Financial Auditing Quiz 1
Which of the following statements about evidence is true? The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion. Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive. Effective internal control contributes little to the reliability of the evidence created within the entity.
A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion. Audit evidence consists of accounting records (initial entries and supporting records, such as ledgers, worksheets, and spreadsheets) and other information (minutes of meetings, confirmations, information obtained by inquiry, etc.). But accounting records alone do not provide sufficient appropriate evidence as a basis for an opinion on the financial statements.
Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? An auditor may not draft an entity's financial statements based on information from management's accounting system. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities.
An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion. GAAS require the audit report to state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.
Which of the following services provides the least assurance regarding the fairness of financial statements? Review. Audit. Attestation. Compilation.
Compilation. During a compilation, neither analytical procedures nor tests of balances and transactions are performed. Thus, no assurance can be expressed regarding the fairness of the financial statements.
In a compliance audit, the auditor has a responsibility to Consider whether management has identified the applicable compliance requirements. Notify the governmental agency providing the awards that the audit is not designed to provide any assurance of detecting noncompliance due to fraud. Issue a report that describes the expected benefits and related costs of the auditor's suggested changes to the entity's internal control. Express an opinion concerning the entity's continued eligibility for the governmental awards based on compliance.
Consider whether management has identified the applicable compliance requirements. Management is responsible for (1) identifying the entity's government programs and understanding and complying with the compliance requirements, (2) establishing and maintaining effective controls over compliance, (3) evaluating and monitoring compliance, and (4) taking necessary correction action.
The objective of assurance services is to Improve the firm's outcomes. Provide more timely information. Enhance decision making. Compare internal information and policies to those of other firms.
Enhance decision making. The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.
What type of evidence would provide the highest level of assurance in an attestation engagement? Evidence obtained indirectly. Evidence secured solely from within the entity. Evidence obtained from multiple internal inquiries. Evidence obtained from independent sources.
Evidence obtained from independent sources. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. Thus, evidence obtained from independent sources outside the entity typically is more reliable than evidence from sources inside the organization.
In an audit of compliance, an auditor would be expected to follow which of the following auditing standards? Only the Generally Accepted Auditing Standards (GAAS) requested by management. Generally Accepted Auditing Standards (GAAS) adapted to meet the circumstances of a compliance audit. Generally Accepted Auditing Standards (GAAS) applied without alteration. Generally Accepted Compliance Auditing Standards (GACAS) specifically issued for compliance audits.
Generally Accepted Auditing Standards (GAAS) adapted to meet the circumstances of a compliance audit. The auditor should use judgment in adapting and applying GAAS for financial statement audits to compliance audits.
Users of an issuer's financial statements demand independent audits because Management may not be objective in reporting. Users expect auditors to correct management errors. Management relies on the auditor to improve internal control. Users demand assurance that fraud does not exist.
Management may not be objective in reporting. Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.
Which agency is responsible for determining the continuing professional education requirements for licensed CPAs? The board of accountancy for the state in which the licensed CPA practices. The Securities and Exchange Commission. The National Association of State Boards of Accountancy. The American Institute of Certified Public Accountants.
The board of accountancy for the state in which the licensed CPA practices. Requirements for licensure vary from state to state. In addition to passing the CPA examination, a candidate may need to satisfy a state's educational, experience, and residency criteria. The board of accountancy for the state in which the licensed CPA practices is responsible for determining the continuing professional education requirements for licensed CPAs.
Which of the following statements about audit evidence is true? The sufficiency and appropriateness of audit evidence is a matter of professional judgment. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. A client's accounting records can be sufficient audit evidence to support the financial statements.
The sufficiency and appropriateness of audit evidence is a matter of professional judgment. The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.
dependent auditing can best be described as A branch of accounting. A discipline that enhances the degree of confidence that users can place in financial statements. A regulatory function that prevents the issuance of improper financial information. A professional activity that measures and communicates financial and business data.
A discipline that enhances the degree of confidence that users can place in financial statements. The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework (e.g., GAAP, cash basis, etc.). An auditor's opinion enhances the degree of confidence that users can place in financial statements.
Which of the following statements correctly defines the term "reasonable assurance"? A significant level of assurance to allow an auditor to detect a material misstatement. An absolute level of assurance to allow an auditor to detect a material misstatement. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. A substantial level of assurance to allow an auditor to detect a material misstatement.
A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. The required basis for the auditor's opinion is reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This standard of assurance is high but not absolute. It is obtained when the auditor has gathered sufficient appropriate evidence to reduce audit risk to an acceptably low level.
According to the auditing standards, which of the following terms identifies a requirement for audit evidence? Reasonable. Disconfirming. Appropriate. Adequate.
Appropriate. AU-C 500, Audit Evidence, requires the auditor to obtain sufficient appropriate audit evidence on which to base the opinion. Appropriate evidence is relevant and reliable in supporting conclusions on which the opinion is based.
