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ACG 5627 > Chapter 1: The Demand for Audit and Other Assurance Services > Flashcards

Chapter 1: The Demand for Audit and Other Assurance Services Flashcards

1
Q

In the auditing process

A) the types and amounts of evidence remain constant from audit to audit.

B) the criteria for evaluating information will not vary depending on the information being audited.

C) the audit report communicates the auditor’s findings to users.

D) records are gathered by the auditor to determine whether the audited information is stated in accordance with SEC standards.

A

C) the audit report communicates the auditor’s findings to users.

The criteria for evaluating information also vary depending on the information being audited.

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2
Q

Which of the following is considered audit evidence?

A)

Oral statements

made by management (Y)

Written

Communications (N)

Auditor

Observation (N)

B)

Oral statements

made by management (N)

Written

Communications (Y)

Auditor

Observation (Y)

C)

Oral statements

made by management (Y)

Written

Communications (Y)

Auditor

Observation (Y)

D)

Oral statements

made by management (N)

Written

Communications (N)

Auditor

Observation (Y)

A

C)

Oral statements

made by management (Y)

Written

Communications (Y)

Auditor

Observation (Y)

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3
Q

Which of the following can be used as a criteria for evaluating information being audited?

A) International Financial Reporting Standards (IFRS)

B) Generally Accepted Accounting Principles (GAAP)

C) Internal Revenue Code (IRC)

D) all of the above

A

D) all of the above

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4
Q

Evidence is paramount to audit and attestation engagements. List the four basic types of audit evidence.

A
  1. Electronic and documentary data about transactions
  2. Written and electronic communications with outsiders
  3. Observations by the auditor
  4. Oral testimony of the auditee (client)
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5
Q

The criteria by which an auditor evaluates the information under audit may vary with the information being audited.

TRUE OR FALSE

A

TRUE

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6
Q

One criteria used by an external auditor to evaluate published financial statements is known as generally accepted auditing standards.

TRUE OR FALSE

A

FALSE

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7
Q

Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports.

TRUE OR FALSE

A

TRUE

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8
Q

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

TRUE OR FALSE

A

TRUE

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9
Q

An auditor must be competent and have an independent mental attitude.

TRUE OR FALSE

A

TRUE

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10
Q

Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called

A) finance.

B) auditing.

C) accounting.

D) economics.

A

C) accounting.

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11
Q

An accountant

A) must possess expertise in the accumulation of audit evidence.

B) must decide the number and types of items to test.

C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information.

D) must be a CPA.

A

C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information.

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12
Q

When auditing accounting data, auditors focus on

A) determining whether recorded information properly reflects the economic events that occurred during the accounting period.

B) determining if fraud has occurred.

C) determining if taxable income has been calculated correctly.

D) analyzing the financial information to be sure that it complies with government requirements.

A

A) determining whether recorded information properly reflects the economic events that occurred during the accounting period.

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13
Q

The trait that distinguishes auditors from accountants is the

A) auditor’s ability to interpret accounting principles generally accepted in the United States.

B) auditor’s education beyond the bachelor’s degree.

C) auditor’s ability to interpret FASB Statements.

D) auditor’s expertise in the accumulation and interpretation of audit evidence.

A

D) auditor’s expertise in the accumulation and interpretation of audit evidence.

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14
Q

Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period.

TRUE OR FALSE

A

TRUE

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15
Q

Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence.

TRUE OR FALSE

A

FALSE

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16
Q

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

A) Client acceptance

B) Information

C) Business

D) Control

A

B) Information

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17
Q

The possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as

A) materiality risk.

B) information risk.

C) interest rate risk.

D) business risk.

A

D) business risk.

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18
Q

Auditing can have a significant effect on both information risk and business risk.

TRUE OR FALSE

A

FALSE

Auditing has no effect on either the risk-free interest rate or business risk, but it can have a significant effect on information risk.

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19
Q

A correct relationship among the auditor, the client, and the external users is

A) management of a public company hires the independent auditor.

B) the audit committee of a private company hires the independent auditor.

C) the client provides capital to the external users.

D) the external users can rely upon the auditor’s report to reduce information risk.

A

D) the external users can rely upon the auditor’s report to reduce information risk.

