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123 Cards in this Set
- Front
- Back
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Which of the following would be considered an assurance engagement?
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All of the above
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It is always a good idea for auditors to begin an audit with professional skepticism characterized by the assumption that...
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a potential conflict of interest always exists between the auditor and the management of the enterprise under audit.
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In an attestation engagement, a CPA practitioner is engaged to...
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prepare a written report containing a conclusion about the reliability of a management assertion
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A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of...
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operational auditing
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The primary difference between operational auditing and financial auditing is that in operational auditing...
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the operational auditor is seeking to help management use resources in the most effective manner possible.
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According to the AICPA, the purpose of an audit of financial statements is to...
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enhance the degree of confidence that intended users can place in the financial statements.
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Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because...
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they generally see a potential conflict of interest between company managers who want to get loans and the bank's needs for reliable financial statements
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The Sarbanes-Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?
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all of the above (bookkeeping, internal audit, valuation)
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Independent auditors of financial statements perform audits that reduce...
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information risk faced by investors
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The primary objective of compliance auditing is to...
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determine whether auditee personnel are following laws, rules, regulations and policies.
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What requirements are usually necessary to become licensed as a certified public accountant?
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all of the above (successful completion of the Uniform CPA examination, experience in the accounting field, and education)
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The organization primarily responsible for ensuring that public officials are using ppublic funds efficiently, economically, and effectively is the...
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Government Accountability Office (GAO)
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Performance audits usually include...
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economy and efficiency audits, program audits
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The objective in an auditor's review of credit ratings of a client's customers is to obtain evidence related to management's assertion about...
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valuation and allocation
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Jones, CPA is planning the audit of Rhonda's company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda's representation in this regard...
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is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.
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The risk to investors that a company's financial statements may be materially misleading is called...
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information risk
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When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?
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Cutoff
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When auditing merchandise at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client's ending inventory balance. This audit procedure provides assurance about which management assertion?
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rights and obligations
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When an auditor reviews additions to the equipment(fixed asset) account to make sure that repair and maintenance expenses are not understated, she wants to obtain evidence as to management's assertion regarding..
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existence
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The Sarbanes-Oxley Act of 2002 generally prohibits public accounting firms from
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all of the above (acting in managerial role for client, auditing firm's own work, providing tax consulting to audit client without approval)
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Substantial equivalency refers to...
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permitting a CPA to practice in another state without having to obtain a license in that state.
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Which of the following best describes the relationship between auditing and attestation engagements?
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Auditing is a subset of attestation engagements that focuses on the certification of financial statements
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Which of the following best describes the focus of the following engagements?
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auditing = financial statements
attestation = financial information assurance = any information consulting = advice and decision support |
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Which of the following is a reason to obtain professional certification?
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all of the above (credibility, advancement/ promotion, monetary rewards)
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Real estate demand studies
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assurance
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Ballot for awards show
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assurance
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Utility rates applications
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attestation
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Newspaper circulation audits
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assurance
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Third party reimbursement maximization
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assurance
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annual financial report to stockholders
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audit
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rental property operation review
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assurance
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examinations of financial forecasts and projections
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attestation and assurance
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customer satisfaction surveys
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assurance
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compliance with contractual requirements
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attestation
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benchmarking/best practices
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assurance
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evaluation of investment management policies
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assurance
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information systems security review
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assurance
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productivity statistics
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attestation
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internal audit strategic review
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assurance
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financial statements submitted to a bank loan officer
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audit
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Your neighbor Loot Starkin invited you to lunch yesterday. Sure enough, it was no free lunch because Loot wanted to discuss the annual report of Dodge Corporation. He owns Dodge stock and just received the annual report. Loot says, "Our auditors just prepared the audited financial statements and gave an unqualified opinion, so my investment must be safe." What misconceptions does Loot Starkin seem to have about the auditor's role with respect to Dodge Corporation?
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According to auditors' dogma, the auditors did not prepare the Dodge Corporation financial statement. An unqualified opinion does not mean an investment is safe.
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Proprietary school's training expenses
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Economy and efficiency, program results;
governmental auditor |
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Advertising agency financial statemetns
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financial statement;
independent CPAs |
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Dept. of Defense launch vehicle
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Economy and efficiency, program results;
governmental |
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Municipal services
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economy and efficiency;
internal auditors |
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Tax shelters
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compliance;
IRS auditors |
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Test pilot reporting
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compliance;
internal auditors |
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bank solvency
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compliance;
bank examiners |
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Materials inspection by manufacturer
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Compliance or Economy and Efficiency;
internal auditors |
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States' reporting chemical use data
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program goal;
governmental |
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sports complex forecast
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financial statement;
independent CPAs |
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Which of the following categories of principles is most closely related to gathering audit evidence?
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performance
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To exercise due care, an accountant should...
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conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis
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One of an accounting firm's basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following...
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standards within a system of quality control.
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Which of the following best describes the concept of professional skepticism?
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critically assessing verbal evidence received from the entity's management.
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The primary purpose for obtaining an understanding of the entity's environment (including its internal control) in a financial statement audit is...
