Audit Chapter 2

Reasonable assurance is: A. a high, but not absolute level of assurance B. absolute level of assurance C. based on what a typical investor would consider to be resonable

A

When an auditor concludes that the financial statements are not presented fairly in conformity with GAAP, an __________ opinion will be issued

adverse

Evidence must be trustworthy (reliable) and provide the audit team with information of interest (relevant) in order to be considered _________

appropriate

A list of the procedures auditors need to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements is a(n) _________

audit plan

The likelihood that an error or fraud will exist in the financial statements prior to be considering the auditors work is the risk of ___________

material misstatement

The likelihood that an error or fraud will exist in the financial statements prior to considering the auditors work is the risk of ____________________

material misstatement

When an auditor concludes that the financial statements are presented fairly in all material respects a(n) _________ opinion will be issued

unmodified

The fundamental principle of _______ requires that the auditor obtains resonable assurance about whether the financial statements as a whole are free from material misstatement whether due to fraud or error a. performance b. reporting c. responsibilities

A

When auditing large entities, a sample of transactions is examined when drawing conclusions. The number of transaction evaluated relates to the issue of: A. sufficiency B. relevance C. reliability D. appropriateness

A

Which of the following is not related to the responsibilities principle? A. Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting B. Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession C. The auditors' use of professional judgment throughout the examination D. Firm-wide policies to evaluate the financial and professional relationships of its professionals

A

Which of the following presumptions does not relate to the reliability of audit evidence? A. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. B. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. C. The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly. D. The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.

A

Which of the following presumptions is correct about the reliability of audit evidence? A. An effective system of internal control provides more assurance about the reliability of audit evidence. B. Reliability of audit evidence refers to the amount of corroborative evidence obtained. C. Information obtained indirectly from outside sources is the most reliable form of audit evidence. D. To be reliable, audit evidence should be convincing rather than persuasive.

A

Knowledge of the clients business and industry helps auditors. Check all that apply A. make judgments about the clients accounting principal choices B. evaluate the reasonableness of management estimates C. write an audit report that is appropriate for the industry D. identify areas for special attention

A,B,D

interpretive publications: check all that apply A. must be followed unless an auditor can justify any departures B. are part of auditing standards C. are as authoritative and binding as the guidance in SAS and auditing standards D. provide guidance on the application of GAASin specific circumstances

A,B,D

Materiality: Check all that apply A. is part of the objective of the audit B. recognizes auditors should focus on matters important to financial statment users C. Recognizes auditors do no expect account balances to be accuate to the penny D. is commonly established based on dollar amounts of key financial statement subtotals

A,B.C

Prior to the year 2002, which of the following is correct. Check all that apply A. the accounting profession was self regulated B. the institute of certified Auditors was responsible for auditing regulations C. standards governing audits were established by members of the accounting profession

A,C

The objectives of an audit are to: check of all that apply A. issue a report on the financial statements B. obtain absolute assurance that the financial statements do no contain material misstatements due to error C. obtain reasonable assurance about whether the financial statements as a whole are free of material misstatements due to fraud

A,C

To ensure personal assigned to engagements are independent in both fact and appearance firms should. Check all that apply A. identify threats to independence and take actions to eliminate or reduce them to an acceptable level B. obtain verbal confirmation from all firm personnel with respect to their compliance with independence requirements C. communicate independence requirements to personnel

A,C

When exercising professional skepticism auditors A. consider the reliability of information obtained from the audit committee B. assume management is dishonest when providing information C. evaluates the reliability of documentary evidence D. evaluate and consider contradictory evidence

A,C,D

Reasonable assurance: A. requires auditors to consider various material misstatement risks B. requires audit procedures to limit the overall to a moderate level C. recognizes auditors cannot provide a high level of assurance regarding their work D. recognizes a GAAS audit may not detect all material misstatement

A,D

When an auditor concludes that the financial statements are not presented fairly in conformity with GAAP, a(n _________ opinion will be issued

Adverse

Satisfactory internal control _______ the probability of errors or frauds in the accounts A. eliminates B. reduces C. has no impact on

B

The fundamental principal of _______ requires that the auditors obtain reasonable assurance about whether the financial statement as a whole are free from material misstatement, whether due to fraud or error. A. reporting B. performance C. responsibilities

B

The most reliable evidence is. A. internal evidence B. direct personal knowledge C. external evidence

B

The performance principle would include all of the following except: A. the auditors' determination of materiality levels B. the auditors' evaluation of independence with respect to their clients. C. the auditors' evaluation of the risk of material misstatement. D. the auditors' determination of the nature, timing, and extent of further audit procedures.

