Auditing Exam 1
The FASB's Accounting Standards Codification (ASC) is recognized as the source of U.S. GAAP by the ______. a. American Institute of Certified Public Accountants (AICPA) b. International Federation of Accountants (IFAC) c. Public Company Accounting Oversight Board (PCAOB) d. Securities and Exchange Commission (SEC)
American Institute of Certified Public Accountants (AICPA), Public Company Accounting Oversight Board (PCAOB), and Securities and Exchange Commission (SEC)
A privately funded body whose mission is to establish standards for financial accounting and reporting is known by the initials _____. (Enter the initials of the applicable body.)
FASB
When a client's financial statements contain a material misstatement that pervasively affects the interpretation of the financial statements, a(n) ______ opinion should be issued. a. unqualified b. advers c. disclaimer of d. qualified
adverse
Professional managers hired by owners to run the corporation on a day-to-day basis are referred to as ____________. A. veterans B. agents C. stockholders D. hosts
agents
The broadest category of independent professional accounting services intended to help decision makers by improving the quality or context of information they use are _______ services.
assurance
These occur when a practitioner is engaged to issue a report on subject matter that is the responsibility of another party. a. accounting services b. attest services c. assurance services
attest services
"Objectively obtaining and evaluating evidence to assess another party's assertions" is a key component of every ________. a. audit b. attest service c. assurance service
audit
The process of obtaining and evaluating evidence makes up most of the accounting professional's activities on any _________. a. assurance service b. audit c. attest service
audit
The principal auditor accepts full responsibility for the work done and conclusions drawn by other auditors when the ______. a. audit report does not refer to the work of other auditors b. other auditors did not conduct the majority of the audit work c. audit report refers to the work of other auditors d. auditor determines the other auditors were not independent of the entity
audit report does not refer to the work of other auditors
Select all that apply The conceptual and procedural details of a financial statement audit build on the fundamental concepts of ___________. - attestation - audit risk - materiality - assurance - evidence
audit risk, materiality, and evidence
Which of the following is a type of attest service? A. consulting B. assurance Services C. financial Planning D. auditing
auditing
Materiality is not a factor when considering ______. a. scope limitation b. auditor independence c. departures from GAAP d. work performed by other auditors
auditor independence
Select all that apply Which of the following statements are true? a. audits were in demand long before securities laws required them b. today audits are rarely utilized in situations where they are not required by law c. some forms of accounting and auditing existed in Greece as early as 500 BC d. in 1926, only about 10% of companies on the new york stock exchange were audited by independent auditors.
audits were in demand long before securities laws required them and some forms of accounting and auditing existed in greece as early as 500 bc
An audit of internal control is ______ for private entities. a. available but not required b. required c. neither available nor required
available but not required
The demand for assurance services comes from ____________ between managers and owners or managers and potential investors. a. conflicts of interest b. information asymmetry c. tax information requirements d. cooperation
conflicts of interest and information asymmetry
The auditor considers whether the comparability of the financial statements between periods has been materially affected (1) by a change in accounting principles or (2) by a material adjustment to correct a misstatement in previously issued financial statements to identify ______ matters that might need to be included in the audit report. (Enter only one word per blank.)
consistency
A lawsuit in progress against a company is an example of a(n) __________ ___________ that needs to be considered when completing an audit. (Enter only one word per blank.)
contingent liabilities
Select all that apply ASB and PCASOB standards use which of the following words to describe actions and procedures auditors have a responsibility to consider? - could - may - should - shall - might
could, may, and might
In the context of a financial statement audit, generally accepted accounting principles usually serve as the established _______________ for assessing management assertions. (Enter only one word per blank.)
criteria
The focus of audit evidence collection ______. (Choose all that Apply) A. depends on the circumstances of the audit B. is generally left to the auditor's discretion C. should always be on the account balances themselves D. is based on the fee the client is being charged.
depends on the circumstances of the audit and should always be on the account balances themselves
True or false: An entity received a going concern report in 20X1. The auditor determines the substantial doubt regarding going concern has been removed in 20X2. The explanatory paragraph included in the prior year's audit report is not included with the auditor's report covering the comparative financial statements.
true
True or false: When a correction to a material misstatement in previously issued financial statements is made, the auditor is not required to mention the misstatement in the current year report.
false
True or false: In most cases, auditors are able to obtain conclusive evidence about specific management assertions.
fasle
Understanding areas of weakness in an entity's internal control helps the auditor ______. a. eliminate all immaterial misstatements from the financial statements b. focus on areas where misstatements are likely to occur c. effectively plan the nature, timing, and extent of further audit procedures d. guarantee an appropriate audit opinion
focus on areas where misstatements are likely to occur
Which of the following usually serves as the basis for evaluating management's assertions in the context of a financial statement audit? a. International Financial Reporting Standards (IFRS) b. International Auditing Standards (IAS) c. Generally Accepted Accounting Principles (GAAP) d. Generally Accepted Auditing Standards (GAAS)
generally accepted accounting principles (GAAP)
Because the objectives and work involved in performing audits of internal control and financial statements are closely interrelated, auditing standards require a(n) ______ audit of internal control and financial statements. (Enter only one word per blank.)
