Audit Chapter 1

What type of audit involves gathering evidence to determine whether the person or entity under review has followed the rules? A. A compliance audit B. An operational audit C. A financial statement audit D. An integrated audit

A. A compliance audit

Which audit involves gathering evidence to determine whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform? A. A compliance audit B. A performance audit C. An integrated audit

A. A compliance audit

Which two audits does an integrated audit combine? A. A financial statement audit and an audit of the effectiveness of ICFR B. A financial statement audit and a compliance audit C. A compliance audit and an audit of the effectiveness of ICFR D. A performance audit and an environmental audit

A. A financial statement audit and an audit of the effectiveness of ICFR

The responsibility for creating and grading the Uniform CPA Exam lies with the ________. A. AICPA B. COSO C. FASB D. IAASB

A. AICPA

Which of the following is a private professional membership organization of CPAs representing the accounting profession? A. AICPA B. PCAOB C. ASB D. IAASB

A. AICPA

In an unqualified audit report on the financial statements of a public company, what does the first statement of the opinion paragraph state? A. An audit was conducted, which financial statements were audited, and the dates of the financial statements. B. PCAOB audit standards were followed since it is a public company. C. The audit firm believes that its audit provides a reasonable basis for its opinion. D. Management is responsible for the fair presentation of the financial statements.

A. An audit was conducted, which financial statements were audited, and the dates of the financial statements.

Which of the following comes under the purview of the Public Company Accounting Oversight Board? A. Auditing Standards (AS) B. Statements on Auditing Standards (SAS) C. Statements on Standards for Attestation Engagement (SSAE) D. Statements on Quality Control Standards (SQCS)

A. Auditing Standards (AS)

Which of the following is true of assurance services? A. Both attestation and auditing services fall under the term of assurance services. B. The term information refers to subject matter that is an entire system, not standalone data. C. The services are performed by someone who was involved with the creation of the information. D. The intended user is an independent Certified Public Accountant qualified to perform the auditing service.

A. Both attestation and auditing services fall under the term of assurance services.

The only licensed accounting professionals in the United States are: A. Certified Public Accountants B. Chartered Accountants C. Certified Internal Auditors D. Certified Fraud Examiners

A. Certified Public Accountants

Who are the only licensed accounting professionals in the United States? A. Certified Public Accountants (CPA) B. Chartered Accounts (CA) C. Financial Accountants (FA) D. Chief financial and operating officer (CFOO)

A. Certified Public Accountants (CPA)

1Which of the following falls within the purview of financial accounting? A. Changes in equity B. Management consulting C. Business valuation D. Mergers and acquisitions

A. Changes in equity

Most financial accounting and disclosure choices being made by the company are complicated and often require significant technical knowledge and experience in order to understand. What term captures this problem? A. Complexity B. Remoteness C. Competing incentives D. Reliability

A. Complexity

What is the applicable financial reporting framework in the U.S. known as? A. GAAP B. GAAS C. IFRS D. The Internal Revenue Code

A. GAAP

Within a U.S. context, the applicable financial reporting framework is typically _______. A. Generally Accepted Accounting Principles (GAAP) B. International Standard on Quality Control (ISQC) C. Auditing and Assurance Standards Board (AASB) D. International Financial Reporting Standards (IFRS)

A. Generally Accepted Accounting Principles (GAAP)

The audit related to which of the following is specifically meant to express an opinion on the effectiveness of the company's system of internal controls over financial reporting? A. ICFR B. GAAP C. FASB D. AICPA

A. ICFR

Which of the following is true of the PCAOB? A. It can impose punishment on accounting firms that do not adhere to standards. B. Prior to its creation, the audit profession was highly unregulated. C. In 2015, it reorganized its auditing standards using several numbering systems. D. When it was created, it rejected nearly all the then standards of the audit profession.

A. It can impose punishment on accounting firms that do not adhere to standards.

Which of the following statements is true? A. Often interested users, like banks, ask private companies or non-users to provide audited financial statements. B. Public users are required to have three audits a year. C. Public users are required to have an audit of internal financial forecast reports (IFFRs). D. For efficiency purposes, the three required audits for public companies are performed at the same time.