B

The purpose of monitoring is to A. review significant judgements made by audit teams and the conclusions reached in formulating the report B. provide the firm reasonable assurance that quality control policies and procedures are operating effectively and complied with in practice C. ensure the firm will pass all PCAOB inspections D. hire the most qualified auditing personal

B

The probability that either an error or fraud will result in a material misstatement is A. control risk B. risk of material misstatment C. inherent risk

B,C

The public company accounting oversight boards (PCAOB) A. Provides external, independet oversight to audits of public and private entities B. Was created by Sarbanes- Oxley C. Is responsible for registering public accounting firm

B,C

The risk assessment process requires an understanding of: Check all that apply A. the client but not the clients industry B. internal controls in the accounting information system C. the clients operation environment

B,C

reasonable assurance A. recognizes auditors cannot provide a high level of assurance regarding their work B. recognizes a GAAS audit may not detect all material misstatements C. requires auditors to consider various material misstatement risks D. requires audit procedures to limit the overall risk to a moderate level

B,C

Auditors are responsible for: A. exercising professional judgement in the reporting stage of the audit only B. having appropriate competence and capabilities to perform the audit C. maintaining professional skepticism through audit planning and performance D. complying with relevant ehtical requirements

B,C,D

Conditions that present challenges to an auditor's professional skepticism include: Check all that apply A. contradictory audit evidence obtained through different procedures B. financial incentives and pressures C. time deadlines for completing the audit D. personal relationships developed with clients

B,C,D

Due Care: A. expects auditors to be infallible B. relates to auditor competence and capabilities C. requires an appropraite level of professional skepticism D. Reflects a resonable level of performance

B,C,D

The probability that a material misstatement caused by error or fraud will not be prevented or detected on a timely basis of the entities internal control is A. inherit risk B. risk of material misstatement C. control risk

C

When auditors confirm accounts receivables with customers , evidence is provided about the legitimacy of the sales, but does not provide evidence the accounts collectible. This addresses the issue of. A. Sufficiency B. Reliability C. Relevance D. Appropriateness

C

When auditors confirm accounts receivables with customers, evidence is provided about the legitimacy of the sales, but does not provide evidence that accounts are collectible. This addresses the issue of: A. sufficiency B. appropriateness C. relevance D. reliability

C

Which of the following situations would most likely be in conflict with the responsibilities principle? A. Auditors obtain expertise in their client's industry as they are conducting the audit examination. B. Auditors fail to document their assessment of control risk following their study of internal control. C. Auditors are directly involved with a client manager in a strategic decision-making capacity. D. Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors.

C

All of the following are examples of procedures a firm can use to monitor its system of quality control except: A. assessing compliance with independence policies and procedures. B. discussions with firm personnel. C. conducting reviews of engagement documentation. D. devoting sufficient resources to developing a system of quality control.

D

An engagement quality control review. A. ensures the firm will pass all PCAOB inspections B. provides the firm reasonable assurance hat quality control policies and procedures are are operating effectively and complied with in practice C. is designed to ensure that upper management is committed to quality control D. evaluates significant audit team judgements and the conclusions reached in formulating the report

D

Audit evidence is usually considered sufficient when A. it has the qualities of being relevant, objective, and free from unknown bias. B. it is reliable C. it has been obtained through random selection methods. D. there is enough quantity to afford a reasonable basis for an opinion on financial statements.

D

Ineffective Internal Controls A. decreases control risk but not the necessary effectiveness of further audit procedures B. increases control risk but not the necessary effectiveness of further audit procedures C. has no effect on control risk or the necessary effectiveness of further audit procedures D. increases control risk and the necessary effectiveness of further audit procedures E. decreases control risk and the necessary effectiveness of further audit procedures

D

Which of the following is least related to the concept of independence in appearance? A. The ownership of a financial interest in a client by the auditor B. The employment of the auditor's family member in an important position with the client C. The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements D. The auditors' objectivity and ability to act impartially toward the client

D

The information auditors use to arrive at conclusions and form the audit opinion is called _______

Evidence

True of false: Any information that permits auditors to reach valid logical conclusions can be considered evidence

