the key company officialscertifythe financial statements.Certificationmeans that the company CEO and CFOmust sign a statement indicatingA.They have read the financial statements.B.They are not aware of any false or misleading statements (or any key omitteddisclosures)C.They believe that the financial statements present an accurate picture of thecompany's financial condition.D.All of the above.53.The process by which a CPA obtains a certificate and license in a state other thanthe state in which the CPA's certificate was originally obtained is referred to asA.Substantial equivalency.B.Quid pro quo.C.Relicensing.D.Re-examination54.The risk that an entity will fail to meet its objectives is referred to asA.Business risk.B.Information risk.C.Assurance risk.D.Audit risk.55.The four basic requirements for becoming a CPA in moststates relate toA.Education, the CPA Examination, experience, and substantial equivalency.B.The CPA Examination, experience, continuing professional education, and astate certificate.C.Continuing professional education, the CPAExamination, experience, and anAICPA certificate.D.Education, the CPA Examination, experience, and a state certificate.

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56.The study of business operations for the purpose of making recommendationsabout the efficient use ofresources, effective achievement of business objectives,and compliance with company policies is referred to asA.Environmental auditing.B.Financial auditing.C.Compliance auditing.D.Operational auditing.57.Theaccounting, auditing, and investigating agency of the U.S. Congress that isheaded by the U.S. Comptroller General is known asA.The Federal Bureau of Investigation (FBI).B.The U.S. General Accountability Office (GAO).C.The InternalRevenue Service (IRS).D.The United States Legislative Auditors (USLA).58.Which of the following would be considered an assurance engagement?A.Giving an opinion on a prize promoter'sclaims about the amount ofsweepstakes prizes awarded in the past.B.Giving an opinion on the conformity of the financial statements of a universitywith generally accepted accounting principles.C.Giving an opinion on the fair presentation of a newspaper's circulation data.D.Giving assurance about the average drive length achieved by golfers with aclient's golf balls.E.All of the above.

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59.It is always a good idea for auditors to begin an audit with the professionalskepticism characterized by the assumption thatA.A potential conflict of interest always exists between the auditor and themanagement of the enterprise under audit.B.In audits of financial statements, the auditor acts exclusively in the capacity ofan auditor.C.The professional status of the independent auditor imposes commensurateprofessional obligations.D.Financial statements and financial data are verifiable.60.In an attestation engagement, a CPA practitioner is engaged toA.Compile a company's financial forecast based on management's assumptionswithout expressing any form of assurance.B.Prepare a written report containing aconclusion about the reliability of amanagement assertion.C.Prepare a tax return using information the CPA has not audited or reviewed.D.Give expert testimony in court on particular facts in a corporate income taxcontroversy.61.Adetermination of cost savings obtained by outsourcing cafeteria services ismost likely to be an objective ofA.Environmental auditing.B.Financial auditing.C.Compliance auditing.D.Operational auditing.

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