Test Bank for Auditing and Assurance Services: A Systematic Approach, 11th Edition

Auditing & Assurance Services: A Systematic Approach, 11e (Messier) Chapter 2 The Financial Statement Auditing Environment 1) A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002). Answer: TRUE Difficulty: 1 Easy Topic: A Decade of Challenge and Change for Financial Statement Auditors Learning Objective: 02-04 Understand the significant changes that have taken place in the auditing profession over the past two decades. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Measurement 2) The primary audit context with which an auditor is concerned is the auditee’s industry or business. Answer: TRUE Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Decision Making 3) The audit committee generally includes senior executives of the organization. Answer: FALSE Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Reporting 1 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4) A financial statement audit is generally organized based on the five basic business processes or cycles. Answer: TRUE Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-07 Be familiar with a five-component model of business processes used to organize an audit. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Decision Making 5) One of the five basic business processes is the warehousing cycle. Answer: FALSE Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-07 Be familiar with a five-component model of business processes used to organize an audit. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Decision Making 6) The ASB’s auditing standards contain a preface that includes Principles Underlying an Audit Conducted in Accordance with GAAS. Answer: TRUE Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 2 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7) PCAOB auditing standards must be followed on all financial statement audits performed in the U.S. Answer: FALSE Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 8) A financial statement audit must be conducted based on GAAP. Answer: FALSE Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 9) Generally, the financial statements of U.S. companies must be prepared based on GAAP. Answer: TRUE Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 3 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10) PCAOB auditing standards must be followed on all audits of public companies’ financial statements. Answer: TRUE Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 11) The Audit Committee consists of: A) members of management. B) a subcommittee of the AICPA who establish the SAS. C) members of the Board of Directors. D) appointed government overseers. Answer: C Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities. Bloom’s: Remember AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking 12) What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.? A) AICPA. B) FASB. C) GASB. D) PCAOB. Answer: D Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 4 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13) The Public Company Accounting Oversight Board’s role is to: A) conduct the final review of auditors’ work before the auditor’s opinion is issued. B) oversee the auditors of public companies in order to protect the interests of investors. C) conduct audits of governmental entities. D) sanction auditors who fail to follow GAAS. Answer: B Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 14) The authoritative body designed to promulgate standards concerning a CPA’s association with audited financial statements of an entity that is required to file financial statements with the SEC is the: A) financial accounting standards board. B) general accounting office. C) public company accounting oversight board. D) auditing standards board. Answer: C Difficulty: 1 Easy Topic: A Model of Business Learning Objective: 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 5 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15) The auditor must be independent of the auditee unless: A) the lack of independence does not influence his or her professional judgment. B) both parties agree that the independence issue is not a problem. C) the lack of independence is insignificant. D) none of the above—the auditor cannot lack independence. Answer: D Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Apply AACSB: Analytical Thinking AICPA: BB Legal; FN Decision Making 16) Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants? A) Purpose of an Audit and Premise upon which an Audit is Conducted. B) Performance. C) Reporting. D) Responsibilities. Answer: D Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Analytical Thinking AICPA: FN Decision Making; BB Resource Management 6 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 17) Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS? A) The purpose and value of a financial statement audit and lays out the responsibilities of management for an effective audit to be possible. B) The fundamental responsibilities and characteristics of an auditor. C) Auditors’ responsibilities in performing an effective audit. D) Auditors provide a written report that expresses their opinion about the financial statements. Answer: C Difficulty: 1 Easy Topic: Auditing Standards; Auditing, Ethics, and the Code of Professional Conduct Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.”; 02-12 Understand that the auditing profession places a premium on ethical behavior and is governed by a Code of