integrated
An error was judged to be material by the auditor even though it did not rise to conventional levels of materiality in quantitative terms. This was likely because the error was ______. a. accidental b. due to lack of auditor independence c. intentional d. due to carelessness
intentional
Organizations design and implement a system of ______ to ensure that the transactions are handled and recorded appropriately and that its resources are protected. a. information technology b. accounting information c. financial reporting d. internal control
internal control
To mitigate financial reporting risks to acceptably low levels, management establishes a system of ______ ______ over financial reporting. (Enter only one word per blank.)
internal controls
The process that varies widely between different types of businesses in purchasing finished goods or raw materials is ______. a. revenue b. inventory management c. human resources management d. financing
inventory management
Select all that apply The financing process includes ______. a. investing in long-term assets b. acquiring goods and services to support operations c. borrowing and repaying funds d. providing a return on owners' investments
investing in long-term assets, borrowing and repaying funds, and providing a return on owners' investments
Select all that apply That an entity will continue as a going concern ______. a. is a basic assumption of financial reporting b. refers to a period of time not to exceed two years from the date of the financial statements being audited c. is evaluated by the auditor d. is assessed by management
is a basic assumption of financial reporting is evaluated by the auditor is assessed by management
Select all that apply Auditing ___________. A. focuses on learning the rules, techniques, and computations required to prepare and analyze financial information B. is more conceptual in nature than financial accounting C. focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of financial information D. helps one understand how to evaluate assertions
is more conceptual in nature than financial accounting, focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of financial information, and helps one understand how to evaluate assertions
A PCAOB report ______. a. indicates the audit was conducted in accordance with generally accepted auditing standards b. is titled "Report of Independent Registered Public Accounting Firm" c. recommends but does not mandate the disclosure of CAMs
is titled "Report of Independent Registered Public Accounting Firm"
The auditor's assessments of ___________ and ___________ ______________ influence the nature, timing, and extent of the audit evidence to be gathered. (Enter only one word per blank.)
materiality, and audit risk
If both the manager and absentee owner seek to maximize their self-interest, the manager ________ act in the best interest of the owner. A. will always b. will never c. may not always
may not always
If the client is a public, rather than a private company, the assessment of internal controls will be ______ thorough.
more
A change in accounting estimate ______ requires an explanatory paragraph in the audit report. a. sometimes b. never c. always
never
Select all that apply When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must add an explanatory paragraph in the Basis for Opinion section indicating ______. a. no opinion in ICFR is being expressed b. the company was not required to have an audit of its ICFR c. the auditor takes no responsibility as related to ICFR
no opinion in ICFR is being expressed and the company was not required to have an audit of its ICFR
An entity received a going concern report in 20X1. The auditor determines the substantial doubt regarding going concern has been removed in 20X2. The explanatory paragraph included in the prior year's audit report is ______. a. included in the report for 20X1, but is not included for 20X2 b. included in the report for both the 20X1 and 20X2 for consistency c. not included with the auditor's report covering the comparative financial statements
not included with the auditor's report covering the comparative financial statements
Select all that apply The entity being audited typically hires and pays the auditor. This highlights the importance to the investing public of auditor ______. a. objectivity b. independence c. cost efficiency d. billing rates
objectivity and independence
Which section of Principles Underlying an Audit Conducted in Accordance with GAAS discusses the inherent limitations of an audit? a. purpose b. responsibilities c. reporting d. performance
performance
In most instances, auditors rely on evidence that is __________ rather than __________ in forming an opinion on a set of financial statements. (Enter only one word per blank.)
persuasive and conclusive
Increasing use of audit data analytics ______ auditors' ability to ask the right questions and evaluate the answers yielded by the data. a. places a greater premium on b. reduces the need for the c. has no effect on the
places a greater premium on
Select all that apply The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS addresses ______. a. the appearance of independence b. planning and supervision c. understanding internal control d. sufficient, appropriate evidence
planning and supervision, understanding internal control, and sufficient, appropriate evidence
Evidence is considered appropriate when it provides information that is both __________ and __________. (Enter only one word per blank.)
