Chapter 01

Auditing and Assurance Services

Multiple Choice Questions

1. The audit objective that all transactions and accounts that should be presented in the
financial statements are in fact included is related to which of the PCAOB assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

2. To be proficient as an auditor, a person must first be able to accomplish which of these

tasks in a decision-making process?
A. Identify audit evidence relevant to the verification of assertions management makes in its
unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient,
competent evidence about assertions management makes in financial statements and notes.
C. Recognize the financial assertions made in management's financial statements and
footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide whether
management's assertions conform to generally accepted accounting principles and reality.

3. Which of the following is an underlying condition that in part creates the demand by users
for reliable information?
A. Economic transactions that are numerous and complex.
B. Decisions are time-sensitive.
C. Users separated from accounting records by distance and time.
D. Financial decisions that are important to investors and users.
E. All of the above.

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4. Which of the following is not included in The American Accounting Association (AAA)
definition of auditing?
A. Potential conflict of interest.
B. Systematic process.
C. Assertions about economic actions.
D. Established criteria.

5. What is the term used to identify the risk that the client's financial statements may be
materially false and misleading?
A. Business risk.
B. Information risk.
C. Client risk.
D. Risk assessment.

6. Which of the following is not a recommendation usually made following the completion of
an operational audit?
A. Economic and efficient use of resources.
B. Effective achievement of business objectives.
C. Attesting to the fairness of the financial statements.
D. Compliance with company policies.

7. In order to be considered as external auditors with respect to government agencies, GAO

auditors must be
A. Organizationally independent.
B. Empowered as the accounting and auditing agency by the U.S. Congress.
C. Funded by the federal government.
D. Guided by standards similar to GAAS.

8. Which of the following is the essential purpose of the audit function?

A. Detection of fraud.
B. Examination of individual transactions to certify as to their validity.
C. Determination of whether the client's financial statement assertions are fairly stated.
D. Assurance of the consistent application of correct accounting procedures.

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9. The audit objective that all the transactions and accounts presented in the financial
statements represent real assets, liabilities, revenues, and expenses is related most closely to
which of the PCAOB assertions?
A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure

10. The audit objective that all transactions are recorded in the proper period is related most
closely to which of the Audit Standards Board (ASB) transaction assertions?
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy

11. The audit objective that all transactions are recorded in the proper account is related most
closely to which one of the ASB transaction assertions?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

12. The audit objective that all balances include items owned by the client is related most
closely to which one of the ASB balance assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

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13. The audit objective that all balances include all items that should be recorded in that
account is related most closely to which one of the ASB balance assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

14. The audit objective that footnotes in the financial statements should be clear and
expressed such that the information is easily conveyed to the readers of the financial
statements is related most closely with which of the ASB presentation and disclosure
assertions?
A. Occurrence
B. Rights and obligations
C. Comprehensibility
D. Understandability

15. The engineering department at Omni Company built a piece of equipment in the
company's own shop for use in the company's operations. The auditor reviewed all work
orders that were capitalized as part of the equipment costs. Which of the following is the ASB
transaction assertion most closely related to the auditor's testing?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

16. The engineering department at Omni Company built a piece of equipment in the
company's own shop for use in the company's operations. When looking at the ending balance
for the fixed asset account the auditor examined all work orders, purchased materials, labor
cost reports, and applied overhead that were capitalized as part of the equipment costs. Which
of the following is the ASB balance assertion most closely related to the auditor's testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation

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17. Which of the following best describes the primary role and responsibility of independent
external auditor?
A. Produce a company's annual financial statements and notes.
B. Express an opinion on the fairness of a company's annual financial statements and
footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client's internal control structure and give management a
report about control problems and deficiencies.

18. Which of the following best describes the main reason independent auditors report on
management's financial statements?
A. Management fraud may exist, and it is likely to be detected by independent auditors.
B. The management that prepares the statements and the persons who use the statements may
have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent audit work.
D. The management that prepares the statements may have a poorly designed system of
internal control.

19. The auditor's judgment concerning the overall fairness of the presentation of financial
position, results of operations, and cash flows is applied within the framework of
A. Quality control.
B. Generally accepted auditing standards, which include the concept of materiality.
C. The auditor's evaluation of the audited company's internal control.
D. The applicable financial reporting framework (i.e., GAAP in the United States).

