Arens Audit Ch. 1 Dreamendoza

Front 1

Chapter 1 The Demand for Audit and Other Assurance Services

Back 1

Chapter 1 The Demand for Audit and Other Assurance Services

Front 2

1) The Sarbanes-Oxley Act applies to which of the following companies?

A.) All companies.
B.) Privately held companies.
C.) Public companies.
D.) All public companies and privately held companies with assets greater than $500 million.

Back 2

C.) Public companies.

Front 3

2) Which of the following is considered audit evidence?

I. Oral statements made by management

II. Written Communications

III. Auditor Observation

A.) YES, NO, NO

B.) NO, YES, YES

C.) YES, YES, YES

D.) NO, NO, YES

Back 3

C.) YES, YES, YES

Front 4

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

Back 4

Answer: The four types of audit and attestation evidence include:
1. Electronic and documentary data about economic transactions
2. Written and electronic communications with outsiders
3. Observations by the auditor
4. Oral testimony of the auditee (client)

Front 5

4) The criteria by which an auditor evaluates the information under audit may vary with the information being audited.
A) True
B) False

Back 5

A.) TRUE

Front 6

5) The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards.
A) True
B) False

Back 6

B.) FALSE

Front 7

6) The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies.
A) True
B) False

Back 7

B.) FALSE

Front 8

7) The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting.
A) True
B) False

Back 8

A.) TRUE

Front 9

8) Only companies that file annual statements with the Securities and Exchange Commission are required to have an annual external audit.
A) True
B) False

Back 9

B.) FALSE

Front 10

1) 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.

Back 10

C.) ACCOUNTING

Front 11

2) Which department provides quantitative information in order for management and others to make decisions?
A) management information systems.
B) auditing.
C) finance.
D) accounting.

Back 11

D.) ACCOUNTING

Front 12

3) In "auditing" financial accounting data, the primary concern is with:
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.

Back 12

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

Front 13

4) 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 accumulation and interpretation of evidence related to a company's financial statements.

Back 13

D) auditor's accumulation and interpretation of evidence related to a company's financial statements.

Front 14

1) ________ 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

Back 14

B.) INFORMATION

Front 15

2) The use of the Certified Public Accountant title is regulated by:
A) the federal government.
B) state law through a licensing department or agency 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

Back 15

B) state law through a licensing department or agency of each state.

Front 16

3) Financial statement users often receive unreliable financial information from companies. Which of the following is not a common reason for this?
A) Complex exchange transactions.
B) Voluminous data.
C) Remoteness of information.
D) Each of these choices is a common reason for unreliable financial information.

Back 16

D) Each of these choices is a common reason for unreliable financial information.

Front 17

1) An audit of historical financial statements is most often performed to determine whether the:
A) organization is operating efficiently and effectively.
B) entity is following specific procedures or rules set down by some higher authority.
C) management team is fulfilling its fiduciary responsibilities to shareholders.
D) none of these choices.

Back 17

D) none of these choices.

Front 18

1) In the audit of historical financial statements, what accounting criteria is most common?
A) Regulatory accounting principles.
B) International financial reporting standards.
C) Generally accepted accounting principles.
D) B and C
E) All of the above.

Back 18

C.) GAAP

Front 19

2) 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.

Back 19

B.) ATTESTATION SERVICE

Front 20

3) Three common types of attestation services are:
A) audits, reviews, and attestations regarding internal controls.
B) audits, verifications, and attestations regarding internal controls.
C) reviews, verifications, and attestations regarding internal controls.
D) audits, reviews, and verifications.

Back 20

A) audits, reviews, and attestations regarding internal controls.

Front 21

4) Which of the following services provides the lowest level of assurance on a financial statement?
A) A review.
B) An audit.
C) Neither service provides assurance on financial statements.
D) Each service provides the same level of assurance on financial statements.

Back 21

A.) A REVIEW

Front 22

5) Which of the following is not a SysTrust Services principle as defined by the AICPA?
A) Online privacy.
B) Availability.
C) Processing integrity.
D) Operational integrity.

Back 22

D) Operational integrity.

Front 23

6) The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company?
A) Reviews of quarterly financial statements.
B) Preparation of corporate tax returns.
C) Most consulting services.
D) Tax services.

Back 23

C.) MOST CONSULTING SERVICES

Front 24

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

I. Financial Statement Audit

II. Operational Audit

III. Compliance Audit

IV. Attestation Engagement

V. Assurance Engagement

A.) Y, Y, Y, Y, Y C.) Y, Y, Y, N, N

B.) Y, Y, Y, Y, N D.) N, N, N, Y, Y

Back 24

B.) Y, Y, Y, Y, N

Front 25

13) CPA firms are never allowed to provide bookkeeping services for clients.
A) True
B) False

Back 25

B.) FALSE

Front 26

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

Back 26

A.) TRUE

Front 27

15) Most public companies' audited financial statements are available on the SEC's EDGAR database.
A) True
B) False

Back 27

A.) TRUE

Front 28

1) One objective of an operational audit is to:
A) determine whether the financial statements fairly present the entity's operations.
B) evaluate the feasibility of attaining the entity's operational objectives.
C) make recommendations for improving performance.
D) report on the entity's relative success in attaining profit maximization.

Back 28

C.) MAKE RECOMMENDATIONS FOR IMPROVING PERFORANCE

Front 29

2) 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.

Back 29

A.) OPERATIONAL AUDIT

Front 30

3) 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.

Back 30

B) compliance audit.

Front 31

4) 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.

Back 31

C) Efficiency and effectiveness of operations.

Front 32

8) The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles.
A) True
B) False

Back 32

B.) FALSE

Front 33

9) Results of compliance audits are typically reported to someone within the organizational unit being audited rather than to a broad spectrum of outside users.
A) True
B) False

Back 33

A.) TRUE