1. A basic assumption that underlies financial reporting is that an entity will continue as a going concern. A. True
2. A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report. A. False
3. A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor’s opinion. Which kind of audit report would an auditor most likely issue under these circumstances? A. qualified opinion due to departure from GAAP
4. A going concern issue requires a modification of the three-paragraph standard unqualified audit report (public company). A. True
5. A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substantial effect in later years. The client’s financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): A. unqualified opinion.
6. A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s A. Audit working papers.
7. A written understanding between the auditor and the client concerning the auditor’s responsibility for the discovery of illegal acts is usually set forth in a(n) A. Engagement letter.
8. A written understanding between the auditor and the entity concerning the auditor’s responsibility for fraud is usually set forth in a(n) A. engagement letter.
9. An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably A. Disclose the fraud to the appropriate level of the client’s management.
10. An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: A. is appropriate and would not negate the unmodified opinion.
12. An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes A. The auditor’s responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud.
13. An auditor obtains knowledge about a new client’s business and its industry in order to A. Understand the events and transactions that may have an effect on the client’s financial statements.
14. An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a large foreign subsidiary. Between which of the following reports should the auditor choose? A. Qualified and disclaimer.
15. An auditor would issue an adverse opinion if A. the statements taken as a whole do not fairly present the financial condition and results of operations of the company.
16. An independent audit adds value to the communication of financial information because the audit A. lends credibility to the financial statements
17. An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified audit report. A. False
18. As generally conceived, the audit committee of a publicly held company should be made up of A. Members of the board of directors who are not officers or employees.
19. As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to A. find smaller errors.
20. As the acceptable level of detection risk decreases, an auditor may change the A. Nature of substantive procedures from less effective to more effective procedures.
21. Assurance services may improve all of the following except A. periodicity
22. Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? A. Whether management has any knowledge of fraud that has been perpetrated on or within the entity.
23. 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. Professional skepticism.
24. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s A. understanding as to the reasons for the change of auditors.
25. Comparative financial statements for a public company include the prior year’s statements, which were audited by a predecessor auditor. The predecessor’s report is not presented along with the comparative financial statements. If the predecessor’s report was unqualified, the successor should: A. indicate in the auditor’s report that the predecessor auditor expressed an unqualified opinion.
26. Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle’s inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: A. a qualified opinion or a disclaimer of opinion.
27. Engagement letters include all of the following except: A. A list of adjusting journal entries.
28. Evaluating a prospective client requires which of the following steps? A. Determine if the firm is independent of the client.
29. Evidence is reliable if it A. Signals the true state of a management assertion.
30. For publicly-held companies, which of the following is integrated into the audit of financial statements? A. The audit of internal controls.
31. For what primary purpose does the auditor obtain an understanding of the entity and its environment? A. to plan the audit and determine the nature, timing and extent of audit procedures to be performed
32. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the A. Integrity of management.
33. If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors’ A. competence and objectivity.
34. In the context of agency theory, information asymmetry refers to the idea that A. Management has more information about the entity’s true financial position than do the absentee owners (i.e. stockholders).
35. In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client’s financial statements? A. Inability of the auditor to obtain sufficient competent evidence.
36. In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? A. The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor’s opinion.
37. Increased fraud risk could result in all of the following except :A. Lower control risk.
38. King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King’s financial statement audit report most likely contained a(n): A. unmodified opinion.
39. Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an) A. unqualified report with an explanatory/emphasis-of-matter paragraph.
40. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would A. Decrease detection risk.
41. Operational auditing is oriented primarily toward A. efficiency and future improvements to accomplish the goals of management.
42. Risk of material misstatement refers to a combination of which two components of the audit risk model? A. Inherent risk and control risk.
43. Risk of material misstatement refers to a combination of which two components of the audit risk model? A. Inherent risk and control risk.
44. Tech Company has disclosed an uncertainty due to pending litigation. The auditor’s decision to issue a qualified opinion on Tech’s financial statements would most likely result from A. a lack of sufficient evidence.
45. The acceptable level of detection risk is inversely related to the A. Extent of the substantive procedures.
46. The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of A. The company’s management.
47. The achieved (actual) level of audit risk A. Can never be known with certainty.
48. The Audit Committee consists of A. Members of the Board of Directors.
49. The auditor can respond to an increased risk of fraud by doing all of the following except: A. Increasing detection risk.
50. The auditor must be independent of the auditee unless A. None of the above—the auditor cannot lack independence.
51. The basic purpose of a financial statement audit is to A. Provide assurance regarding whether the auditee’s financial statements are fairly stated.
52. The engagement partner and manager review the work of engagement team members to evaluate which of the following? A. All of these are correct.
