Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 6 Audit Responsibilities and Objectives
6.1 Learning Objective 6-1
1) The objective of an audit of the financial statements is an expression of an opinion on
A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements.
C) the accuracy of the annual report.
D) the accuracy of the balance sheet and income statement.
2) If the auditor believes that the financial statements are not fairly stated or is unable to reach a
conclusion because of insufficient evidence, the auditor
A) should withdraw from the engagement.
B) should request an increase in audit fees so that more resources can be used to conduct the
audit.
C) has the responsibility of notifying financial statement users through the auditor’s report.
D) should notify regulators of the circumstances.
3) Auditors accumulate evidence to
A) defend themselves in the event of a lawsuit.
B) determine if the financial statements are correct.
C) satisfy the requirements of the Securities Acts of 1933 and 1934.
D) reach a conclusion about the fairness of the financial statements.
4) Which of the following is not one of the steps used to develop audit objectives?
A) know the proper type of audit opinion to issue
B) divide the financial statements into cycles
C) know the management assertions about the financial statements
D) know the specific audit objectives for classes of transactions
5) When developing the audit objectives, the first step is to divide the financial statements into
cycles.
6.2 Learning Objective 6-2
1) The responsibility for adopting sound accounting policies and maintaining adequate internal
control rests with the
A) board of directors.
B) company management.
C) financial statement auditor.
D) company’s internal audit department.
2) If management insists on financial statement disclosures that the auditor finds unacceptable,
the auditor can withdraw from the engagement or
A)
Issue an adverse opinion
Issue a qualified opinion
Yes
Yes
B)
Issue an adverse opinion
Issue a qualified opinion
No
No
C)
Issue an adverse opinion
Issue a qualified opinion
Yes
No
D)
Issue an adverse opinion
Issue a qualified opinion
No
Yes
3) In certifying their annual financial statements, the CEO and CFO of a public company certify
that the financial statements comply with the requirements of
A) GAAP.
B) the Sarbanes-Oxley Act.
C) the Securities Exchange Act of 1934.
D) GAAS.
4) Which of the following statements is true of a public company’s financial statements?
A) Sarbanes-Oxley requires only the CEO to certify the financial statements.
B) Sarbanes-Oxley requires only the CFO to certify the financial statements.
C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.
D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.
5) The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to
A) the auditor.
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.
6) Because they operate the business on a daily basis, a company’s management knows more
about the company’s transactions and related assets, liabilities, and equity than the auditors.
7) The annual reports of many public companies include a statement about management’s
responsibilities and relationship with the CPA firm.
8) The auditors determine which disclosures must be presented in the financial statements.
9) The Sarbanes-Oxley Act provides for criminal penalties.
6.3 Learning Objective 6-3
1) The auditor’s best defense when material misstatements are not uncovered is to have
conducted the audit
A) in accordance with generally accepted auditing standards.
B) as effectively as reasonably possible.
C) in a timely manner.
D) only after an adequate investigation of the management team.
2) Which of the following is not one of the reasons that auditors provide only reasonable
assurance on the financial statements?
A) The auditor commonly examines a sample, rather than the entire population of transactions.
B) Accounting presentations contain complex estimates which involve uncertainty.
C) Fraudulently prepared financial statements are often difficult to detect.
D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
3) Which of the following statements is the most correct regarding errors and fraud?
A) An error is unintentional, whereas fraud is intentional.
B) Frauds occur more often than errors in financial statements.
C) Errors are always fraud and frauds are always errors.
D) Auditors have more responsibility for finding fraud than errors.
4) When an auditor believes that an illegal act may have occurred, the auditor should first
A) obtain an understanding of the nature and circumstances of the act.
B) consult with legal counsel or others knowledgeable about the illegal act.
C) discuss the matter with the audit committee.
D) withdraw from the engagement.
5) The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
that misstatements that are not ________ are detected.
A) important to the financial statements
B) statistically significant to the financial statements
C) material to the financial statements
D) identified by the client
6) Fraudulent financial reporting is most likely to be committed by whom?
A) line employees of the company
B) outside members of the company’s board of directors
C) company management
D) the company’s auditors
7) Which of the following would most likely be deemed a direct effect illegal act?
A) violation of federal employment laws
B) violation of federal environmental regulations
C) violation of federal income tax laws
D) violation of civil rights laws
8) The concept of reasonable assurance indicates that the auditor is
A) not a guarantor of the correctness of the financial statements.
B) not responsible for the fairness of the financial statements.
C) responsible only for issuing an opinion on the financial statements.
D) responsible for finding all misstatements.
9) Which of the following is the auditor least likely to do when aware of an illegal act?
A) discuss the matter with the client’s legal counsel
B) obtain evidence about the potential effect of the illegal act on the financial statements
C) contact the local law enforcement officials regarding potential criminal wrongdoing
D) consider the impact of the illegal act on the relationship with the company’s management
10) An auditor discovers that the company’s bookkeeper unintentionally made an mistake in
calculating the amount of the quarterly sales. This is an example of
A) employee fraud.