Professional Conduct. Bloom’s: Understand AACSB: Analytical Thinking AICPA: BB Legal; FN Decision Making 18) The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS states that auditors are responsible for having appropriate competence and: A) independence with respect to the financial statements and supplementary disclosures. B) exercising professional care as judged by peer reviewers. C) capabilities to perform the audit. D) objectivity as an auditor as verified by proper supervision. Answer: C Difficulty: 1 Easy Topic: Auditing Standards; Auditing, Ethics, and the Code of Professional Conduct Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.”; 02-12 Understand that the auditing profession places a premium on ethical behavior and is governed by a Code of Professional Conduct. Bloom’s: Remember AACSB: Analytical Thinking AICPA: FN Decision Making; BB Resource Management 7 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 19) The Reporting section of the Principles Underlying an Audit Conducted in Accordance with GAAS requires that the report, “states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.” This passage requires: A) a statement of fact by the auditor. B) an opinion by the auditor. C) an implied measure of fairness. D) an objective measure of compliance. Answer: B Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 20) Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of: A) objective cynicism. B) independent differentialism. C) professional skepticism. D) impartial conservatism. Answer: C Difficulty: 2 Medium Topic: Auditing, Ethics, and the Code of Professional Conduct; Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-12 Understand that the auditing profession places a premium on ethical behavior and is governed by a Code of Professional Conduct.; 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Apply AACSB: Analytical Thinking AICPA: BB Legal; FN Risk Analysis 8 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 21) The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of: A) the stock exchange officials. B) the independent auditor. C) the company’s management. D) the securities and exchange commission. Answer: C Difficulty: 1 Easy Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 22) The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the: A) partner assigned to the audit engagement. B) management of the company. C) auditor in charge of the fieldwork. D) securities and exchange commission. Answer: B Difficulty: 1 Easy Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 9 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 23) The largest public accounting firms typically are structured as: A) subchapter S corporations. B) professional corporations. C) limited liability partnerships. D) limited liability corporations. Answer: C Difficulty: 1 Easy Topic: Accounting Firms and Audit Teams Learning Objective: 02-03 Understand the organization of public accounting firms and the composition of audit teams. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Research 24) Typically, an external auditor first gets supervisory experience at what level of authority? A) Associate. B) Senior. C) Manager. D) Partner. Answer: B Difficulty: 1 Easy Topic: Accounting Firms and Audit Teams Learning Objective: 02-03 Understand the organization of public accounting firms and the composition of audit teams. Bloom’s: Remember AACSB: Communication AICPA: FN Measurement; BB Resource Management 25) An “in-charge” auditor typically holds the rank of: A) associate. B) senior. C) manager. D) partner. Answer: B Difficulty: 1 Easy Topic: Accounting Firms and Audit Teams Learning Objective: 02-03 Understand the organization of public accounting firms and the composition of audit teams. Bloom’s: Remember AACSB: Communication AICPA: FN Measurement; BB Resource Management 10 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26) Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance? A) The risk that financial statements are misstated because of fraud. B) The risk that financial statements are misstated because of error or fraud. C) Whether management has systems in place to evaluate and effectively manage the entity’s business risks. D) Developing client acceptance and continuance practices that minimize the likelihood of lawsuits against the auditor. Answer: C Difficulty: 1 Easy Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Apply AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Risk Analysis 27) Forensic audits include all of the following except: A) criminal investigations. B) manufacturers’ assertions about product quality. C) employee fraud. D) management fraud. Answer: B Difficulty: 1 Easy Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Understand AACSB: Communication AICPA: BB Industry; FN Leveraging Technology 11 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 28) A typical objective of an operational audit is for the auditor to: A) determine whether the financial statements present fairly the entity’s operations. B) evaluate the feasibility of attaining the entity’s operational objectives. C) make recommendations for improving performance. D) report on the entity’s relative success in attaining profit maximization. Answer: C Difficulty: 1 Easy Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Leveraging Technology 29) Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and: A) monetary stimulus. B) evaluation. C) accuracy. D) compliance. Answer: D Difficulty: 1 