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to determine the nature, timing, and extent of further audit procedures to be performed
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Ordinarily, what source of evidence should least affect audit conclusions?
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inquiry of management.
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The most persuasive evidence regarding the existence of newly acquired computer equipment is...
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physical observation
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Which of the following procedures would provide the most reliable audit evidence?
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Inspection of bank statements obtained directly from the client's financial institution
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Breaux & Co., CPAs require that all audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of Breaux & Co., CPAs' professional skepticism concern regarding which of the following?
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adequate planning and supervision
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The attestation standards do not contain a requirement that auditors obtain
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an understanding of the auditee's internal controls.
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Which of the following concepts is least related to the standard of due care?
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reasonable assurance
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The evidence considered by most appropriate by auditors is best described as...
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direct personal knowledge obtained through physical observation and mathematical recalculation
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Auditors' understanding of the internal control in an entity contributes information for...
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planning the nature, timing, and extent of further audit procedures on an audit
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Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?
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relevant ethical requirements
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Kramer, CPA consulted with an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with a specialist in this case would...
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be considered proper due care
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Which of the following topics is not addressed in the auditors' report for a public entity?
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absolute assurance regarding the fairness of the entity's financial statements in accordance with GAAP
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Which of the following is a conceptual difference between attestation standards and generally accepted auditing standards?
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The attestation standards provide a framework for the attest function beyond historical financial statements.
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Define independence in fact
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The auditor's state of mind, reflecting an unbiased and impartial perspective with respect to the financial statements and other information they audit
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Define independence in appearance
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Others' (particularly financial statement users) perceptions of the auditors' independence
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What two general types of relationship would normally compromise auditors' independence?
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financial relationships (owning stock or having an outstanding loan from a client) and managerial relationships (acting in a decision making capacity on the behalf of a client of proving advice on information that will be audited)
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Has the auditors' independence been compromised: the auditors' firm provides extensive consulting services to the client; these services provide revenues to the firm that exceed revenues received from the audit engagement
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While auditors might still be independent in fact with respect to the audit of the client, the large revenues resulting from these services create a financial interest that many users would find to be troubling.
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Has the auditors' independence been compromised: The spouse of a partner in charge of the audit engagement occupies an executive-level position within the client
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This would pose a compromise to auditors' independence and not permitted under current guidelines. The auditor is directly involved with the engagement and the executive level position is occupied by her spouse with a client.
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Has the auditors' independence been compromised: A distant relative of a partner within the firm occupies and entry-level position within a client of the firm
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This would not compromise the auditor's independence most likely. THe auditor is not directly involved in the engagement and the relationship between auditor and client is not as close.
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Has the auditors' independence been compromised: a staff member within the firm owns shares of stock of one of that firm's clients (she is not a member of the engagement team serving that client)
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This is a direct financial interest in a client. Many firms do not allow staff to hold financial interests in audit clients, but guidelines would not conclude that the situation compromises the independence of the staff member
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Definition of a financial statement audit for a private entity
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AICPA Auditing Standards Board
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Guidance for reporting on internal control for a public entity
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PCAOB
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Standards for the practice of internal auditing
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Institute of Internal Auditors
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Generally accepted government auditing standards
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US Government Accountability Office
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Standards of financial accounting
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Financial Accounting Standards Board
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Auditing standards for public entities
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PCAOB
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Auditing standards for private entities
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AICPA Auditing Standards Board
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Guidance for lending credibility for private entities
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AICPA Auditing STandards Board
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Auditing standards for foreign entities
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IFAC International Auditing and Assurance Standards Board
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An entity has contacted you about performing their audit engagement. You have not previously served a client in the entity's industry, which has many industry-specific accounting issues that are both technical and complex.
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competence and capabilities element responsibilities principle
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An entity has entered into a number of lease agreements. Based on the requirements of GAAP, you believe that these obligations meet the criteria for being classified as capital leases; however, the entity has elected to treat these leases as operating leases, providing full and complete disclosure of this treatment in the footnotes to the financial statements
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reporting
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Because of a disagreement with its current auditors, an entity has contacted you about conducting its current-year audit. However, because the previous auditors have just recently resigned the engagement, you have some questions as to whether an audit can be completed in time to meet the entity's deadlines for providing audited financial statements to a lender.
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performance - not properly planned
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Based on the effectiveness of the entity's internal control, you have assessed control risk at low levels and decided that a smaller number of customer accounts need to be confirmed.
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Performance - obtain sufficient evidence
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An entity has contacted you about performing their auit engagement. This entity became aware of your firm because the husband of one of your partners is currently serving as the entity's chief financial officer
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responsibility requires auditors to be independent
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One of your clients is currently a potential defendant in several cases because of the damage caused by one of their products. Because this entity does not believe that they are likely to receive an unfavorable outcome from this litigation, they did not disclose the potential litigation in the footnotes accompanying their financial statements.
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reporting - should insist upon disclosure of litigation and if client refuses, auditor should issue a qualified or adverse opinion.