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20
Q

The most common way for users to obtain reliable information is to

A) have an internal audit.

B) have an independent audit.

C) verify all information individually.

D) verify the information with management.

A

B) have an independent audit.

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21
Q

External users of the financial statements

A) value the auditor’s report because of the auditor’s independence from the client.

B) look to the auditor’s report as an indication of the statements’ reliability.

C) use the audited information on the assumption that it is reasonably complete, accurate, and unbiased.

D) all of the above.

A

D) all of the above.

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22
Q

Explain what is meant by information risk, and list the four causes of this risk.

A

Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. Four causes of information risk are

  • remoteness of information,
  • biases and motives of the provider,
  • voluminous data, and
  • complex exchange transactions.
23
Q

As society becomes more complex, decision makers are more likely to receive reliable information.

TRUE OR FALSE

A

FALSE

24
Q

Management is required by GAAP to reduce information risk, even if the costs outweigh the benefits.

A

FALSE

25
Q

In the audit of historical financial statements, management asserts that the financial statements are fairly stated in accordance with what standards?

A) regulatory accounting principles

B) applicable international accounting standards

C) applicable U.S. accounting standards

D) B and C

A

D) B and C

26
Q

Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n)

A) accounting and bookkeeping service.

B) attestation service.

C) assurance service.

D) tax service.

A

B) attestation service.

27
Q

Three common types of attestation services are

A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting.

B) audits of historical financial information, verifications of historical financial information, and attestations regarding internal controls.

C) reviews of historical financial information, verifications of future financial information, and attestations regarding internal controls.

D) audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information.

A

A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting.

28
Q

Which of the following services provides the lowest level of assurance on a financial statement?

A) review

B) audit

C) Neither service provides assurance on financial statements.

D) Each service provides the same level of assurance on financial statements

A

A) review

29
Q

Which of the following is an accurate statement regarding assurance services?

A) Assurance services must be performed by a CPA.

B) An attestation service is not a type of assurance service.

C) Assurance services improve the quality of information for decision makers.

D) Assurance services can only be performed on financial data.

A

C) Assurance services improve the quality of information for decision makers.

30
Q

Audits

A) are an assurance service, but not an attestation service.

B) are designed to provide absolute assurance that the financial statements are free of material misstatement.

C) are required for publicly traded companies in the United States.

D) do not require the auditor to express their opinion in a written report.

A

C) are required for publicly traded companies in the United States.

31
Q

A high, but not absolute, level of assurance is called

A) probable assurance.

B) reasonable assurance.

C) limited assurance.

D) incomplete assurance.

A

B) reasonable assurance.

32
Q

Which of the following is an accurate statement regarding the various types of other assurance services?

A) Assurance services must be about the reliability of another party’s assertion about compliance with specified criteria.

B) Other assurance services must meet the definition of an attestation service.

C) The primary purpose of a management consulting engagement is to improve the quality of information.

D) The market for other forms of assurance services is open to non-CPA competitors.

A

D) The market for other forms of assurance services is open to non-CPA competitors.

Audits and some types of attestation services are limited by regulation to licensed CPAs, but the market for other forms of attestation and assurance is open to non-CPA competitors.

33
Q

What are the four categories of attestation services?

A
  • Audit of historical financial statements
  • Audit of internal control over financial reporting
  • Review of historical financial statements
  • Other attestation services that may be applied to a broad range of subject matter.
34
Q

CPA firms are never allowed to provide bookkeeping services for clients.

TRUE OR FALSE

A

FALSE

35
Q

Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting.

TRUE OR FALSE

A

TRUE

36
Q

Most public companies’ audited financial statements are available on the SEC’s EDGAR database.

TRUE OR FALSE

A

TRUE

37
Q

The primary purpose of a management consulting engagement is to generate a recommendation to management.

TRUE OR FALSE

A

TRUE

38
Q

One objective of an operational audit is to

A) determine whether the financial statements fairly present the entity’s operations.

B) determine if the auditee is in compliance with GAAP.

C) make recommendations for improving performance.

D) report on the entity’s relative success in attaining profit maximization.

A

C) make recommendations for improving performance.

39
Q

An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit?

