Auditing test 2 Chapter 2
Which of the following situations would most likely be in conflict with the responsibilities principle? Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors. Auditors obtain expertise in their client's industry as they are conducting the audit examination . Auditors are directly involved with a client manager in a strategic decision-making capacity. Auditors fail to document their assessment of control risk following their study of internal control.
. Auditors are directly involved with a client manager in a strategic decision-making capacity.
Which of the following statements describes an appropriate relationship with respect to the reliability of audit evidence? Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities. Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers. A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor. Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.
A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.
Which of the following topics is not addressed in the auditors' report for a public entity? Responsibilities of the auditor and management in the financial reporting process. Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP. A description of an audit engagement. A summary of the auditors' opinion on the effectiveness of the entity's internal control over financial reporting.
Absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP.
Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures? Lending credibility to a client's financial statements Using statistical sampling techniques Acceptance and continuance of client relationships and specific engagements Membership in the Center for Public Company Audit Firms
Acceptance and continuance of client relationships and specific engagements
Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? Independence. Adequate competence and capabilities. Adequate planning and supervision. Gathering sufficient appropriate evidence.
Adequate planning and supervision.
When financial statements do not present fairly the financial condition, results of operations, and cash flows of an entity, an auditor would mostly likely issue a(n): Unmodified opinion. Adverse opinion. Disclaimer of opinion. Qualified opinion.
Adverse opinion.
Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. An auditor on the engagement owns a financial interest in the stock of the client. The client provides financial support to a number of charitable causes that also receive support from the accounting firm.
An auditor on the engagement owns a financial interest in the stock of the client.
Which of the following presumptions is correct about the reliability of audit evidence? Information obtained indirectly from outside sources is the most reliable form of audit evidence. To be reliable, audit evidence should be convincing rather than persuasive. Reliability of audit evidence refers to the amount of corroborative evidence obtained. An effective system of internal control provides more assurance about the reliability of audit evidence.
An effective system of internal control provides more assurance about the reliability of audit evidence.
Which of the following information would not be included in the auditors' standard report? The names of the financial statements audited A description of the nature of an audit An indication that all necessary disclosures have been presented An opinion on the entity's financial statements
An indication that all necessary disclosures have been presented
Which of the following is not true with respect to the concept of reasonable assurance? Reasonable assurance allows for mistakes and misinterpretations by the audit team throughout the examination. The nature of many audit procedures is such that they cannot always be relied upon to detect misstatements. Audit teams should evaluate all transactions and components of an account balance or class of transactions. Auditors should control the overall risk in an audit to an acceptably low level.
Audit teams should evaluate all transactions and components of an account balance or class of transactions.
The role of the Public Company Accounting Oversight Board in the standard-setting process is to develop Statements on Auditing Standards for the audits of nonpublic entities. Auditing Standards for the audits of public entities. Governmental Auditing Standards for the audits of governmental entities. International Standards on Auditing for the audits of foreign entities.
Auditing Standards for the audits of public entities.
Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? Auditing procedures Auditing standards Due care System of quality control
Auditing standards
Which of the following is not true with respect to the responsibilities for establishing generally accepted auditing standards? Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission. Interpretive publications are issued by the AICPA to provide guidance on the application of generally accepted auditing standards in specific circumstances. The PCAOB is the body with formal authority for the creation of auditing standards for the audits of public entities. If specific guidance is not provided by PCAOB Auditing Standards, auditors may refer to Statements on Auditing Standards that have not been amended or superseded.
Auditing standards for both public and private entities must be formally approved by the Securities and Exchange Commission.
Which of the following situations would most likely be in conflict with the responsibilities principle? Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors. Auditors obtain expertise in their client's industry as they are conducting the audit examination. Auditors are directly involved with a client manager in a strategic decision-making capacity. Auditors fail to document their assessment of control risk following their study of internal control.
Auditors are directly involved with a client manager in a strategic decision-making capacity
Which of the following statements is not true with respect to the performance principle? Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits. Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity's financial statements. In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity's internal controls in preventing and detecting misstatements. Auditors are required to consider both the relevance and the reliability of evidence in evaluating whether the evidence they have gathered is appropriate.
Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.
Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? Auditors would be required to rely on external (rather than internal) forms of evidence. Auditors would be required to perform procedures at interim periods, rather than at year end. Auditors would be required to confirm a larger number of customer accounts receivable balances. Auditors would be required to obtain more evidence through direct personal observation.
