Chapter 1 Study Guide
Which of the following is the LEAST likely to be true regarding an internal auditor?
An external auditor may not rely on the work of the internal auditor.
What is the difference between an integrated audit and a compliance audit?
An integrated audit is an audit that combines the financial statement audit with an audit of the effectiveness of internal controls over financial reporting (ICFR), whereas a compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes.
What is most similar to an opinion on whether the financial statements are presented fairly, in all material respects, and in accordance with an applicable financial reporting framework?
An opinion on the effectiveness of internal controls over financial reporting (ICFR), which enhances the degree of confidence that intended users can place in the financial statements
Which of the following is NOT an example of a time or cost constraint that an auditor may face when conducting an audit?
Audit industry guidelines require auditors to discover all misstatements.
Among situations that could cause auditors to issue a modified opinion, which of the following is a case of pervasively material scope limitations?
Auditor was not able to gather sufficient appropriate evidence and cannot express an opinion on the financial statements.
Which of the following is the best synthesis of the principles of professional skepticism and professional judgment?
Auditors should apply their experience in determining whether the financial information provided to them is complete and accurate.
Martina Juarez is auditing the inventory of Tecumseh Plastics. Martina references GAAS to help her plan her procedures. Which of the following best describes Martina's responsibility in this scenario?
Conducting the audit in accordance with appropriate auditing standards
During the audit of Lange Toys, a private company, the auditors were unable to attend or test the client year-end inventory count. This scope limitation was considered pervasive. Assuming no other issues were discovered during the audit, which type of audit report should be issued?
Disclaimer of opinion
Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances".
Scope paragraph
What would happen to Roxanne, a CPA candidate who passed the first part of the Uniform CPA Exam in March 2020 but failed the second part in July 2020?
She would have until September 2021 to pass the second as well as the third and fourth parts of the exam.
If a CPA suspects that he or she might lack specialized training required to conduct an audit appropriately, he or she should consult rules promulgated by the
State board of accountancy.
Shawn Johnson is interested in determining whether Fix It Company can pay for the goods it has received. Shawn is most likely which type of financial statement user?
Supplier
What distinguishes the AICPA's Auditing Standards Board (ASB) from the PCAOB?
The ASB issues auditing standards for private and non-profit companies and the PCAOB oversees audits of public companies.
Which of the following is an unrealistic user expectation relating to the audit expectation gap?
The audit is guaranteeing the future viability of the entity.
Which of the following statements is most correct regarding the audit opinion?
The audit opinion is not a reflection of how management is performing.
Patrick Quinn works for a local toy shop. He has hired a small accounting firm to audit his financial statements, at his bank's request. During the second-year audit, the auditors uncovered a misstatement in accounts payable from the previous year. Patrick is puzzled by this, believing that since they audited the previous year, they must have tested that invoice. Which of the following is the most likely unrealistic expectation in this example?
The auditor has checked all transactions.
Bob Alvarez works for Higher Ed University. The Dean of Higher Ed University just announced the "good news" that the auditors gave their highest rating on the financial statements and so the University was in great financial condition. Which of the following is the most likely unrealistic expectation in this example?
The auditor is guaranteeing the future viability of the entity.
Jerry works for a small sporting goods store. He suspects a colleague of misappropriating assets. When Jerry discusses this with his wife, Amy, she tells him that since the sporting goods store is audited each year by the local accounting firm, this can't be the case. Which of the following is the most likely unrealistic expectation in this example?
The auditor will definitely find any and all fraud.
What does an unmodified audit opinion indicate about the financial statements in question?
The auditor's belief that there are no material misstatements
Which of the following are reasons why the auditors cannot provide absolute assurance about the effectiveness of internal controls? Select all that apply.
The design and implementation of controls is somewhat subjective. Using professional judgment, auditors select the most critical internal controls over financial reporting and test the effectiveness of those controls. There is not enough time for auditors to test the effectiveness of all of the entity's internal controls.
Which of the following items would most likely be considered material to the financial statement user?`
A $1,000 overstatement in total revenues of $100,000 that turns a $500 loss into a $500 profit.
Which is the reason that a financial statement audit enhances the quality of financial information?
Adds credibility to the financial statements
When an independent practitioner is hired to report on the integrity of financial statements, which may include financial forecasts or reports on financial reporting processes, it is considered what type of service?
Attestation
Which statement below best describes the relationships between assurance, attestation, and audit?
Attestation is a type of assurance service.
How are attestation and assurance services similar?
Both involve improving the quality of information for decision makers.
Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles".
Definition and inherent limitations paragraph
Management is responsible for which of the following?
Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.
During an audit of Sydney's Pet Supplies, a public company, the auditor was not able to gather sufficient appropriate evidence and could not express an opinion on the financial statements. Which type of audit report should be issued?
Disclaimer of opinion
Who maintains the Accounting Standards Codification (ASC)?
FASB
Which of the following statements is most correct regarding integrated audits?