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You are performing tests of the client's controls over the processing of revenue transactions to determine whether these controls are operating effectively and can be relied upon to prevent or detect misstatements.
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performance - auditors should obtain an understanding of the entity and its internal control.
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One of your supervisors has requested a number of clarifications based on her review of your work on an audit engagement. A subsequent meeting with her has resolved these clarifications and you have both concluded that your work supports the opinion on the client's financial statements.
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Performance - requires proper planning and supervision
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THe likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as
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risk of material misstatement
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The risk of material misstatements is composed of which audit risk components?
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inherent risk and control risk
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Auditors are not responsible for accounting estimates with respect to..
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making the estimates
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Auditing standards do not require auditors of financial statements to
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report all findings of errors and frauds to police officers
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The risk that auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is
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detection risk
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Auditors are responsible for the quality of work related to management and control of
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detection risk
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The auditors assessed a combined inherent risk and control risk at .50 and said they wanted to achieve a .05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?
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.10
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An audit plan contains...
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specifications of procedures the auditors believe appropriate for the financial statements under audit.
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The revenue cycle of a company generally includes which accounts?
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Cash ,accounts receivable, sales
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When auditing the existence assertion for an asset, auditors proceed from the
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general ledger back to the supporting original transaction documents.
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If tests of control induce the audit team to change the assessed level of control risk for fixed assets from .4 to 1.0, and audit risk (.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to...
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change from .25 to .1
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Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?
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Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.
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In an audit of a private company, it is acceptable under generally accepted auditing standards for an audit team to...
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assess both inherent and control risk at high and achieve an acceptably low audit risk by performing extensive detection work
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Confirmations of accounts receivable provide evidence primarily about which two assertions?
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existence and rights and obligations
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If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?
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accounts receivable
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One of the typical characteristics of management fraud
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victimization of investors through the use of materially misleading financial statements
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Under the Private Securities Litigation Reform Act, independent auditors are required to
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Report to the SEC all instances of illegal acts they believe have a material effect on financial statements if the board of directors does not first report to the SEC
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With respect to the concept of materiality, which one of the following statements is correct?
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Materiality is a matter of professional judgment
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When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following?
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evidence of a conservative systematic bias
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Which of the following circumstances would most likely cause an audit team to perform extended procedures?
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The client has made several large adjustments at or near year end
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An audit committee is
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composed of members of a company's board of directors who are not involved in the day to day operations of the company
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When the audit team becomes aware of an illegal act committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to
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evaluate the effect of the illegal act on the financial statements
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Which of the following statements best describes the audit teams's responsibility for detecting a client's illegal acts?
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The audit team must design tests to obtain reasonable assurance that all illegal acts with direct material statement effects are detected.
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Which accounts are most susceptible to overstatement? to understatement?
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Inventory understatements may rsult from failure to capitalize costs or from erroneous depreciation calculations. Liabilty and expense understatements are common because they result in improved perceptions of financial condition and profitability
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Why do you think a company could permit asset accounts to be understated?
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They can result from accounting errors, misapplications of accounting principles, a measurement errors.
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Why do you think a company could permit liability accounts to be overstated?
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Estimated liabilities may be measured large for conservatism. The company might over accrue expenses in order to reduce taxable income. A fraud might be imbedded in false payables to false vendors
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Which direction of misstatement is most likely: income overstatement or income understatement?
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Income overstatement occurs most frequently. Apparently the cause is usually understatement of expenses or overstatement of revenues
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Paul, CPA, has participated in the audit of Tordik Cheese Compnay for five years, first as an assistant accountant and the last two years as the senior accountant. Paul has never seen an accounting adjustment recommended. Paul believes that the inherent risk must be zero.
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Paul is not justified. He may have seen no adjustments because none were material or the control system had functioned well in the past and prevented or corrected material errors
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Hill, CPA, has just completed an exhaustive study and evaluation of the internal controls of Edward Foods. Hill believes the control risk must be zero because no material errors could possibly slip through the many error-checking procudres and review layers used by Edward
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Hill is not justified. She may know the internal accounting control is exceptionally good, but her review didnt cover the last month of Edward's fiscal year, and control activities are always subject to lapses.
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Fields, CPA, is lazy and does not like audit jobs in Philli, anyway. on the audit of Pilly, Fields decides to use substantive procedures to audit the year end balances very thoroughly to the extent that his risk of failing to detect material errors and irregularities should be .02 or less. Fields gave no thought to inherent risk and conducted only a very limited review of Philly's internal control system
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The decision may result in an ineffective audit, although the spirits is within the spirit of audit standards
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Shad, is nearing the end of a dirty audit of allnight protection company. The accounting personnel were all resigned duirng the year and replaced by inexperienced people. The comptroller resigned last month in disgust. The journals and ledgers were a mess because the one computer specialist was hospitalized for three months during the year. Shad was thank to do this audit in less time than last year when everything was operating smoothly.
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inherent and control risk may be greater than last year. However, the audit was less extensive, therefore creating higher detection risk and the audit risk is very high
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