Chapter 5 TB

Question 1

(T/F) The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA.

Answer 1

FALSE

Question 2

(T/F) Auditors in the U.S. follow guidance issued by the PCAOB, AICPA, and the IAASB.

Answer 2

TRUE

Question 3

(T/F) The PCAOB is committed to merging its standards with those of the AICPA and the IAASB.

Answer 3

FALSE

Question 4

(T/F) An auditor would follow the PCAOB’s guidance when auditing a company whose stock is traded on the London Stock Exchange if the company conducts operations in multiple U.S. cities.

Answer 4

FALSE

Question 5

(T/F) The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results.

Answer 5

TRUE

Question 6

(T/F) Auditors are responsible for having the appropriate competence and capabilities to perform the audit, complying with ethical requirements, and maintaining professional skepticism throughout the audit.

Answer 6

TRUE

Question 7

(T/F) An audit must be performed by persons who can make sound judgments relating to complex accounting issues.

Answer 7

TRUE

Question 8

(T/F) The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement.

Answer 8

FALSE

Question 9

(T/F) PCAOB guidance includes standards on certain auditor responsibilities related to SEC filings.

Answer 9

TRUE

Question 10

(T/F) In some circumstances, the auditor will not express an opinion on the financial statements but will instead state that an opinion cannot be expressed.

Answer 10

TRUE

Question 11

(T/F) The common purpose of auditing standards created by the various authorities is to provide reasonable assurance that audits are conducted in a quality manner.

Answer 11

TRUE

Question 12

(T/F) The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining reasonable assurance that the statements are free from misstatement.

Answer 12

FALSE

The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining absolute assurance that the statements are free from misstatement.

Question 13

(T/F) If controls are effective, there is a higher likelihood that the financial statements are free of material misstatement.

Answer 13

TRUE

Question 14

(T/F) The activities performed by the auditor throughout the opinion formulation process are determined by whether the auditor is conducting a financial statement audit only or an integrated audit.

Answer 14

FALSE

Question 15

(T/F) The cycle approach to auditing is a convenient way to break the audit into manageable time periods.

Answer 15

FALSE

The cycle approach to auditing is a convenient way to break the audit such that closely related types of transactions and account balances are included in the same cycle.

Question 16

(T/F) Comparability is one of the five management assertions.

Answer 16

FALSE

Question 17

(T/F) Making client acceptance and continuance decisions is the first phase of the audit opinion formulation process.

Answer 17

TRUE

Question 18

(T/F) An auditor should give equal emphasis to all management assertions when testing accounts.

Answer 18

FALSE

Question 19

(T/F) The revenue cycles includes transactions related to revenue such as sales, receivables, and gain or loss from disposal of equipment.

Answer 19

FALSE

Capital gain is not included in the revenue cycle.

Question 20

(T/F) An audit firm’s portfolio management includes client acceptance and continuance decisions that occur before the audit opinion formation process is initiated.

Answer 20

FALSE

Question 21

(T/F) Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for the auditor’s opinion.

Answer 21

TRUE

Question 22

(T/F) Audit documentation would not include analyses prepared by the client.

Answer 22

FALSE

Audit documentation includes:
- analyses prepared by the client
- audit programs summarizing audit procedures

Question 23

(T/F) Developing an understanding of the client’s business and industry is essential to the auditor’s assessment of risk.

Answer 23

TRUE

Question 24

(T/F) Tests of controls are a type of substantive procedure.

Answer 24

FALSE

Question 25

(T/F) The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies.

Answer 25

FALSE ## Footnote The Public Company Accounting Oversight Board (PCAOB) sets specific standards for audits of public companies.

Question 26

(T/F) Tests of controls are procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements.

Answer 26

FALSE ## Footnote Risk assessment procedures are procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements.

Question 27

(T/F) The auditor performs substantive procedures to detect material misstatements in account balances.

Answer 27

TRUE

Question 28

(T/F) Audit procedures can be classified as risk assessment procedures, tests of controls, or substantive procedures.

Answer 28

TRUE

Question 29

(T/F) Assertions about existence address whether assets and liabilities exist, and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred.

Answer 29

TRUE

Question 30

(T/F) The first phase in the audit opinion formulation process is performing a risk assessment.

Answer 30

FALSE ## Footnote The first phase in the audit opinion formulation process is *making client acceptance and continuance decisions.*

Question 31

(T/F) Physically inspecting a client’s assets is an audit procedure.

Answer 31

TRUE

Question 32

(T/F) Audit documentation is frequently referred to as working papers.