relevant and reliable
Select all that apply The auditor's standard unqualified audit report for a public company contains the ______. - name of the engagement partner - report title - audit report date - addressee - "basis for Opinion" section
report title audit report date addressee "Basis for Opinion" section
The final phase and overall objective of the audit is to a. conduct auditing tests b. report to interested users c. notify the SEC about acts of fraud d. inform management about possible material misstatements
report to interested users
Select all that apply If a material inconsistency exists between the financial statements and other information provided by the entity, the auditor must ______. a. request that any incorrect other information be changed b. determine whether the financial statement or other information require revision c. immediately withdraw from the engagement if the entity refuses to change inconsistent information d. communicate the material inconsistency to the client and the audit committee in writing
request that any incorrect other information be changed, determine whether the financial statements or other information require revision, and communicate the material inconsistency to the client and the audit committee in writing
Select all that apply A change from an inappropriate use or application of an accounting principle in prior years to an acceptable accounting principle in the current year ______. a. requires an explanatory paragraph to highlight lack of comparability b. means that the auditor cannot issue an unqualified opinion on the current year financial statement c. is considered a change in accounting principle or method of application d. requires the prior period financial statement to be restated retroactively
requires an explanatory paragraph to highlight a lack of comparability and requires the prior period financial statements to be restated retroactively
Select all that apply The PCAOB ______. a. requires registration of all public accounting firms providing public company audits b. was established by the American Accounting Association c. is overseen by the SEC d. can impose sanctions for rule violations
requires registration of all public accounting firms providing public company audits, is overseen by the SEC, and can impose sanctions for rule violations
The quantity of evidence the auditor obtains is the basis of ______. a. reliability b. appropriateness c. sufficiency d. relevance
sufficiency
In the "basis for opinion" section of the auditor's report, the use of the term "reasonable assurance" is intended to indicate that a. misstatements that remain in the financial statements are all immaterial. b. the auditor has examined all evidence that could reasonably have been gathered during the audit. c. the audit may fail to detect all material misstatements. d. the auditor has made a reasonable judgment about materiality.
the audit may fail to detect all material misstatements
An independent audit by external auditors is important when management communicates financial information to interested users because a. the audit ensures that all errors have been detected b. the audit ensures that the financial statements are accurate. c. the audit increases the information asymmetry between the preparers of the financial statements and the users of the financial statements. provides total assurance that the financial statements are fairly stated d. the audit reduces information risk for users of the financial statements
the audit reduces information risk for users of the financial statements
In the United States, standards governing the audits of private companies are issued by a. the public company accounting oversight board b. the institute of management accountants c. the auditing standards board d. the financial accounting standards board
the auditing standards board
True or false: If an auditor fails to exercise due professional care, he or she can be held liable for civil damages or even criminal penalties.
true
Understanding management assertions in terms of _______________ and __________________ ___________________ helps the auditor focus on the different types of audit procedures needed to test the assertions. (Enter only one word per blank.)
transactions, and account balances
T/F: Management assertions are central to financial statement auditing because they are the focus of the auditor's evidence collection and evaluation efforts.
true
Select all that apply An auditor issues a qualified opinion when there is ______. a. insufficient appropriate evidence b. a specific departure from GAAP but overall the financial statements present fairly in conformity with GAAP c. a scope limitation when the overall financial statements are presented fairly in accordance with GAAP d. a lack of independence e. a GAAP departure that materially affects the financial statements overall such that the statements are not fairly presented
- a specific departure from GAAP but overall the financial statements present fairly in conformity with GAAP - a scope limitation when the overall financial statements are presented fairly in accordance with GAAP
Select all that apply Capital markets allow public companies to raise the investment capital necessary in order to _________. - improve credit rating - fund technology - fund equipment needed - finance research and development - expand to new markets - increase managerial compensation
- fund technology - fund equipment needed -finance research and development - expand to new markets
Select all that apply In deciding if they qualify to serve as the "principal auditor" for a consolidated entity, the auditor considers the Blank______. a. percentage of the total audit fee that was paid to each of the participating audit firms b. importance of the portion of the consolidated financial statements audited by the other auditors c. materiality of the portion of the consolidated financial statements audited by the other auditors d. auditor's overall knowledge of the combined entity's financial statements
- importance of the portion of the consolidated financial statements audited by the other auditors - materiality of the portion of the consolidated financial statements audited by the other auditors - auditor's overall knowledge of the combined entity's financial statements
Select all that apply In deciding if they qualify to serve as the "principal auditor" for a consolidated entity, the auditor considers the ______. a. materiality of the portion of the consolidated financial statements audited by the other auditors b. auditor's overall knowledge of the combined entity's financial statements c. percentage of the total audit fee that was paid to each of the participating audit firms d. importance of the portion of the consolidated financial statements audited by the other auditors
- materiality of the portion of the consolidated financial statements audited by the other auditors - auditor's overall knowledge of the combined entity's financial statements - importance of the portion of the consolidated financial statements audited by the other auditors
Select all that apply An auditor issues a standard unqualified audit report when the auditor has ______. a. reasonable assurance the financial statements conform to GAAP in al material respects b. performed the audit in accordance with applicable auditing standards c. gathered sufficient appropriate evidence d. received payment for services rendered and is released to issue the audit report
- reasonable assurance the financial statements conform to GAAP in all material respects - performed the audit in accordance with applicable auditing standards - gathered sufficient appropriate evidence
Select all that apply When a circumstance such as a fire restricts the scope of the engagement, ______. a. the auditor can issue a standard unqualified opinion b. alternative procedures can be used to gather sufficient appropriate evidence c. the auditor must issue a qualified opinion with explanatory paragraph d. the auditor should disclaim an opinion
- the auditor can issue a standard unqualified opinion - alternative procedures can be used to gather sufficient appropriate evidence
Select all that apply In identifying CAMS, auditors must take into account ______. a. management's assessment of significant risks of material misstatement b. the nature and timing of significant unusual transactions c. degree of auditor judgment related to areas that involved significant management judgment
- the nature and timing of significant unusual transactions - degree of auditor judgment related to areas that involved significant management judgment
A common rule of thumb is that total (aggregated) misstatements of more than about ____________% of income before tax would cause the financial statements to be materially misstated. (Enter only one word per blank.)
