Audit Chapter 1 & 2

Operational auditing (performed by internal auditors) is oriented primarily toward

efficiency and future improvements to accomplish the goals of management.

The Public Company Accounting Oversight Board

is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.

GAAS require the auditor to document in the working papers the justification for a departure from a relevant presumptively mandatory requirement. What language indicates a presumptively mandatory requirement?

should

Preliminary engagement activities include

-Understanding the client and the client's industry. -Determining audit engagement team requirements. -Ensuring the independence of the audit team and audit firm.

During an audit conducted in accordance with GAAS, an auditor should depart from a relevant presumptively mandatory requirement only when

A required specific procedure would be ineffective in achieving the intent of the requirement

Which of the following best describes the application and other explanatory material section of an AU-C section?

Although such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements of an AU-C section. The auditor is required to understand it.

Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements in an audit conducted in accordance with GAAS?

An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

Which of the following best describes relationships among auditing, attest, and assurance services?

Auditing is a type of assurance service.

Which of the following best describes the general character of the three generally accepted auditing standards classified as standards of field work?

Criteria for audit planning and evidence gathering.

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements?

Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

The auditing standards used to guide the conduct of the audit are

Explicitly referred to in the scope paragraph of the auditor's standard report.

Which of the following statements relating to attest and assurance services is not correct?

Financial statement auditing is a form of attest service but it is not an assurance service.

Which of the following would be considered a nonattest assurance service engagement? I. Expressing an opinion about the reliability of an entity's financial statements. II. Reviewing and commenting on an entity-prepared business plan.

II only

Which of the following best places the events of the last decade in proper sequence?

Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB.

Which of the following statements best describes what is meant by an unqualified audit opinion?

Issuance of a standard unqualified auditor's report indicates that in the auditor's opinion the client's financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases.

An independent audit aids in the communication of economic data because the audit

Lends credibility to the financial statements.

An auditor strives to achieve independence in appearance in order to

Maintain public confidence in the profession

An audit in accordance with GAAS is conducted on the premise that

Management and, when appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit

Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements?

Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.

Which of the following best describes what is meant by the term generally accepted auditing standards?

Measures of audit quality and the objectives to be achieved in an audit

Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States?

Nonpublic company audits=ASB Public company audits=PCAOB

Because an audit in accordance with GAAS is influenced by the possibility of materially misstated financial statements, the auditor should conduct the audit with

Professional skepticism

Which of the following is not a part of the role of internal auditors?

Providing reports on the reliability of financial statements to investors and creditors.

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is moderately material, but the auditor does not consider it to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor's opinion. Which kind of audit report would an auditor most likely issue under these circumstances?

Qualified opinion due to departure from GAAP.

Which of the following statements best describes the role of materiality in a financial statement audit?

The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

GAAS requires the auditor to obtain reasonable assurance that the financial statements as a whole are free from material misstatement. Reasonable assurance, which is a high, rather than absolute, level is assurance is acceptable because

There are inherent limitations of an audit, some of which cannot be cured by further audit procedures

Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions?

To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity's information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

The overall objectives of the audit, in conducting an audit of financial statements in accordance with GAAS, include all of the following, except

To adequately plan the work and properly supervise any assistants.

For what primary purpose does the auditor obtain an understanding of the entity and its environment?

To plan the audit and determine the nature, timing, and extent of audit procedures to be performed.

Which of the following is the most important reason for an auditor to gain an understanding of an audit client's system of internal control over financial reporting?

Understanding a client's system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.