Chapter 1

Question 1

Independent auditing can be best described as

A) a professional activity that measures and communicates financial and business data
B) a discipline that attests to the results of accounting and other functional operations and data
C) a branch of accounting
D) a regulatory function that prevents the issuance of improper financial information

Answer 1

B) a discipline that attests to the results of accounting and other functional operations and data

Question 2

Which of the following professional services is an attestation engagement?

A) An income tax engagement to prepare federal and state tax returns
B) An engagement to report on compliance with statutory requirements
C) A consulting service engagement to provide computer processing advice to client
D) The compilation of financial statements from a client’s records

Answer 2

B) An engagement to report on compliance with statutory requirements

Question 3

Which of the following attributes is likely to be unique to audit work of CPAs as compared to the work performed by practitioners of other professions?

A) Independence
B) Competence
C) Due professional care
D) Complex body of knowledge

Answer 3

A) Independence

Question 4

Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide:

A) the results of internal examinations of financial and accounting matters to a company’s top-level management
B) a measure of management performance in meeting organizational goals
C) aid to the independent auditor, who is conducting the audit of financial statements
D) a means of assurance that internal accounting controls are functioning as planned

Answer 4

B) a measure of management performance in meeting organizational goals

Question 5

In comparison to the external auditor, an internal auditor is more likely to be concerned with

A) internal control
B) cost accounting procedures
C) operational auditing
D) internal administrative control

Answer 5

C) operational auditing

Question 6

Which of the following best describes the operational audit?

A) It concentrates on implementing financial and accounting control in a newly organized company
B) It attempts and is designed to verify the fair presentation of a company’s results of operations
C) It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company
D) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls

Answer 6

D) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls

Question 7

Compliance auditing extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, as well as

A) accuracy
B) adherence to specific rules or procedures
C) internal control
D) evaluation

Answer 7

B) adherence to specific rules and procedures

Question 8

Define Auditing

Answer 8

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between information and established criteria.

Question 9

Auditing should be done a __________, __________ person.

Answer 9

Competent

Independent

Question 10

To do an audit, there must be information in a __________ form and some __________ by which the auditor can evaluate information.

Answer 10

Verifiable

Standards (criteria)

Question 11

Define Evidence

Answer 11

Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. (I.e. Transaction data, client testimony, written and electronic communications w/ outsiders, and observations)

Question 12

The __________ communicates the auditor’s findings to users.

Answer 12

Audit report

Question 13

Define Accounting

Answer 13

Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making.

Question 14

Auditing can have a significant effect on __________.

Answer 14

Information risk

Question 15

__________ reflects the possibility that the information upon which the business risk decision was made was inaccurate.

Answer 15

Information risk

Question 16

What are the causes of information risk?

Answer 16

1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
4. Complex exchange transactions

Question 17

How do we reduce information risk?

Answer 17

1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided

Question 18

What is the relationship between the client and auditor?

Answer 18

Client or audit committee hires auditor

Question 19

What is the relationship between the auditor and the external users?

Answer 19

Auditor issues report relied upon by users to reduce information risk

Question 20

What is the relationship between the client and the external users?

Answer 20

The client provides financial statements to the external users, while the external users provide the client with capital.

Question 21

An __________ is an independent professional service that improves the quality of information for decision makers.

Answer 21

Assurance service

Question 22

__________ can be performed by CPAs or by a variety of other professionals. (I.e. Consumer Reports & Better Business Bureau)

Answer 22

Assurance services

Question 23

An __________ is a type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is made by another party.

Answer 23

Attestation service

Question 24

What are the other types of attestation services?

Answer 24

1. Audit of Historical Financial Statements
2. Audit of Internal Control over Financial Reporting
3. Review of Historical Financial Statements
4. Attestation Services on Information Technology

Question 25

What other type assurance services are available?

Answer 25

1. Controls over and risks related to investments, including policies related to derivatives
2. Mystery shopping
3. Assess risks of accumulation, distribution, and storage of digital information
4. Fraud and illegal acts risk assessment
5. Organic ingredients
6. Compliance with entertainment royalty agreements
7. ISO 9000 Certifications
8. Corporate responsibility and sustainability

Question 26

What are some examples of non-assurance services?

Answer 26

1. Other management consulting
2. Accounting and bookkeeping
3. Tax services

Question 27

Define Operational Audit

Answer 27

An operational audit evaluates the efficiency and effectiveness of any part of an organizations operating procedures and methods.

Question 28

Define Compliance Audit

Answer 28

It is (1) a review of an organizations financial records performed to determine whether the organization is following specific procedures, rules, or rules set by some higher authority.

(2) An audit performed to determine whether an entity receives financial assistance from the federal government has complied with specific laws and regulations.

Question 29

Define Financial Statement Audit

Answer 29

An audit conducted to determine the overall financial statement of an entity are stated in accordance with specified criteria (usually U.S. Or International accounting standards)

Auditor must have a thorough understanding of the entity and its environment

Question 30

What is XBRL?

Answer 30

Extensible Business Reporting Language

It enables sorting and comparing of financial data.

Public companies required to provide interactive financial statement data.

Question 31

What is a Certified Public Accounting Firm?

Answer 31

Responsible for auditing the published historical financial statements of all publicly traded companies, most other reasonably large companies, and many smaller companies and no commercial organizations. (AKA “external auditors” or “independent auditors”)

Question 32

What are Government Accountability Office Auditors?

Answer 32

An auditor working for the U.S. Government Accountability Office (GAO); The GAO reports to and is responsible solely to Congress.

Question 33

What are Internal Revenue Agents?

Answer 33

Auditors who work for the Internal Revenue Service (IRS) and conduct examinations of taxpayers returns.

Question 34

What are Internal Auditors?

Answer 34

Auditors employed by a company to audit for the company’s board of directors and management.

Lack independence compared to CPA firms

Question 35

What is a Certified Public Accountant (CPA)?

Answer 35

A person who has met state regulatory requirements, including passing the uniform CPA examination, and has thus been certified; a CPA may have as his or her primary responsibility the performance of the audit function on published historical financial statements of commercial and non commercial financial entities.

Question 36

What is the educational requirement to become a CPA?

Answer 36

Undergraduate/Graduate degree in accounting with 150 semester credit hours (225 quarter credits)

Question 37

What is the Uniform CPA Exam requirement?

Answer 37

1. Auditing and Attestation (AUD) - 4 hours
2. Financial Accounting and Reporting (FAR) - 4 hours
3. Regulation (REG) - 3 hours
4. Business Environment and Concepts (BEC) - 3 hours

Question 38

What is the experience requirement to become a CPA?

Answer 38

Varies widely from no experience to 2 years, including auditing

Question 39

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

A) It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements
B) It is difficult to prepare financial statements that fairly present a company’s financial position, operations, and cash flows without the expertise of an independent auditor
C) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements
D) It is a customary courtesy that all stockholders of a company receive and independent report on management’s stewardship of the affairs of business

Answer 39

C) The opinion of an independent auditor is needed because a company may not be objective with respect to its own financial statements