Easy Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Leveraging Technology 30) External auditors are referred to as “external” because: A) they report to users outside of the audited entity. B) they are paid by parties outside of the audited entity. C) they are not employees of the entity being audited. D) their offices are not at the entity’s place of business. Answer: C Difficulty: 1 Easy Topic: Types of Auditors Learning Objective: 02-01 Be familiar with the different types of auditors. Bloom’s: Understand AACSB: Communication AICPA: BB Industry; FN Decision Making 12 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 31) Which is NOT an attribute of an external auditor? A) Independence. B) Auditee advocacy. C) Objectivity. D) Concern for the public interest. Answer: B Difficulty: 1 Easy Topic: Types of Auditors Learning Objective: 02-01 Be familiar with the different types of auditors. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Decision Making 32) What is the general character of the work conducted in performing a forensic audit for a company? A) Providing assurance that the financial statements are not materially misstated. B) Detecting or deterring fraudulent activity. C) Offering an opinion on the reliability of the specific assertions made by management. D) Identifying the causes of an entity’s financial difficulties. Answer: B Difficulty: 1 Easy Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Understand AACSB: Communication AICPA: BB Industry; FN Leveraging Technology 13 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 33) Which of the following is NOT a requirement of the Sarbanes-Oxley Act? A) Audit firms cannot provide most types of nonaudit services to their public company auditees. B) Audit firms are required to rotate audit partners off audit engagements every five years for public company audits. C) Firms that audit public companies are subject to inspection by the PCAOB. D) A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement. Answer: D Difficulty: 2 Medium Topic: A Decade of Challenge and Change for Financial Statement Auditors; A Model of Business Learning Objective: 02-04 Understand the significant changes that have taken place in the auditing profession over the past two decades.; 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 34) A CPA is most likely to refer to one or more of the items listed in the Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS in determining: A) the nature of the CPA’s report qualification. B) the scope of the CPA’s auditing procedures. C) requirements for the review of the entity and its environment. D) whether the CPA should undertake an audit engagement. Answer: D Difficulty: 2 Medium Topic: A Model of Business; Auditing Standards Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities.; 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Apply AACSB: Communication AICPA: BB Legal; FN Decision Making 14 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 35) Who bears ultimate responsibility for the financial statements? A) Management of the organization, equally with the external auditor that audits the statements. B) Management and the shareholders of the organization. C) The external auditor that audits the statements. D) Management of the organization. Answer: D Difficulty: 1 Easy Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Remember AACSB: Analytical Thinking AICPA: BB Legal; FN Measurement 36) The Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) an audit opinion in accordance with the auditor’s findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirement, appropriate competence and maintaining professional skepticism. Answer: D Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Measurement 15 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 37) The Responsibilities section of Principles Underlying an Audit Conducted in Accordance with GAAS recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper: A) business and finance courses. B) quality control and peer review. C) education and experience in auditing. D) supervision and review skills. Answer: C Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Diversity AICPA: FN Decision Making; BB Marketing 38) The main difference between SAS and AU is: A) they are the same except that SAS are organized chronologically and the AU are organized by topical area. B) SAS are issued by the ASB and AU are issued by the PCAOB. C) SAS are issued by the PCAOB and AU are issued by the ASB. D) SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP. Answer: A Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-11 Understand the nature of auditing standards. Bloom’s: Analyze AACSB: Communication AICPA: FN Decision Making; BB Resource Management 16 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 39) The AICPA’s Statements on Auditing Standards can be described as: A) providing very specific guidance about the specific activities an auditor must perform on each engagement. B) similar to financial accounting standards in that they are developed by the government. C) tend to be general in nature and require a great deal of professional judgment. D) providing assurance that an auditor will not issue an incorrect opinion. Answer: C Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-11 Understand the nature of auditing standards. Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Measurement 40) Due professional care requires auditors to: A) obtain independent, third party (non-auditee) documentation as evidence for all information presented in the financial statements. B) exercise professional skepticism during the audit. C) disregard any evidence generated by the auditee during the audit. D) find every error contained in the financial statements prepared by management. Answer: B Difficulty: 2 Medium Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Decision Making 17 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 41) The objectives of the Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS are to provide assurance and include all of the following except for: A) an opinion statement of whether the financial statements present fairly. B) an opinion statement of whether the financials are free of material misstatements. C) an opinion statement of whether the financials are in accordance with an applicable financial reporting framework. D) an opinion statement of whether the financial statements between periods are not materially affected by changes in accounting principles that are not disclosed. Answer: D Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Analytical Thinking AICPA: BB Legal; FN Measurement 42) An internal auditor is likely to be more concerned with ________ than the external auditor. A) internal administrative procedures B) cost accounting procedures C) the efficiency of operations D) internal control Answer: C Difficulty: 2 Medium Topic: Types of Other Audit, Attest, and Assurance Services; Types of Auditors Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals.; 02-01 Be familiar with the different types of auditors. Bloom’s: Apply AACSB: Analytical Thinking AICPA: BB Industry; FN Risk Analysis 18 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 43) Which of the following is NOT included in the broad category of assurance services? A) Operational audit. B) Reporting on internal control. C) Accounting or review services. D) Evaluation of the auditee’s risk management framework. Answer: C Difficulty: 2 Medium Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Apply AACSB: Communication AICPA: BB Industry; FN Reporting 44) Which of the following is NOT explicitly a part of the IIA’s definition of internal auditing? A) Internal auditing is an objective assurance activity. B) Internal auditing is a consulting activity. C) Internal auditing should help an organization accomplish its objectives. D) Internal auditors should help external auditors complete the annual financial statement audit. Answer: D Difficulty: 1 Easy Topic: Types of Auditors Learning Objective: 02-01 Be familiar with the different types of auditors. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Research 45) Which of the following statements regarding the PCAOB is incorrect? A) It is a public-sector, nonprofit corporation. B) It is overseen by the SEC. C) It sets standards for public company audits. D) It has delegated all of its standard-setting authority to the AICPA. Answer: D Difficulty: 2 Medium Topic: A Model of Business Learning Objective: 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Decision Making 19 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 46) Due professional care requires: A) auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence. B) the examination of all available corroborating evidence. C) the exercise of error-free judgment. D) a study and review of internal controls that includes tests of controls. Answer: A Difficulty: 1 Easy Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Remember AACSB: Ethics AICPA: FN Decision Making; BB Critical Thinking 47) Which of the following best describes the role of corporate governance? A) Management decides which accounting principles are the most appropriate. B) Shareholders vote to decide who should be members of the board of directors. C) Holding the management team accountable to shareholders and other constituents for the utilization of the entity’s resources. D) Management often is compensated based on the company’s profitability. Answer: C Difficulty: 3 Hard Topic: A Model of Business Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities. Bloom’s: Understand AACSB: Communication AICPA: BB Industry; FN Decision Making 20 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 48) The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that the auditor is unable to obtain absolute assurance that the financials are free of material misstatements because of inherent limitations which arise from all of the following except: A) the presentation of the financial statements based on GAAS. B) the nature of financial reporting. C) the nature of audit procedures. D) the need for the audit to be conducted within a reasonable period of time and so as to achieve a balance between benefit and cost. Answer: A Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Analytical Thinking AICPA: BB Legal; FN Decision Making 49) Which of the following best describes what is meant by generally accepted auditing standards? A) Audit assertions generally determined on audit engagements. B) Acts to be performed by the auditor. C) Standards of quality for the auditor’s performance. D) Procedures to be used to gather evidence to support financial statements. Answer: C Difficulty: 3 Hard Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Analytical Thinking AICPA: BB Legal; FN Measurement 21 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 50) The ‘Purpose of an Audit and Premise upon which an Audit is Conducted’ section of Principles Underlying an Audit Conducted in Accordance with GAAS