Auditing Exam 1

The only professional who can audit a set of historical financial statements for a public or private company in the United States is ______. (Chapter 1)

A Certified Public Accountant (CPA)

The audit risk model is presented as ______. (Chapter 3)

AR=f(IR*CR*DR)

Being independent in appearance is best defined as ________. (Chapter 2)

Addressing potential conflicts of interest that can be observed or factually determined by others

Which of the following is not a fraud risk factor? (Chapter 3)

Amount of ethics training provided by the company.

What is due diligence defense? (Chapter 2)

An audit firm must show that it made a reasonable investigation, that the firm followed auditing standards, and accordingly had reasonable grounds to believe, and did believe, that the statements certified were true at the date of the statements and as of the time the registration statement became effective.

What happens if an independence threat appears to be insurmountable? (Chapter 3)

An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client.

An integrated audit refers to two audits performed at the same time, or _______. (Chapter 1)

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

Which of the following comes under the purview of the Public Company Accounting Oversight Board? (Chapter 1)

Auditing Standards (AS)

Which of the following statements are true? (Chapter 3)

Auditors rely heavily on their professional judgment in setting planning materiality

Which of the following provides guidance to all members of the AICPA with respect to performance of their professional responsibilities? (Chapter 2)

Code of Professional Conduct

If a company refuses permission to contact its previous audit firm, what should the new auditor do? (Chapter 3)

Consider the implications of that refusal when deciding whether to accept the engagement.

Within a U.S. context, the applicable financial reporting framework is typically _______. (Chapter 1)

Generally Accepted Accounting Principles (GAAP)

Which of the following activities is not a prohibited activity that impairs independence? (Chapter 2)

Having a home mortgage from a bank who is an attest client

Which of the following statements is true? (Chapter 2)

If a CPA concludes that threats are at an acceptable level after applying the identified safeguards, then the CPA may proceed with the professional service.

Which of the following statements is true? (Chapter 3)

Inherent risk is the susceptibility of an assertion to material misstatement before consideration of any related controls.

The term independent with respect to assurance services implies that the service is ______. (Chapter 1)

Performed by someone who was not involved with the creation of the information

Which term means that (or is defined as): auditors should maintain a questioning mind and thoroughly investigate all evidence presented by the client? (Chapter 3)

Professional skepticism

Which of the following is performed during the risk assessment phase? (Chapter 3)

Risk and materiality assessment

What two factors lead to the development of an overall strategy? (chapter 3)

The auditor's determination of materiality and audit risk

Of the following scenarios, which would most likely result in an audit firm not accepting an engagement? (Chapter 4)

The client has advised that the auditor will be unable to confirm certain inventories with no valid reason given.

Which of the following is an example of an incentive or pressure that increases the risk of fraud? (Chapter 3)

The client operates in a highly competitive industry

Which group licenses CPA? (Chapter 2)

The state boards of accountancy

Which of the following beliefs will narrow the audit expectation gap? (Chapter 1)

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

Materiality is a relative concept, and it differs from company to company and from year to year for a given company. (Chapter 1)

True

When would auditors increase the amount of detailed audit procedures used to test the year-end account balances and transactions from throughout the year? (Chapter 3)

When the detection risk is low

Information is considered qualitatively material if it ________. (Chapter 3)

affects a user's decision-making process for a reason other than its magnitude

If an auditor is considering accepting a client in an industry that is unfamiliar to the auditor, the auditor should _________. (Chapter 4)

attempt to learn all matters that would materially pertain to the entity's business

The main purpose of an engagement letter is to ______. (Chapter 3)

avoid any misunderstandings between the auditor and the client

A financial statement audit is conducted to ______. (Chapter 1)

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

With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is _______. (Chapter 1)

high, but not absolute

Analytical procedures are conducted during the risk assessment phase of the audit to ______. (Chapter 4)

identify accounts at risk of material misstatement

The first step in the process to assist the CPA in making an ethical judgment is ______. (Chapter 2)

identify threats to compliance with rules

From a definitional perspective, information is considered material if it ________. (Chapter 3)

impacts the decision-making process of users of the financial statements

Generally speaking, the existence of related party transactions _______. (Chapter 4)

increases inherent risk and should be investigated further

The risk of material misstatement is a function of ________. (Chapter 3)

inherent risk and control risk

SEC rules prohibit an audit firm from providing which of the following nonattest services to an audit client? (Chapter 2)

internal audit outsourcing, bookkeeping, and actuarial services

Compared to an audit of historical financial statements, a review engagement is _______. (Chapter 1)

less extensive and also less expensive

If results from the tests of controls show the internal control is effective at preventing and/or detecting material misstatements, auditors will conclude that control risk is _____ and overall risk of material misstatement (RMM) is ______. (Chapter 3)

low; low

Private companies, or non-issuers, in the U.S. are ______. (Chapter 1)

not required by the federal government to have financial statement audits

Although codes of ethics may be designed in part to encourage ideal behavior, they must also be _______. (Chapter 2)

practical and enforceable

Public companies, or issuers, in the U.S. are ______ (Chapter 1)

required by the federal government to have annual financial statement audits

Audit risk is best defined as the ______. (Chapter 3)

risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

If an auditor is attempting to access the long-term viability of the client firm as a going concern, the auditor should attempt to calculate _________. (Chapter 4)

solvency ratios

Inherent risk related to closing procedures would generally be increased when _______. (Chapter 4)

staff assigned to deal with closing procedures are relatively inexperienced

Assurance, attestation, and auditing are similar because all three represent a common process of _______. (Chapter 1)

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

If management is preoccupied with meeting specific accounting numbers, this is a negative factor that should influence client acceptance and retention and is associated with _______. (Chapter 3)

the integrity of management

Higher inherent risk traits are found where _______. (Chapter 3)

transactions or account balances are derived from significant estimates