5
When a "material corporate event" occurs, the SEC requires a publicly traded company to file a(n) ______. a. 10Q b. 8Q c. 10k d. 8k
8k
Smaller U.S. accounting firms that audit nonpublic entities adhere to ______ standards. a. both ASB and PCAOB b. PCAOB c. ASB
ASB
Global accounting firms formulate their global audit methodologies and policies starting with ______. a. PCAOB standards and only consider IAASB standards if the company being audited has offices in multiple foreign countries b. IAASB standards and only consider PCAOB standards if the company being audited has offices in the United States c. IAASB standards and add specific requirements from the ASB and PCAOB as necessary d. PCAOB standards and add specific requirements from the ASB and IAASB necessary
IAASB standards and add specific requirements from the ASB and PCAOB as necessary
Which of the following is included in the footnotes to the financial statements but does not require an explanatory paragraph in the auditor's report? a. a departure from GAAP that is not confined to specific elements, accounts, or items of the financial statements b. a change in accounting principles that does not have a material effect in the current year but is expected to have a material effect in future years c. accounting for a major subsidiary using the equity method in 20X1 and consolidating the subsidiary's and parent's financial statements in 20X2
a change in accounting principles that does not have a material effect in the current year but is expected to have a material effect in future years
During the course of an audit, an auditor encounters a pervasively material scope limitation that cannot be eliminated by conducting alternative audit procedures. The auditor should issue a. an unqualified opinion with a disclaimer of opinion attached. b. an adverse opinion. c. an unqualified/unmodified opinion with modified language in the opinion paragraph explaining the scope limitation. d. a disclaimer of opinion.
a disclaimer of opinion
The auditor would most likely issue a disclaimer of opinion because (of) a. the reliance on the work of another auditor b. a material scope limitation c. a pervasively material departure from generally accepted accounting principles d. a lack of independence on the part of the auditor
a lack of independence on the part of the auditor
Select all that apply The auditor's report does not refer to the work of other auditors when the principal auditor ______. a. accepts full responsibility for the work done and conclusions drawn by other auditors b. is satisfied as to the professional reputation and independence of the other auditor c. shares responsibility for the audit report with other auditors
accepts full responsibility for the work done and conclusions drawn by other auditors and is satisfied as to the professional reputation and independence of the other auditor
When business owners hire others to manage their business, the demand for auditing can be understood as the need for _________. a. accountability b. performance evaluation c. benchmarking
accountability
Select all that apply For a manufacturer, the inventory management process includes ______. a. accumulating and allocating costs to inventory b. purchasing raw materials inventory c. making cost adjustments
accumulating and allocating costs to inventory, and making cost adjustments
Select all that apply Management engages in the five business processes to ______. a. achieve objectives b. implement strategies c. ensure compliance with applicable laws d. measure performance
achieve objectives, and implement strategies
An auditor has completed an audit of a public company in accordance with the auditing standards of the PCAOB, and is preparing to issue an unqualified opinion on those financial statements. The auditor has also conducted an audit of the effectiveness of the entity's internal control over financial reporting (ICFR), and plans to issue a separate unqualified opinion on that as well. Accordingly, the auditor will a. modify the basis of opinion section of the audit report on the financial statements to refer to the audit of ICFR. b. not refer to the audit of ICFR in the audit report on the financial statements. c. add a critical audit matter (CAM) to the audit report. d. add an explanatory paragraph to the audit report on the financial statements referring to the audit of the effectiveness of ICFR.