states that management is responsible for all the following except for: A) the preparation and fair presentation of the financial statement in accordance with the applicable financial reporting framework. B) the design, implementation, and maintenance of internal control. C) providing financial statement users with an opinion on whether the financial statements present fairly. D) ensuring that the financial statements are free from material misstatement, whether due to error or fraud. Answer: C Difficulty: 3 Hard Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 51) The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that for auditors to obtain reasonable assurance, they need to do all of the following except: A) make sure all audit team members have adequate training. B) obtain sufficient appropriate audit evidence. C) identify and assess risks of material misstatement. D) determine and apply appropriate materiality levels. Answer: A Difficulty: 3 Hard Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 22 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 52) The Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of this requirement is to prevent: A) an auditor from reporting on one basic financial statement and not the others. B) an auditor from expressing different opinions on each of the basic financial statements. C) management from reducing its final responsibility for the basic financial statements. D) misinterpretations regarding the degree of responsibility the auditor is assuming. Answer: D Difficulty: 3 Hard Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 53) The Performance section of the “Principles Underlying an Audit” is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) an audit opinion in accordance with the auditor’s findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirement, appropriate competence and maintaining professional skepticism. Answer: A Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Research 23 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 54) The Reporting section of the “Principles Underlying an Audit” is concerned with: A) proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence. B) the auditor expressing an audit opinion in accordance with the auditor’s findings, whether the financials are presented fairly, and whether the financial are in accordance with the applicable financial reporting framework. C) whether the auditor has unrestricted access to those within the entity from whom the auditor needs to obtain audit evidence. D) complying with ethical requirements, appropriate competence and maintaining professional skepticism. Answer: B Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Research 55) The IAASB and the ASB have collaborated on the principles underlying an audit conducted in accordance with generally accepted auditing standards. These principles are grouped into four categories. What are the four categories? Answer: The four categories of principles are: 1. Purpose and premise of an audit; 2. Personal responsibilities of the auditor; 3. Auditor actions in performing the audit; and 4. Reporting. Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 24 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 56) The principles underlying an audit conducted in accordance with generally accepted auditing standards are grouped into four categories. The second category is that of “personal responsibility of the auditor.” Generally explain what is intended by this principle. Answer: Auditors are responsible for having appropriate competence and capabilities to perform the audit; complying with relevant ethical requirements; and maintaining professional skepticism and exercising professional judgment, throughout the planning and performance of the audit. Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Understand AACSB: Communication AICPA: BB Legal; FN Reporting 25 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 57) You are the owner of a small grocery store, Corner Marketplace. Explain the five process categories and how they apply to your business. Answer: Financing: The financing process involves loans or shareholder capital financing for assets such as land, buildings, and equipment. Corner Marketplace may have a bank loan or lease for its store. It may also have solicited other means of financing, such as additional owner funds. Purchasing: Businesses acquire goods and services to support the sale of their own goods or services through the purchasing process. Corner Marketplace would purchase food inventory to sell to customers. It might also need to purchase display cases, freezers, etc. to store and display the inventory. Human Resource Management: Business organizations hire personnel to perform various functions in accordance with the enterprise’s mission and strategy. Corner Marketplace should have established policies for hiring, training, evaluating, counseling, promoting, compensating, and terminating employees. Inventory Management: A grocery store would have significant inventory to manage, which it accomplishes as part of the inventory management process. The store would need to allocate proper costs to inventory and would need to account for produce, etc. that is expired. Revenue: Corner Marketplace would generate revenue through sales of food to customers and would collect the proceeds of those sales. Typically, a small grocery store would not have accounts receivables from customers, as customers would pay immediately. However, the revenue