Chapter 1 – Auditing: Integral to the Economy
1. The need for assurance services arises because the interests of the users of information may be different from
that of the interests of those responsible for providing information.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Demand for Assurances
2. A financial statement audit is a systematic process of objectively obtaining and evaluating evidence.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
3. Auditors should conduct their work with an attitude of professional skepticism.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
4. A bank using Milton Company’s financial statements to determine the creditworthiness of a potential loan to
Milton is a good example of the need for unbiased reporting.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
5. An integrated audit requires the auditor to assess the effectiveness of internal controls.
a.
True
b.
False
True
6. In all states, a CPA must have completed at least 150 hours of college semester hours to receive their license.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
7. The Center for Audit Quality was started by the International Federation of Accountants.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
8. The Center for Audit Quality has the primary authority to set auditing standards.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
9. In an audit, management is considered the “client”.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
10. Auditing is the process of attesting to assertions about economic actions and events.
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
Chapter 1 – Auditing: Integral to the Economy
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
11. Auditing is the process of verifying the accuracy of the financial statements.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
12. Management may have incentive to bias financial information, but the various users of the statements are
not likely to have conflicting interests in the financial information.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-01 – LO: 01-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
13. Auditing exists because users need unbiased information on which to assess management performance and
make economic decisions.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
14. A free market can only exist if there is sharing of perfectly reliable information.
a.
True
b.
False
False
15. Users rely on the auditors’ independent assessment of financial statement presentation because few users
have direct knowledge of the company’s operations.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Demand for Assurances
16. The PCAOB is a public board, appointed by Congress, to provide oversight of the firms that audit public
companies registered with the SEC.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
17. If the auditor has no reservations about management’s financial statements then the auditor will issue a
qualified opinion.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
18. Independence is often referred to as the cornerstone of the auditing profession.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Demand for Assurances
19. Audits of publicly traded companies must be performed by multinational accounting firms.
a.
True
b.
False
20. Auditors generally need quantitative and mathematical skillsets more than they need communication and
leadership skills.
a.
True
b.
False
21. The overall objective of an audit is to obtain assurance whether the financial statements are free of
misstatement.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-01 – LO: 01-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
22. Bondholders are one of the users of financial statements.
a.
True
b.
False
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
23. A key responsibility of the internal audit function is to provide assurance on the reliability of financial
reporting to external stakeholders of a company.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-02 – LO: 01-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Parties Involved in Preparing and Auditing Financial Statements
24. The Public Company Accounting Oversight Board provides the criteria against which the auditor measures
the fairness of financial statement presentation.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
25. The FASB is responsible for creating International Financial Reporting Standards.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-04 – LO: 01-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Organizations Affecting the External Auditing Profession
26. External auditors frequently serve on the audit committees of their clients.
a.
True
b.
False
False
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Scope of Services
27. CPA certificates for auditors are issued by state boards of accountancy.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
28. Internal controls are the responsibility of management.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
29. The court system acts as a deterrent to quality controls for the auditing profession.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-04 – LO: 01-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Organizations Affecting the External Auditing Profession
30. The SEC is the governmental body with the oversight responsibility for the efficient operation of capital
markets in the United States.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
31. Audit firm culture is one of the primary drivers of audit quality.
a.
True
The Providers of Assurance Services
Chapter 1 – Auditing: Integral to the Economy
b.
False
True
1
AUDT.JOHN.16.01-05 – LO: 01-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Quality
32. Effective audit processes, by themselves, are sufficient to achieve audit quality.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-05 – LO: 01-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Quality
33. Only the Big 4 audit firms can conduct audits of private companies in the United States.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
34. The American Institute of CPAs sets auditing standards for non-publicly traded companies.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
35. Though often relying on the FASB, the SEC has authority to establish GAAP for publicly traded companies.
a.
True
b.
False
36. The SEC has authority to establish GAAP for all business enterprises.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
37. The Public Company Accounting Oversight Board was established by the AICPA in response to Securities
laws.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
38. The Center for Audit Quality is responsible for the oversight of the peer review process for registered audit
firms.
a.
True
b.
False
False
1
AUDT.JOHN.16.01-06 – LO: 01-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Achieving Audit Quality
39. The SEC provides annual reports to the PCAOB.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional and Regulatory Organizations
40. The AICPA has a peer review program that reviews and evaluates the portions of an audit firm’s accounting
and audit practice that are not inspected by the PCAOB.
a.
True
b.
False
True
1
AUDT.JOHN.16.01-06 – LO: 01-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Achieving Audit Quality and Minimizing Lawsuits
41. A quality audit is one performed “in accordance with generally accepted auditing standards (GAAS) to
provide reasonable assurance that the audited financial statements and related disclosures are presented in
accordance with generally accepted accounting principles (GAAP) and (2) are not materially misstated whether
due to errors or fraud.”
