Ch 1 HW The Demand for Audit and Other Assurance Services

Definition of Assurance

An independent professional service that improves the quality of information for decision makers.

Audits a) are required for publicly traded companies in the United States. b) are an assurance​ service, but not an attestation service. c) do not require the auditor to express their opinion in a written report. d) are designed to provide absolute assurance that the financial statements are free of material misstatement.

Answer a) are required for publicly traded companies in the United States. -- b) are an assurance​ service, but not an attestation service. (False) c) do not require the auditor to express their opinion in a written report. (False) d) are designed to provide absolute assurance that the financial statements are free of material misstatement. (False)

T/F In circumstances where the auditor is being asked to audit subjective types of​ information, typically, the auditor and the entities being audited should agree in writing about the criteria being audited after the audit starts.

False

T/F Auditing can have a significant effect on both information risk and business risk.

False (pg 7)

T/F In an audit of internal controls over financial​ reporting, the auditor may rely upon Internal​ Control-Integrated Framework issued by COSO.

True

T/F Section 404 of the​ Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting.

True

T/F The auditor must be competent and have an independent mental attitude

True

T/F The criteria by which an auditor evaluates the information under audit may vary with the information being audited.

True

T/F The primary purpose of a management consulting engagement is to generate a recommendation to management.

True (pg 12)

T/F An integrated approach to auditing considers both the risk of misstatements and operating controls intended to prevent misstatements.

True (pg 14)

Which of the following are required to have a written report regarding the assertion of another​ party?

Yes: FS Audit, Op Aud, Comp Aud, Attest Engagement No: Assurance Engagement

Which of the following audits can be regarded as generally being a compliance​ audit? a) IRS​ agents' examinations of taxpayer returns b) a CPA​ firm's audit of a public company c) GAO​ auditor's evaluation of the computer operations of governmental units d) an internal​ auditor's review of a​ company's payroll authorization procedures

a) IRS​ agents' examinations of taxpayer returns

Select the scope of the audit responsibilities for internal auditors. a) Perform compliance or operational audits in order to assure management or the board of directors that controls and policies are properly and consistently​ developed, applied and evaluated. b) Perform audits in accordance with accounting standards of published financial statements prepared in accordance with U.S. GAAS or CAS. c) Perform compliance or operational audits in order to assure the Congress of the expenditure of public funds in accordance with its directives and the law. d) Perform compliance audits to enforce the federal tax laws as defined by U.S. GAAP or IFRS.

a) Perform compliance or operational audits in order to assure management or the board of directors that controls and policies are properly and consistently​ developed, applied and evaluated.

Select the scope of audit responsibilities for GAO auditors. a) Perform compliance or operational audits in order to assure the Congress of the expenditure of public funds in accordance with its directives and the law. b) Perform compliance audits to enforce the federal tax laws as defined by U.S. GAAP or IFRS. c) Perform audits in accordance with accounting standards of published financial statements prepared in accordance with U.S. GAAS or CAS. d) Perform compliance or operational audits in order to assure management or the board of directors that controls and policies are properly and consistently​ developed, applied and evaluated.

a) Perform compliance or operational audits in order to assure the Congress of the expenditure of public funds in accordance with its directives and the law. (pg 14)

Identify the four parts of the Uniform CPA Examination. ​(Select all that​ apply.) a) Regulation b) Auditing and Attestation c) Management Consultation d) Section 404 of the​ Sarbanes-Oxley Act e) Financial Accounting and Reporting f) Tax Services g) Business Environment and Concepts h) Operational Audit

a) Regulation b) Auditing and Attestation e) Financial Accounting and Reporting g) Business Environment and Concepts

An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as​ a(n) a) compliance audit b) audit of financial statements c) production audit d) operational audit

a) compliance audit

The most common way for users to obtain reliable information is to a) have an independent audit b) verify the information with management c) verify all information individually d) have an internal audit

a) have an independent audit (pg 8)

One objective of an operational audit is to... a) determine whether financial statements fairly represent the entity's operations b) determine if the auditee is in compliance with GAAP c) make recommendations for improving performance d) report on the entity's relative success in attaining profit maximization

answer: c) make recommendations for improving performance -- a) determine whether financial statements fairly represent the entity's operations (Financial Statement Audit) b) determine if the auditee is in compliance with GAAP (Compliance Audit) d) report on the entity's relative success in attaining profit maximization (idk?)

Identify an​ example(examples) of auditing services (select all that apply) a) Accounting and bookkeeping b) Audit of historical financial statements c) Certain management consulting d) Internal control over financial reporting e) Reviews f) Tax services

b) Audit of historical financial statements

Identify an​ example(examples) of assurance services. ​(Select all that​ apply.) a) Accounting and bookkeeping b) Audit of historical financial statements c) Certain management consulting d) Internal control over financial reporting e) Reviews f) Tax services

b) Audit of historical financial statements c) Certain management consulting d) Internal control over financial reporting e) Reviews

Identify an​ example(examples) of attestation services. ​(Select all that​ apply.) a) Accounting and bookkeeping b) Audit of historical financial statements c) Certain management consulting d) Internal control over financial reporting e) Reviews f) Tax services

b) Audit of historical financial statements d) Internal control over financial reporting e) Reviews