cycle includes cash receipts and credit card transactions. Difficulty: 3 Hard Topic: A Model of Business Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities.; 02-07 Be familiar with a five-component model of business processes used to organize an audit. Bloom’s: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Industry 26 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 58) Define corporate governance, the board of directors, and the audit committee and explain how they relate to each other. Answer: Corporate governance is all the people, processes, and activities in place to help ensure proper stewardship over an entity’s assets. The board of directors is the body primarily responsible for management oversight in corporations. The audit committee oversees internal and external audit work done for an entity. The board of directors plays a part in ensuring proper corporate governance by holding management responsible for the usage of the entity’s assets. The audit committee is made up of members of the board of directors. The audit committee enhances corporate governance by holding management accountable for its activities through audits of its work. Difficulty: 2 Medium Topic: A Model of Business Learning Objective: 02-06 Recognize that an audit is shaped by the auditee’s business, industry, and economic environment and understand the essential components and processes characteristic of most business entities. Bloom’s: Understand AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking 27 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 59) Describe the organizations involved in standard setting for auditors in the United States and what their respective roles are in setting current auditing standards for companies in the United States. Answer: Most auditing standards were developed by the AICPA’s Accounting Standards Board (ASB). At that time, the profession was self-regulated. However, the Sarbanes-Oxley Act of 2002 transferred the authority to set auditing standards for public company audits to the Public Company Accounting Oversight Board (PCAOB), which is overseen by the Securities and Exchange Commission (SEC). However, the PCAOB adopted the ASB’s auditing standards on an interim basis. CPAs must still abide by the AICPA’s Code of Professional Conduct at all times. They must also follow auditing standards set by the ASB when performing audits of private companies and other nonpublic entities. The ASB has replaced the 10 GAAS with a more comprehensive and coherent description of the principles underlying an audit conducted in accordance with generally accepted auditing standards. Difficulty: 3 Hard Topic: A Decade of Challenge and Change for Financial Statement Auditors; A Model of Business; Auditing Standards Learning Objective: 02-04 Understand the significant changes that have taken place in the auditing profession over the past two decades.; 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.”; 02-08 Identify and be familiar with the major organizations that affect the public accounting profession’s environment. Bloom’s: Understand AACSB: Ethics AICPA: BB Legal; FN Decision Making 28 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 60) What are the four things required of an auditor to obtain reasonable assurance that are outlined in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS? Answer: – Plans the work and properly supervises any assistants. – Determines and applies appropriate materiality level or levels throughout the audit. – Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control. – Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks. Difficulty: 1 Easy Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Apply AACSB: Communication AICPA: BB Legal; FN Measurement 29 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 61) Jane Goodperson performed an audit on the Quagmire Corporation and issued an unqualified opinion. Jane performed the audit with due professional care and in accordance with generally accepted auditing standards. Two months after the report is issued, Jane discovers on the news that the CEO of Quagmire, Johnny Best, had been stealing small amounts of inventory. The amount, however, is immaterial compared to the overall inventory of the corporation. Jane soon receives a call from Quagmire’s CFO, Mark Beastly. Mark wants Jane to refund her audit fees. Mark thinks Jane did not properly perform the audit, as she did not discover this fraud. Further, he feels that now Quagmire’s financial statements are not fairly stated because of Jane. How should Jane respond to this claim? Answer: Jane should tell Mark that her responsibility was to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. She had no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, which are not material to the financial statements will be detected. Quagmire’s management, not Jane, has responsibility for the financial statements. In fact, because of the Sarbanes-Oxley Act of 2002, Mark had to assume explicit responsibility for the financial statements by “certifying” that he, as CFO, is responsible for establishing and maintaining internal control and that the financial statements fairly present the entity’s financial conditions and operations. This statement is probably still true, since the amount stolen was immaterial. Difficulty: 2 Medium Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Apply AACSB: Communication AICPA: BB Legal; FN Risk Analysis 30 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 