Who establishes generally accepted auditing standards? State Boards of Accountancy. Financial Accounting Standards Board and the Governmental Accounting Standards Board. Auditing Standards Board and the Public Company Accounting Oversight Board. Securities and Exchange Commission.
Auditing Standards Board and the Public Company Accounting Oversight Board. AICPA Code of Professional Conduct requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opinions on internal control for public companies.
In a compliance audit, the auditor's primary objective is to Provide assurance that all compliance requirements have been documented. Help management identify all compliance requirements of the entity. Express an opinion whether the entity maintained compliance with applicable requirements. Make recommendations to management to help ensure compliance with laws and regulations.
Express an opinion whether the entity maintained compliance with applicable requirements. The auditor's objectives are to (1) obtain sufficient appropriate evidence to form an opinion and report at the level specified in the governmental audit requirement on whether the entity complied, in all material respects, with the compliance requirements, (2) identify audit and reporting requirements in the governmental audit requirement that supplement GAAS and Government Auditing Standards, and (3) perform and report on the related procedures.
The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley's financial statements. The primary objective of this audit is to provide assurance to the Securities and Exchange Commission. Board of directors of Donley. Regional stock exchange. Investors in Donley securities.
Investors in Donley securities. An audit's primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.
An attestation engagement is one in which a CPA is engaged to Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. Assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance. Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts. Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
Issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party. An attestation engagement is one in which a practitioner is engaged to issue, or does issue, an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter that is the responsibility of another party. The conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter.
A financial statement audit is designed to Obtain absolute assurance on the financial statements and express an opinion on the financial statements. Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. Provide assurance on internal control and to identify significant deficiencies and material weaknesses. Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material.
Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. The auditor's overall objectives include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on whether the statements are presented fairly, in all material respects, in accordance with the applicable reporting framework.
In a compliance audit, the auditor's primary objective is to Test and express an opinion on internal control over compliance. Determine that all instances of noncompliance are discovered and reported. Provide management with recommendations for improvement over compliance. Obtain sufficient appropriate evidence to form an opinion on compliance.
Obtain sufficient appropriate evidence to form an opinion on compliance. The auditor's objective in a compliance audit is to obtain sufficient appropriate evidence to form an opinion and report at the level specified in the governmental audit requirement on whether the entity complied, in all material respects, with the applicable compliance requirements.
Most of the auditor's work in forming an opinion on financial statements consists of Understanding internal control. Obtaining and evaluating audit evidence. Comparing recorded accountability with assets. Examining cash transactions.
Obtaining and evaluating audit evidence. According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and sources of information other than accounting records.
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of securities. Compile financial statements in conformity with a comprehensive basis of accounting other than GAAP. Provide assurance on investment performance statistics prepared by an investment company on established criteria. Communicate with an audit committee regarding management's consultations with another CPA.
Provide assurance on investment performance statistics prepared by an investment company on established criteria. SSAEs apply only to attest engagements for which no specific standards (e.g., SASs or SSARSs) apply. In an attest engagement, a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, the practitioner must state a conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated in the report. Attest services traditionally have been limited to expressing an opinion on historical financial statements on the basis of an audit in accordance with U.S. GAAP. But CPAs increasingly provide assurance on representations other than historical statements and in forms other than an opinion.
Which of the following professional bodies has the authority to revoke a CPA's license to practice public accounting? Professional Ethics Division of AICPA. State CPA Society Ethics Committee. State board of accountancy. National Association of State Boards of Accountancy.
State board of accountancy. A valid license is a prerequisite to the practice of public accounting. State boards of accountancy are the governmental agencies that license CPAs. Revocation or suspension of a CPA's license may be made only by the issuing board.
Which of the following auditor concerns usually is so serious that the auditor might conclude that a financial statement audit cannot be conducted? The entity has no formal written code of conduct. Management fails to modify prescribed controls for changes in conditions. The integrity of the entity's management is suspect. Procedures requiring separation of duties are subject to management override.
The integrity of the entity's management is suspect. The financial statements contain assertions by management, so the integrity of management is crucial to the auditor's evaluation of the (1) sufficiency and (2) appropriateness (relevance and reliability) of the evidence obtained to support those assertions. Thus, if the integrity of management is suspect, the auditor may be unable to obtain sufficient appropriate evidence to support an opinion.
The services provided by government auditors may extend beyond the expression of an opinion on the fairness of financial presentation to include reporting on Performance Compliance Economy & Efficiency Y N Y Y Y N N Y Y Y Y Y
Y Y Y Under Government Auditing Standards, the types of engagements addressed include (1) financial audits (financial statement audits and other types, such as compliance with specified regulations for federal award expenditures), (2) performance audits, and (3) attestation engagements (e.g., reporting on compliance with specified laws, regulations, rules, contracts, or grant agreements). Performance audits include many objectives, such as assessing (1) program effectiveness and results, (2) economy and efficiency, (3) internal control, and (4) compliance with legal requirements.