True

To be considered _________, evidence must be reliable and relevant

appropriate

To be considered __________ evidence must be reliable and relevant

appropriate

Regarding evidence __________ refers to evidence quality and ___________ relates to evidence quantity

appropriateness, sufficiency

Policies and procedures implemented to prevent or detect material accounting frauds and errors and provide for timely correction is the definition of ___________

internal control

The primary purpose of assessing the risk of material misstatement is to help auditors determine the _______, ______ and ______ of further audit procedures needed to gather evidence about the fairness of the entity's financial statements

nature, timing, extent

Pressures to keep audit fees low and the desire to achieve high levels of client satisfaction present challenges for auditors maintaining appropriate levels of ____________

professional skepticism

A company that offers registered securities for sale to the general population is called a(n) _________

public entity

The fact that a small misstatement (in absolute terms) is likely to influence investment decisions referred to as ____________ factors

qualitative materiality

The concept of __________ recognizes that auditors are not "insures" or "guarantors" regarding the fairness of the entity's financial statements

reasonable assurance

The concept of ________________ recognizes that auditors are not insures or guarantors regarding the fairness on the entity financial statements

reasonable assurance

Guidance for "communicating the results" are covered under the GAAS __________ principal

reporting

The fundamental principal of _________ relates to auditors integrity and professional qualifications

responsibilities

When an auditor concludes that the financial statements are presented fairly in all material respects, a(n) ___________ option will be issued

unmodified

The risk of material misstatement is a combination of ___________ risk and _______ risk

inherent and control

True or False: Human resources is an important aspect of a system of quality control

True

True or False: any information that permits auditors to reach valid logical conclusions can be considered evidence

True

The probability that either an error or fraud will result in a material misstatement is A. risk of material misstatement B. Control risk C. inherit risk

C

PCAOB Auditing Standards apply to A. public entities only B. non public entities only C. both public and nonpublic entities

A

PCAOB inspections are conducted on an annual basis for: A. firms performing audits of more than 100 public entities B. firms performing audits of less than 100 public entities C. firms that have had substandard work identified in previous inspections D. all firms that audit public entities

A

The two general types of relationships that are are believed to compromise independence are: A. financial and friendship B. financial and family C. financial and managerial D. managerial and family

C

Audit reports refer to an audit being conducted in accordance with _________ of the public company accounting oversight board A. standards B. Procedures

A

In the audit report, an audit opinion: Check all that apply A. is expressed in accordance with the applicable financial reporting framework B. must always be expressed even if the auditor is inable to complete the audit C. states if the financial statements are presented fairly in al material respect.

A, B

When making a decision to accept a new client engagement or continuing to perform an engagement for an existing client, the most important issues that firms should focus on are A. firms ability to comply with legal and ethical requirements related to the engagements B. Clients ability to pay for an engagement that will meet all legal, ethical and professional requirements C. integrity and business reputation of the client D. firms ability to adequately perform the engagement

A, C,D

AICPA statements on Auditing Procedures: Check all that apply A. were developed in response of an auditing scandal B. served as the basis for audits of public and nonpublic companies C. are still being issued by the american standards board

A,B

Reasonable assurance A. requires auditors to consider various material misstatement risks B. Recognizes a GAAS audit may not detect all material misstatements C. Requires audit procedures to limit the overall risk to a moderate level D. Recognizes auditors cannot provide a high level of assurance regarding their work

A,B

The Public Company Accounting Oversight Board (PCAOB) A. provides independent oversight over the audits of public entities B. establishes and enforces standards for audit engagements C.inspects the quality of audits conducted by all public accounting firms

A,B

A system of quality control provides reasonable assurance that an audit firm: Check all that apply A. complies with professional standards B. issues appropriate reports C. complies with regulatory and legal requirements D. only allows experienced, licensed CPAs to work with their audit clients

A,B,C

For quality control standards to be effective it is important that firm management A. demonstrates its commitment to quality control B. devotes sufficient resources to quality control policies and procedures C. ensures that financial considerations do not override work quality D. does not base personal decision on the quality or work performed

A,B,C

When making a decision to accept a new client engagement or continuing to perform an engagement for an existing client, the most important issues that firms should focus on are. Check all that apply A. integrity and business reputation of the client B. firms ability to comply with legal and ethical requirements related to the engagement C. firms ability to adequately perform with engagement D. clients ability to pay for an engagement that will meet all legal, ethical and performance requirements

A,B,C

Elements of the performance principle include A. reasonable assurance B. materiality C. audit evidence D. planning and supervision E. risk assessment F. understandable reporting