B) an error.
C) misappropriation of assets.
D) a defalcation.
11) An auditor has a duty to
A) provide reasonable assurance that material misstatements will be detected.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial statements.
D) be an insurer of the fairness in the statements.
12) If the auditor were responsible for making certain that all of management’s assertions in the
financial statements were absolutely correct,
A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically practical.
13) When dealing with laws and regulations that do not have a direct effect on the financial
statements, the auditor
A) should inquire of management about whether the entity is in compliance with such laws and
regulations.
B) has no responsibility to determine if any violations of these laws has occurred.
C) must report all violations, including inconsequential violations, to the audit committee.
D) should perform the same procedures as for violations having a direct effect on the financial
statements.
14) Which of the following statements is usually true?
A) Materiality is easy to quantify.
B) Fraudulent financial statements are often easy for the auditor to detect, especially when there
is collusion among management.
C) Reasonable assurance is a low level of assurance that the financial statements are free from
material misstatement.
D) An item is considered material if it would likely have changed or influenced the decisions of
a reasonable person using the statements.
15) Auditing standards make ________ distinction(s) between the auditor’s responsibilities for
searching for errors and fraud.
A) little
B) a significant
C) no
D) various
16) In comparing management fraud with employee fraud, the auditor’s risk of failing to discover
the fraud is
A) greater for management fraud because managers are inherently more deceptive than
employees.
B) greater for management fraud because of management’s ability to override existing internal
controls.
C) greater for employee fraud because of the higher crime rate among blue collar workers.
D) greater for employee fraud because of the larger number of employees in the organization.
17) Misappropriation of assets
A) is generally committed by company management.
B) harms the users of the financial statements by providing them incorrect financial data for their
decision making.
C) causes harm to stockholders because the assets are no longer available to their rightful
owners.
D) causes the financial statements to be misstated since the misappropriation usually involves
material amounts.
18) When comparing the auditor’s responsibility for detecting employee fraud and for detecting
errors, the profession has placed the responsibility
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering errors and employee fraud.
D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
19) If there is collusion among management, the chance a normal audit would uncover such acts
is
A) very low.
B) very high.
C) zero.
D) none of the above.
20) When the auditor becomes aware of or suspects noncompliance with laws and regulations
A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit.
B) the auditor should discuss the matter with management at a level above those suspected of the
noncompliance.
C) the auditor should obtain additional information to evaluate the possible effects on the
financial statements.
D) all of the above
21) When the auditor identifies or suspects noncompliance with laws and regulations, the auditor
A) should discuss the matter with those whom they believe committed the illegal act.
B) begin communication with the FASB in accordance with PCAOB regulations.
C) may disclaim an opinion on the basis of scope limitations if he is precluded by management
from obtaining sufficient appropriate evidence.
D) should withdraw from the engagement.
22) When an auditor knows that an illegal act has occurred, she must
A) report it to the proper governmental authorities.
B) consider the effects on the financial statements, including the adequacy of disclosure.
C) withdraw from the engagement.
D) issue an adverse opinion.
23) Which of the following is an accurate statement concerning the auditor’s responsibility to
consider laws and regulations?
A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations
impact the financial statements.
B) The auditor’s responsibility will depend on whether the laws or regulations are expected to
have a direct impact on the financial statements.
C) It is the responsibility of the auditor to determine if an act constitutes noncompliance.
D) The auditor must inform an outside party if management has knowingly not complied with a
law or regulation.
24) Which of the following statements best describes the auditor’s responsibility with respect to
illegal acts that do not have a material effect on the client’s financial statements?
A) Generally, the auditor is under no obligation to notify parties other than personnel within the
client’s organization.
B) Generally, the auditor is under an obligation to inform the PCAOB.
C) Generally, the auditor is obligated to disclose the relevant facts in the auditor’s report.
D) Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act.
25) Which of the following statements best describes the auditor’s responsibility regarding the
detection of fraud?
A) The auditor is responsible for the failure to detect fraud only when such failure clearly results
from nonperformance of audit procedures specifically described in the engagement letter.
B) The auditor is required to provide reasonable assurance that the financial statements are free
of both material errors and fraud.
C) The auditor is responsible for detecting material financial statement fraud, but not a material
misappropriation of assets.
D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is
issued.
26) When reporting identified or suspected noncompliance,
A) the auditor must report inconsequential noncompliance to the audit committee.
B) the auditor should communicate all material noncompliance matters to those charged with
governance.
C) any intentional noncompliance must be reported to local law enforcement.
D) all noncompliance, whether material or not, must result in a disclaimer of opinion.
27) Another term for misappropriation of assets is
A) management fraud.
B) collusion.
C) employee fraud.
D) illegal acts.