Which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to​ Congress? a) independent auditor b) GAO auditor c) revenue agent d) internal auditor

b) GAO auditor

What are the major differences in the scope of the audit responsibilities for​ CPAs, GAO​ auditors, IRS​ agents, and internal​ auditors? Begin by selecting the scope of audit responsibilities for CPAs. a) Perform strictly attestation service where a report is issued about the reliability of an assertion that is the responsibility of another party. b) Perform audits in accordance with auditing standards of financial statements prepared in accordance with U.S. GAAP or IFRS. c) ​Record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. d) Perform compliance audits to enforce the federal tax laws as defined by​ Congress, interpreted by the​ courts, and regulated by the IRS.

b) Perform audits in accordance with auditing standards of financial statements prepared in accordance with U.S. GAAP or IFRS. (pg 14)

Auditors do NOT provide which of the following? a) assurance on the effectiveness of internal controls over financial reporting b) absolute assurance on the financial statements including assuming responsibility for them c) assurance on corporates sustainability reports d) assurance on financial statements

b) absolute assurance on the financial statements including assuming responsibility for them

The trait that distinguishes auditors from accountants is the... a) auditor's education beyond the bachelor's degree b) auditor's expertise in the accumulation and the interpretation of audit evidence c) auditor's ability to interpret FASB Statements. d) auditor's ability to interpret accounting principles generally accepted in the United States

b) auditor's expertise in the accumulation and the interpretation of audit evidence

A bank loan officer is trying to decide whether the bank should make a loan to a particular company. The interest rate the bank will charge the company is determined by many factors. Which of the following factors is influenced by the​ auditor's report? a) the risk-free interest rate risk b) information risk c) the business risk for/of the customer d) All of the above are influenced by the auditor's report

b) information risk (pg 7)

An accountant... a) must decide the number and types of items to test b) must have an understanding of the principals and rules that provide the basis for preparing the accounting information c) must be a CPA d) must possess expertise in the accumulation of audit evidence

b) must have an understanding of the principals and rules that provide the basis for preparing the accounting information

The use of the Certified Public Accountant title is regulated by a) the federal government. b) state law through the licensing departments of each state. c) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees. d) the Securities and Exchange Commission.

b) state law through the licensing departments of each state. (pg 16)

Select the scope of the audit responsibilities for IRS agents. a) Perform audits in accordance with accounting standards of published financial statements prepared in accordance with U.S. GAAS or CAS. b) ​Record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. c) Perform compliance audits to enforce the federal tax laws as defined by​ Congress, interpreted by the​ courts, and regulated by the IRS. d) Perform audits in accordance with auditing standards of financial statements prepared in accordance with U.S. GAAP or IFRS.

c) Perform compliance audits to enforce the federal tax laws as defined by​ Congress, interpreted by the​ courts, and regulated by the IRS. (pg 15)

Which of the following engagements is most likely to be considered an operational​ audit? a) The auditor determines whether the organization is following provisions of laws and regulations. b) The auditor examines information presented in an​ entity's financial statements to determine whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. c) The auditor evaluates the​ organization's efficiency in processing payments. d) The auditor assists the client in preparation of financial statements.

c) The auditor evaluates the​ organization's efficiency in processing payments.

Internal auditors... a) must be CPAs b) must be independent of the entity that employs them c) are employed to all types of organizations d) report to the accounting department

c) are employed to all types of organizations

Distinguish among the following three factors impacting a loan interest​ rate: risk-free interest​ rate, business​ risk, and information risk. Which one or ones does the auditor reduce by performing an​ audit? a) risk-free interest rate b) business risk c) information risk

c) information risk

Which risk(s) does the auditor reduce by performing an audit? (select all that apply) a) Risk-free interest rate b) business risk c) information risk

c) information risk

c. In a financial statement​ audit, the auditor obtains a reasonable level of assurance about whether the financial statements are free of material misstatement in order to express an opinion. In order to obtain reasonable​ assurance, the auditor must... a) have prior experience in the industry in which the audit client operates. b) examine all documents available that support the financial statements. c) obtain sufficient audit evidence. d) test controls around significant transaction cycles.

c) obtain sufficient audit evidence.

Which of the following is considered an assurance​ engagement? a) Bookkeeping b) Preparation c) Compilation d) Audit

d) Audit

In a financial statement​ audit, the auditor a) determines whether the financial statements are stated in accordance with specified criteria. b) gathers evidence to determine whether the statements contain material errors or other misstatements. c) must have a thorough understanding of the entity and its environment. d) all of the above.

d) all of the above.

The possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as a) information risk b) materiality risk c) interest rate risk d) business risk

d) business risk (pg 7)

Definition of Attestation

A type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party.

Definition of Audit

A form of attestation service in which the auditor expresses a conclusion as to whether the financial statements are presented in accordance with an applicable financial reporting framework such as U.S. GAAP or IFRS.

Definition of Risk-free intrest rate

This is approximately the rate the bank could earn by investing in U.S. treasury notes for the same length of time as the business loan.

Definition of Business risk for the customer

This risk reflects the possibility that the business will not be able to repay its loan because of economic or business conditions such as a recession, poor management decisions, or unexpected competition in the industry.

Definition of Information Risk

This risk reflects the possibility that the information upon which the business risk decision was made was inaccurate.