Chapter 01

Auditing and Assurance Services

 

Multiple Choice Questions

 

1. The audit objective that all transactions and accounts that should be presented
in the financial statements are in fact included is related to which of the PCAOB
assertions? 
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

2. To be proficient as an auditor, a person must first be able to accomplish which

of these tasks in a decision-making process? 
A. Identify audit evidence relevant to the verification of assertions management
makes in its unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain
sufficient, competent evidence about assertions management makes in financial
statements and notes.
C. Recognize the financial assertions made in management's financial statements
and footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide
whether management's assertions conform to generally accepted accounting
principles and reality.

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3. Which of the following is an underlying condition that in part creates the
demand by users for reliable information? 
A. Economic transactions that are numerous and complex.
B. Decisions are time-sensitive.
C. Users separated from accounting records by distance and time.
D. Financial decisions that are important to investors and users.
E. All of the above.

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4. Which of the following is not included in The American Accounting
Association (AAA) definition of auditing? 
A. Potential conflict of interest.
B. Systematic process.
C. Assertions about economic actions.
D. Established criteria.

5. What is the term used to identify the risk that the client's financial statements
may be materially false and misleading? 
A. Business risk.
B. Information risk.
C. Client risk.
D. Risk assessment.

6. Which of the following is not a recommendation usually made following the

completion of an operational audit? 
A. Economic and efficient use of resources.
B. Effective achievement of business objectives.
C. Attesting to the fairness of the financial statements.
D. Compliance with company policies.

7. In order to be considered as external auditors with respect to government

agencies, GAO auditors must be 
A. Organizationally independent.
B. Empowered as the accounting and auditing agency by the U.S. Congress.
C. Funded by the federal government.
D. Guided by standards similar to GAAS.

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8. Which of the following is the essential purpose of the audit function? 
A. Detection of fraud.
B. Examination of individual transactions to certify as to their validity.
C. Determination of whether the client's financial statement assertions are fairly
stated.
D. Assurance of the consistent application of correct accounting procedures.

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9. The audit objective that all the transactions and accounts presented in the
financial statements represent real assets, liabilities, revenues, and expenses is
related most closely to which of the PCAOB assertions? 
A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure

10. The audit objective that all transactions are recorded in the proper period is
related most closely to which of the Audit Standards Board (ASB) transaction
assertions? 
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy

11. The audit objective that all transactions are recorded in the proper account is
related most closely to which one of the ASB transaction assertions? 
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

12. The audit objective that all balances include items owned by the client is
related most closely to which one of the ASB balance assertions? 
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

1-5
13. The audit objective that all balances include all items that should be recorded
in that account is related most closely to which one of the ASB balance
assertions? 
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

14. The audit objective that footnotes in the financial statements should be clear
and expressed such that the information is easily conveyed to the readers of the
financial statements is related most closely with which of the ASB presentation
and disclosure assertions? 
A. Occurrence
B. Rights and obligations
C. Comprehensibility
D. Understandability

15. The engineering department at Omni Company built a piece of equipment in

the company's own shop for use in the company's operations. The auditor
reviewed all work orders that were capitalized as part of the equipment costs.
Which of the following is the ASB transaction assertion most closely related to
the auditor's testing? 
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

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16. The engineering department at Omni Company built a piece of equipment in
the company's own shop for use in the company's operations. When looking at
the ending balance for the fixed asset account the auditor examined all work
orders, purchased materials, labor cost reports, and applied overhead that were
capitalized as part of the equipment costs. Which of the following is the ASB
balance assertion most closely related to the auditor's testing? 
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation

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17. Which of the following best describes the primary role and responsibility of
independent external auditor? 
A. Produce a company's annual financial statements and notes.
B. Express an opinion on the fairness of a company's annual financial statements
and footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client's internal control structure and give
management a report about control problems and deficiencies.

18. Which of the following best describes the main reason independent auditors
report on management's financial statements? 
A. Management fraud may exist, and it is likely to be detected by independent
auditors.
B. The management that prepares the statements and the persons who use the
statements may have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent
audit work.
D. The management that prepares the statements may have a poorly designed
system of internal control.

19. The auditor's judgment concerning the overall fairness of the presentation of

financial position, results of operations, and cash flows is applied within the
framework of 
A. Quality control.
B. Generally accepted auditing standards, which include the concept of
materiality.
C. The auditor's evaluation of the audited company's internal control.
D. The applicable financial reporting framework (i.e., GAAP in the United
States).

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20. Assurance services involve all of the following, except 
A. Relevance as well as the reliability of information.
B. Nonfinancial information as well as traditional financial statements.
C. Providing absolute rather than reasonable assurance.
D. Electronic databases as well as printed reports.

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21. Because of the risk of material misstatement, an audit of financial statements
in accordance with generally accepted auditing standards should be planned and
performed with an attitude of 
A. Objective judgment.
B. Independent integrity.
C. Professional skepticism.
D. Impartial conservatism.

22. Which of the following best describes assurance services? 

A. Independent professional services that report on the client's financial
statements.
B. Independent professional services that improve the quality of information for
decision makers.
C. Independent professional services that report on specific written management
assertions.
D. Independent professional services that improve the operations of the client.

23. Which of the following is not a PCAOB assertion about inventory related to

presentation and disclosure? 
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at its cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed
in notes.
D. All of the above are PCAOB presentation and disclosure assertions about
inventory.

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24. Which of the following is not an ASB assertion about inventory related to
presentation and disclosure? 
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed
in notes.
D. All of the above are ASB presentation and disclosure assertions about
inventory.

25. In performing an attestation engagement, a CPA typically 

A. Supplies litigation support services.
B. Assesses control risk at a low level.
C. Expresses a conclusion on an assertion about some type of subject matter.
D. Provides management consulting advice.

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26. An attestation engagement is one in which a CPA is engaged to 
A. Issue, or does issue, a report on subject matter or an assertion about the
subject matter that is the responsibility of another party.
B. Provide tax advice or prepare a tax return based on financial information the
CPA has not audited or reviewed.
C. Testify as an expert witness in accounting, auditing or tax matters, given
certain stipulated facts.
D. Assemble prospective financial statements based on the assumptions of the
entity's management without expressing any assurance.

27. The underlying conditions that create demand by users for reliable

information include all of the following, except: 
A. Transactions are numerous and complex.
B. Users lack professional skepticism.
C. Users are separated from accounting records by distance and time.
D. Financial decisions are important to investors and users.
E. Decisions are time-sensitive.