add an explanatory paragraph to the audit report on the financial statements referring to the audit of the effectiveness of ICFR
When the auditor determines that the entity has changed its use (or application) of accounting principles between periods or has corrected a material misstatement in previously issued financial statements in a way that materially affects the comparability of the financial statements being reported on, the auditor must ______. a. add an explanatory paragraph to the report b. issue a qualified or adverse opinion c. disclaim an opinion on the financial statements
add an explanatory paragraph to the report
When there is a lack of consistency in the application of accounting principles due to accounting changes, an auditor ______. a. disclaims an opinion on the current year financial statements due to a lack of consistency b. issues a qualified audit report stating "except for the change in accounting method described in note xx" c. adds an explanatory paragraph to a standard unqualified audit report d. issues an adverse report on the entity's financial statements
adds an explanatory paragraph to a standard unqualified audit report
The auditor has completed the audit of her client for the current year, and has noted that inventory amounts recorded on the financial statements have been accounted for at fair values, which is a departure from generally accepted accounting principles. The impact of this accounting is at LEAST material, and possibly pervasively material. The auditor would likely choose between what two audit reports? a. A disclaimer of opinion and an unqualified report with a disclaimer of opinion regarding the inventory balance. b. A qualified report, and an adverse report with a disclaimer of opinion regarding the inventory balance. c. An adverse report and qualified report. d. An adverse report and a disclaimer of opinion.
an adverse report and qualified report
An auditor would be most likely to issue an unqualified opinion and add a discussion of the change in an explanatory paragraph when ______. a. there is a client-imposed scope limitation b. there is a departure from GAAP that is not confined to specific elements, accounts, or items of the financial statements c. an entity makes a change in an accounting principle and the auditor concurs with the change
an entity makes a change in an accounting principle and the auditor concurs with the change
The auditor is required to read the other information and consider whether such information is consistent with the information in the audited financial statements when ______. a. an entity publishes documents that contain other information in addition to the audited financial statements b. prior period financial statements have been audited but the predecessor's report will not be included c. prior period financial statements have been audited and the predecessor's report will be included with the current year statements
an entity publishes documents that contain other information in addition to the audited financial statements
In order to reach and justify a conclusion on the fairness of the financial statements, an auditor must obtain evidence that is ______. (Choose all that Apply)
appropriate and sufficient
Attest services ______. (Choose all that Apply) A. are a subset of assurance services B. include auditing C. are limited to economic events or actions
are a subset of assurances and include auditing
Learning auditing essentially helps to understand how to gather and assess evidence so you can evaluate ______________ (or claims) made by others. (Enter only one word per blank.)
assertions
Much of what auditors do revolves around collecting and evaluating evidence about management's financial statement _________________. (Enter only one word per blank.)
assertions
The body primarily responsible for management oversight in U.S. corporations is the ______. a. board of directors b. compensation committee c. junior employees d. human resources department
board of directors
Auditors usually organize audits by grouping financial statement accounts according to the ______. a. number of transactions in the accounts b. dollar value of the accounts c. business processes that primarily affect those accounts d. location of the accounts on the financial statements
business processes that primarily affect those accounts
The extent to which rules, policies, laws, covenants, or government regulations are followed by the entity being audited is determined by a(n) ______ audit. a. operational b. internal control c. fraud d. compliance
compliance
To sign an audit opinion on an entity's financial statements in the United States, an external auditor must be a(n) ______ ______ Accountant. (Enter only one word per blank.)
certified public
Select all that apply Changes that affect comparability, but not consistency, include a change in ______. a. reporting entity b. classification c. accounting estimate d. accounting principle
classification and accounting estimate
Select all that apply If the other auditor's report is not a standard unqualified audit report, the principal auditor must ______. a. determine the nature of the departure and its significance b. always refer to the departure in their audit report c. explain how material departures affect the overall audit opinion d. not issue an unqualified audit opinion
determine the nature of the departure and its significance explain how material departures affect the overall audit opinion
Confirming the balance of a specific customer's outstanding accounts receivable balance is an example of ______ information.
direct
If the scope limitation is so pervasive that it limits the ability of the auditor to conclude on the financial statements as a whole, the auditor will issue a(n) _________________ of opinion. (Enter only one word per blank.)
disclaimer
When there is a lack of auditor independence, the auditor ______. a. issues an adverse opinion b. issues a qualified opinion that identifies the specific areas where independence is lacking c. issues an unqualified opinion with explanation d. disclaims an opinion
disclaims an opinion
Under ASB standards, when an auditor makes reference in the audit report to an issue that has been appropriately presented or disclosed in the financial statements, the auditor is using a(n) ______-of-______ paragraph. (Enter only one word per blank.)