A. Often interested users, like banks, ask private companies or non-users to provide audited financial statements.

In an audit report on the effectiveness of ICFR for a public company, to what does the basis of opinion paragraph make a reference? A. Registration with the PCAOB and independence requirements of the SEC and other federal securities laws B. The financial statement audit report and the type of opinion that was given on the financial statements. C. The COSO Internal Control-Integrated Framework as the criteria used as the basis for determining if ICFR are effective. D. A definition of ICFR that is taken directly from PCAOB AS 2201.

A. Registration with the PCAOB and independence requirements of the SEC and other federal securities laws

Which act created the Public Company Accounting Oversight Board, which oversees the audits of public companies? A. The SOX Act of 2002 B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 D. The Companies Act 2006

A. The SOX Act of 2002

In an audit report on the effectiveness of ICFR for a public company, what does the scope paragraph explain? A. The auditors conducted their audit in accordance with the standards of the PCAOB. B. An internal control system does not eliminate all risk associated with the preparation of financial statements. C. A material misstatement of the financial statements will not be prevented or detected on a timely basis. D. Circumstances may change in the future and render controls ineffective if the controls are not modified appropriately.

A. The auditors conducted their audit in accordance with the standards of the PCAOB.

Among the reasons why users demand an audit of financial statements, what is the problem of competing incentives? A. The company has a reason to disclose information in a way that presents it in favorable light. B. Financial statement users lack accounting and legal knowledge to understand accounting and disclosure choices. C. Financial statement users to not have access to the company under review and thus face difficulty in determining whether the statements are fair. D. Financial statement users need reliable information in order to make decisions that have real consequences.

A. The company has a reason to disclose information in a way that presents it in favorable light.

Which statement is correct as to financial statement audit reports for public versus private companies? A. There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements. B. There is a standard report for the audit of public company financial statements but none for auditing private company financial statements. C. There is a standard report for the audit of private company financial statements but none for auditing public company financial statements. D. There is no distinction between standard reports for the audit of financial statements, regardless of whether the company is private or public.

A. There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements.

Which of the following beliefs will narrow the audit expectation gap? A. There is no guarantee the auditor will find all material fraud, should fraud have occurred. B. The auditor is providing complete assurance. C. The auditor is guaranteeing the future viability of the entity. D. An unmodified audit opinion is an indicator of complete accuracy of the financial statements.

A. There is no guarantee the auditor will find all material fraud, should fraud have occurred.

The only professional who can audit a set of historical financial statements for a public or private company in the United States is ________. A. a Certified Public Accountant (CPA) B. a Certified Fraud Examiner (CFE) C. the IRS D. a loan officer

A. a Certified Public Accountant (CPA)

An integrated audit refers to two audits performed at the same time, or ________. A. an audit on the effectiveness of internal controls and an audit of the financial statements for external purposes. B. an internal audit and an external audit with the same identical objectives. C. an audit for intentional material misstatements and an audit for errors. D. an audit based on time constraints and an audit based on cost constraints.

A. an audit on the effectiveness of internal controls and an audit of the financial statements for external purposes.

What is a compliance audit? A. an audit to determine whether the entity has conformed with regulations, rules or processes B. an assessment of the economy, efficiency and effectiveness of an organization's operations C. an evaluation and improvement of risk management, internal control procedures and elements of the governance process D. an assessment of the company's financial statements

A. an audit to determine whether the entity has conformed with regulations, rules or processes

Among the various processes relating to auditing and assurance standards, the largest umbrella represents ________ services. A. assurance B. attestation C. audit D. review

A. assurance

What services are defined as independent professional services that improve the quality of information, or its context, for decision makers? A. assurance services B. attestation services C. absolute assurance D. audit services

A. assurance services

Which terms does the textbook claim are used interchangeably, but actually represent different types of services? A. assurance, attestation, and auditing B. accounting, auditing, and assurance C. accounting, attestation, and auditing D. assurance, attestation, and accounting