28. Cutoff tests designed to detect credit sales made before the end of the year
that have been recorded in the subsequent year provide assurance about the
PCAOB assertion of 
A. Presentation.
B. Completeness.
C. Rights.
D. Existence.

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29. Inquiries of warehouse personnel concerning possible obsolete or slow
moving inventory items provide assurance about the PCAOB assertion of 
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

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30. Inquiries of warehouse personnel concerning possible obsolete or slow
moving inventory items provide assurance about the ASB balance assertion of 
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

31. The probability that the information circulated by a company will be false or

misleading is referred to as 
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

32. The Sarbanes-Oxley Act of 2002 requires that the key company officials
certify the financial statements. Certification means that the company CEO and
CFO must sign a statement indicating: 
A. They have read the financial statements.
B. They are not aware of any false or misleading statements (or any key omitted
disclosures).
C. They believe that the financial statements present an accurate picture of the
company's financial condition.
D. All of the above.

33. The process of a CPA obtaining a certificate and license in a state other than
the state in which the CPA's certificate was originally obtained is referred to as 
A. Substantial equivalency.
B. Quid pro quo.
C. Relicensing.
D. Re-examination.

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34. The risk an entity will fail to meet its objectives is referred to as 
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

35. The four basic requirements for becoming a CPA in most states are 
A. Education, the CPA Examination, experience, and substantial equivalency.
B. The CPA Examination, experience, continuing professional education, and a
state certificate.
C. Continuing professional education, the CPA Examination, experience, and an
AICPA certificate.
D. Education, the CPA Examination, experience, and a state certificate.

36. The study of business operations for the purpose of making

recommendations about the efficient use of resources, effective achievement of
business objectives, and compliance with company policies is referred to as 
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

37. The accounting, auditing, and investigating agency of the U.S. Congress,

headed by the U.S. Comptroller General is known as 
A. The Federal Bureau of Investigation (FBI).
B. The U.S. General Accounting Office (GAO).
C. The Internal Revenue Service (IRS).
D. The United States Legislative Auditors (USLA).

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38. Which of the following would be considered an assurance engagement?
Refer To: 01-38 
A. Giving an opinion on a prize promoter's claims about the amount of
sweepstakes prizes awarded in the past.
B. Giving an opinion on the conformity of the financial statements of a
university with generally accepted accounting principles.
C. Giving an opinion on the fair presentation of a newspaper's circulation data.
D. Giving assurance about the average drive length achieved by golfers with a
client's golf balls.
E. All of the above.

39. It is always a good idea for auditors to begin an audit with the professional
skepticism characterized by the assumption that
Refer To: 01-38 
A. A potential conflict of interest always exists between the auditor and the
management of the enterprise under audit.
B. In audits of financial statements, the auditor acts exclusively in the capacity
of an auditor.
C. The professional status of the independent auditor imposes commensurate
professional obligations.
D. Financial statements and financial data are verifiable.

40. In an attestation engagement, a CPA practitioner is engaged to

Refer To: 01-38 
A. Compile a company's financial forecast based on management's assumptions
without expressing any form of assurance.
B. Prepare a written report containing a conclusion about the reliability of a
management assertion.
C. Prepare a tax return using information the CPA has not audited or reviewed.
D. Give expert testimony in court on particular facts in a corporate income tax
controversy.

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41. Determination of cost savings obtained by outsourcing cafeteria services is
most likely to be an objective of
Refer To: 01-38 
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

42. The primary difference between operational auditing and financial auditing

is that in operational auditing
Refer To: 01-38 
A. The operational auditor is not concerned with whether the audited activity is
generating information in compliance with financial accounting standards.
B. The operational auditor is seeking to help management use resources in the
most effective manner possible.
C. The operational auditor starts with the financial statements of an activity
being audited and works backward to the basic processes involved in producing
them.
D. The operational auditor can use analytical skills and tools that are not
necessary in financial auditing.

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43. According to the AICPA, the purpose of an audit of financial statements is to

Refer To: 01-38 

A. Enhance the degree of confidence that intended users can place in the
financial statements.
B. Express an opinion on the fairness with which they present financial position,
results of operations, and cash flows in conformity with accounting standards
promulgated by the Financial Accounting Standards Board.
C. Express an opinion on the fairness with which they present financial position,
result of operations, and cash flows in conformity with accounting standards
promulgated by the U.S. Securities and Exchange Commission.
D. Obtain systematic and objective evidence about financial assertions and
report the results to interested users.

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44. Bankers who are processing loan applications from companies seeking large
loans will probably ask for financial statements audited by an independent CPA
because
Refer To: 01-38 
A. Financial statements are too complex to analyze themselves.
B. They are too far away from company headquarters to perform accounting and
auditing themselves.
C. The consequences of making a bad loan are very undesirable.
D. They generally see a potential conflict of interest between company managers
who want to get loans and the bank's needs for reliable financial statements.

45. The Sarbanes-Oxley Act of 2002 prohibits professional service firms from

providing which of the following services to an audit client?
Refer To: 01-38 
A. Bookkeeping services.
B. Internal audit services.
C. Valuation services.
D. All of the above.

46. Independent auditors of financial statements perform audits that reduce

Refer To: 01-38 
A. Business risks faced by investors.
B. Information risk faced by investors.
C. Complexity of financial statements.
D. Timeliness of financial statements.

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47. The primary objective of compliance auditing is to
Refer To: 01-38 
A. Give an opinion on financial statements.
B. Develop a basis for a report on internal control.
C. Perform a study of effective and efficient use of resources.
D. Determine whether an audit client's personnel are following laws, rules,
regulations, and policies.

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48. What requirements are usually necessary to become licensed as a CPA?
Refer To: 01-38 
A. Successful completion of the Uniform CPA Examination.
B. Experience in the accounting field.
C. Education.
D. All of the above.

49. The organization primarily responsible for ensuring that public officials are
using public funds efficiently, economically, and effectively is the
Refer To: 01-38 
A. Governmental Internal Audit Agency (GIAA).
B. Central Internal Auditors (CIA).
C. Securities and Exchange Commission (SEC).
D. Government Accountability Office (GAO).

50. Performance audits usually include (two answers)

Refer To: 01-38 
A. Financial audits.
B. Economy and efficiency audits.
C. Compliance audits.
D. Program audits.