For efficiency purposes, auditors will select audit procedures that allow them to gather evidence that is useful to both of the financial statement and ICFR audits.
Which of the following is NOT an example of an attestation service?
Investigation of website security
Molly Morton works at a firm that services clients in her local area, as well as in other locations. Her firm has a significant presence nationally but is not one of the largest firms. Her firm has more than 50 partners. Molly most likely works at which tier firm?
Mid-tier
Which of the following is the LEAST likely to be considered a limitation in a financial statement audit?
Reliance on documents and evidence provided from outside the client organization
Which of the following are included in the Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards? Select all that apply.
Reporting the results of an audit Premise upon which an audit is conducted Purpose of an audit
Which organization is primarily tasked with enforcement and interpretation of securities laws?
SEC
A CPA being contacted about potential disciplinary action or revocation of his or her CPA license would likely hear from which of the following entities?
State board of accountancy
Which of the following statements is correct regarding audit opinions?
The audit does not guarantee the future viability of the entity.
What is the appropriate date for an audit report?
The conclusion of the gathering of evidence for the audit.
Which of the following is not a characteristic of an assurance service?
The subject matter is limited to financial information.
The reality of auditing is that the auditor will assess the risk of fraud and conduct tests to try to uncover any fraud, but there is no guarantee the auditor will find all material frauds, should one have occurred.
True
During the audit of Niagara Backpacks, a private company, the auditors found an immaterial overstatement in the inventory account. Assuming no other issues were discovered during the audit, which type of audit report should be issued?
Unmodified
During an audit of Olivia's Baked Goods, a public company, the financial statements were not found to be presented fairly and should not be relied upon. Which type of audit opinion should be issued?
adverse
Operational (performance) audits are useful because they:
are concerned with the economy, efficiency, and effectiveness of an organization's activities.
An independent practitioner asked to report on the integrity of financial forecasts and management assessments of reporting processes would be providing _______ services.
attestation
Gene Cosby is an IRS agent. He is currently gathering evidence regarding the income tax deductions of G&M Operations, Inc. Which type of audit is Gene most likely working on?
compliance audit
An assurance service that determines whether the entity has conformed with regulations, rules or processes is a (an):
compliance audit.
All of the following are reasons why users would demand an audit of financial statements except:
cost
In the United States, a state board of accountancy issues a license to practice to aspirants who have
earned all three E's: education, exam, and experience.
Kelvon Greene is interested in the pension funding of Game Time Entertainment, Inc. Kelvon is most likely which type of financial statement user?
employee
The auditor will find any and all fraud.
false
Lynn Wysocki is evaluating the grant proposal for Canton Public Schools. Lynn is most likely a representative of which type of financial statement user?
government
Auditors of publicly traded companies are required to perform a(an) ________ for their clients.
integrated audit
Susan Campbell is an employee of HLC Building, Inc. She is currently evaluating and improving risk management for the construction division. Which type of audit is Susan most likely working on?
internal audit
Olivia Kline is interested in the creditworthiness of Davidson Security Services. Olivia is most likely which type of financial statement user?
lender
Preparing financial statements is the responsibility of the
management
Non-assurance services provided by an accounting firm might include (select all that apply)
management consulting, a business valuation
Which type of audit assesses the economy, efficiency and effectiveness of an organization's operations?
operational audit
Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by COSO".
opinion paragraph
According to the Principles Underlying An Audit Conducted in Accordance with Generally Accepted Auditing Standards, auditors are responsible for all of the following EXCEPT
planning audits to be efficient and profitable.
Using _______, auditors select the most critical internal controls over financial reporting and test the effectiveness of those controls.
professional judgement
Which of the following best describes being alert to conditions that may indicate possible misstatement due to fraud or error?
professional skepticism
The role of COSO is to:
provide guidance in the area of internal control and risk management.
During an audit of Lucas Manufacturing, a public company, the financial statements were found to be presented fairly, except for one uncorrected material departure. Which type of audit opinion should be issued?
qualified
The function of internal audit is determined by:
those charged with governance and management.
The auditor is not responsible for preparing the financial statements.
true
What is the difference between a compliance audit and an operational audit?
A compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes, whereas an operational audit is an assessment of the economy, efficiency and effectiveness of an organization's operations.
Which of the following is an example of something that may indicate a performance gap?
A lead auditor does not update the level of assurance being provided after the beginning of a complex audit.
Which of the following statements is true regarding the concept of materiality?
A lower level of materiality assessed by the auditor, means a smaller likelihood that a misstatement may potentially impact or change the decision-making process.
Which of the following are functions of the State Boards of Accountancy? Select all that apply.
Adopting and enforcing rules regarding continuing professional education requirements Adopting and enforcing rules of professional conduct for CPAs Issuing CPA licenses to individuals who meet all the requirements
How are assurance, attestation, and audit services similar?
All result in a written report about the results.