A) operational audit

B) compliance audit

C) financial statement audit

D) production audit

A

A) operational audit

40
Q

An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n)

A) audit of financial statements.

B) compliance audit.

C) operational audit.

D) production audit.

A

B) compliance audit.

41
Q

Which one of the following is more difficult to evaluate objectively?

A) presentation of financial statements in accordance with generally accepted accounting principles

B) compliance with government regulations

C) efficiency and effectiveness of operations

D) All three of the above are equally difficult.

A

C) efficiency and effectiveness of operations

42
Q

Which of the following audits can be regarded as generally being a compliance audit?

A) IRS agents’ examinations of taxpayer returns

B) GAO auditor’s evaluation of the computer operations of governmental units

C) an internal auditor’s review of a company’s payroll authorization procedures

D) a CPA firm’s audit of a public company

A

A) IRS agents’ examinations of taxpayer returns

43
Q

Which of the following are required to have a written report regarding the assertion of another party?

A)

Financial Statement Audit (Y)

Operational Audit (Y)

Compliance Audit (Y)

Attestation Engagement (Y)

Assurance Engagement (Y)

B)

Financial Statement Audit (Y)

Operational Audit (Y)

Compliance Audit (Y)

Attestation Engagement (Y)

Assurance Engagement (N)

C)

Financial Statement Audit (Y)

Operational Audit (Y)

Compliance Audit (Y)

Attestation Engagement (N)

Assurance Engagement (N)

D)

Financial Statement Audit (N)

Operational Audit (N)

Compliance Audit (N)

Attestation Engagement (Y)

Assurance Engagement (Y)

A

B)

Financial Statement Audit (Y)

Operational Audit (Y)

Compliance Audit (Y)

Attestation Engagement (Y)

Assurance Engagement (N)

44
Q

In a financial statement audit, the auditor

A) gathers evidence to determine whether the statements contain material errors or other misstatements.

B) must have a thorough understanding of the entity and its environment.

C) determines whether the financial statements are stated in accordance with specified criteria.

D) all of the above.

A

D) all of the above.

45
Q

To perform an audit, it is necessary for the information to be in a verifiable form and there must be some criteria by which the auditor can evaluate the information. Detail the information and criteria that would be used when

(A) an independent CPA firm audits a company’s historical financial statements.

(B) an Internal Revenue Service auditor audits that same company’s tax return.

(C) an internal auditor performs an operational audit to evaluate whether the company’s computerized payroll processing system is operating efficiently and effectively.

A

A) The information used by a CPA firm in a financial statement audit is the financial information in the company’s financial statements. The most commonly used criteria are applicable U.S. or international accounting standards.

(B) The information used by an IRS auditor is the financial information in the company’s federal tax return. The criteria used are the internal revenue code and interpretations.

(C) The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month. The criteria would consist of company standards for departmental efficiency and effectiveness.

46
Q

The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles.

TRUE OR FALSE

A

FALSE

47
Q

Results of compliance audits are typically reported to the company’s management rather than to a broad spectrum of outside users.

TRUE OR FALSE

A

TRUE

Results of compliance audits are typically reported to management, rather than outside users, because management is the primary group concerned with the extent of compliance with prescribed procedures and regulations.

48
Q

An integrated approach to auditing considers both the risk of misstatements and operating controls intended to prevent misstatements.

TRUE OR FALSE

A

TRUE

49
Q

Internal auditors

A) must be independent of the entity that employs them.

B) generally report to the accounting department.

C) are employed by all types of organizations.

D) must be CPAs.

A

C) are employed by all types of organizations.

50
Q

Which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to Congress?

A) internal auditor

B) revenue agent

C) independent auditor

D) GAO auditor

A

D) GAO auditor

51
Q

The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts.

TRUE OR FALSE

A

FALSE

52
Q

The three requirements for becoming a CPA include all but which of the following?

A) uniform CPA examination requirement

B) education requirements

C) character requirements

D) experience requirement

A

C) character requirements

53
Q

The use of the Certified Public Accountant title is regulated by

A) the federal government.

B) state law through the licensing departments of each state.

C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees.

D) the Securities and Exchange Commission.

A

B) state law through the licensing departments of each state.

ACG 5627 (14 decks)

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