20. Assurance services involve all of the following, except

A. Relevance as well as the reliability of information.
B. Nonfinancial information as well as traditional financial statements.
C. Providing absolute rather than reasonable assurance.
D. Electronic databases as well as printed reports.

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21. Because of the risk of material misstatement, an audit of financial statements in
accordance with generally accepted auditing standards should be planned and performed with
an attitude of
A. Objective judgment.
B. Independent integrity.
C. Professional skepticism.
D. Impartial conservatism.

22. Which of the following best describes assurance services?

A. Independent professional services that report on the client's financial statements.
B. Independent professional services that improve the quality of information for decision
makers.
C. Independent professional services that report on specific written management assertions.
D. Independent professional services that improve the operations of the client.

23. Which of the following is not a PCAOB assertion about inventory related to presentation
and disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at its cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in notes.
D. All of the above are PCAOB presentation and disclosure assertions about inventory.

24. Which of the following is not an ASB assertion about inventory related to presentation
and disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in notes.
D. All of the above are ASB presentation and disclosure assertions about inventory.

25. In performing an attestation engagement, a CPA typically

A. Supplies litigation support services.
B. Assesses control risk at a low level.
C. Expresses a conclusion on an assertion about some type of subject matter.
D. Provides management consulting advice.

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26. An attestation engagement is one in which a CPA is engaged to
A. Issue, or does issue, a report on subject matter or an assertion about the subject matter that
is the responsibility of another party.
B. Provide tax advice or prepare a tax return based on financial information the CPA has not
audited or reviewed.
C. Testify as an expert witness in accounting, auditing or tax matters, given certain stipulated
facts.
D. Assemble prospective financial statements based on the assumptions of the entity's
management without expressing any assurance.

27. The underlying conditions that create demand by users for reliable information include all
of the following, except:
A. Transactions are numerous and complex.
B. Users lack professional skepticism.
C. Users are separated from accounting records by distance and time.
D. Financial decisions are important to investors and users.
E. Decisions are time-sensitive.

28. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about the PCAOB assertion of
A. Presentation.
B. Completeness.
C. Rights.
D. Existence.

29. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory
items provide assurance about the PCAOB assertion of
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

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30. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory
items provide assurance about the ASB balance assertion of
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

31. The probability that the information circulated by a company will be false or misleading is
referred to as
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

32. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the
financial statements. Certification means that the company CEO and CFO must sign a
statement indicating:
A. They have read the financial statements.
B. They are not aware of any false or misleading statements (or any key omitted disclosures).
C. They believe that the financial statements present an accurate picture of the company's
financial condition.
D. All of the above.

33. The process of a CPA obtaining a certificate and license in a state other than the state in
which the CPA's certificate was originally obtained is referred to as
A. Substantial equivalency.
B. Quid pro quo.
C. Relicensing.
D. Re-examination.

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34. The risk an entity will fail to meet its objectives is referred to as
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

35. The four basic requirements for becoming a CPA in most states are
A. Education, the CPA Examination, experience, and substantial equivalency.
B. The CPA Examination, experience, continuing professional education, and a state
certificate.
C. Continuing professional education, the CPA Examination, experience, and an AICPA
certificate.
D. Education, the CPA Examination, experience, and a state certificate.

36. The study of business operations for the purpose of making recommendations about the
efficient use of resources, effective achievement of business objectives, and compliance with
company policies is referred to as
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

37. The accounting, auditing, and investigating agency of the U.S. Congress, headed by the
U.S. Comptroller General is known as
A. The Federal Bureau of Investigation (FBI).
B. The U.S. General Accounting Office (GAO).
C. The Internal Revenue Service (IRS).
D. The United States Legislative Auditors (USLA).

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38. Which of the following would be considered an assurance engagement?
Refer To: 01-38
A. Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes
awarded in the past.
B. Giving an opinion on the conformity of the financial statements of a university with
generally accepted accounting principles.
C. Giving an opinion on the fair presentation of a newspaper's circulation data.
D. Giving assurance about the average drive length achieved by golfers with a client's golf
balls.
E. All of the above.