A. assurance, attestation, and auditing

Examination of non-financial information falls under _______ services and outside of_______ services. A. assurance; audit B. attestation; assurance C. audit; assurance D. attestation; audit

A. assurance; audit

A review of historical financial statements is an example of ________. A. attestation service B. absolute assurance C. financial forecast D. applicable financial reporting framework

A. attestation service

When CPAs are hired to report on the integrity of financial forecasts and reports on financial reporting processes, it is called an ______________. A. attestation service B. absolute assurance C. applicable financial reporting framework D. audit service

A. attestation service

Examination of internal controls is a service that comes under _______ services, which fall under _______ services. A. attestation; assurance B. assurance; attestation C. acceptable; assurance D. attestation; audit

A. attestation; assurance

The most common assurance service is the ________. A. audit of a company's historical financial statements B. compilation of financial statements C. review of a company's financial controls D. review of a company's historical financial statements

A. audit of a company's historical financial statements

The term practitioner would be least likely to be used when referring to the performance of ________. A. audit services B. attestation services C. assurance services D. bookkeeping services

A. audit services

Legislation impacts _______. A. auditor performance B. financial statement user's expectations C. both financial statement user's expectations and auditor performance D. neither financial statement user's expectations not auditor performance

A. auditor performance

The audit expectation gap occurs when there is a difference between the expectations of the ________. A. auditors and financial statement users B. auditors and company under review C. company under review and financial statement users D. generally accepted accounting principles and auditors

A. auditors and financial statement users

Which of the following is the discovery of material weakness? A. conclusion that the company did not maintain effective ICFR over the period under audit. B. risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. C. identification of accounts and related assertions most at risk of material misstatement. D. high, but not absolute, level of assurance in a judgment about matters that are subjective.

A. conclusion that the company did not maintain effective ICFR over the period under audit.

In an audit report on the effectiveness of ICFR for a public company, which paragraph cautions not to use the current year opinion to assume that future internal controls will be effective? A. definition and inherent limitations paragraph B. scope paragraph C. opinion paragraph D. paragraph referencing the financial statement audit

A. definition and inherent limitations paragraph

In an audit report on the effectiveness of ICFR for a public company, what does the definition and inherent limitations paragraph provide? A. definition of ICFR that is taken directly from PCAOB AS 2201 B. indication that the firm is registered with the PCAOB C. different responsibilities of management and auditors D. process of conducting an audit of the effectiveness of ICFR

A. definition of ICFR that is taken directly from PCAOB AS 2201

A financial statement audit is conducted to ________. A. enhance the reliability and credibility of the information included in the financial statements B. guarantee that the financial statements are free from error or fraud C. determine whether financial documents were altered by those committing a fraud D. focus on finding all misstatements in the financial records

A. enhance the reliability and credibility of the information included in the financial statements

Identify a service that falls under audit services. A. examination of historical financial statements B. compilation of historical financial statements C. inspection of website security D. review of financial forecast

A. examination of historical financial statements

Economic conditions impact _______. A. financial statement user's expectations B. auditor performance C. both financial statement user's expectations and auditor performance D. neither financial statement user's expectations not auditor performance

A. financial statement user's expectations

The purpose of audit services is to provide ________. A. financial statement users with an opinion as to the fair presentation of the financial reporting B. management with an opinion as to the fairness of the company's managerial accounting procedures C. investment advice to the company D. limited assurance that no material modifications need to be made to the financial statements

A. financial statement users with an opinion as to the fair presentation of the financial reporting

Who among the following users of the financial statement of a company may be particularly interested in evaluating whether the company is paying a fair amount of taxes given its reported earnings, and to gain a better understanding of the company's activities? A. government B. general pubic C. employees D. investors

A. government

With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is _______. A. high, but not absolute B. guaranteed, but not absolute C. 100%, but not objective D. objective, and not subjective

A. high, but not absolute

In assurance services, the term "information" refers to subject matter that is _____________. A. historical or prospective B. created by independent or in-house services C. financial and outside the purview of the non-financial D. internal to a company only

A. historical or prospective

Assurance services are defined as ________. A. independent professional services that improve the quality of information, or its context, for decision makers B. individual provisional services to improve internal controls for financial statement users C. individual prospective financial statement quality D. independent information improvement

A. independent professional services that improve the quality of information, or its context, for decision makers

Any group that will be using the financial statements to make decisions, such as investors and creditors, is known as ________. A. intended users B. groups of standing C. decision-makers D. practitioners

A. intended users

ICFR stands for: A. internal controls over financial reporting. B. internal controls for reporting. C. international controls over financial reporting. D. internal controls over forecast reports.