emphasis-of-matter
Identify the stages in which an auditor can collect evidence in an accounting system to help determine whether the financial statements are fairly stated. (Choose all that Apply) A. ending account balances B. internal controls C. notes to the financial Statement D. transactions
ending account balances, internal controls, and transactions
Select all that apply Identify common preliminary engagement activities. a. ensure the independence of the audit firm and audit team b. audit business processes and related accounts c. determine the audit engagement team requirements d. consider and audit internal controls e. establish an understanding with the client about the services to be performed
ensure the independence of the audit firm and audit team, determine the audit engagement team requirements, and establish an understanding with the client about the services to be performed
A system or code of conduct based on moral duties and obligations that indicate how we should behave is referred to as __________ . (Enter only one word per blank.)
ethics
All professions operate under some type of code of ___________ or a code of __________. (Enter only one word per blank.)
ethics and conduct
The final phase in the audit process is to ___________. a. evaluate the results and issue an audit report b. audit business processes and related accounts c. complete the audit d. discuss findings with the audit committee
evaluate the results and issue an audit report
Whenever the audit opinion is qualified for a GAAP departure, the opinion paragraph will include the qualifying words "______ ______." (Enter only one word per blank.)
except for
Select all that apply Which of the following are the "Three E's" of state requirements for the CPA certification? - eligibility - experience - explanation - education - examination
experience, education, and examination
True or false: Before accepting a new audit client, the auditor is required to conduct a background check on top management.
false
True or false: In the purchasing process, businesses must sell goods and services to support their operations.
false
True or false: Reporting in accordance with a set of agreed-upon procedures reduces the conflict of interest between managers and owners and thus the need for auditing.
false
True or false: The concept of materiality plays a limited role in the auditor's choice of audit reports.
false
Select all that apply The auditor's standard unqualified audit report for a public company includes ______. a. how long the auditor has served b. "Critical Audit Matters" section c. "Opinion" section d. name and signature of the audit firm breakdown of fees billed to the client
how long the auditor has served "Critical Audit Matters" section "Opinion" section name and signature of the audit firm
Employee payroll is the main transaction that affects financial statements in the __________ __________ management process. (Enter only one word per blank.)
human resources
Select all that apply The Critical Audit Matters section of the audit report ________. A. includes information on auditor response to the matters B. is required for all public companies C. only includes issues reported to the audit committee D. includes all issues involving especially challenging, subjective, or complex auditor judgment
includes information on auditor response to the matters, is required for all public companies, and only includes issues reported to the audit committee
An important preliminary engagement activity is to ensure the ___________ of the audit firm and audit team. a. reliability b. objectivity c. integrity d. independence
independence
The major portion of the AICPA's Code of Professional Conduct identifies actions that may impair auditors' ______. a. competency b. fee schedules c. trainng d. independence
independence
The title of the audit report refers to the ______ of the public accounting firm that conducted the audit. a. independence b. qualificaitons c. integrity d. objectivity
independence
An ASB audit report ______. a. is titled "Report of Independent Registered Public Accounting Firm" b. indicates the audit was conducted in accordance with generally accepted auditing standards c. contains an opinion on the effectiveness of the entity's internal control over financial reporting
indicates the audit was conducted in accordance with generally accepted auditing standards
The paragraph containing the auditor's opinion ______. (Choose all that Apply) A. indicates the criteria used to assess management assertions B. indicates how the audit was conducted C. emphasizes the concept of materiality
indicates the criteria used to assess management assertions and emphasizes the concept of materiality
The scope paragraph of the Basis for Opinion section of the audit report ______. a. states that management is responsible for the financial statements b. indicates the standards used to conduct the audit c. states that the auditor's responsibility is to express an opinion d. indicates that the audit firm is required to be independent of the company being audited
indicates the standards used to conduct the audit
Designing procedures to test whether an entity's internal control over financial transactions is effective allows the auditor to obtain ______ information regarding whether account balances are fairly stated.
indirect
Select all that apply If an entity's disclosures with respect to its ability to continue as a going concern are inadequate, the result could be for the auditor to ______. a. disclaim an opinion on the entity b. issue an unqualified opinion with an explanatory paragraph c. issue a qualified opinion d. issue an adverse opinion
issue a qualified opinion and issue an adverse opinion
If an entity is experiencing extreme and immediate financial distress, the auditor may conclude that the entity's use of a going-concern basis of accounting is inappropriate, and will ______. a. issue an adverse opinion b. disclaim an opinion on the entity c. issue a qualified opinion d. issue and unqualified opinion with an explanatory paragraph
issue an adverse opinion
If an entity makes a change in accounting principle and the auditor concurs with the change, the auditor will Blank______. a. qualify the report and indicate that the financial statements present fairly except for the effects of the change in accounting principle b. issue a qualified opinion and add a discussion of the change in an explanatory paragraph c. issue an unqualified opinion and add a discussion of the change in an explanatory paragraph
issue an unqualified opinion and add a discussion of the change in an explanatory paragraph
when a manager is honest, __________. a. it may be in the manager's self-interest to hire an auditor b. the owner likely will not want to invest in audit services b. there is no need for audit services c. it is in the manager's self-interest to ensure an auditor is not hired
it may be in the manager's self-interest to hire an auditor
A company's system of internal controls is put in place by a company's ______. (Choose all that Apply) A. management B. internal Auditors C. external Auditors D. board of directors
management and board of directors
Select all that Apply Information asymmetry and conflicts of interest exist between ______. a. managers and potential investors b. buyers and sellers c. managers and company employees
managers and potential investors, buyers and sellers
The opinion section of the audit report contains the phrase "in all ______________ _______________" emphasizing the auditor is only responsible for detecting misstatements large enough to affect the decisions of a reasonable financial statement user. (Enter only one word per blank.)
