Audit Chapter 1

An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should

B. Obtain a knowledge of matters that relate to the nature of the entity's business.

The auditor's report is generally addressed to the

C. Stockholders of the company.

Auditors are most likely to use the most rigorous audit procedures to examine

D. Management assertions that are deemed to be of high risk.

T/F Auditing is a type of attest service.

True

T/F Decision makers demand reliable information that is provided by accountants.

True

T/F Testing all transactions that occurred during the period is cost prohibitive.

True

During the first phase of an audit, a CPA most likely would

Evaluate the integrity of management

Assurance services may improve all of the following except

Periodicity.

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that

A. Any disputes over significant accounting issues have been settled to the auditor's satisfaction.

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to

A. Identify areas of relatively high risk of misstatement and plan the audit accordingly.

Before accepting an engagement to audit a new entity, an auditor is required to

A. Make inquiries of the predecessor auditor.

Evidence is reliable if it

A. Signals the true state of a management assertion.

Which of the following is not a concept that is included in the scope paragraph of the auditor's report?

A. The conformance of the financial statements with generally accepted accounting principles.

Which of the following statements is not true with respect to assurance, attest, and audit services?

A. These services are applied only to financial statements and financial statement accounts.

Why do auditors generally use a sampling approach to evidence gathering?

Auditors must balance the cost of the audit with the need for precision

Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?

B. Different interests may exist between the company preparing the statements and the parties using the statements.

Which of the following is true with respect to the auditor's report?

B. The report indicates that the company's financial statements were audited in accordance with applicable auditing standards.

Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders?

B. To enhance auditor independence from the management of the corporation.

Which of the following statements best describes a relationship between sample size and other elements of auditing?

C. If materiality decreases, sample size will need to increase.

In the context of agency theory, information asymmetry refers to the idea that

C. Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).

The basic purpose of a financial statement audit is to

C. Provide assurance regarding whether the auditee's financial statements are fairly stated.

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

C. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.

Which of the following statements about the study of auditing is NOT true?

C. The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.

Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"?

C. There should be a well-planned approach for obtaining and evaluating evidence.

Which one of the following statements best describes the concept of materiality?

D. Materiality is largely a matter of professional judgment.

Preliminary engagement activities include

D. Performing background checks on top management.

An auditor would issue an adverse opinion if

D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

T/F Auditing services and attestation services are the same.

False

T/F Independence standards are required for audits of public companies, but not for audits of private companies.

False

T/F Information asymmetry seldom occurs.

False

Which of the following would best be described as an assurance service?

Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies

For publicly-held companies, which of the following is integrated into the audit of financial statements?

The audit of internal controls.

Which of the following best describes the concept of audit risk?

The risk that the auditor will provide a "clean" opinion on financial statements that are, in fact, materially misstated

T/F Conflicts of interest often occur between absentee owners and managers.

True