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60 Cards in this Set
- Front
- Back
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(T/F) The relationship of the audit firm to the clientcan be described as the framework of an employer-employee relationship. |
FALSE |
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(T/F) An important requirement of the auditingstandards is that the auditor gather sufficient appropriate evidence todetermine whether the financial statements have been prepared by competentindividuals. |
FALSE
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(T/F) An accounting cycle involves both balance sheetand income statement accounts and follows transactions through a process whereit begins to its conclusion. |
TRUE
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(T/F) At the conclusion of the audit, the auditorissues an audit opinion to the SEC. |
FALSE
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Which of the following is a characteristic ofthe person doing the assessment of the financial statements: A. The person completing the assessment is an employee of the company. B. The person completing theassessment works for an accounting firm that is associated with thecompany only in a role of being hired to perform an audit. C. The person performing the assessment may be bankers, current orpotential stockholders, or regulatory bodies. D. The person performing the assessment makes adjustments to the decisionsrecorded by the firm so that outsiders have accurate information to makedecisions. |
B. The person completing the assessment works for an accounting firm that is associated with the company only in a role of being hired to perform an audit. |
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One of the characteristics of a principal-agentrelationship is:
A. Owners of the company are involved in the daily management of thecompany. B. They hire an agent to runthe company for them and to make daily decisions for the company C. The owners have more knowledge than management about the dailyoperations of the company. D. Outsiders benefit when a manager is hired by owners to protect theirinterests in the company because the information available to outsiders is morelikely to correspond to financial accounting standards. |
B. They hire an agent to run the company for them and to make daily decisions for the company |
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Which of the following best describes “attest”services? A. The auditor attests tothe quality of some type information. B. The auditor attests to the source of some type of information C. The auditorattests to the accuracy of some type of information D. The auditor attests to the quantity of some type of information |
C. The auditor attests to the accuracy of some type of information |
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The areas where management is more likely tomisstate transactions are riskier for the auditor because A. The auditor will be the subject of legal action B. the auditor probably will not have enough time to identify these areas C. because failing to correctthe misstatements may lead to issuing a clean opinion on materially misstatedfinancial statements D. because failing to correct the misstatements may lead to issuing aqualified opinion on materially misstated financial statements |
C. because failing to correct the misstatements may lead to issuing a clean opinion on materially misstated financial statements |
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Which of the following will allow a company toreport higher net income? A. recording fictitious expenses at the beginning of the year B. recording fictitiousrevenue at the end of the year C. depreciating long lived assets D. increasing a line of credit at a bank |
B. recording fictitious revenue at the end of the year |
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The principle reason to misstate financial statementsis to A. minimize the amount of taxes owed by the company B. maximize the amount of officers’ bonuses C. satisfy the requirement of a going concern D. keep the company’s stockprice from falling |
D. keep the company’s stock price from falling |
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Which of the following is not an important partof the audit process? A. understanding incentives of the company to misstate the financialstatements B. identify the financial statement accounts with the greatest potentialfor misstatements C. document management’sefforts to achieve the necessary requirements to gain a bank loan D. design audit procedures to determine that the accounts are fairlypresented according to the applicable financial reporting framework |
C. document management’s efforts to achieve the necessary requirements to gain a bank loan |
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Which of the following is an incorrect statementabout auditors’ professional duties? A. In their professional duties, they will be watched by federal and stateregulators and interested outsiders B. Attention will be focused on the auditors’ responsibility to determinewhether the financial statements present fairly the financial position of thefirm and the results of operations C. Auditors must understand the importance of presenting unbiasedinformation to outsiders D. The auditors isexpected to approach an audit with an independent mind and to recognize that heor she is hired to protect the interests of owners |
D. The auditors is expected to approach an audit with an independent mind and to recognize that he or she is hired to protect the interests of owners |
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Throughout the planning and performance of theaudit, auditors are responsible for A. having appropriate competence and capabilities to review the audit B. complying with relevantethical requirements C. complying with relevant independence and fraud detection requirements D. maintainingprofessional skepticism and exercising professional judgment |
D. maintaining professional skepticism and exercising professional judgment |
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The Public Companies Accounting Oversight Board(PCAOB) is A. a for profit public company B. a government entity C. private sector non profitorganization D. a non profit public company |
C. private sector non profit organization |
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Before the creation of the PCAOB, the auditingstandards of the Auditing Standards Board were used to audit allcompanies. Which statement bestdescribes the PCAOB and auditing standards? A. In 2003, the PCAOB adoptedcertain auditing standards of the ASB as interim standards B. In 2003, the PCAOB developed over 100 new auditing standards C. In 2003, the PCAOB developed audit standards to audit all companies,private and public D. In 2003, the PCAOB adopted all the standards of the AICPA to save timein the development of new standards |