material respects
The auditor considers the materiality and the importance of the portion of the consolidated financial statements audited by other auditors when determining whether they qualify to serve as the ______ auditor on the engagement. (Enter only one word per blank.)
principal or lead
Select all that apply Owners who are not directly involved in running the business are referred to as _________ a. principals b. stewards c. stockholders d. agents
principals and stockholders
To ensure the audit is conducted effectively and efficiently, it is important to ______. a. properly plan the audit b. ensure all audit team members have worked on the audit before c. discuss the audit with the board of directors
properly plan the audit
In the United States, the organization responsible for inspecting accounting firms that audit public companies is the a. the american institute of certified public accountants b. public company accounting oversight board c. the auditing inspection board d. the american accounting association
public company accounting oversight board
To deter possible recurrence of rule violations and to enhance the quality and reliability of future audits, the ______ can impose sanctions on registered firms. a. american accounting association - aaa b. national association of state boards of accounting - nasba c. public company accounting oversight board - pcaob d. american institute of certified public accountants - aicpa
public company accounting oversight board - pcaob
Select all that apply Which organizations work closely with the SEC when formulating accounting and auditing standards? a. public company accounting oversight board - pcaob b. international accounting standards board - iasb c. the financial accounting standards board - fasb d. american institute of certified public accountants - aicpa
public company accounting oversight board - pcaob, and the financial accounting standards board - fasb
Businesses acquire goods and services to support their operations in the ______ process. a. revenue b. purchasing c. inventory management d. financing
purchasing
When an auditor reports that the financial statements are fairly stated except for a misstatement identified in the inventory account, a(n) ___________ opinion should be issued. a. unqualified b. qualified c. adverse d. disclaimer of
qualified
Select all that apply With regard to other information in documents containing audited financial statements, the auditor is required to ______. a. read the other information b. take responsibility for information that is not financial in nature c. perform audit procedures to corroborate the other information d. consider whether such information is consistent with the information in the audited financial statements
read the other information and consider whether such information in the audited financial statements
The auditor's environment and work performed are clearly shaped by the responsibility to provide __________ __________ with respect to errors, fraud, and illegal acts. (Enter only one word per blank.)
reasonable assurance
Usually, the highest quality audit evidence ______. A. relates directly to ending account balance B. comes from examining a sample of transactions from the period C. is provided by testing the client's internal controls
relates directly to ending account balances
The PCAOB conducts a program of regular inspections to assess the degree of compliance of registered accounting firms with the rules and professional standards of the ______. a. american accounting association - aaa b. sarbanes-oxley act of 2002 c. public company accounting oversight board - pcaob d. securities and exchange commission - sec e. american institution of certified public accountants - aicpa
sarbanes-oxley act of 2002, public company accounting oversight board - pcaob, and securities and exchange commission - sec
If an auditor is unable to obtain all the necessary information to conclude if an account balance is fairly stated a(n) _______________ ______________ exists. (Enter only one word per blank.)
scope limitation
Select all that apply The new PCAOB reporting standards include ______. a. reporting the opinion section last b. separate disclosure of critical audit matters c. an implicit statement that the auditor is independent d. a clearer description of management and auditor responsibilities
separate disclosure of critical audit matters and a clearer description of management and auditor resonsibilities
If an auditor assesses a larger level of materiality amount for an account, they will need a ______ sample than if materiality were a smaller amount.
smaller
Select all that apply Businesses obtain capital through ______. a. increasing sales b. soliciting investments c. borrowing d. reducing expenditures
soliciting investments and borrowing
When the audit has been performed in accordance with applicable auditing standards, the auditor has gathered sufficient evidence, and the auditor believes that the financial statements conform to GAAP, a(n) ______ ______ financial statement audit report is issued. (Enter only one word per blank.)
standard unqualified
Select all that apply The increased used of data analytics in auditing __________ a. makes it less important for audit professionals to reason through challenging concepts b. streamlines some tedious audit tasks c. requires the auditor to be an expert in technology and computer programming d. requires the ability to query, manipulate, and interpret information
streamlines some tedious audit tasks and requires the ability to query, manipulate, and interpret information
Select all that apply Which of the following statements are correct? a. the auditor cannot guarantee that all material misstatements will be uncovered b. the auditor provides assurance that all immaterial misstatement will be detected c. a clean audit opinion can be issued even if the auditor believes there are some immaterial misstatements d. a common rule of thumb is that misstatements of more than 10% of income is considered material
the auditor cannot guarantee that all material misstatements will be uncovered and a clean audit opinion can be issued even if the auditor believes there are some immaterial misstatements.