Auditors would be required to perform procedures at interim periods, rather than at year end.
Which of the following statements is generally correct about the appropriateness of audit evidence? Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources. To be reliable, audit evidence must be either valid or relevant, but need not be both. Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources.
Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would: Be considered as exercising proper due care. Be considered a failure to follow generally accepted auditing standards because Kramer should have known how to value fine art before accepting the engagement. Not be considered a violation of generally accepted auditing standards because generally accepted auditing standards does not apply to not-for-profit entities. None of the choices are correct.
Be considered as exercising proper due care.
Which of the following combinations would provide the auditor the most reliable evidence? Source of Evidence Effectiveness of Internal control Choice a Internal More effective Choice b Internal Less effective Choice c External More effective Choice d External Less effective Choice a Choice b Choice c Choice d
Choice c
Which of the following best demonstrates the concept of professional skepticism? Relying more extensively on external evidence rather than internal evidence. Focusing on items that have a more significant quantitative effect on the entity's financial statements. Critically assessing verbal evidence received from the entity's management. Evaluating potential financial interests held by auditors in the client.
Critically assessing verbal evidence received from the entity's management.
Which of the following concepts is least related to the risk of material misstatement? Control risk Detection risk Inherent risk Materiality
Detection risk
Which of the following would normally be considered earliest in the audit examination? Determination of materiality levels for use during the audit Consideration of the ability of the entity's internal control to prevent or detect errors Preparation of a written audit plan Evaluation of the type of audit opinion to be issued, based on the auditor's findings
Determination of materiality levels for use during the audit
Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? Develop Auditing Standards for the audits of nonpublic entities. Develop Auditing Standards for the audits of public entities. Develop Statements on Auditing Standards for the audits of nonpublic entities. Develop Statements on Auditing Standards for the audits of public entities.
Develop Auditing Standards for the audits of public entities.
Which of the following is most closely associated with the responsibilities principle? Due care Planning Qualified audit opinion Risk of material misstatement
Due care
Which of the following is not related to the performance principle of GAAS? Planning and supervision Due care Risk of material misstatement Sufficient appropriate evidence
Due care
Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? Establish procedures that comply with the standards of the Sarbanes-Oxley Act. Use attributes sampling techniques in testing internal controls. Consider inherent risk and control risk before determining detection risk. Establish policies to ensure that the audit work meets applicable professional standards.
Establish policies to ensure that the audit work meets applicable professional standards.
What type of evidence would provide the highest level of assurance in an attestation engagement? Evidence secured solely from within the entity Evidence obtained from independent sources Evidence obtained indirectly Evidence obtained from multiple internal inquiries
Evidence obtained from independent sources
Which of the following statements is true with respect to the quality of audit evidence? Quality is related to the relevance of evidence, but not the reliability of evidence. Evidence is considered of higher quality when gathered prior to year-end than following year-end. Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control. In evaluating quality, sufficiency of evidence is of greater importance than appropriateness of evidence.
Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control.
Firm A performs audits of 60 public entities, while firm B performs audits of 120 public entities. How often must each firm undergo a PCAOB inspection? Both firm A and firm B will be inspected every other year. Firm A will be inspected annually and firm B will be inspected every three years. Firm A will be inspected every three years and firm B will be inspected annually. Both firm A and firm B will be inspected annually.
Firm A will be inspected every three years and firm B will be inspected annually.
Which of the following is most closely related to the relevance of audit evidence? Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable. In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year. Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.
In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable.
Ordinarily, what source of evidence should least affect audit conclusions? External documentary evidence. Inquiry of management. Documentation prepared by the audit team. Inquiry of entity legal counsel.
Inquiry of management
Which of the following situations would provide auditors with a lower level of detection risk? Inspecting an item rather than directly confirming the existence of that item with third parties. Relying extensively on verbal inquiry of client personnel in gathering evidence. Examining an account that is more susceptible to misstatement because of complex calculations and accounting methods. Evaluating a smaller number of transactions or components of an account balance.
Inspecting an item rather than directly confirming the existence of that item with third parties.