39. It is always a good idea for auditors to begin an audit with the professional skepticism
characterized by the assumption that
Refer To: 01-38
A. A potential conflict of interest always exists between the auditor and the management of
the enterprise under audit.
B. In audits of financial statements, the auditor acts exclusively in the capacity of an auditor.
C. The professional status of the independent auditor imposes commensurate professional
obligations.
D. Financial statements and financial data are verifiable.

40. In an attestation engagement, a CPA practitioner is engaged to

Refer To: 01-38
A. Compile a company's financial forecast based on management's assumptions without
expressing any form of assurance.
B. Prepare a written report containing a conclusion about the reliability of a management
assertion.
C. Prepare a tax return using information the CPA has not audited or reviewed.
D. Give expert testimony in court on particular facts in a corporate income tax controversy.

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41. Determination of cost savings obtained by outsourcing cafeteria services is most likely to
be an objective of
Refer To: 01-38
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

42. The primary difference between operational auditing and financial auditing is that in
operational auditing
Refer To: 01-38
A. The operational auditor is not concerned with whether the audited activity is generating
information in compliance with financial accounting standards.
B. The operational auditor is seeking to help management use resources in the most effective
manner possible.
C. The operational auditor starts with the financial statements of an activity being audited and
works backward to the basic processes involved in producing them.
D. The operational auditor can use analytical skills and tools that are not necessary in
financial auditing.

43. According to the AICPA, the purpose of an audit of financial statements is to

Refer To: 01-38
A. Enhance the degree of confidence that intended users can place in the financial statements.
B. Express an opinion on the fairness with which they present financial position, results of
operations, and cash flows in conformity with accounting standards promulgated by the
Financial Accounting Standards Board.
C. Express an opinion on the fairness with which they present financial position, result of
operations, and cash flows in conformity with accounting standards promulgated by the U.S.
Securities and Exchange Commission.
D. Obtain systematic and objective evidence about financial assertions and report the results
to interested users.

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44. Bankers who are processing loan applications from companies seeking large loans will
probably ask for financial statements audited by an independent CPA because
Refer To: 01-38
A. Financial statements are too complex to analyze themselves.
B. They are too far away from company headquarters to perform accounting and auditing
themselves.
C. The consequences of making a bad loan are very undesirable.
D. 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.

45. The Sarbanes-Oxley Act of 2002 prohibits professional service firms from providing
which of the following services to an audit client?
Refer To: 01-38
A. Bookkeeping services.
B. Internal audit services.
C. Valuation services.
D. All of the above.

46. Independent auditors of financial statements perform audits that reduce

Refer To: 01-38
A. Business risks faced by investors.
B. Information risk faced by investors.
C. Complexity of financial statements.
D. Timeliness of financial statements.

47. The primary objective of compliance auditing is to

Refer To: 01-38
A. Give an opinion on financial statements.
B. Develop a basis for a report on internal control.
C. Perform a study of effective and efficient use of resources.
D. Determine whether an audit client's personnel are following laws, rules, regulations, and
policies.

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48. What requirements are usually necessary to become licensed as a CPA?
Refer To: 01-38
A. Successful completion of the Uniform CPA Examination.
B. Experience in the accounting field.
C. Education.
D. All of the above.

49. The organization primarily responsible for ensuring that public officials are using public
funds efficiently, economically, and effectively is the
Refer To: 01-38
A. Governmental Internal Audit Agency (GIAA).
B. Central Internal Auditors (CIA).
C. Securities and Exchange Commission (SEC).
D. Government Accountability Office (GAO).

50. Performance audits usually include (two answers)

Refer To: 01-38
A. Financial audits.
B. Economy and efficiency audits.
C. Compliance audits.
D. Program audits.

51. The objective in an auditor's review of credit ratings of a client's customers is to obtain
evidence related to management's financial statement assertion about
Refer To: 01-38
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

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52. 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
Refer To: 01-38
A. Is sufficient evidence for Jones to conclude that the completeness assertion is supported for
expenses.
B. Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's
completeness assertion.
C. Should be disregarded because it is not in writing.
D. Is not considered a sufficient basis for Jones to conclude that all expenses have been
recorded.