The first phase of the audit is a. training of the auditor b. audit reporting c. planning d. the client acceptance/client retention decision
the client acceptance/client retention decision.
The person in an accounting firm responsible for the overall conduct and quality of the audit is a. the various staff auditors assigned to the engagement b. the senior manager c. the audit senior d. the engagement partner
the engagement partner
Select all that apply Which of the following have given rise to an explosion in the demand for the assurance provided by auditors? A. the development of limited liability companies B. a decrease in the number of sole proprietorships C. the expanding world economy D. the development of the corporate form of business
the expanding world economy and the development of the corporate form of business
The focus of this course in Auditing is a. the external auditor that audits the financial statements of clients b. auditors that perform tax audits for the irs c. all types of auditors d. the internal auditor that audits an entity's financial statements and oeprations
the external auditor that audits the financial statements of clients
The responsibility for setting auditing standards for the audit of public companies in the United States has been delegated by the Securities and Exchange Commission to a. the auditing standards board b. the financial auditing standards board c. the public company accounting oversight board d. the american institute of certified public accountants
the public company accounting oversight board
Select all that apply The new PCAOB reporting standards include ______. a. a reduction of information related to management's responsibilities b. the retention of the binary, pass/fail reporting approach c. a basis of opinion section d. laying out the key features of an audit more clearly
the retention of the binary, pass/fail reporting approach, a basis of opinion section, and laying out the key features of an audit more clearly
A lending officer at a bank is reading the financial statements of Montana Industries, and the lending officer notes that the financial statements are accompanied by an auditor's unmodified/unqualified report. From this, the lending officer may conclude that a. the auditor detected no misstatements during the audit b. there is reasonable assurance that the financial statements are free from material misstatement c. the financial statements are free of immaterial misstatement d. the financial statements are free of material misstatement
there is reasonable assurance that the financial statements are free from material misstatement
Select all that apply An auditor adds an explanatory paragraph to a standard unqualified report on an entity's financial statements when ______. a. there is substantial doubt on entity's ability to continue as a going concern b. there is a lack of independence of the auditor c. the auditor performs an integrated audit and issues separate reports on the financial statement and internal control d. the auditor decides to refer to the report of other auditors as the basis, in part, for the opinion e. there is a scope limitation resulting from an inability to collect sufficient appropriate evidence
there is substantial doubt about an entity's ability to continue as a going concern, the auditor performs an integrated audit and issues separate reports on the financial statements and internal control, and the auditor decides to refer to the report of other auditors as the basis, in part, for the opinion
An auditor is most likely to issue a qualified opinion on an entity when ______. a. the entity is experiencing immediate financial distress and the auditor concludes the use of a going-concern basis of accounting is inappropriate b. there is substantial doubt about the entity's ability to continue as a going concern and the financial problems are not adequately disclosed c. there is substantial doubt about the entity's ability to continue as a going concern and the financial problems are adequately disclosed
there is substantial doubt about the entity's ability to continue as a going concern and the financial problems are not adequately disclosed
Management's going concern assessment is independently assessed by auditors ______. a. to ensure management's assessment has been adequately conducted and disclosed b. to provide extra assurance to financial statement users that the company will not go bankrupt c. and included as part of the audit report
to ensure management's assessment has been adequately conducted and disclosed
Select all that apply Auditors are responsible ______. a. for the effectiveness of internal control over financial reporting b. to exercise due professional care c. for the fairness of the financial statements d. to provide reasonable assurance with respect to errors, fraud, and illegal acts
to exercise due professional care, and to provide reasonable assurance with respect to errors, fraud, and illegal acts
When the auditor concludes there is substantial doubt about the entity's ability to continue as a going concern and management has adequately disclosed the financial problems, the auditor will typically express a(n) ______ opinion with an explanatory paragraph. a. qualified b. disclaimer of c. adverse d. unqualified
unqualified
Professional standards require that public accounting firms establish policies and procedures for deciding ______. A. whether to accept new clients B. if current clients should be retained C. how to set their audit fees D. the number of auditors to use for an engagement
whether to accept new clients and if current clients should be retained
The audit report concludes with the __________. - year the audit began serving as the company auditor - signatures of the audit committee members - date of the report - signature of the cpa firm providing the audit - city and state of the corporation's headquarters
year the auditor began serving as the company auditor, date of the report, and signature of the cpa firm providing the audit