53. The first PCAOB general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and A. Proficiency as an auditor, which likely has been acquired from previous experience.
54. The Public Company Accounting Oversight Board A. is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.
55. The Public Company Accounting Oversight Board’s role is to A. Oversee the auditors of public companies in order to protect the interests of investors.
56. The risk of material misstatement differs from detection risk in that it A. Exists independently of the actions of the auditor.
57. The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as A. Detection risk.
58. To provide for the greatest degree of independence in performing internal audit activities, the internal audit function most likely should report to the A. Audit committee of the board of directors.
59. Tolerable misstatement is A. materiality used to establish a scope for the audit procedures for the individual account balance or disclosures.
60. What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.? A. PCAOB.
61. When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the A. Extent of substantive tests.
62. When an auditor is asked to express an opinion on an entity’s rent and royalty revenues, he or she may: A. accept the engagement, provided the auditor’s opinion is expressed in a special report.
63. When an entity moves into a significant new line of business, all of the following increase except: A. Acceptable audit risk.
64. When planning an audit, an auditor should A. determine overall materiality for audit purposes.
65. When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year’s financial statements? A. A departure from generally accepted accounting principles caused an adverse opinion on the prior year’s financial statements, and those statements have been properly restated.
66. When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that: A. states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
67. When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor’s report should cover A. both years.
68. Which of the following best describes relationships among auditing, attest, and assurance services? A. auditing is a type of assurance service
69. Which of the following best describes the auditor’s responsibility for “other information” included in the annual report to stockholders that contains financial statements and the auditor’s report? A. The auditor has no obligation to corroborate the “other information” but should read the “other information” to determine whether it is materially inconsistent with the financial statements.
70. Which of the following best describes the concept of audit risk? A. The risk that the auditor will provide a “clean” opinion on financial statements that are, in fact, materially misstated.
71. Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance? A. Whether management has systems in place to evaluate and effectively manage the entity’s business risks.
72. Which of the following best describes the general character of the three PCAOB generally accepted auditing standards that are classified as standards of fieldwork? A. The criteria of audit planning and evidence-gathering.
73. Which of the following best describes the general character of the three generally accepted auditing standards classified as standards of field work? A. Criteria for audit planning and evidence gathering.
74. Which of the following best describes the relationship between business objectives, strategies, processes, controls, and transactions? A. To achieve its objectives, a business formulates strategies and implements processes, which are carried out through business transactions. The entity’s information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.
75. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements.
76. Which of the following best places the events of the last decade in proper sequence? A. Increased consulting services to auditees, Enron and other scandals, Sarbanes-Oxley Act, prohibition of most consulting work for auditees, establishment of PCAOB.
77. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements? A. Management places substantial emphasis on meeting earnings projections.
78. Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of field work and reporting? A. Materiality and audit risk.
79. Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of field work and reporting? A. Materiality and audit risk.
80. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern? A. Cash flows from operating activities are negative.
81. Which of the following describes the PCAOB generally accepted auditing standard requiring a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision? A. Due care.
82. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
83. Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States? A. Nonpublic company audits Public company audits
84. Which of the following is not a part of the role of internal auditors? A. Providing reports on the reliability of financial statements to investors and creditors.
85. Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting? A. financial statement misstatements might be more likely.
86. Which of the following procedures would not be used to obtain an understanding of the entity and its environment? A. Verify proper valuation of inventory subject to technological obsolescence.
87. Which of the following statements about the study of auditing is NOT true? A. The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements.
88. Which of the following statements best describes a relationship between sample size and other elements of auditing? A. If materiality decreases, sample size will need to increase.
89. Which of the following statements best describes management’s and the external auditor’s respective levels of responsibility for a public company’s financial statements? A. Management has the primary responsibility to ensure that the company’s financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement.
90. Which of the following statements best describes the role of materiality in a financial statement audit? A. the lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather
91. Which of the following statements best describes what is meant by an unqualified audit opinion? A. Issuance of a standard unqualified auditor’s report indicates that in the auditor’s opinion the client’s financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases.
92. Which of the following would an auditor most likely use in determining overall materiality when planning the audit? A. The entity’s income before taxes for the period-to-date (e.g., 6 months).
93. Which of the following would be considered a change that affects consistency? A. Change in accounting principle
94. Which of the following would be considered a nonattest assurance service engagement? A. Neither I nor II.
95. Which of these statements concerning illegal acts by clients is correct? A. An auditor’s responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and fraud.
96. Why do auditors generally use a sampling approach to evidence gathering? A. Auditors must balance the cost of the audit with the need for precision.
Other Links:
See other websites for quiz:
Check on QUIZLET