Which of the following procedures would provide the most reliable audit evidence? Inquiries of the client's accounting staff held in private Inspection of pre-numbered client shipping documents Inspection of bank statements obtained directly from the client's financial institution Analytical procedures performed by auditors on the client's trial balance
Inspection of bank statements obtained directly from the client's financial institution
Which of the following procedures would provide the most reliable audit evidence? Inquiries of the client's internal audit staff. Inspection of prenumbered client purchase orders filed in the vouchers payable department. Inspection of vendor sales invoices received from client personnel. Inspection of bank statements obtained directly from the client's financial institution.
Inspection of bank statements obtained directly from the client's financial institution.
Which of the following combinations of standards and types of entities would not represent appropriate professional guidance? Statements on Auditing Standards, nonpublic entities. Interim Auditing Standards, public entities. Auditing Standards, public entities. Interim Auditing Standards, nonpublic entities.
Interim Auditing Standards, nonpublic entities.
Under generally accepted auditing standards, which of the following relates to the responsibilities principle? The initial planning of the audit engagement The confirmation of accounts receivable The completion of an internal control questionnaire Maintaining professional skepticism and exercising professional judgment
Maintaining professional skepticism and exercising professional judgment
The Sarbanes-Oxley Act of 2002 Requires the Public Company Accounting Oversight Board (PCAOB) be composed of seven members. Requires the Public Company Accounting Oversight Board (PCAOB) have CPAs for a majority of its members. Changes rules on auditor independence, adopting a more flexible, principles-based approach rather than one based on prohibitions of certain types of non-audit services to audit clients Mandates integrated audits for public companies
Mandates integrated audits for public companies
Which element of a system of quality control strives to provide the firm with reasonable assurance that its policies and procedures are operating effectively? Human resources Leadership responsibilities for quality within the firm Monitoring Relevant ethical requirements
Monitoring
Which of the following does not directly relate to an auditor's responsibility for having appropriate competence and capabilities to perform the audit? Participating in continuing professional education Gaining experience through hands-on practice Obtaining reliable documentary evidence Attending on-the-job training
Obtaining reliable documentary evidence
Which of the following factors influences the risk of material misstatement? Susceptibility of the account Nature, timing, and extent balance to misstatement of further audit procedures A. Yes No B. Yes Yes C. No Yes D. No No Multiple Choice Option A Option B Option C Option D
Option A
Which of the following would be evaluated during the PCAOB inspection process? Firm's system of Financial viability quality control of the firm A. Yes No B. Yes Yes C. No Yes D. No No Option A Option B Option C Option D
Option A
The relevant ethical requirements relating to due care, professional skepticism, and professional judgment are responsibilities of the auditor at which stage(s) of the audit? Risk Assessment Audit Evidence A. Yes No B. Yes Yes C. No Yes D. No No Multiple Choice Option A Option B Option C Option D
Option B
Which of the following could serve as a source of professional guidance in the audit of a public entity? Auditing standards issued Statements on auditing by the PCAOB standards issued by the ASB A. Yes No B. Yes Yes C. No Yes D. No No Option A Option B Option C Option D
Option B
Which of the following could serve as a source of professional guidance in the audit of a public entity? Auditing standards issued Statements on auditing by the PCAOB standards issued by the ASB A. Yes No B. Yes Yes C. No Yes D. No No Multiple Choice Option A Option B Option C Option D
Option B
Which of the following is true with respect to PCAOB inspections of accounting firms? All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control. All results of PCAOB inspections are made available to the public following the inspection. Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection.
PCAOB inspections review a sample of audits conducted by firms as well as the firm's systems of quality control.
Considering the susceptibility of the account balance to misstatement to assess the risk of material misstatement. Responsibilities Performance Reporting principles
Performance
Establishing materiality levels for use in determining the amount of evidence to be gathered. Reporting principles Performance Responsibilities
Performance
Establishing materiality levels for use in determining the amount of evidence to be gathered. Responsibilities Reporting principles Performance
Performance
Establishing materiality levels for use in determining the amount of evidence to be gathered. Responsibilities Reporting principles Performance
Performance
Gathering sufficient, appropriate evidence. Reporting principles Responsibilities Performance
Performance
Which of the following categories of principles is most closely related to gathering audit evidence? Performance. Reasonable assurance. Reporting. Responsibilities.
Performance.