51. The objective in an auditor's review of credit ratings of a client's customers

is to obtain evidence related to management's financial statement assertion about

Refer To: 01-38 

A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

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52. Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally
asserts to Jones that all expenses for the year have been recorded in the
accounts. Rhonda's representation in this regard
Refer To: 01-38 
A. Is sufficient evidence for Jones to conclude that the completeness assertion is
supported for expenses.
B. Can enable Jones to minimize the work on the gathering of evidence to
support Rhonda's completeness assertion.
C. Should be disregarded because it is not in writing.
D. Is not considered a sufficient basis for Jones to conclude that all expenses
have been recorded.

53. The risk to investors that a company's financial statements may be materially

misleading is called
Refer To: 01-38 
A. Client acceptance risk.
B. Information risk.
C. Moral hazard.
D. Business risk.

54. When auditing merchandise inventory at year-end, the auditor performs

audit procedures to ensure that all goods purchased before year-end are received
before the physical inventory count. This audit procedure provides assurance
about which management assertion?
Refer To: 01-38 
A. Cutoff.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

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55. When auditing merchandise inventory at year-end, the auditor performs
audit procedures to obtain evidence that no goods held on consignment are
included in the client's ending inventory balance. This audit procedure provides
assurance about which management assertion?
Refer To: 01-38 
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

56. When an auditor reviews additions to the equipment (fixed asset) account to

make sure that repair and maintenance expenses are not understated, she wants
to obtain evidence as to management's assertion regarding
Refer To: 01-38 
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

57. The Sarbanes-Oxley Act of 2002 generally prohibits professional service

firms from
Refer To: 01-38 
A. Acting in a managerial decision-making role for an audit client.
B. Auditing the firm's own work on an audit client.
C. Providing tax consulting to an audit client without audit committee approval.
D. All of the above.

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58. Substantial equivalency refers to
Refer To: 01-38 
A. An auditor's tendency not to believe management's assertions without
sufficient corroboration.
B. Providing consulting work for another firm's audit client in exchange for the
other firm's providing consulting services to one of your clients.
C. The waiving of certification exam parts for an individual holding an
equivalent certification from another professional organization.
D. Permitting a CPA to practice in another state without having to obtain a
license in that state.

59. Which of the following best describes the relationship between auditing and
attestation engagements?
Refer To: 01-38 
A. Auditing is a subset of attestation engagements that focuses on the
certification of financial statements.
B. Attestation is a subset of auditing that provides lower assurance than that
provided by an audit engagement.
C. Auditing is a subset of attestation engagements that focuses on providing
clients with advice and decision support.
D. Attestation is a subset of auditing that improves the quality of information, or
its context, for decision makers.

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60. Which of the following best describes the focus of the following
engagements?

   
Refer To: 01-38 
A. Option A
B. Option B
C. Option C
D. Option D

61. Which of the following is a reason to obtain professional certification?

Refer To: 01-38 
A. Certification provides credibility that an individual is technically competent.
B. Certification often is a necessary condition for advancement and promotion
within a professional services firm.
C. Obtaining certification is often monetarily rewarded by an individual's
employer.
D. All of the above.

 Question also found in Study Guide

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62. Which of the following is not an underlying condition that creates demand
by users for reliable financial information? 
A. Remoteness
B. Vagueness
C. Consequences
D. Complexity

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63. According to the American Accounting Association (AAA), the definition of
auditing includes the following statement 
A. an independent appraisal function established within an organization to
examine and evaluate its activities.
B. a process of reducing to a socially acceptable level the information risk to
users of financial statements.
C. an expression of opinion on the fairness of financial statements.
D. a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events.

64. Which of the following is not a major element of assurance services? 

A. Independence
B. Improving the quality of information
C. Improving profitability of the client
D. Improving the context of information

65. The goal of operational auditing is to 

A. Help managers discharge their management responsibilities and improve
profitability.
B. Evaluate compliance with specific laws and regulations.
C. Reduce to a socially acceptable level the information risk to users of financial
statements.
D. Express an opinion on the fairness of financial statements.

66. The PCAOB assertions made by management in financial statements do not

include 
A. Existence.
B. Compliance.
C. Completeness.
D. Presentation.

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67. Which of the following is not a role of the AICPA? 
A. Refine the body of professional knowledge, regulate membership admissions,
and police conduct of members.
B. Prepare and grade the uniform CPA examination.
C. License the practices of CPAs in the various states.
D. Issue public statements on practice standards.

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68. The ASB transaction objective that requires the auditor to establish evidence
that all transactions and accounts that should be presented in the financial
statements are included is? 
A. Completeness.
B. Existence or occurrence.
C. Rights and obligations.
D. Valuation or allocation.

69. Which of the following is an example of a regulatory auditor? 

A. Internal auditors
B. Big 4 auditors
C. U.S. Internal Revenue Service auditors
D. Operational auditors

70. The definition of performance audits does not include 

A. economy audits.
B. efficiency audits.
C. financial audits.
D. program audits.

71. CPA certificates and licenses to practice are issued by the 

A. AICPA.
B. States or territories.
C. AICPA Examinations Division.
D. GAO.

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Matching Questions
 

 Question also found in Study Guide

72. Which of the PCAOB assertions (A - E) are best verified by the following

audit procedures (1-4)? 

1. Valuation or      Confirming inventory held on consignment

allocation  by the client with independent third party.   ____
2. Valuation or      Consulting the Wall Street Journal for year-
allocation  end prices of securities held by the client.   ____
3. Existence or      Physically examine all major property and
occurrence  equipment additions.   ____
4. Rights and      Review the aged trial balance for significant
obligations  past due accounts.   ____
 

73. ABC Company had a major sale to XYZ Company. This sale accounted for
20% of the revenue of ABC Company. The auditors performed the audit
procedures listed 1 - 3. For each audit procedure select the ASB transaction
assertion that is most likely being tested. 

     The auditor reviewed the shipping documents

1. Completene to check the date that product was shipped to
ss  XYZ Company.   ____
     The auditor reviewed the shipping documents
to ensure that all product included in the sales
2. Cutoff  revenue to XYZ had been shipped.   ____
     The auditor reviewed the invoice sent to XYZ
Company to ensure that XYZ had been properly
3. Accuracy  billed.   ____

1-30
 

74. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors
performed the audit procedures listed 1 - 5. For each audit procedure select the
ASB balance assertion that is most likely being tested. 