Answer 32

TRUE

Question 33

(T/F) Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure, and which could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Answer 33

TRUE

Question 34

(T/F) Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls.

Answer 34

FALSE ## Footnote Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be *material,* either individually or when aggregated with other misstatements, before consideration of any related controls.

Question 35

(T/F) There is an inverse relationship between the assessment of risk of material misstatement in an account and the amount of evidence required.

Answer 35

FALSE

Question 35

(T/F) The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work.

Answer 35

TRUE

Question 36

(T/F) The effectiveness of entity-wide controls may reduce the extent of testing of transaction controls.

Answer 36

TRUE

Question 37

(T/F) When assessing the effectiveness of controls for relevant assertions, the auditor tests only transaction controls.

Answer 37

FALSE

Question 38

(T/F) The auditor is not required to test every control related to relevant assertions in a significant account.

Answer 38

TRUE

Question 39

(T/F) For an integrated audit, the auditor’s opinion about internal control effectiveness is based on control effectiveness at year-end as opposed to throughout the year.

Answer 39

TRUE

Question 40

(T/F) A controls reliance audit includes substantive procedures and does not include tests of controls.

Answer 40

FALSE ##Footnote *Substantive audit* includes substantive procedures and does not include tests of controls.

Question 41

(T/F) Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements.

Answer 41

TRUE

Question 42

(T/F) Presentation and disclosure assertions address whether components of the financial statements are properly classified, described, and disclosed.

Answer 42

TRUE

Question 43

(T/F) The PCAOB does not currently have a mandate for convergence with other auditing standards.

Answer 43

TRUE

Question 44

(T/F) Substantive analytical procedures are optional for significant accounts and disclosures.

Answer 44

TRUE

Question 45

(T/F) In performing substantive tests on account balances, the auditor performs tests for all five assertions.

Answer 45

FALSE

Question 46

(T/F) If the auditor assesses internal controls to be effective, substantive testing likely will be performed for some, but not all, significant accounts and disclosures.

Answer 46

FALSE

Question 47

(T/F) If the auditor's assessment is that there is high risk due to the subjectivity of the accounting process, substantive procedures should be more rigorous.

Answer 47

TRUE

Question 48

(T/F) An integrated audit requires the issuance of separate reports for the opinions expressed on the financial statements and on internal control.

Answer 48

FALSE ## Footnote An integrated audit is one that combines an examination of financial statements with an evaluation of internal financial controls.

Question 49

(T/F) In an integrated audit, the auditor issues an opinion on both the financial statements and internal control.

Answer 49

TRUE

Question 50

The PCAOB’s General Auditing Standards requires that an audit be performed by which type of person? An auditor with seasoned judgment in varying degrees of supervision and review. An auditor having the appropriate professional qualifications. An auditor with adequate technical and leadership skills. All of the above.

Answer 50

An auditor having the appropriate professional qualifications.

Question 51

Which auditing standards apply to private companies? The AICPA Standards. The IASSB Standards. The Standards of the PCAOB. All of the above.

Answer 51

The AICPA Standards.

Question 52

The *AICPA Principles Governing an Audit* include which of the following categories that guide the conduct of an audit? Purpose of an audit and premise upon which an audit is conducted. Responsibilities. Performance. All of the above.

Answer 52

All of the above.

Question 53

What is the scope of applicability of the auditing standards of the AICPA? Nonpublic companies traded in non-U.S. markets. Nonpublic companies in the U.S. Public companies traded in non-U.S. markets. Public companies traded in the U.S.

Answer 53

Nonpublic companies in the U.S.

Question 54

Which of the following is not required by the PCAOB’s General Auditing Standards category? Exercise due professional care. Obtain reasonable assurance as to whether internal controls are effective. Maintain an independence in mental attitude. Exercise professional skepticism.

Answer 54

Obtain reasonable assurance as to whether internal controls are effective.

Question 55

Which of the following organizations provides auditing standards for public companies? GAO. AICPA. GAAP. PCAOB.

Answer 55

PCAOB.

Question 56

Which of the following factors has the greatest effect on the reliability of financial statements? The size of the client The industry of the client The client’s internal control structure. The client’s trend of earnings.

Answer 56

The client’s internal control structure.

Question 57

What is management’s responsibility with respect to the conduct of an audit? Preparing financial statements. Maintaining internal control over financial reporting. Providing the auditor with relevant information and access to personnel. All of the above.

Answer 57

Preparing financial statements.