53. The risk to investors that a company's financial statements may be materially misleading
is called
Refer To: 01-38
A. Client acceptance risk.
B. Information risk.
C. Moral hazard.
D. Business risk.

54. 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?
Refer To: 01-38
A. Cutoff.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

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55. When auditing merchandise inventory 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?
Refer To: 01-38
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

56. 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
Refer To: 01-38
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

57. The Sarbanes-Oxley Act of 2002 generally prohibits professional service firms from
Refer To: 01-38
A. Acting in a managerial decision-making role for an audit client.
B. Auditing the firm's own work on an audit client.
C. Providing tax consulting to an audit client without audit committee approval.
D. All of the above.

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58. Substantial equivalency refers to
Refer To: 01-38
A. An auditor's tendency not to believe management's assertions without sufficient
corroboration.
B. Providing consulting work for another firm's audit client in exchange for the other firm's
providing consulting services to one of your clients.
C. The waiving of certification exam parts for an individual holding an equivalent
certification from another professional organization.
D. Permitting a CPA to practice in another state without having to obtain a license in that
state.

59. Which of the following best describes the relationship between auditing and attestation
engagements?
Refer To: 01-38
A. Auditing is a subset of attestation engagements that focuses on the certification of financial
statements.
B. Attestation is a subset of auditing that provides lower assurance than that provided by an
audit engagement.
C. Auditing is a subset of attestation engagements that focuses on providing clients with
advice and decision support.
D. Attestation is a subset of auditing that improves the quality of information, or its context,
for decision makers.

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60. Which of the following best describes the focus of the following engagements?

Refer To: 01-38

A. Option A
B. Option B
C. Option C
D. Option D

61. Which of the following is a reason to obtain professional certification?

Refer To: 01-38
A. Certification provides credibility that an individual is technically competent.
B. Certification often is a necessary condition for advancement and promotion within a
professional services firm.
C. Obtaining certification is often monetarily rewarded by an individual's employer.
D. All of the above.

Question also found in Study Guide

62. Which of the following is not an underlying condition that creates demand by users for
reliable financial information?
A. Remoteness
B. Vagueness
C. Consequences
D. Complexity

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63. According to the American Accounting Association (AAA), the definition of auditing
includes the following statement
A. an independent appraisal function established within an organization to examine and
evaluate its activities.
B. a process of reducing to a socially acceptable level the information risk to users of financial
statements.
C. an expression of opinion on the fairness of financial statements.
D. a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events.

64. Which of the following is not a major element of assurance services?

A. Independence
B. Improving the quality of information
C. Improving profitability of the client
D. Improving the context of information

65. The goal of operational auditing is to

A. Help managers discharge their management responsibilities and improve profitability.
B. Evaluate compliance with specific laws and regulations.
C. Reduce to a socially acceptable level the information risk to users of financial statements.
D. Express an opinion on the fairness of financial statements.

66. The PCAOB assertions made by management in financial statements do not include
A. Existence.
B. Compliance.
C. Completeness.
D. Presentation.

67. Which of the following is not a role of the AICPA?

A. Refine the body of professional knowledge, regulate membership admissions, and police
conduct of members.
B. Prepare and grade the uniform CPA examination.
C. License the practices of CPAs in the various states.
D. Issue public statements on practice standards.

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68. The ASB transaction objective that requires the auditor to establish evidence that all
transactions and accounts that should be presented in the financial statements are included is?
A. Completeness.
B. Existence or occurrence.
C. Rights and obligations.
D. Valuation or allocation.

69. Which of the following is an example of a regulatory auditor?

A. Internal auditors
B. Big 4 auditors
C. U.S. Internal Revenue Service auditors
D. Operational auditors

70. The definition of performance audits does not include

A. economy audits.
B. efficiency audits.
C. financial audits.
D. program audits.

71. CPA certificates and licenses to practice are issued by the

A. AICPA.
B. States or territories.
C. AICPA Examinations Division.
D. GAO.

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Matching Questions

Question also found in Study Guide

72. Which of the PCAOB assertions (A - E) are best verified by the following audit
procedures (1-4)?

1. Valuation or Confirming inventory held on consignment by the

allocation client with independent third party. ____
2. Valuation or Consulting the Wall Street Journal for year-end
allocation prices of securities held by the client. ____
3. Existence or Physically examine all major property and
occurrence equipment additions. ____
4. Rights and Review the aged trial balance for significant past
obligations due accounts. ____

73. ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the
revenue of ABC Company. The auditors performed the audit procedures listed 1 - 3. For each
audit procedure select the ASB transaction assertion that is most likely being tested.