     The auditors walked through the warehouse

1. Valuation  looking for obsolete inventory.   ____
     The auditors compared invoices received
2. Rights and from suppliers with the cost of inventory listed
obligations  in the inventory accounts.   ____
     The auditors reviewed purchase orders to
determine if any inventory was on
3. Valuation  consignment.   ____
     The auditors reviewed vendor invoices to
determine if freight costs, taxes, tariffs or other
4. Completeness  costs had been included in inventory costs.   ____
     The auditors selected items from the
inventory and reviewed inventory records to
ensure these items were included in those
5. Accuracy  records.   ____
 
 

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True / False Questions
 

 Questions also found in Study Guide

75. Financial decision makers demand reliable information that is provided by

accountants. 
True    False

76. Financial decision makers obtain their accounting information from lenders

of funds. 
True    False

77. Four conditions that create demand for reliable information are complexity,
remoteness, timeliness, and consequences. 
True    False

78. The lending of credibility to financial information is known as certification. 

True    False

79. Independent auditors are employees of the client. 

True    False

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80. Assurance service is the systematic process of objectively obtaining and
evaluating evidence. 
True    False

81. Evidence consists of assertions about economic actions and events. 

True    False

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82. The purpose of obtaining and evaluating evidence is to ascertain the degree
of correspondence between the assertions and established criteria. 
True    False

83. The AICPA Statement on Auditing Standards defines auditing more broadly

than the AAA definition of auditing. 
True    False

84. The PCAOB audit objective related to the completeness assertion is to

establish evidence that assets, liabilities, and equities actually exist. 
True    False

85. The ASB balance audit objective related to valuation or accuracy is to

determine whether proper values have been assigned to assets, liabilities,
equities, revenues, and expenses. 
True    False

86. The objective of internal auditing is to assist members of an organization to

effectively perform their obligations. 
True    False

87. Internal auditors perform only operational audits. 

True    False

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88. Government auditors perform both financial and performance audits. 
True    False

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89. Expanded scope governmental auditing includes economy and efficiency
and program results audits. 
True    False

90. The AICPA licenses CPAs to practice in the United States. 

True    False

91. Professional skepticism is an auditor's tendency not to believe anyone. 

True    False

92. Assurance services are independent professional services that improve the

quality of information or its context for decision makers. 
True    False

93. The concept "professional skepticism" requires that auditors assume

management is dishonest and should not be trusted. 
True    False

94. For independent auditors of financial statements in the United States,

established criteria largely consist of the generally accepted accounting
principles (GAAP). 
True    False

 
 

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Fill in the Blank Questions
 

 Questions also found in Study Guide

95. The risk that the information disseminated by a company will be materially

false or misleading is called _____________________________
_____________________________. 
________________________________________

96. The audit process involves obtaining and evaluating

_____________________________. 
________________________________________

97. The purpose of obtaining and evaluating evidence is to ascertain the degree

of correspondence between the _____________________________ and
_____________________________. 
________________________________________

98. The objective of the ordinary examination of financial statements by the

independent auditor is the expression of a(n)
_____________________________ on the _____________________________
of financial statements. 
________________________________________

1-37
99. _____________________________ refers to recognizing assets and
liabilities as of proper date and accounting for revenue, expense, and other
transactions in the proper period. 
________________________________________

100. The ASB balance objective related to _____________________________

is to establish with evidence that all transactions and accounts that should be
presented in the financial statements are included. 
________________________________________

1-38
 

101. The ASB transaction objective related to

_____________________________ is to determine whether proper values have
been assigned to all financial transactions. 
________________________________________

102. _____________________________ _____________________________ is
the study of business operations for the purpose of making recommendations to
managers on how to improve profitability. 
________________________________________

103. The _____________________________ is the accounting, auditing, and

investigating agency of the U.S. Congress. 
________________________________________

104. _____________________________ governmental auditing goes beyond an

audit of financial reports and compliance with laws and regulations to include
_____________________________ and _____________________________
and _____________________________ _____________________________
audits. 
________________________________________

105. The four basic requirements for becoming a CPA are

_____________________________, _____________________________,
_____________________________, and _____________________________. 
________________________________________

1-39
106. _____________________________ _____________________________ is
an auditor's tendency not to believe management assertions. 
________________________________________

1-40
 

107. A _____________________________ consists of writing up the financial

statements from a client's books and records. 
________________________________________

108. Through the process of _____________________________, after

becoming a CPA licensed in one state, a person can obtain a CPA certificate and
license in another state. 
________________________________________

109. Examples of _____________________________
_____________________________ are (1) economy and efficiency audits and
(2) program audits. 
________________________________________

 
 

Essay Questions
 

110. What are the differences between the American Accounting Association

and AICPA definitions and objectives of auditing? 

 
 

1-41
111. What is operational auditing and by whom is it performed? 

1-42
 

112. What is information risk? What is business risk? 

 
 

113. What are the four basic requirements for becoming a CPA? 

 
 

114. Define assurance, attestation, and auditing in the context of "lending

credibility." 

 
 

 This question is also in the Study Guide

1-43
 

115. Audits may be characterized as (a) financial statement audits, (b)

compliance audits, or (c) operational audits. The work can be done by (a)
independent (external) auditors, (b) internal auditors, or (c) government auditors.
Below is a list of several audit engagements. For each engagement indicate (a)
the type of audit and (b) who would typically do the audit.
1. Render an opinion on the fairness of the presentation of financial statements
of a public corporation.
2. Compare the cost of maintaining a fleet of delivery trucks with the option of
using an independent delivery service.
3. Audit reported income on a corporation's tax return.
4. Review contract cost of constructing aircraft engines for the armed services.
5. Report on how the installation of a new computer system would help a client
reduce data processing costs and improve financial reporting. 

 
 

1-44
Chapter 01 Auditing and Assurance Services Answer Key
 

Multiple Choice Questions

 

1. The audit objective that all transactions and accounts that should be presented
in the financial statements are in fact included is related to which of the PCAOB
assertions? 
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-45
2. To be proficient as an auditor, a person must first be able to accomplish which
of these tasks in a decision-making process? 
A. Identify audit evidence relevant to the verification of assertions management
makes in its unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain
sufficient, competent evidence about assertions management makes in financial
statements and notes.
C. Recognize the financial assertions made in management's financial
statements and footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide
whether management's assertions conform to generally accepted accounting
principles and reality.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard
 

1-46
3. Which of the following is an underlying condition that in part creates the
demand by users for reliable information? 
A. Economic transactions that are numerous and complex.
B. Decisions are time-sensitive.
C. Users separated from accounting records by distance and time.
D. Financial decisions that are important to investors and users.
E. All of the above.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

4. Which of the following is not included in The American Accounting

Association (AAA) definition of auditing? 
A. Potential conflict of interest.
B. Systematic process.
C. Assertions about economic actions.
D. Established criteria.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-47
5. What is the term used to identify the risk that the client's financial statements
may be materially false and misleading? 
A. Business risk.
B. Information risk.
C. Client risk.
D. Risk assessment.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
 

6. Which of the following is not a recommendation usually made following the

completion of an operational audit? 
A. Economic and efficient use of resources.
B. Effective achievement of business objectives.
C. Attesting to the fairness of the financial statements.
D. Compliance with company policies.