A. In 2003, the PCAOB adopted certain auditing standards of the ASB as interim standards |
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Management is responsible for A. gathering sufficient evidence B. the preparation of thefinancial statements C. determining that the financial statements have been prepared inaccordance with the applicable financial reporting framework D. approving the audit plan |
B. the preparation of the financial statements |
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The auditor is responsible for A. the preparation of the financial statements B. preparing adjustments to the accounting records C. gathering sufficientappropriate evidence D. advising management on accounting matters |
C. gathering sufficient appropriate evidence |
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Substantive tests of transactions are done togather evidence on A. income statement accounts B. balance sheet accounts C. accounts receivable D. inventory |
A. income statement accounts |
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Tests done by the auditor that are referred toas internal control tests determine whether A. the internal controls have been placed in operation B. the internal controls are operating effectively C. the internal controls are the responsibility of management D. the internal controls ofthe company prevent or detect misstatements in the financial statements |
D. the internal controls of the company prevent or detect misstatements in the financial statements |
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If the controls are not working, the auditor ismost likely to A. request the client to make the necessary adjustment B. perform a substitute test C. perform more substantivetests D. perform more tests of controls |
C. perform more substantive tests |
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Detection risk is A. the susceptibility of management assertions in an accounting businessprocess to a material misstatement assuming no internal controls B. the risk that internal controls fail to prevent or detect misstatementsin the financial statements C. is the risk thatsubstantive audit procedures fail to detect misstatements in the financial statements D. the risk of assuming aclean opinion when the financial statements are materially incorrect |
C. is the risk that substantive audit procedures fail to detect misstatements in the financial statements |
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Inherent risk is A. the susceptibilityof management assertions in an accounting business process to a materialmisstatement assuming no internal controls B. the risk that internal controls fail to prevent or detect misstatementsin the financial statements C. is the risk that substantive audit procedures fail to detectmisstatements in the financial statements D. the risk of assuming aclean opinion when the financial statements are materially incorrect |
A. the susceptibility of management assertions in an accounting business process to a material misstatement assuming no internal controls |
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Control risk is A. the susceptibility of management assertions in an accounting businessprocess to a material misstatement assuming no internal controls B. the risk thatinternal controls fail to prevent or detect misstatements in the financialstatements C. is the risk that substantive audit procedures fail to detectmisstatements in the financial statements D. the risk of assuming aclean opinion when the financial statements are materially incorrect |
B. the risk that internal controls fail to prevent or detect misstatements in the financial statements |
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Which of the following statements iscorrect? A. the auditor controlsdetection risk by the amount of substantive testing he does B. the auditor controls inherent risk by the amount of control testing hedoes C. the auditor controls control risk by the amount of control testing hedoes D. the auditor controls audit risk by the amount of substantive testing hedoes |
A. the auditor controls detection risk by the amount of substantive testing he does |
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The only risk controlled by the auditor is A. inherent risk B. control risk C. detection risk D. audit risk |
C. detection risk |
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The risk of material misstatement is a functionof A. audit risk and detection risk B. inherent risk andcontrol risk C. audit risk and inherent risk D. control risk anddetection risk |
B. inherent risk and control risk |
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The auditing standards define audit risk as therisk that A. the auditor issues a qualified opinion when the financial statementsare not materially misstated B. the auditor issues an unqualified opinion when the financial statementsare misstated C. the auditor issues a qualified opinion when the financial statementsare materially misstated D. the auditor expresses aninappropriate audit opinion when the financial statements are materiallymisstated |
D. the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated |
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Which of the following is a method that theauditor might use to calculate materiality? A. based on a decision rule that is a percentage of total sales B. based on a decision rule that is a percentage of total expenses C. based on a decision rulethat is a percentage of pre-tax income or income from operations D. based on a decision rule that is a percentage of total assets |
C. based on a decision rule that is a percentage of pre-tax income or income from operations |
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The auditing standards specify thatmisstatements are considered to be material if A. they individually or in the aggregate could reasonably be expected toinfluence the decisions of management B. they could reasonably be expected to influence the decisions ofknowledgeable users of the financial statements C. they individually or in the aggregate could be expected to influencethe decisions of outside users of the financial statements D. they individuallyor in the aggregate could reasonably be expected to influence the decisions ofusers of the financial statements |
D. they individually or in the aggregate could reasonably be expected to influence the decisions of users of the financial statements |
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The determination of materiality is basedon A. generally accepted auditing standards B. the likelihood of material misstatements being present C. the professional judgmentof the auditor” D. the understanding of the entity’s internal controls |
C. the professional judgment of the auditor” |