Which of the following is an important consideration during the planning of the audit? Considering the independence of members of the audit team Performing some of the audit procedures prior to the end of the year under audit Considering the ability and expertise of the audit team with respect to accounting and auditing issues in the client's industry Considering the impact of tests of controls on the overall assessment of control risk
Performing some of the audit procedures prior to the end of the year under audit
The most reliable evidence regarding the existence of newly acquired computer equipment is: Inquiry of management. Documentation prepared externally. Evaluation of the client's procedures. Physical observation.
Physical observation.
The responsibilities principle under generally accepted auditing standards does not include which of the following? Competence and capabilities Independent attitude Due care Planning and supervision
Planning and supervision
Which of the following types of audit evidence provides the least assurance of reliability? Receivable confirmations received from the client's customers Prenumbered receiving reports completed by the client's employees Prior months' bank statements obtained from the client Municipal property tax bills prepared in the client's name
Prenumbered receiving reports completed by the client's employees
The human resources element of quality control in a public accounting firm includes which of the following? Professional development should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities. People at all organizational levels must maintain independence in fact and appearance. Supervision appropriate for the competencies of the personnel assigned to the work is important. When accepting and continuing client relationships, firms should consider their own competence.
Professional development should be provided so that personnel will have the knowledge required to enable them to fulfill their responsibilities.
Which of the following is not related to ethical requirements of auditors? Due care. Independence in appearance. Independence in fact. Professional judgement
Professional judgement
The application of relevant training, knowledge, and experience in making informed decisions about appropriate courses of action during an audit is known as: Absolute assurance. Professional judgment. Professional skepticism. Reasonable assurance.
Professional judgment.
Which of the following is a true statement about the Public Company Accounting Oversight Board (PCAOB): Public accounting firms must register with the PCAOB before performing audits of public companies. The PCAOB is a private, nonprofit organization established in 1933. Two of the five board members of the PCAOB must be CPAs. The PCAOB reports the results of disciplinary proceedings to the SEC to sanction registered CPA firms not passing inspection.
Public accounting firms must register with the PCAOB before performing audits of public companies.
Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)? Unmodified opinion or disclaimer of opinion Qualified opinion or disclaimer of opinion Unmodified opinion or adverse opinion Qualified opinion or adverse opinion
Qualified opinion or adverse opinion
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? Presumptive Judgmental Criticizing Questioning
Questioning
Which of the following concepts is least related to the standard of due care? Independence in fact. Professional skepticism. Prudent auditor. Reasonable assurance.
Reasonable assurance
Which of the following concepts is least related to the standard of due care? Independence in fact. Professional skepticism. Prudent auditor. Reasonable assurance.
Reasonable assurance.
Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients? Acceptance and continuance of client relationships and specific engagements. Engagement performance. Monitoring. Relevant ethical requirements.
Relevant ethical requirements.
Which of the following principles is most closely associated with the auditors' conclusion as to the fair presentation of the entity's financial statements? Communication principle. Performance principle. Reporting principle. Responsibilities principle.
Reporting principle.
Considering whether a scope limitation precludes sufficient evidence to allow an opinion to be expressed on the entity's financial statements Reporting principles Responsibilities Performance
Reporting principles
Considering whether a scope limitation precludes sufficient evidence to allow an opinion to be expressed on the entity's financial statements. Reporting principles Performance Responsibilities
Reporting principles
Evaluating audit firm personnel's independence with respect to a prospective client. Performance Responsibilities Reporting principles
Responsibilities
Evaluating the potential relationships between the auditor and family who are employed by the entity. Performance Reporting principles Responsibilities
Responsibilities
Exercising an appropriate level of professional skepticism. Reporting principles Performance Responsibilities
Responsibilities
Possessing the appropriate competence and capabilities to perform the audit. Reporting principles Responsibilities Performance
Responsibilities
Which of the following paragraphs references the conduct of the audit in accordance with PCAOB standards? Introductory paragraph Scope paragraph Opinion paragraph Internal control paragraph
Scope paragraph
Pronouncements issued by the Public Company Accounting Oversight Board are subject to formal approval by the American Institute of Certified Public Accountants. Auditing Standards Board. International Auditing and Assurance Standards Board. Securities and Exchange Commission.
Securities and Exchange Commission.
Which of the following courses of action is most appropriate if an auditor concludes that there is a high risk of material misstatement? Use smaller, rather than larger, sample sizes. Perform substantive tests as of an interim date. Select more effective substantive tests. Increase tests of controls.