Original

AACSB: Communication
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Easy
 

1-48
7. In order to be considered as external auditors with respect to government
agencies, GAO auditors must be 
A. Organizationally independent.
B. Empowered as the accounting and auditing agency by the U.S. Congress.
C. Funded by the federal government.
D. Guided by standards similar to GAAS.

Original

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

8. Which of the following is the essential purpose of the audit function? 

A. Detection of fraud.
B. Examination of individual transactions to certify as to their validity.
C. Determination of whether the client's financial statement assertions are fairly
stated.
D. Assurance of the consistent application of correct accounting procedures.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Medium
 

1-49
9. The audit objective that all the transactions and accounts presented in the
financial statements represent real assets, liabilities, revenues, and expenses is
related most closely to which of the PCAOB assertions? 
A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

10. The audit objective that all transactions are recorded in the proper period is
related most closely to which of the Audit Standards Board (ASB) transaction
assertions? 
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-50
11. The audit objective that all transactions are recorded in the proper account is
related most closely to which one of the ASB transaction assertions? 
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

12. The audit objective that all balances include items owned by the client is
related most closely to which one of the ASB balance assertions? 
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-51
13. The audit objective that all balances include all items that should be recorded
in that account is related most closely to which one of the ASB balance
assertions? 
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

14. The audit objective that footnotes in the financial statements should be clear
and expressed such that the information is easily conveyed to the readers of the
financial statements is related most closely with which of the ASB presentation
and disclosure assertions? 
A. Occurrence
B. Rights and obligations
C. Comprehensibility
D. Understandability

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-52
15. The engineering department at Omni Company built a piece of equipment in
the company's own shop for use in the company's operations. The auditor
reviewed all work orders that were capitalized as part of the equipment costs.
Which of the following is the ASB transaction assertion most closely related to
the auditor's testing? 
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard
 

1-53
16. The engineering department at Omni Company built a piece of equipment in
the company's own shop for use in the company's operations. When looking at
the ending balance for the fixed asset account the auditor examined all work
orders, purchased materials, labor cost reports, and applied overhead that were
capitalized as part of the equipment costs. Which of the following is the ASB
balance assertion most closely related to the auditor's testing? 
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard
 

1-54
17. Which of the following best describes the primary role and responsibility of
independent external auditor? 
A. Produce a company's annual financial statements and notes.
B. Express an opinion on the fairness of a company's annual financial statements
and footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client's internal control structure and give
management a report about control problems and deficiencies.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-55
18. Which of the following best describes the main reason independent auditors
report on management's financial statements? 
A. Management fraud may exist, and it is likely to be detected by independent
auditors.
B. The management that prepares the statements and the persons who use the
statements may have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent
audit work.
D. The management that prepares the statements may have a poorly designed
system of internal control.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Bloom's: Comprehension
Difficulty: Medium
 

1-56
19. The auditor's judgment concerning the overall fairness of the presentation of
financial position, results of operations, and cash flows is applied within the
framework of 
A. Quality control.
B. Generally accepted auditing standards, which include the concept of
materiality.
C. The auditor's evaluation of the audited company's internal control.
D. The applicable financial reporting framework (i.e., GAAP in the United
States).

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

20. Assurance services involve all of the following, except 

A. Relevance as well as the reliability of information.
B. Nonfinancial information as well as traditional financial statements.
C. Providing absolute rather than reasonable assurance.
D. Electronic databases as well as printed reports.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-57
21. Because of the risk of material misstatement, an audit of financial statements
in accordance with generally accepted auditing standards should be planned and
performed with an attitude of 
A. Objective judgment.
B. Independent integrity.
C. Professional skepticism.
D. Impartial conservatism.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
 

22. Which of the following best describes assurance services? 

A. Independent professional services that report on the client's financial
statements.
B. Independent professional services that improve the quality of information for
decision makers.
C. Independent professional services that report on specific written management
assertions.
D. Independent professional services that improve the operations of the client.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-58
23. Which of the following is not a PCAOB assertion about inventory related to
presentation and disclosure? 
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at its cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed
in notes.
D. All of the above are PCAOB presentation and disclosure assertions about
inventory.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

24. Which of the following is not an ASB assertion about inventory related to

presentation and disclosure? 
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed
in notes.
D. All of the above are ASB presentation and disclosure assertions about
inventory.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-59
25. In performing an attestation engagement, a CPA typically 
A. Supplies litigation support services.
B. Assesses control risk at a low level.
C. Expresses a conclusion on an assertion about some type of subject matter.
D. Provides management consulting advice.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

26. An attestation engagement is one in which a CPA is engaged to 

A. Issue, or does issue, a report on subject matter or an assertion about the
subject matter that is the responsibility of another party.
B. Provide tax advice or prepare a tax return based on financial information the
CPA has not audited or reviewed.
C. Testify as an expert witness in accounting, auditing or tax matters, given
certain stipulated facts.
D. Assemble prospective financial statements based on the assumptions of the
entity's management without expressing any assurance.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-60
27. The underlying conditions that create demand by users for reliable
information include all of the following, except: 
A. Transactions are numerous and complex.
B. Users lack professional skepticism.
C. Users are separated from accounting records by distance and time.
D. Financial decisions are important to investors and users.
E. Decisions are time-sensitive.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

28. Cutoff tests designed to detect credit sales made before the end of the year
that have been recorded in the subsequent year provide assurance about the
PCAOB assertion of 
A. Presentation.
B. Completeness.
C. Rights.
D. Existence.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-61
29. Inquiries of warehouse personnel concerning possible obsolete or slow
moving inventory items provide assurance about the PCAOB assertion of 
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

30. Inquiries of warehouse personnel concerning possible obsolete or slow

moving inventory items provide assurance about the ASB balance assertion of 
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-62
31. The probability that the information circulated by a company will be false or
misleading is referred to as 
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
 