62) Mike has just graduated from State University with a bachelor’s degree in accounting. He would like to pursue a career in auditing. What options does Mike have? Describe three auditing career options, including a description of the organization Mike would work for. Answer: External: Mike could become an external auditor. He would work for a CPA firm providing independent audits to nonpublic or public companies. Mike would need to pass the Uniform CPA Examination monitored by the American Institute of Certified Public Accountants. His state may have other requirements, such as 150 credit hours and experience. Internal: Mike could also be an internal auditor. He would be directly employed by the entity for which he is performing audits. Internal auditors may conduct financial, internal control, compliance, operational, and forensic audits within their organization. Internal auditors are supported by the Institute of Internal Auditors. Governmental: Another option for Mike is governmental auditing. This is essentially a form of internal auditing and Mike could be employed by federal (such as the Government Accountability Office or the Internal Revenue Service), state, or local agencies. Forensic: Mike could also be a forensic auditor. Forensic auditors are employed by corporations, government agencies, public accounting firms, and consulting and investigative services firms. They are trained in detecting, investigating, and deterring fraud and white-collar crime and are supported by the Association of Certified Fraud Examiners. Difficulty: 2 Medium Topic: Types of Auditors Learning Objective: 02-01 Be familiar with the different types of auditors. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Decision Making 31 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 63) With respect to an entity’s financial statements, describe both the responsibility of management and that of the auditor. Answer: The financial statements are the responsibility of management. Management is responsible to ensure that the financial statements fairly present the entity’s financial conditions and operations. Management is responsible for establishing and maintaining internal control. The auditor’s responsibility is to express an opinion on the financial statements based on the audit. The auditor is responsible to provide reasonable assurance with respect to errors, fraud, and illegal acts. Difficulty: 1 Easy Topic: Society’s Expectations and the Auditor’s Responsibilities Learning Objective: 02-05 Know that management is primarily responsible for the entity’s financial statements and understand the auditor’s responsibility for detecting errors, material fraud, and illegal acts. Bloom’s: Understand AACSB: Communication AICPA: FN Decision Making; BB Critical Thinking 64) What auditing standards are used to conduct an audit for a privately-held corporation? What auditing standards are used to conduct an audit for a publicly-traded corporation? What organization is responsible for setting each of these sets of standards? Answer: Auditing standards developed by the AICPA’s Auditing Standards Board (ASB) are used to conduct an audit for a privately-held corporation or other entities that are nonpublic companies. This includes the principles underlying an audit conducted in accordance with generally accepted auditing standards and the ASB’s Statements on Auditing Standards (SAS). Auditing standards developed by the Public Company Accounting Oversight Board (PCAOB) must be used to conduct an audit for a publicly-traded corporation. These standards include all those issued by the ASB through 2003, which were codified by the PCAOB, and any new standards issued by the PCAOB after that point. Difficulty: 2 Medium Topic: Auditing Standards Learning Objective: 02-09 Understand that auditing standards are established by both U.S. and international standard setters.; 02-10 Be familiar with the “principles underlying an audit conducted in accordance with generally accepted auditing standards.” Bloom’s: Remember AACSB: Communication AICPA: BB Legal; FN Reporting 32 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 65) There are several types of audit services that are provided by auditors. Identify and define three of these types of audits. Answer: Financial Statement Audit: Auditors test the transactions, balances, and disclosures in a set of financial statements to determine if they are materially correct. Internal Control Audit: Auditors test the internal controls of a company to determine whether the control system is functioning effectively (i.e., preventing, or detecting and correcting, misstatements in the financial statements). Compliance Audit: Auditors test the extent to which rules, policies, laws, covenants, or government regulations are followed by the entity. Operational Audit: Auditors review part or all of an organization’s activities to evaluate whether resources are being used effectively and efficiently. The auditor assesses the entity’s performance, identifies areas for improvement, and develops recommendations. Forensic Audit: Auditors conduct forensic audits to detect or deter fraudulent activities. Difficulty: 2 Medium Topic: Types of Other Audit, Attest, and Assurance Services Learning Objective: 02-02 Be familiar with the various types of audit, attest, and assurance services offered by accounting professionals. Bloom’s: Remember AACSB: Communication AICPA: BB Industry; FN Reporting 33 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.