Question 58

Which of the following assertions address whether accounts have been included in the financial statements at appropriate amounts? Completeness assertion. Valuation or allocation assertion. Rights and obligations assertion. None of the above.

Answer 58

Valuation or allocation assertion.

Question 59

Which of the following is the primary assertion related to testing inventory on hand to see if it includes consignment goods? Existence. Completeness. Valuation. Rights and Obligations.

Answer 59

Rights and Obligations.

Question 60

Which assertion is most closely related to the determination of the adequacy of the allowance for doubtful accounts? Existence. Valuation. Rights and Obligations. Presentation and Disclosure.

Answer 60

Valuation.

Question 61

Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included? Existence. Valuation. Completeness. Rights and Obligations

Answer 61

Completeness.

Question 62

Which assertion addresses whether the financial statement items are properly classified in the financial statements? Completeness. Existence. Valuation. Presentation and Disclosure.

Answer 62

Presentation and Disclosure.

Question 63

Which of the following groups are committed to the convergence of the auditing standards? IAASB. PCAOB. AICPA. Both A and C. All of the above.

Answer 63

Both A and C.

Question 64

Which of the following is a procedure that requests a direct written response to the auditor from a third party? Inquiry. Confirmation. Inspection. Observation.

Answer 64

Confirmation.

Question 65

Which of the following is a procedure which analyzes plausible relationships among financial and nonfinancial data? Analytical procedures. Scanning. Reviewing. Observation.

Answer 65

Analytical procedures.

Question 66

What does the quality of the evidence an auditor collects depend upon? The nature of the procedures. The extent of the procedures. The timing of the procedures. Both A and C. All of the above

Answer 66

All of the above

Question 67

Which of the following terms describes procedures designed to detect material misstatements in accounts? Substantive procedures. Control tests. Risk assessment procedures. Business risk procedures.

Answer 67

Substantive procedures.

Question 68

When testing accounts receivable, which of the following audit procedures would an auditor likely use with respect to accounts with unusual sales terms? Inquiries. Confirmation. Contract review. Aging of receivables

Answer 68

Confirmation.

Question 69

Which of the following statements accurately describes the auditor’s reporting responsibility for a financial statement audit? The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. The auditor will identify in the auditor’s report those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonably accurate, the auditor must so state in the auditor’s report. The auditor will express an unqualified opinion on the financial statements or will conduct additional audit procedures until such an opinion can be expressed.

Answer 69

The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.

Question 70

Which of the following statements about the auditing standards issued by the AICPA is true? The auditing standards issued by the AICPA are no longer recognized by the PCAOB. The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of existence. The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies. The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

Answer 70

The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

Question 71

Which of the following is a reason why an auditor needs an understanding of internal controls? To provide individual comments on internal control non-compliance. To become comfortable that the client will pay its audit bills. To assess materiality. To assess the risk of possible misstatements in the financial statements

Answer 71

To assess the risk of possible misstatements in the financial statements

Question 72

Which of the following is not a reason why an auditor obtains an understanding of internal controls? Understanding the entity's internal control is a requirement of professional auditing standards. The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control. It is the primary basis for the audit report. It assists the auditor in designing the nature, timing, and extent of further audit procedures.

Answer 72

It is the primary basis for the audit report.

Question 73

Which type of audit documentation is required by PCAOB standards? Flowcharts. Narratives. Questionnaires. A specific form of documentation is not required.

Answer 73

A specific form of documentation is not required.

Question 74

Which of the following is not a typical accounting cycle? Revenue. Inventory. Cash. Internal controls.

Answer 74

Internal controls.

Question 75

Which of the following statements about assertions is true? All assertions are equally important for all accounts. The importance of an assertion depends upon the account. Assertions are not related to accounts. None of the above.

Answer 75

The importance of an assertion depends upon the account.

Question 76

Which of the following assertions would the auditor usually consider most relevant for accounts payable? Existence. Valuation. Disclosure. Completeness

Answer 76

Completeness

Question 77

Which of the following is a use of audit documentation? Assisting the engagement team in planning and performing the audit. Assisting members of the engagement team responsible for supervising and reviewing the audit work. Retaining a record of matters of continuing significance to future audits of the same organization. All of the above

Answer 77

All of the above

Question 78

Which of the following factors influence the risk of material misstatement? Business risks. Management incentives. IT risks. All of the above

Answer 78

All of the above

Question 79

What does business risk include? Economic factors. Competitive factors. Regulatory risk. All of the above.

Answer 79

All of the above.