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After the auditor determines materiality for thecompany, the auditor can determine A. the accounts where maximum audit testing is required B. the level of misstatementnecessary for the misstatement to be considered material C. the value of clear and accurate financial disclosures D. the auditor’s responsibility to outside users of financial statementsto provide financial information consistent with accounting regulations |
B. the level of misstatement necessary for the misstatement to be considered material |
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For internal controls that are relevant to theaudit, the auditor should A. understand incentives of the company to misstate the financialstatements B. identify the relevant financial statement accounts with the greatestpotential for misstatements C. understand the design ofthe controls and the implementation of the controls D. design audit procedures to determine that the accounts are fairlypresented according to the applicable financial reporting framework |
C. understand the design of the controls and the implementation of the controls |
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Internal controls are A. usually necessary to run the company B. part of the environment ofthe client C. implemented in areas where fraud risk is greatest D. are only necessary if audit testing is going to rely on them |
B. part of the environment of the client |
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When an auditor signs an engagement letter A. the auditor may commence the audit B. the client has an obligation to pay the audit fee C. the auditor has a contractto perform the audit D. the client is attesting to the accuracy of the financial statements |
C. the auditor has a contract to perform the audit |
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Generally accepted auditing standards requirethe auditor to obtain sufficient appropriate audit evidence to reduce auditrisk to an acceptable level. If the auditor determines that he cannot complywith this standard due to the risk level present in the client before theengagement, he will A. reject theengagement. B. advise the client on howto reduce the risk level C. increase substantive testing to reduce the risk to an acceptable level D. increase control testing to reduce the risk to an acceptable level. |
A. reject the engagement. |
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(T/F) The audit plan will be used to gather sufficientappropriate evidence reduce audit risk to a near zero level. |
FALSE
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(T/F) The auditor should document the audit strategyin audit report containing the key decisions about the scope, timing, andconduct of the audit. |
FALSE
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(T/F) During the planning process, the auditor determinesthe overall audit strategy for the audit. This strategy establishes the scope,timing, and direction of the audit and guides the auditor when he prepares theaudit plan. |
TRUE
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(T/F) In the planning stage, one of the objectives ofthe auditor is to identify and assess the risk of material misstatement. |
TRUE
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(T/F) The purpose of the audit is to increase the levelof confidence that users of financial statements can place on financialstatements. |
TRUE |
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(T/F) The internal control function in a company is aprocess designed by management and others charged with governance to providereasonable assurance that the financial statements are prepared in accordancewith the applicable financial reporting framework. |
TRUE |
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(T/F) In a financial statement audit, the auditor willdecide to either (1) rely on internal controls in the company to prevent ordetect misstatements or (2) make recommendations to the client so that controlscan be relied upon. |
FALSE
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(T/F) The auditing standards allow the auditor to usethe work of the internal auditors to gather evidence about the effectiveness ofinternal controls. |
TRUE
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(T/F) During an audit, the auditor may become aware ofdeficiencies in the internal control functions of a client that may be ofinterest to the audit committee of the company. |
TRUE
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(T/F) At the end of an audit after the opinion isissued, the auditor should have sufficient appropriate evidence to reduce auditrisk to an acceptably low level. |
FALSE |
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The auditing standards define internal controlsover financial statements as processes designed by management and otherscharged with governance to provide reasonable assurance that companyresponsibilities are met. Which of the following is not one of those areas? A. The reliability of financial reporting. B. The earning of net income. C. The effectiveness and efficiency of operations. D. The compliance with laws and regulations. |
B. The earning of net income. |
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Management is responsible for designing thecontrols and the auditor is responsible for A. testing them only if hechooses to rely on them to prevent or detect misstatements in the accountbalances. B. testing them only if he chooses to rely on them to prevent or detectmisstatements in the transactions C. testing them onlyif he chooses to rely on them to prevent or detect misstatements in thefinancial statements D. testing them only if he chooses to rely on them to prevent or detectmisstatements in the management representations |
C. testing them only if he chooses to rely on them to prevent or detect misstatements in the financial statements |
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Define the component “Monitoring” A. to identify risks to the entity’s ability to achieve its objectives B. the procedures used by the company to help it achieve its objectives C. systems to exchange the information needed to make decisions D. to determine whetherinternal controls effectively prevent misstatements or detect misstatements inthe financial statements |
D. to determine whether internal controls effectively prevent misstatements or detect misstatements in the financial statements |
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Which of the following is not a subdivision ofthe component “control environment?” A. Integrity and ethical values B. Management organization C. Human resources policies and procedures D. Commitment to competence |
B. Management organization |
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The auditor uses professional judgment todetermine whether sufficient appropriate audit evidence has been obtained toreduce audit risk to an acceptable low level. The audit evidence might comefrom A. internal control evidence B. substantive tests of controls C. a combination of internalcontrol evidence and substantive evidence D. a combination of substantive tests and analytical procedures |