A,B,C,D,E

To obtain reasonable assurance the auditor must: Check all that apply A. identify and assess risks of material misstatements B. obtain sufficient appropriate audit evidence C. apply appropriate materiality levels throughout the audit D. issue a modified opinion at the conclusion of the audit E. plan to work and supervise assistants

A,B,C,E

Generally Accepted Auditing Standards (GAAS) Check all that apply A. guide the conduct of audit examinations B. identify necessary qualifications and characteristics of auditors C. only include pronouncements issued by the PCAOB D. have a purpose to meet the objective of audit emainations

A,B,D

Auditors are expected to be unbiased and impartial with respect to information they audit which is referred to as independence in A. appearance B. Fact C. actions

B

Which of the following refers to the nature of information provided by the audit evidence A. Appropriateness B. Relevance C. Reliability D. Sufficiency

B

in the audit report the term "financial statements" A. only includes the four basic financial statements B. includes all footnote disclosures and additional information required by GAAp C. can exclude footnotes disclosures and additional information if stated in the audit report

B

Reasonable assurance. Check all that apply A. requires audit procedures to limit the overall risk to a moderate level B. Recognizes a GAAS audit may not detect all material misstatements C.requires auditors to consider varios material misstatement risks D. recognizes auditors cannot provide a high level of assurance regarding their work

B,C

Substantive procedures are: check all that apply A. unnecessary when the risk of material misstatement is low B. used to obtain evidence about account balances C. reflected in the determination of detection risk

B,C

The Public Company Accounting Oversight board (PCAOB). Check all that apply A. provides external, independent oversight to audits of public and private entities B. is responsible for registering public accounting firms C. was created by Sarbanes- Oxley

B,C

Professional judgment: Check all that apply A. is a state of mind characterized by appropriate questioning and a critical assessment of audit evidence B. is particularly important when evaluating management estimates used in financial statements C. relates to evidence obtained and conclusions reached D. must be demonstrated throughout the entire audit process

B,C,D

An audit plan is a: Check all that apply A. only required if assistants will be used during the audit B. stated in enough detail to understand about the work to be done C. only required for the audit of public companies D. A list of the audit procedures auditors need to perform

B,D

PCAOB auditing standards are subject to the formal approval of the A. Audition standards board B. IRS C. Sec D. AICPA

C

The fundamental GAAS principal that defines objectivity and the role it plays in the audit is the ________ principal A. performance B. Reporting C. responsibilities

C

True or False: auditors can read business periodicals and textbooks to help obtain an understanding of a clients business

True

Due to multiple and sometimes conflicting standards, auditors and regulators have much interest in _______ which is making the standards coordinated or uniform throughout the world

Convergence

A(n) ________ opinion contains the words "except for" A. unqualified B. adverse C. disclaimer of D. qualified

D

The chance that the audit team's substantive procedures will fail to uncover a material misstatement is called _________ risk A. appropriate B. reliablity c. Suffciency D. detection

D

The fundamental principles developed by the Auditing Standards Board are best described as: A. standards that apply only to audits of public entities. B. industry-specific guidance on how audit procedures should be conducted. C. ten basic standards underlying an audit. D. guidelines for the general conduct of audit engagements.

D

True or False: The competence and capabilities required to become an auditor are developed and maintained strictly through the auditors college education and CPE ( continuing professional education)

False

GAAP, IFRS and special purpose (cash or tax bases) are examples of ___________ frameworks

Financial reporting

Auditing standards include ___________ which include AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position

Interpretive Publications

Auditors are required to plan the work and "obtain and evaluate evidence" as part of the GAAS ________ principal

Performance

General quality criteria for conducting an audit is set forth in the fundamental principal of _____________

Performance

General quality for conducting an audit is set for in the fundamental principal of _______________

Performance

A state of mind characterized by appropriate questioning and a critical assessment of audit evidence is ___________

Professional skepticism

Audit procedures used to obtain evidence with respect to the fairness of an account balance are referred to as _________ procedures

Substantive

Perceptions of auditors' independence is the focus of indepence in: A. fact B. Actions C. Apperance

c

When an auditors state of mind leaves him or her unbiassed and impartial with respect to information being audited, the auditor is said to possess ________ in _______

independence, fact

The information auditors use to arrive at conclusions and form the audit opinion is called _________

evidence

The information auditors use to arrive at conclusions and form the audit opinion is called _____________

evidence

When an auditor is perceived to by others to be unbiased, the possesses _________ in ________

indepence, appearance

The application of relevant training knowledge and experience in making informed decisions during the audit engagement is _________

professional judgment