Question 80

At what level does the auditor assess the risk of material misstatement? The financial statement level. The company level. The assertion level. Both A and C. All of the above.

Answer 80

Both A and C.

Question 81

What does the effectiveness of internal controls influence? Inherent risk. Control risk. Risk of material misstatement. Both B and C.

Answer 81

Both B and C.

Question 82

Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk? Controls over significant, unusual transaction. Controls over related-party transactions. Controls related to marketable securities. Controls related to significant management estimates.

Answer 82

Controls related to marketable securities.

Question 83

Which statement is true concerning materiality? Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements. Materiality guidelines are specifically prescribed by the PCAOB. Materiality is not a useful concept in assessing internal control effectiveness. Materiality is a concept applied to financial statement presentation but not to disclosures.

Answer 83

Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements.

Question 84

Which of the following statements is true regarding client acceptance or continuance decisions? An audit firm cannot discontinue providing audit services to a client without just cause. Potential audit fees are not a valid consideration in the acceptance or continuance decision. The client acceptance/continuance decision is one of the most important factors in audit quality. Audit firms are not permitted to conduct background checks on the management of a potential client.

Answer 84

The client acceptance/continuance decision is one of the most important factors in audit quality.

Question 85

Which of the following is not a component of business risk? Regulatory risk and changes. Economic or competitive changes. Changes in stock market performance. Changes in fair market values of assets or liabilities.

Answer 85

Changes in stock market performance.

Question 86

With a substantive audit strategy, what is an auditor likely to do? Extensively tests internal controls. Limit the testing of internal controls. Not assess control risks. Issue an adverse opinion on the financial statements.

Answer 86

Limit the testing of internal controls.

Question 87

Which of the following is not a question an auditor considers in deciding whether to pursue a lower control risk approach prior to substantive testing? Is the design of the control effective? Does the control promote operational efficiency? Is it cost effective to test controls? Are controls operating effectively?

Answer 87

Does the control promote operational efficiency?

Question 88

Which of the following would not affect an auditor's judgment concerning internal controls? The assertion being tested. The design of the control. The operation of the control. The level of inherent risk.

Answer 88

The level of inherent risk.

Question 89

With a dual-purpose test, what is an auditor likely to do? Perform a substantive procedure concurrently with a test of a control. Perform a substantive procedure concurrently with a risk assessment test. Perform a risk assessment test concurrently with a test of a control. None of the above.

Answer 89

Perform a substantive procedure concurrently with a test of a control.

Question 90

Which statement is correct? Assertions affected by highly objective estimates usually require direct tests of balances. The materiality of the account totally dictates the substantive procedures to be performed. The evidence the auditor obtains from risk assessment procedures does not influence the substantive procedures to be performed. The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.

Answer 90

The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.

Question 91

Which of the following factors affect the substantive procedures performed in an audit? The subjectivity of the accounting process. Size of the account. Effectiveness of the relevant controls. All of the above affect the substantive procedures that are performed.

Answer 91

All of the above affect the substantive procedures that are performed.

Question 92

If the auditor’s assessment of the materiality of the account balance is high, what would be the respective effect on (1) the extent of substantive testing and (2) the nature of procedures performed? (1) Less (2) More rigorous (1) Less (2) Less rigorous. (1) More (2) Less rigorous (1) More (2) More rigorous

Answer 92

(1) More (2) More rigorous

Question 93

An auditor gathers evidence on internal controls for which respective time periods for the purposes of expressing an opinion on (1) control effectiveness and for (2) testing controls in the financial statement period? Control Effectiveness - Financial Statement (1) As of year-end (2) As of year end (1) As of year-end (2) Throughout the year (1) Throughout the year (2) As of year end (1) Throughout the year (2) Throughout the year

Answer 93

(1) As of year-end (2) Throughout the year

Question 94

Which of the following would not be a factor in whether a control weakness would be considered to be a material weakness as opposed to a significant deficiency? The materiality of the related balance. The volume of transactions affected. The subjectivity of the account balance. The nature of the client’s industry.

Answer 94

The nature of the client’s industry.

Question 95

Which of the following statements is correct concerning the auditor’s opinion on internal control effectiveness? The report describes any material weaknesses and discusses actions taken by management to remediate the problems. The report does not discuss whether the control weaknesses were first identified by management or the auditor. The report does not recognize the integrated nature of the audit and the effect of the material weakness on the planning of the financial statement audit. The report identifies management’s actions to remedy the prior year’s control weaknesses.

Answer 95

The report does not discuss whether the control weaknesses were first identified by management or the auditor.