C. a combination of internal control evidence and substantive evidence |
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A significant deficiency is: A. a control deficiency or a combination of control deficiencies thatadversely affects the company’s ability to initiate, authorize, record,process, or report internal financial data reliably in accordance with anapplicable financial reporting framework B. a controldeficiency or a combination of control deficiencies that adversely affects thecompany’s ability to initiate, authorize, record, process, or report externalfinancial data reliably in accordance with an applicable financial reportingframework C. a control deficiency or combination of control deficiencies that resultin more than a remote likelihood that a material misstatement in the financialstatements would not be prevented or detected D. a control deficiency orcombination of control deficiencies that results in a remote likelihood that amaterial misstatement in the financial statements would not be prevented ordetected |
B. a control deficiency or a combination of control deficiencies that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with an applicable financial reporting framework |
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A material weakness is: A. a control deficiency or a combination of control deficiencies thatadversely affects the company’s ability to initiate, authorize, record,process, or report internal financial data reliably in accordance with anapplicable financial reporting framework B. a control deficiency or a combination of control deficiencies thatadversely affects the company’s ability to initiate, authorize, record,process, or report external financial data reliably in accordance with anapplicable financial reporting framework C. a significant deficiency or combination of significant deficienciesthat results in a remote likelihood that a material misstatement in thefinancial statements would not be prevented or detected D. a significant deficiencyor combination of significant deficiencies that result in more than a remotelikelihood that a material misstatement in the financial statements would notbe prevented or detected |
D. a significant deficiency or combination of significant deficiencies that result in more than a remote likelihood that a material misstatement in the financial statements would not be prevented or detected |
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An “integrated audit is defined as A. an audit where an accounting firm issues an audit report on theinternal controls and also gives an opinion on the financial statements B. an audit where an accounting firm issues an audit report on thefinancial statements and also gives an opinion on internal controls C. an audit where an accounting firm issues an audit report on thefinancial statements and also gives an opinion on the existence of thecompany’s internal controls over financial reporting D. an audit where anaccounting firm issues an audit report on the financial statements and alsogives an opinion on the effectiveness of the company’s internal controls overfinancial reporting |
D. an audit where an accounting firm issues an audit report on the financial statements and also gives an opinion on the effectiveness of the company’s internal controls over financial reporting |
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The internal control over financial reportingwill not be considered effective if A. the internal controls are considered non effective B. one or more materialweaknesses exist in the company C. there is a significant deficiency in the company’s internal control D. there are numerous control deficiencies in internal control |
B. one or more material weaknesses exist in the company |
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Which of the following is correct about theframework for documenting control systems? A. Management makesits assessment on the effectiveness of internal controls using a recognizedframework for documenting control systems B. The auditor may use the same framework to assess the effectiveness ofthe controls C. The COSO framework isthe only acceptable framework D. The COSO framework was developed by public accounting firms andindustry experts |
A. Management makes its assessment on the effectiveness of internal controls using a recognized framework for documenting control systems |
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A “walkthrough” can best be described as A. the auditor physically observes the transaction paper trail from thepoint of origination to the transaction being entered into the financialrecords B. the auditor takes a tour of the accounting department and then observesall departments where a transaction may originate and subsequently be enteredinto the financial records C. the auditorfollows a transaction from its origination, through the company’s processes,including information systems, until it is reflected in the financial records D. the auditor observes theIT department and reviews the programs that process the transaction fromorigination to the financial records |
C. the auditor follows a transaction from its origination, through the company’s processes, including information systems, until it is reflected in the financial records |
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If there is a material weakness in internalcontrol, the auditor A. expresses a qualified opinion on the effectiveness of internal controlover financial reporting B. considers the effect of compensating controls and whether thecompensating control prevents or detects a material misstatement in thefinancial statements C. expresses a subject to opinion on the effectiveness of internal controlover financial reporting D. expresses an adverseopinion on the effectiveness of internal control over financial reporting |
D. expresses an adverse opinion on the effectiveness of internal control over financial reporting |
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What role do internal controls play in thecorporate governance process? A. they make managementresponsible for the procedures used in financial reporting B. they make sure the financial statements are fairly stated C. they allow the auditor to gather sufficient information aboutsignificant accounts D. they make management take responsibility to establish and test internalcontrols |
A. they make management responsible for the procedures used in financial reporting |
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Which of the following is notan element of a computerized information system? A. hardware B. e-mail C. documentation D. personnel E. data |
B. e-mail |
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Which of the following is not a type of data anauditor might use to perform statistical analysis on data in the clientfiles? A. live data B. simulated data C. historical data D. forecasted data |
D. forecasted data |