Merriwether Corp. is seeking a line of credit for its operations and the bank has requested audited financial statements. The bank wants to hire an independent auditor to conduct the audit, but Merriwether's CFO knows a local accountant that she would like to use. Which of the following describes the best reasoning in selecting the right individual?
An auditor has the training and detailed knowledge to understand technical accounting and disclosure issues necessary to evaluate Merriwether's financial statements.
If a management team needs to confirm best practices in designing internal control systems, they should consult the
Committee on Sponsoring Organizations of the Treadway Commission (COSO).
Patrick Brown is concerned that management at his largest customer is under immense pressure to meet operating goals. Patrick has requested that his largest customer provide him with audited financial statements to help assess their creditworthiness. Which of the following sources of demand for audit and assurance services is Patrick is most likely concerned with?
Competing incentives
Robert is a manager for Green Industries. His performance is assessed based upon the company's financial performance. Which of the following represents the main reason why financial statement users might demand an audit?
Competing incentives
Li Na is concerned about the significant and unusual estimates used by one of her lending clients. Li has requested that her client provide her with audited financial statements to help assess their creditworthiness. Which of the following sources of demand for audit and assurance services is Li most likely concerned with?
Complexity
Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate".
Definition and inherent limitations paragraph
Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in: "We have audited the internal control over financial reporting of The Bread Company as of December 31, 2020 based on the criteria established in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission".
Opinion paragraph
Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "We have audited the internal control over financial reporting of The Bread Company as of December 31, 2020 based on the criteria established in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission".
Opinion paragraph
Which of the following organizations issues auditing standards for the audits of public companies?
PCAOB
Jackson Best is auditing the cash and cash equivalents of New York Deli. In planning his audit, Jackson applies his training and previous experience while making decisions regarding his results. Which of the following best describes Jackson's responsibility in this scenario?
Planning and performing the audit with professional judgment
Amber Brown is auditing the allowance for doubtful accounts of Plymouth Rubber Processing. In planning her audit, Amber ensures she is independent of the Plymouth Rubber Processing, its management, and its staff when completing the audit work. Which of the following best describes Amber's responsibility in this scenario?
Planning and performing the audit with professional skepticism
Sylvia Vaughn is auditing the accounts receivable of Smith Collections. In planning her audit, Sylvia seeks independent evidence to evaluate information provided by Smith Collections. Which of the following best describes Sylvia's responsibility in this scenario?
Planning and performing the audit with professional skepticism
Tomoko Yamaguchi is auditing the accounts receivable of Fashion Enterprises. In planning her audit, Tomoko becomes suspicious of evidence that contradicts inquiries she made of client personnel. Which of the following best describes Tomoko's responsibility in this scenario?
Planning and performing the audit with professional skepticism
Which of the following activities is the responsibility of the auditor?
Planning and performing the audit with professional skepticism.
Which of the following statements is correct regarding the issuance of audit standards?
Prior to the creation of the PCAOB, the ASB was responsible for issuing audit standards that were used for the audits of public and private companies.
In the United States, how do public companies differ from private companies in audit requirements?
Public companies but not private companies are required to have an annual financial audit.
During an audit of Bruce Delivery, Co., a public company, the financial statements were found to be presented fairly, except for the auditor's inability to gather evidence for a material item. Which type of audit opinion should be issued?
Qualified
During the audit of Davis Services, a private company, the auditors were unable to confirm accounts receivable, due to the client's limitations on contact with the customers. This scope limitation was not considered pervasive. Assuming no other issues were discovered during the audit, which type of audit report should be issued?
Qualified
All of the following are limitations of an audit EXCEPT
Samples are representative of all items available for testing.
Blackwell Manufacturing is headquartered in Houston, Texas. For which of the following reasons might the city be users of Blackwell's financial statements?
To determine if Blackwell is paying its fair share of taxes To determine how grant funds have been spent To determine if Blackwell is complying with regulations
During an audit of Nerfold, Inc., a public company, the financial statements were found to be fairly stated. Which type of audit opinion should be issued?
Unqualified
Standards issued by the PCAOB that provide minimum requirements and guidance for auditing services are called
auditing standards
The audit expectation gap can be reduced by all of the following EXCEPT`
auditors offering discounting fees for low risk audits.
Assurance services are provided only by qualified accounting firms.
false
Auditors design an audit to provide absolute assurance that the financial statements are free of misstatement.
false
An engagement performed by a practitioner to provide limited assurance that financial statements need no material modifications is BEST described as a (an)
review engagement.
Auditors can only provide reasonable assurance that the financial statements are presented fairly because:
sampling techniques are used to gather evidence. some items in the financial statements are subjective. an audit must be completed in a reasonable amount of time.
All of the following are inherent limitations causing the auditor to be unable to obtain absolute assurance that the financial statements are free of material misstatement EXCEPT
the need for professional skepticism.
The functions of an internal audit are determined by
those responsible for governance within the organization.
The audit expectation gap occurs when:
user beliefs do not align with what professional standards and regulations expect of auditors.