A. internal controls over financial reporting.

Compared to an audit of historical financial statements, a review engagement is _______. A. less extensive and also less expensive B. more extensive and also more expensive C. less extensive but more expensive D. more extensive but less expensive

A. less extensive and also less expensive

If auditors conclude the company did not maintain effective ICFR over the period under audit, it would mean the auditors discovered a/an _______ in the client's ICFR. A. material weakness B. audit risk C. reasonable assurance D. professional skepticism

A. material weakness

The term independent with respect to assurance services implies that the service is ________. A. performed by someone who was not involved with the creation of the information. B. performed by someone who was involved with the creation of the information and, therefore, fully understands it. C. performed by a company employee. D. is subjective.

A. performed by someone who was not involved with the creation of the information.

As attestation services encompass more than just the inspection of historical financial statements, the term _______ is used rather than _______. A. practitioner; auditor B. auditor; practitioner C. intended user; auditor D. intended user; practitioner

A. practitioner; auditor

In the United States, what entities are required by the federal government to have an annual financial statement audit? A. public companies or issuers B. private companies or issuers C. public companies or non-issuers D. private companies or non-issuers

A. public companies or issuers

Education of financial statement users as to the responsibilities of preparers and auditors of financial statements will _________. A. reduce the audit expectation gap B. ensure the auditor will find all material fraud C. guarantee the future viability of the entity D. increase audit firm reputation and independence

A. reduce the audit expectation gap

Independent professional attestation services improve the quality of information. Quality is best described as an improvement in informational ________. A. relevance and reliability. B. financial and nonfinancial qualities C. historical and prospective qualities D. internal and external qualities

A. relevance and reliability.

Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on the information contained in the financial statements. What term captures this problem? A. reliability B. competing incentives C. complexity D. remoteness

A. reliability

The nature of audit procedures refers to the ________. A. reliance on evidence provided by the client and its management B. use of judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates C. materiality of misstatement D. pressures auditors face to complete their audit within a certain time frame at a reasonable cost

A. reliance on evidence provided by the client and its management

Assurance, attestation, and auditing are similar because all three represent a common process of _______. A. taking information prepared by someone else and comparing that information to an established set of criteria. B. compiling and reviewing historical financial statements and providing non-financial information. C. compiling historical financial statements and providing non-financial information and web security. D. reviewing financial forecast, examining internal controls, and providing website security.

A. taking information prepared by someone else and comparing that information to an established set of criteria.

The audit expectation gap is narrowed by realistic user expectations such as that the auditor ________. A. tests a sample of transactions B. is providing complete assurance C. is guaranteeing the future viability of the entity D. will definitely find any and all fraud

A. tests a sample of transactions

The set of standards used in preparing the historical financial statements, such as GAAP or IFRS, is referred to as ________. A. the applicable financial reporting framework B. Generally Accepted Auditing Standards (GAAS) C. material modifications D. a review of historical financial statements

A. the applicable financial reporting framework

A key similarity between assurance, attestation, and auditing services is ________. A. the comparison of information prepared by someone else against an established set of criteria B. the comparison of actual output to projected output C. the comparison of financial accounting data to managerial accounting data D. the comparison of financial audit data to tax audit data

A. the comparison of information prepared by someone else against an established set of criteria

When auditors determine that the financial statements of a private firm are presented fairly in accordance with the applicable financial reporting framework, they issue the standard _______ report, which is often referred to as a "_______" report. A. unmodified, clean B. qualified, clean C. modified, rough D. unqualified, rough