32. The Sarbanes-Oxley Act of 2002 requires that the key company officials
certify the financial statements. Certification means that the company CEO and
CFO must sign a statement indicating: 
A. They have read the financial statements.
B. They are not aware of any false or misleading statements (or any key omitted
disclosures).
C. They believe that the financial statements present an accurate picture of the
company's financial condition.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-63
33. The process of a CPA obtaining a certificate and license in a state other than
the state in which the CPA's certificate was originally obtained is referred to as 
A. Substantial equivalency.
B. Quid pro quo.
C. Relicensing.
D. Re-examination.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

34. The risk an entity will fail to meet its objectives is referred to as 
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
 

1-64
35. The four basic requirements for becoming a CPA in most states are 
A. Education, the CPA Examination, experience, and substantial equivalency.
B. The CPA Examination, experience, continuing professional education, and a
state certificate.
C. Continuing professional education, the CPA Examination, experience, and an
AICPA certificate.
D. Education, the CPA Examination, experience, and a state certificate.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

36. The study of business operations for the purpose of making

recommendations about the efficient use of resources, effective achievement of
business objectives, and compliance with company policies is referred to as 
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-65
37. The accounting, auditing, and investigating agency of the U.S. Congress,
headed by the U.S. Comptroller General is known as 
A. The Federal Bureau of Investigation (FBI).
B. The U.S. General Accounting Office (GAO).
C. The Internal Revenue Service (IRS).
D. The United States Legislative Auditors (USLA).

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

38. Which of the following would be considered an assurance engagement?

Refer To: 01-38 
A. Giving an opinion on a prize promoter's claims about the amount of
sweepstakes prizes awarded in the past.
B. Giving an opinion on the conformity of the financial statements of a
university with generally accepted accounting principles.
C. Giving an opinion on the fair presentation of a newspaper's circulation data.
D. Giving assurance about the average drive length achieved by golfers with a
client's golf balls.
E. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-66
39. It is always a good idea for auditors to begin an audit with the professional
skepticism characterized by the assumption that
Refer To: 01-38 
A. A potential conflict of interest always exists between the auditor and the
management of the enterprise under audit.
B. In audits of financial statements, the auditor acts exclusively in the capacity
of an auditor.
C. The professional status of the independent auditor imposes commensurate
professional obligations.
D. Financial statements and financial data are verifiable.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-67
40. In an attestation engagement, a CPA practitioner is engaged to
Refer To: 01-38 
A. Compile a company's financial forecast based on management's assumptions
without expressing any form of assurance.
B. Prepare a written report containing a conclusion about the reliability of a
management assertion.
C. Prepare a tax return using information the CPA has not audited or reviewed.
D. Give expert testimony in court on particular facts in a corporate income tax
controversy.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Medium
 

1-68
41. Determination of cost savings obtained by outsourcing cafeteria services is
most likely to be an objective of
Refer To: 01-38 
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-69
42. The primary difference between operational auditing and financial auditing
is that in operational auditing
Refer To: 01-38 
A. The operational auditor is not concerned with whether the audited activity is
generating information in compliance with financial accounting standards.
B. The operational auditor is seeking to help management use resources in the
most effective manner possible.
C. The operational auditor starts with the financial statements of an activity
being audited and works backward to the basic processes involved in producing
them.
D. The operational auditor can use analytical skills and tools that are not
necessary in financial auditing.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-70
43. According to the AICPA, the purpose of an audit of financial statements is to

Refer To: 01-38 

A. Enhance the degree of confidence that intended users can place in the
financial statements.
B. Express an opinion on the fairness with which they present financial position,
results of operations, and cash flows in conformity with accounting standards
promulgated by the Financial Accounting Standards Board.
C. Express an opinion on the fairness with which they present financial position,
result of operations, and cash flows in conformity with accounting standards
promulgated by the U.S. Securities and Exchange Commission.
D. Obtain systematic and objective evidence about financial assertions and
report the results to interested users.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-71
44. Bankers who are processing loan applications from companies seeking large
loans will probably ask for financial statements audited by an independent CPA
because
Refer To: 01-38 
A. Financial statements are too complex to analyze themselves.
B. They are too far away from company headquarters to perform accounting and
auditing themselves.
C. The consequences of making a bad loan are very undesirable.
D. They generally see a potential conflict of interest between company managers
who want to get loans and the bank's needs for reliable financial statements.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-72
45. The Sarbanes-Oxley Act of 2002 prohibits professional service firms from
providing which of the following services to an audit client?
Refer To: 01-38 
A. Bookkeeping services.
B. Internal audit services.
C. Valuation services.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

46. Independent auditors of financial statements perform audits that reduce

Refer To: 01-38 
A. Business risks faced by investors.
B. Information risk faced by investors.
C. Complexity of financial statements.
D. Timeliness of financial statements.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-73
47. The primary objective of compliance auditing is to
Refer To: 01-38 
A. Give an opinion on financial statements.
B. Develop a basis for a report on internal control.
C. Perform a study of effective and efficient use of resources.
D. Determine whether an audit client's personnel are following laws, rules,
regulations, and policies.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

48. What requirements are usually necessary to become licensed as a CPA?

Refer To: 01-38 
A. Successful completion of the Uniform CPA Examination.
B. Experience in the accounting field.
C. Education.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-74
49. The organization primarily responsible for ensuring that public officials are
using public funds efficiently, economically, and effectively is the
Refer To: 01-38 
A. Governmental Internal Audit Agency (GIAA).
B. Central Internal Auditors (CIA).
C. Securities and Exchange Commission (SEC).
D. Government Accountability Office (GAO).