Select more effective substantive tests.
Which of the following is not related to the responsibilities principle? Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession Firm-wide policies to evaluate the financial and professional relationships of its professionals Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting The auditors' use of professional judgment throughout the examination
Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting
The standard auditors' report refers to standards of the PCAOB and GAAP in which paragraph? Standards of the PCAOB: Scope only; GAAP: Opinion only Standards of the PCAOB: Introductory only; GAAP: Scope and opinion Standards of the PCAOB: Introductory and scope; GAAP: Opinion only Standards of the PCAOB: Introductory only; GAAP: All paragraphs
Standards of the PCAOB: Scope only; GAAP: Opinion only
One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following: Generally accepted auditing standards. Standards within a system of quality control. Generally accepted accounting principles. International auditing standards.
Standards within a system of quality control.
Which of the following best describes the general contents of the introductory paragraph of the auditors' report? A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. The auditors' conclusion with respect to the fairness of the entity's financial statements. Statements identifying the responsibility of auditors and management in the financial reporting process. The auditors' conclusion with respect to the effectiveness of the entity's internal control over financial reporting. Next Visit question mapQuestion 49 of 50 Total49 of 50 Prev
Statements identifying the responsibility of auditors and management in the financial reporting process.
An independent auditor must have which of the following? A pre-existing and well-informed point of view with respect to the audit Technical training that is adequate to meet the requirements of a professional A background in many different disciplines Experience in taxation that is sufficient to comply with generally accepted auditing standards
Technical training that is adequate to meet the requirements of a professional
As specified in Title I of the Sarbanes-Oxley Act of 2002, which organization has oversight and enforcement authority over the Public Company Accounting Board (PCAOB) and its decisions? The AICPA The SEC The FASB The Treasury Department
The SEC
The Public Company Accounting Oversight Board was established by which of the following? The Financial Accounting Standards Board The American Institute of Certified Public Accountants The Sarbanes-Oxley Act of 2002 The International Accounting Standards Board
The Sarbanes-Oxley Act of 2002
Which of the following situations would result in the issuance of a disclaimer of opinion? The audit reveals weaknesses in the client's internal control over financial reporting. The auditor is discovered to own a financial interest in the entity. The audit is performed, with limited exception, in accordance with generally accepted auditing standards. The entity's financial statements are not presented in conformity with the applicable financial reporting framework.
The auditor is discovered to own a financial interest in the entity.
Which of the following is not a concept from the performance principle under generally accepted auditing standards? The auditor must plan the work and properly supervise any assistants. The auditor must express an opinion in accordance with the auditor's findings. The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. The auditor must determine and apply an appropriate materiality level throughout the audit.
The auditor must express an opinion in accordance with the auditor's findings.
Which of the following statements is more closely related to independence in fact, rather than independence in appearance? Ownership of a financial interest in a client by an auditors' distant relative. The auditors' actual state of mind and unbiased mental attitude. Employment of an auditors' child in a position of influence within a client. Ownership of a financial interest in a client by an auditors' spouse.
The auditors' actual state of mind and unbiased mental attitude.
Which of the following is most closely related to the responsibilities principle? The auditors' responsibility to issue a report as a result of their examination. The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements. The auditors' compliance with relevant ethical requirements of independence and due care. The auditors' responsibility to plan the audit and properly supervise assistants.
The auditors' compliance with relevant ethical requirements of independence and due care.
Which of the following is least related to the concept of independence in appearance? The auditors' objectivity and ability to act impartially toward the client The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements The ownership of a financial interest in a client by the auditor The employment of the auditor's family member in an important position with the client
The auditors' objectivity and ability to act impartially toward the client
Which of the following presumptions does not relate to the reliability of audit evidence? The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements. The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.
The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
Which of the following is an example of the appropriate implementation of a system of quality control? The firm requires all documents obtained during the audit to be destroyed immediately following the engagement to ensure the client's information remains confidential. The firm's quality control policies have evolved through the performance of audit procedures but are not formally developed or communicated to staff members. All firm employees must verbally confirm their compliance with the appropriate independence requirements before being assigned to an engagement. The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.
The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.