A. unmodified, clean

What type of audit is concerned with the economy, efficiency and effectiveness of an organization's activities? A. A compliance audit B. An operational audit C. A financial statement audit D. An integrated audit

B. An operational audit

Which are the most specific services provided by the auditor? A. Compilation services B. Audit services C. Attestation services D. Assurance services

B. Audit services

Which of the following is a characteristic of an audit of historical financial statements? A. It provides limited assurance that no material modifications need to be made to the financial statements. B. It expresses an opinion on the fair presentation of the financial statements. C. It is the same as an examination of internal controls. D. It is broader than a review engagement.

B. It expresses an opinion on the fair presentation of the financial statements.

Those charged with governance are the ________. A. CEO, CFO, and COO B. board of directors and management of an entity C. stockholders D. auditors

B. board of directors and management of an entity

A review of historical financial statements as compared to an audit of historical financial statements ________. A. is more extensive in terms of the work product required B. is typically less expensive C. provides greater assurance D. provides an opinion

B. is typically less expensive

If the auditors do not have access to all the information relevant to the audit, this is known as a(an) ________. A. material misstatement B. limitation in scope C. estimate D. sampling technique

B. limitation in scope

Public companies, or issuers, in the U.S. are ________. A. required by the federal government to have quarterly financial statement audits B. required by the federal government to have annual financial statement audits C. required by the federal government to have semi-annual financial statement audits D. not required by the federal government to have financial statement audits

B. required by the federal government to have annual financial statement audits

What type of audit provides an opinion by the auditor about whether the financial statements are presented fairly in accordance with an applicable financial reporting framework? A. A compliance audit B. An operational audit C. A financial statement audit D. An audit on the effectiveness of ICFR

C. A financial statement audit

Which is the most inclusive or broadest service provided by the auditor? A. Audit services B. Attestation services C. Assurance services D. A review of historical financial statements

C. Assurance services

Which of the following is included as a focus of assurance services? A. Compilation of historical financial statements B. Examination of internal controls C. Review of historical financial statements D. Review of financial forecast

C. Review of historical financial statements

What is the final step in becoming a licensed CPA? A. Taking the CPA exam B. Meeting the educational requirements C. Work experience D. Evidence of personal integrity

C. Work experience

Which of the following is not one of the three E's needed to become a licensed CPA? A. Education B. Examination C. Experience D. Efficiency

D. Efficiency

Which of the following is not one of the four sections tested on the CPA exam? A. Auditing and Attestation B. Business Environment and Concepts C. Regulation D. Internal Controls

D. Internal Controls

Which type of entity generally finds a review of historical financial statements to be the most useful? A. Large public corporations B. Small public corporations C. Large private corporations D. Small private corporations

D. Small private corporations

The limitations of an audit are NOT caused by ________. A. the nature of financial reporting. B. the nature of audit procedures. C. the need for the audit to be conducted within a reasonable period of time at a reasonable cost. D. a guarantee that the financial statements are free from error

D. a guarantee that the financial statements are free from error

What type of audit is conducted to provide assurance about various aspects of an organization's activities rather than the reliability of financial statements? a(an) A. compliance audit B. operational audit C. financial statement audit D. internal audit

D. internal audit

The nature of audit procedures can refer to the concept of ________. A. consistency B. timeliness C. effectiveness D. materiality

D. materiality

Private companies, or non-issuers, in the U.S. are ________. A. required by the federal government to have quarterly financial statement audits B. required by the federal government to have annual financial statement audits C. required by the federal government to have semi-annual financial statement audits D. not required by the federal government to have financial statement audits

D. not required by the federal government to have financial statement audits

Pressures of time and money may affect the audit due to all of the following EXCEPT ________. A. clients want to issue their financial statements by a certain date B. clients refusing to pay additional fees for additional audit effort and time C. pressures within the CPA firm to complete all audits on a timely basis to avoid incurring costs that may not be recovered D. pressures by shareholders to find all misstatements in the financial reports

D. pressures by shareholders to find all misstatements in the financial reports