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

50. Performance audits usually include (two answers)

Refer To: 01-38 
A. Financial audits.
B. Economy and efficiency audits.
C. Compliance audits.
D. Program audits.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-75
51. The objective in an auditor's review of credit ratings of a client's customers
is to obtain evidence related to management's financial statement assertion about

Refer To: 01-38 

A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-76
52. Jones, CPA, is planning the audit of Rhonda's Company. Rhonda verbally
asserts to Jones that all expenses for the year have been recorded in the
accounts. Rhonda's representation in this regard
Refer To: 01-38 
A. Is sufficient evidence for Jones to conclude that the completeness assertion is
supported for expenses.
B. Can enable Jones to minimize the work on the gathering of evidence to
support Rhonda's completeness assertion.
C. Should be disregarded because it is not in writing.
D. Is not considered a sufficient basis for Jones to conclude that all expenses
have been recorded.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-77
53. The risk to investors that a company's financial statements may be materially
misleading is called
Refer To: 01-38 
A. Client acceptance risk.
B. Information risk.
C. Moral hazard.
D. Business risk.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-78
54. When auditing merchandise inventory at year-end, the auditor performs
audit procedures to ensure that all goods purchased before year-end are received
before the physical inventory count. This audit procedure provides assurance
about which management assertion?
Refer To: 01-38 
A. Cutoff.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-79
55. When auditing merchandise inventory at year-end, the auditor performs
audit procedures to obtain evidence that no goods held on consignment are
included in the client's ending inventory balance. This audit procedure provides
assurance about which management assertion?
Refer To: 01-38 
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-80
56. When an auditor reviews additions to the equipment (fixed asset) account to
make sure that repair and maintenance expenses are not understated, she wants
to obtain evidence as to management's assertion regarding
Refer To: 01-38 
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-81
57. The Sarbanes-Oxley Act of 2002 generally prohibits professional service
firms from
Refer To: 01-38 
A. Acting in a managerial decision-making role for an audit client.
B. Auditing the firm's own work on an audit client.
C. Providing tax consulting to an audit client without audit committee approval.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-82
58. Substantial equivalency refers to
Refer To: 01-38 
A. An auditor's tendency not to believe management's assertions without
sufficient corroboration.
B. Providing consulting work for another firm's audit client in exchange for the
other firm's providing consulting services to one of your clients.
C. The waiving of certification exam parts for an individual holding an
equivalent certification from another professional organization.
D. Permitting a CPA to practice in another state without having to obtain a
license in that state.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-83
59. Which of the following best describes the relationship between auditing and
attestation engagements?
Refer To: 01-38 
A. Auditing is a subset of attestation engagements that focuses on the
certification of financial statements.
B. Attestation is a subset of auditing that provides lower assurance than that
provided by an audit engagement.
C. Auditing is a subset of attestation engagements that focuses on providing
clients with advice and decision support.
D. Attestation is a subset of auditing that improves the quality of information, or
its context, for decision makers.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-84
60. Which of the following best describes the focus of the following
engagements?

   
Refer To: 01-38 
A. Option A
B. Option B
C. Option C
D. Option D

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard
 

1-85
61. Which of the following is a reason to obtain professional certification?
Refer To: 01-38 
A. Certification provides credibility that an individual is technically competent.
B. Certification often is a necessary condition for advancement and promotion
within a professional services firm.
C. Obtaining certification is often monetarily rewarded by an individual's
employer.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-86
 Question also found in Study Guide

62. Which of the following is not an underlying condition that creates demand

by users for reliable financial information? 
A. Remoteness
B. Vagueness
C. Consequences
D. Complexity

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

1-87
63. According to the American Accounting Association (AAA), the definition of
auditing includes the following statement 
A. an independent appraisal function established within an organization to
examine and evaluate its activities.
B. a process of reducing to a socially acceptable level the information risk to
users of financial statements.
C. an expression of opinion on the fairness of financial statements.
D. a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-88
64. Which of the following is not a major element of assurance services? 
A. Independence
B. Improving the quality of information
C. Improving profitability of the client
D. Improving the context of information

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

65. The goal of operational auditing is to 

A. Help managers discharge their management responsibilities and improve
profitability.
B. Evaluate compliance with specific laws and regulations.
C. Reduce to a socially acceptable level the information risk to users of financial
statements.
D. Express an opinion on the fairness of financial statements.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-89
66. The PCAOB assertions made by management in financial statements do not
include 
A. Existence.
B. Compliance.
C. Completeness.
D. Presentation.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-90
67. Which of the following is not a role of the AICPA? 
A. Refine the body of professional knowledge, regulate membership admissions,
and police conduct of members.
B. Prepare and grade the uniform CPA examination.
C. License the practices of CPAs in the various states.
D. Issue public statements on practice standards.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

68. The ASB transaction objective that requires the auditor to establish evidence
that all transactions and accounts that should be presented in the financial
statements are included is? 
A. Completeness.
B. Existence or occurrence.
C. Rights and obligations.
D. Valuation or allocation.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-91
69. Which of the following is an example of a regulatory auditor? 
A. Internal auditors
B. Big 4 auditors
C. U.S. Internal Revenue Service auditors
D. Operational auditors

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

70. The definition of performance audits does not include 

A. economy audits.
B. efficiency audits.
C. financial audits.
D. program audits.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-92
71. CPA certificates and licenses to practice are issued by the 
A. AICPA.
B. States or territories.
C. AICPA Examinations Division.
D. GAO.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 
 

1-93
Matching Questions
 

 Question also found in Study Guide

72. Which of the PCAOB assertions (A - E) are best verified by the following

audit procedures (1-4)? 

1. Valuation or      Confirming inventory held on consignment by

allocation  the client with independent third party.   4 
2. Valuation or      Consulting the Wall Street Journal for year-
allocation  end prices of securities held by the client.   1 
3. Existence or      Physically examine all major property and
occurrence  equipment additions.   3 
4. Rights and      Review the aged trial balance for significant
obligations  past due accounts.   1 
 

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard
 

1-94
73. ABC Company had a major sale to XYZ Company. This sale accounted for
20% of the revenue of ABC Company. The auditors performed the audit
procedures listed 1 - 3. For each audit procedure select the ASB transaction
assertion that is most likely being tested. 

     The auditor reviewed the shipping documents to

1. Completene check the date that product was shipped to XYZ
ss  Company.   2 
     The auditor reviewed the shipping documents to
ensure that all product included in the sales revenue
2. Cutoff  to XYZ had been shipped.   1 
     The auditor reviewed the invoice sent to XYZ
Company to ensure that XYZ had been properly
3. Accuracy  billed.   3 
 

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard
 

1-95
74. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors
performed the audit procedures listed 1 - 5. For each audit procedure select the
ASB balance assertion that is most likely being tested. 