Which of the following is not true with respect to the auditors' report for a public entity? The report title should contain the word "independent." The report provides a detailed listing of major auditing procedures performed during the examination. The opinion assesses the financial statements against an applicable financial reporting framework. The report specifically identifies the financial statements and years examined by the auditor.
The report provides a detailed listing of major auditing procedures performed during the examination.
Which of the following is a definition of control risk? The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls The risk that the auditor will not detect a material misstatement The risk that the auditor's assessment of internal controls will be at less than the maximum level The susceptibility of material misstatement assuming there are no related internal control policies or procedures
The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls
The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is To determine the nature, timing, and extent of substantive procedures to be performed. To make consulting suggestions to the entity's management. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements. To determine whether the entity has changed any accounting principles.
To determine the nature, timing, and extent of substantive procedures to be performed.
Which of the following types of auditors' reports does not require an additional paragraph to support the opinion? Unmodified opinion Adverse opinion Qualified opinion Disclaimer of opinion
Unmodified opinion
The initial development of auditing standards was in response to a scandal involving embezzlement that was not detected during an audit engagement. auditors' concerns that all components of the financial statements were not being verified. independent inquiries of the public accounting profession made by the SEC. requests by companies for greater assurance with respect to the auditors' ability to detect financial statement misstatements.
a scandal involving embezzlement that was not detected during an audit engagement.
The particular and specialized actions that auditors undertake to obtain evidence in a specific audit engagement are known as Auditing Standards. audit procedures. Interpretive Publications. Statements on Auditing Standards.
audit procedures.
Internal evidence is obtained directly from third parties independent of the client. originates outside of the client's system but has been received and processed by the client. consists of documents that are produced, used, and stored within the client's information system. consists of representations made by the client's officers, directors, owners, and employees.
consists of documents that are produced, used, and stored within the client's information system.
All of the following statements are true regarding generally accepted auditing standards (GAAS) except: departures from auditing standards that impose presumptively mandatory requirements on auditors are not permitted under any circumstances. Auditing Standards issued by the PCAOB serve as an appropriate source of GAAS for the audits of public entities. separate auditing standards have been developed for the audits of U.S. governmental entities and foreign entities. Interpretive Publications, which are officially considered less authoritative and less binding than auditing standards, are included as part of GAAS.
departures from auditing standards that impose presumptively mandatory requirements on auditors are not permitted under any circumstances.
All of the following are examples of procedures a firm can use to monitor its system of quality control except: discussions with firm personnel. conducting reviews of engagement documentation. devoting sufficient resources to developing a system of quality control. assessing compliance with independence policies and procedures.
devoting sufficient resources to developing a system of quality control.
All of the following are examples of procedures a firm can use to monitor its system of quality control except: discussions with firm personnel. conducting reviews of engagement documentation. devoting sufficient resources to developing a system of quality control. assessing compliance with independence policies and procedure
devoting sufficient resources to developing a system of quality control.
A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as due care. independence. professional judgment. professional skepticism.
due care.
An internal evaluation of the significant judgments made by the audit team and the conclusions reached in formulating its report for engagements meeting specified criteria is known as a(n): engagement quality control review. inspection. peer review. performance control evaluation.
engagement quality control review.
The auditors' responsibility to express an opinion on the financial statements is implicitly represented in the auditors' standard report. explicitly represented in the introductory paragraph of the auditors' standard report. explicitly represented in the scope paragraph of the auditors' standard report. explicitly represented in the opinion paragraph of the auditors' standard report.
explicitly represented in the introductory paragraph of the auditors' standard report.
The three fundamental principles underlying GAAS include all of the following, except: general principle. performance principle. reporting principle. responsibilities principle.
general principle.
An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: certify the correctness of Camden's financial statements. make a complete examination of Camden's records and verify all of Camden's transactions. give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.
give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).
The fundamental principles developed by the Auditing Standards Board are best described as: ten basic standards underlying an audit. standards that apply only to audits of public entities. industry-specific guidance on how audit procedures should be conducted. guidelines for the general conduct of audit engagements.
guidelines for the general conduct of audit engagements.
Auditing standards are considered to be: specialized actions or procedures to obtain evidence to render an opinion. Standards for the preparation of financial statements. standards to govern the quality of a specific firm's audit practice. guides for the quality of audits that apply to all audits.
guides for the quality of audits that apply to all audits.