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
42. The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor independence
requirements.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
43. The SEC and PCAOB independence rules for auditors are identical..
a.
True
b.
False
False
1
AUDT.JOHN.16.01-06 – LO: 01-06
44. Audit quality is driven, in part, by the audit firm’s culture.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
45. Audit staff performing audit work must be appropriately supervised by partners and managers.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
46. Which the following is not a reason for a public company to receive an audit?
a.
Potential bias in providing information.
b.
Closeness between a user and the organization.
c.
Complexity of the processing systems.
d.
Remoteness between a user and the organization.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Demand for Assurances
47. What is the term used to describe a systematic process of objectively obtaining evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria and communicating the results to interested users?
a.
Internal audit.
b.
Financial statement audit.
c.
External audit.
d.
Program audit
b
Achieving Audit Quality and Minimizing Lawsuits
48. An Integrated Audit Report provides opinion(s) on which of the following?
a.
The financial statements.
b.
Internal controls.
c.
Both financial statements and internal controls.
d.
Neither financial statements or internal controls.
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Scope of Services
49. Which one of the following organizations is recognized for providing guidance on a framework for internal
control ?
a.
AICPA.
b.
PCAOB.
c.
IAASB.
d.
COSO..
d
1
AUDT.JOHN.16.01-04 – LO: 01-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Organizations Affecting the External Auditing Profession
50. Which phase of the audit opinion formulation process is most commonly thought of as auditing by the
general public?
a.
Performing risk assessment.
b.
Obtaining evidence about internal controls.
c.
Obtaining substantive evidence about accounts.
d.
Making reporting decisions..
1
AUDT.JOHN.16.01-01 – LO: 01-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
51. Which one of the following is not a primary driver of audit quality?
a.
Skills and personal qualities of audit staff.
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
Chapter 1 – Auditing: Integral to the Economy
b.
Reasonable audit fees.
c.
Effective audit processes..
d.
Audit firm culture.
b
1
AUDT.JOHN.16.01-05 – LO: 01-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Quality
52. Who are the users of the financial statements?
a.
Management.
b.
Auditors.
c.
Taxing Authorities.
d.
Both A and C.
d
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
53. Which one of the following is a factor that creates a need for an independent auditor’s assessment of the
financial statement presentation?
a.
Complexity of transactions affecting the financial statements.
b.
Lack of criteria on which to base information.
c.
Remoteness of the user from the organization.
d.
Both A and C.
e.
Both A and B.
d
1
AUDT.JOHN.16.01-01 – LO: 01-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
54. What can users of the audit report reasonably expect from the audited financial statements?
a.
The financial statements are complete and contain many of the important financial disclosures.
b.
The financial statements are presented fairly according to the substance of GAAP.
c.
The financial statements are free from all errors.
d.
All of the above.
e.
None of the above.
Chapter 1 – Auditing: Integral to the Economy
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
55. Which one of the following is not a management expectation for independent auditors?
a.
An outside source of expertise on accounting matters.
b.
Individuals who perform tests and draw conclusions on assertions.
c.
A participant in management decision making.
d.
A provider of a written communication.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
56. According to the FRC which of the following attributes contributes to the reliability and usefulness of audit
reporting?
a.
The audit methodology is well structured.
b.
Quality technical support is available when auditors require guidance.
c.
Auditors appropriately conclude as to the truth and fairness of the financial statements.
d.
The audit work is effectively reviewed.
AUDT.JOHN.16.01-05 – LO: 01-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Quality
57. To conduct an audit, what must an auditor do?
a.
Comply with relevant ethical standards.
b.
Exercise perfect judgment.
c.
Obtain sufficient appropriate evidence to provide absolute assurance.
d.
All of the above.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
58. An “integrated audit” expresses an opinion on which of the following?
Chapter 1 – Auditing: Integral to the Economy
a.
The company’s internal controls.
b.
The company’s financial statements.
c.
The company’s compliance with its rules and policies.
d.
Both A and B.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
59. What is the first phase in an audit?
a.
Client acceptance or client continuance.
b.
Understanding the client.
c.
Understanding internal controls.
d.
Testing of account balances.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditing Defined
60. How is the audit report referred to when the auditor has no reservations about management’s financial
statements?
a.
An unqualified report.
b.
A qualified report.
c.
An adverse report.
d.
An integrated report.
AUDT.JOHN.16.01-01 – LO: 01-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Overview of the External Auditing Profession
61. Why is auditing important in a free market society?
a.
The public requires auditors to function as divisions of regulatory bodies.
b.
Auditors detect all errors and fraud perpetrated by company employees.
c.
It provides reliable information upon which to judge economic performance.
d.
The auditor is an amiable insurance policy for investors.
e.
All of the above are true.