     The auditors walked through the warehouse

1. Valuation  looking for obsolete inventory.   1 
     The auditors compared invoices received from
2. Rights and suppliers with the cost of inventory listed in the
obligations  inventory accounts.   5 
     The auditors reviewed purchase orders to
3. Valuation  determine if any inventory was on consignment.   2 
     The auditors reviewed vendor invoices to
determine if freight costs, taxes, tariffs or other
4. Completeness  costs had been included in inventory costs.   1 
     The auditors selected items from the inventory
and reviewed inventory records to ensure these
5. Accuracy  items were included in those records.   4 
 

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard
 
 

True / False Questions

 

 Questions also found in Study Guide

75. Financial decision makers demand reliable information that is provided by

accountants. 
TRUE

1-96
76. Financial decision makers obtain their accounting information from lenders
of funds. 
FALSE

1-97
77. Four conditions that create demand for reliable information are complexity,
remoteness, timeliness, and consequences. 
TRUE

78. The lending of credibility to financial information is known as certification. 

FALSE

79. Independent auditors are employees of the client. 

FALSE

80. Assurance service is the systematic process of objectively obtaining and

evaluating evidence. 
FALSE

81. Evidence consists of assertions about economic actions and events. 

FALSE

82. The purpose of obtaining and evaluating evidence is to ascertain the degree

of correspondence between the assertions and established criteria. 
TRUE

83. The AICPA Statement on Auditing Standards defines auditing more broadly

than the AAA definition of auditing. 
FALSE

1-98
84. The PCAOB audit objective related to the completeness assertion is to
establish evidence that assets, liabilities, and equities actually exist. 
FALSE

1-99
85. The ASB balance audit objective related to valuation or accuracy is to
determine whether proper values have been assigned to assets, liabilities,
equities, revenues, and expenses. 
TRUE

86. The objective of internal auditing is to assist members of an organization to

effectively perform their obligations. 
TRUE

87. Internal auditors perform only operational audits. 

FALSE

88. Government auditors perform both financial and performance audits. 

TRUE

89. Expanded scope governmental auditing includes economy and efficiency

and program results audits. 
TRUE

90. The AICPA licenses CPAs to practice in the United States. 

FALSE

91. Professional skepticism is an auditor's tendency not to believe anyone. 

FALSE

1-100
92. Assurance services are independent professional services that improve the
quality of information or its context for decision makers. 
TRUE

1-101
93. The concept "professional skepticism" requires that auditors assume
management is dishonest and should not be trusted. 
FALSE

94. For independent auditors of financial statements in the United States,

established criteria largely consist of the generally accepted accounting
principles (GAAP). 
TRUE

 
 

Fill in the Blank Questions

 

 Questions also found in Study Guide

95. The risk that the information disseminated by a company will be materially

false or misleading is called _____________________________
_____________________________. 
information risk

96. The audit process involves obtaining and evaluating

_____________________________. 
evidence

1-102
97. The purpose of obtaining and evaluating evidence is to ascertain the degree
of correspondence between the _____________________________ and
_____________________________. 
assertions, established criteria

98. The objective of the ordinary examination of financial statements by the

independent auditor is the expression of a(n)
_____________________________ on the _____________________________
of financial statements. 
opinion, fairness

1-103
99. _____________________________ refers to recognizing assets and
liabilities as of proper date and accounting for revenue, expense, and other
transactions in the proper period. 
Cutoff

100. The ASB balance objective related to _____________________________

is to establish with evidence that all transactions and accounts that should be
presented in the financial statements are included. 
completeness

101. The ASB transaction objective related to

_____________________________ is to determine whether proper values have
been assigned to all financial transactions. 
accuracy

102. _____________________________ _____________________________ is
the study of business operations for the purpose of making recommendations to
managers on how to improve profitability. 
Operational auditing

103. The _____________________________ is the accounting, auditing, and

investigating agency of the U.S. Congress. 
GAO

1-104
104. _____________________________ governmental auditing goes beyond an
audit of financial reports and compliance with laws and regulations to include
_____________________________ and _____________________________
and _____________________________ _____________________________
audits. 
Expanded-scope, economy, efficiency, program results

1-105
105. The four basic requirements for becoming a CPA are
_____________________________, _____________________________,
_____________________________, and _____________________________. 
education, examination, experience, state certificate and license

106. _____________________________ _____________________________ is
an auditor's tendency not to believe management assertions. 
Professional skepticism

107. A _____________________________ consists of writing up the financial

statements from a client's books and records. 
compilation

108. Through the process of _____________________________, after

becoming a CPA licensed in one state, a person can obtain a CPA certificate and
license in another state. 
Substantial equivalency

109. Examples of _____________________________
_____________________________ are (1) economy and efficiency audits and
(2) program audits. 
performance audits

 
 

1-106
Essay Questions
 

110. What are the differences between the American Accounting Association

and AICPA definitions and objectives of auditing? 

The AAA definition is broad and general enough to encompass independent,

internal, and governmental auditing. The AICPA has not defined auditing but its
statement on objectives of financial audits restricts auditing to independent
CPA's audit of the traditional financial statements and their footnotes. The
AICPA SAS also offers guides to report on internal control, letters to
underwriters, and special reports.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
 

1-107
111. What is operational auditing and by whom is it performed? 

Operational auditing is the evaluation of business operations for various

purposes. Operational auditing includes: (1) testing for compliance with laws
and regulations and company policies and procedures, (2) evaluating the
effectiveness of operations in achieving goals and objectives, and (3) evaluating
the efficiency and economy of operations. Operational audits are normally
performed by internal auditors. However, operational audits also may be
conducted by independent CPA firms as part of their management advisory
services.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-108
 

112. What is information risk? What is business risk? 

Information risk is the risk that financial statements will be materially false or
misleading. Business risk is the risk an entity will fail to meet its objectives.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

113. What are the four basic requirements for becoming a CPA? 

Education, the CPA Examination, experience, and a state certificate.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
 

1-109
114. Define assurance, attestation, and auditing in the context of "lending
credibility." 

Assurance is the "lending of credibility" to information. Attestation is the

"lending of credibility" to assertions made by a third party. Auditing is the
"lending of credibility" to financial statements.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
 

 This question is also in the Study Guide

1-110
115. Audits may be characterized as (a) financial statement audits, (b)
compliance audits, or (c) operational audits. The work can be done by (a)
independent (external) auditors, (b) internal auditors, or (c) government auditors.
Below is a list of several audit engagements. For each engagement indicate (a)
the type of audit and (b) who would typically do the audit.
1. Render an opinion on the fairness of the presentation of financial statements
of a public corporation.
2. Compare the cost of maintaining a fleet of delivery trucks with the option of
using an independent delivery service.
3. Audit reported income on a corporation's tax return.
4. Review contract cost of constructing aircraft engines for the armed services.
5. Report on how the installation of a new computer system would help a client
reduce data processing costs and improve financial reporting. 

   

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard
 

1-111