PCAOB inspections are conducted by individuals selected by the PCAOB who are not current employees of public accounting firms. another public accounting firm selected by the firm being inspected. current employees of another public accounting firm selected by the PCAOB. the AICPA's Public Oversight Board.
individuals selected by the PCAOB who are not current employees of public accounting firms.
To ensure that a public accounting firm is providing services that conform to professional standards, the firm should follow: international auditing standards. the performance principle of GAAS. generally accepted accounting principles. its system of quality control.
its system of quality control.
Auditors try to achieve independence in appearance in order to: maintain public confidence in the profession. become independent in fact. comply with the responsibilities principle. maintain an unbiased mental attitude.
maintain public confidence in the profession.
A CPA firm would provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by establishing an understanding with each client concerning individual responsibilities in a signed engagement letter. assessing the risk that errors and fraud may cause the financial statements to contain material misstatements. developing specific audit objectives to support management's assertions that are embodied in the financial statements. maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
In a system of quality control, leadership responsibilities for quality within the firm are best characterized by: basing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients. management's evaluation of the integrity and business reputation of the client. management's clear and consistent demonstration of its own commitment to quality control and high-quality work. assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.
management's clear and consistent demonstration of its own commitment to quality control and high-quality work.
The audit failures of both Enron and WorldCom were examples in which the leadership responsibilities for quality work within the accounting firm were overshadowed by fears that losing a key client would result in shareholder losses from reduced company profitability. require additional audit procedures and increase the fees paid by the companies to the accounting firm. negatively influence the results of the firm's inspection. negatively impact individual auditors' performance evaluations.
negatively impact individual auditors' performance evaluations.
The preparation of an audit plan prior to the beginning of field work is appropriately considered documentation of planning. supervision. information evaluation. quality assurance.
planning.
The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as: due care. independence in appearance. professional judgment. professional skepticism.
professional skepticism.
As it relates to audit evidence, appropriateness refers to the originality of evidence gathered. quality of evidence gathered. quantity of evidence gathered. timeliness of evidence gathered.
quality of evidence gathered
The concept of ________ recognizes that a GAAS audit may fail to detect all material misstatements. absolute assurance due care reasonable assurance risk of material misstatement
reasonable assurance
An important role of the Public Company Accounting Oversight Board is to oversee the issuance of statements by the Financial Accounting Standards Board. preparation and grading of the Uniform CPA Examination. peer review of member firms of the Private Companies Practice Section. regulation of firms that audit public entities.
regulation of firms that audit public entities.
When a firm decides to withdraw from an engagement, it should document all of the following except: significant issues influencing the decision to withdraw from the engagement. the basis for any conclusions related to this decision to withdraw from the engagement. significant consultations related to the decision to withdraw from the engagement. significant effects the decision to withdraw from the engagement could have on the firm.
significant effects the decision to withdraw from the engagement could have on the firm.
Generally accepted auditing standards are specific actions performed by auditors during an examination. standards that guide the conduct of an audit examination. legal requirements auditors must observe during the audits of public entities. standards used by entities in deciding whether to engage or retain the services of auditors.
standards that guide the conduct of an audit examination.
The performance principle would include all of the following except: the auditors' determination of materiality levels. the auditors' evaluation of independence with respect to their clients. the auditors' evaluation of the risk of material misstatement. the auditors' determination of the nature, timing, and extent of further audit procedures.
the auditors' evaluation of independence with respect to their clients.
Control risk is the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. the probability that a material misstatement could occur and not be detected by auditors' procedures. the risk that auditors will not be able to complete the audit on a timely basis. the risk that auditors will not properly control the staff on the audit engagement.
the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.
Audit evidence is usually considered sufficient when it is reliable. there is enough quantity to afford a reasonable basis for an opinion on financial statements. it has the qualities of being relevant, objective, and free from unknown bias. it has been obtained through random selection methods.
there is enough quantity to afford a reasonable basis for an opinion on financial statements.
The primary purpose of the auditors' study of internal control for a nonpublic entity is: to provide constructive suggestions to the client for improving its internal control. to report on internal control as required by Auditing Standard No. 5 . to identify and detect fraud and irregularities perpetrated by client personnel. to determine the nature, timing, and extent of further audit procedures.
to determine the nature, timing, and extent of further audit procedures.