28) The provisions of many laws and regulations affect the financial statements
A) directly.
B) only indirectly.
C) both directly and indirectly.
D) materially if direct; immaterially if indirect.
29) If a client has violated federal tax laws,
A) the auditor must notify the IRS.
B) and the amount is significant, the auditor should communicate with those charged with
governance.
C) the noncompliance generally will not impact the financial statements.
D) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the
audit.
30) Discuss the differences between errors, frauds, and illegal acts. Give an example of each.
31) Discuss the actions an auditor should take when an illegal act is identified or suspected.
32) Discuss three reasons why auditors are responsible for “reasonable” but not “absolute”
assurance.
33) Discuss the differences in the auditor’s responsibilities for discovering (1) material errors, (2)
material fraud (3) illegal acts having a direct effect on the financial statements, and (4) illegal
acts that do not have a direct effect on the financial statements.
34) Errors are usually more difficult for an auditor to detect than frauds.
35) Other than inquiring of management about policies they have established to prevent illegal
acts and whether management knows of any laws or regulations that the company has violated,
the auditor should not search for illegal acts that do not have a direct effect on the financial
statements unless there is reason to believe they may exist.
36) When an auditor believes that an illegal act may have occurred, the first step he or she should
take is to gather additional evidence to determine the extent of the illegality and if there is a
direct impact on the financial statements.
37) Audits are expected to provide a higher degree of assurance for the detection of material
frauds than is provided for an equally material error.
38) Auditors have a higher degree of responsibility for detecting illegal acts that have a direct
effect on the financial statements than illegal acts that do not have a direct effect on the financial
statements.
39) The auditor’s first course of action when an illegal act is uncovered should be to immediately
notify the appropriate authorities, including but not limited to, law enforcement and the
Securities and Exchange Commission.
40) An audit generally provides no assurance that illegal acts that do not have a direct effect on
the financial statements will be detected.
41) Auditing standards indicate that reasonable assurance is a moderate, but not absolute, level of
assurance that the financial statements are free of material misstatement.
42) In obtaining reasonable assurance that the financial statements are free of material
misstatement, the auditor does not need to take into account the applicable legal and regulatory
framework relevant to the client.
43) The objective of the audit of financial statements by an independent auditor is to verify that
the financial statements are free of misstatements and accurately represent the company’s
financial position and results of operations.
44) As the impact from noncompliance is further removed from affecting the financial
statements, the less likely the auditor is to become aware of or recognize noncompliance when
auditing the financial statements.
6.4 Learning Objective 6-4
1) An audit must be performed with an attitude of professional skepticism. Professional
skepticism consists of two primary components: a questioning mind and
A) the assumption that upper-level management is dishonest.
B) a critical assessment of the audit evidence.
C) the assumption that all employees are motivated by greed.
D) verification of all critical information by independent third parties.
2) Which of the following is an accurate statement about professional skepticism?
A) Professional skepticism involves a critical assessment of the evidence.
B) Professional skepticism is easy to implement in practice.
C) It is easy for auditors to understand that their clients may try to deceive them throughout the
audit process.
D) Professional skepticism is only necessary for the audits of public companies.
3) One of the characteristics of professional skepticism is ________, which is the conviction to
decide for oneself, rather than accepting the claims of others.
A) interpersonal understanding
B) autonomy
C) suspension of judgment
D) self-esteem
4) A questioning mindset
A) means the auditor must prove every statement that management makes to them.
B) means the auditor should approach the audit with a “do not trust anyone” mental outlook.
C) assures that the auditor will only accept honest clients.
D) means the auditor should approach the audit with a “trust but verify” mental outlook.
5) One of the characteristics of professional skepticism is_______, which is a desire to
investigate beyond the obvious.
A) self-esteem
B) an interpersonal understanding
C) a search for knowledge
D) a questioning mindset
6) ________ is the self-confidence to resist persuasion and to challenge assumptions or
conclusions.
A) Self-esteem
B) Interpersonal understanding
C) Suspension of judgment
D) Autonomy
7) An auditor should recognize that the application of auditing procedures may produce evidence
indicating the possibility of errors of fraud and therefore should
A) plan and perform the engagement with an attitude of professional skepticism.
B) not rely on internal controls that are designed to prevent or detect errors or fraud.
C) design audit tests to detect unrecorded transactions.
D) extend the work to audit the majority of the recorded transactions and records of an entity.
8) Recent academic research on the topic of professional skepticism suggests that there are six
characteristics to skepticism. List and briefly describe each of these characteristics.
9) Auditors often convince themselves that they only accept clients they can trust and who have
high integrity.
10) A suspension of judgment is the recognition that people’s motivations and perceptions can
lead them to provide biased or misleading information.
6.5 Learning Objective 6-5
1) The starting point to effective professional judgment begins with
A) gathering the facts.
B) identifying alternatives.
C) identifying relevant literature.
D) identifying and defining the issue.