The auditor reviewed the shipping documents to check

1. Completeness the date that product was shipped to XYZ Company. ____
The auditor reviewed the shipping documents to
ensure that all product included in the sales revenue to
2. Cutoff XYZ had been shipped. ____
The auditor reviewed the invoice sent to XYZ
3. Accuracy Company to ensure that XYZ had been properly billed. ____

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74. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed
the audit procedures listed 1 - 5. For each audit procedure select the ASB balance assertion
that is most likely being tested.

The auditors walked through the warehouse looking

1. Valuation for obsolete inventory. ____
The auditors compared invoices received from
2. Rights and suppliers with the cost of inventory listed in the
obligations inventory accounts. ____
The auditors reviewed purchase orders to determine
3. Valuation if any inventory was on consignment. ____
The auditors reviewed vendor invoices to determine
if freight costs, taxes, tariffs or other costs had been
4. Completeness included in inventory costs. ____
The auditors selected items from the inventory and
reviewed inventory records to ensure these items were
5. Accuracy included in those records. ____

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True / False Questions

Questions also found in Study Guide

75. Financial decision makers demand reliable information that is provided by accountants.
True False

76. Financial decision makers obtain their accounting information from lenders of funds.
True False

77. Four conditions that create demand for reliable information are complexity, remoteness,
timeliness, and consequences.
True False

78. The lending of credibility to financial information is known as certification.

True False

79. Independent auditors are employees of the client.

True False

80. Assurance service is the systematic process of objectively obtaining and evaluating
evidence.
True False

81. Evidence consists of assertions about economic actions and events.

True False

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82. The purpose of obtaining and evaluating evidence is to ascertain the degree of
correspondence between the assertions and established criteria.
True False

83. The AICPA Statement on Auditing Standards defines auditing more broadly than the AAA
definition of auditing.
True False

84. The PCAOB audit objective related to the completeness assertion is to establish evidence
that assets, liabilities, and equities actually exist.
True False

85. The ASB balance audit objective related to valuation or accuracy is to determine whether
proper values have been assigned to assets, liabilities, equities, revenues, and expenses.
True False

86. The objective of internal auditing is to assist members of an organization to effectively

perform their obligations.
True False

87. Internal auditors perform only operational audits.

True False

88. Government auditors perform both financial and performance audits.

True False

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89. Expanded scope governmental auditing includes economy and efficiency and program
results audits.
True False

90. The AICPA licenses CPAs to practice in the United States.

True False

91. Professional skepticism is an auditor's tendency not to believe anyone.

True False

92. Assurance services are independent professional services that improve the quality of
information or its context for decision makers.
True False

93. The concept "professional skepticism" requires that auditors assume management is
dishonest and should not be trusted.
True False

94. For independent auditors of financial statements in the United States, established criteria
largely consist of the generally accepted accounting principles (GAAP).
True False

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Fill in the Blank Questions

Questions also found in Study Guide

95. The risk that the information disseminated by a company will be materially false or
misleading is called _____________________________
_____________________________.
________________________________________

96. The audit process involves obtaining and evaluating _____________________________.

________________________________________

97. The purpose of obtaining and evaluating evidence is to ascertain the degree of
correspondence between the _____________________________ and
_____________________________.
________________________________________

98. The objective of the ordinary examination of financial statements by the independent
auditor is the expression of a(n) _____________________________ on the
_____________________________ of financial statements.
________________________________________

99. _____________________________ refers to recognizing assets and liabilities as of proper

date and accounting for revenue, expense, and other transactions in the proper period.
________________________________________

100. The ASB balance objective related to _____________________________ is to establish

with evidence that all transactions and accounts that should be presented in the financial
statements are included.
________________________________________

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101. The ASB transaction objective related to _____________________________ is to
determine whether proper values have been assigned to all financial transactions.
________________________________________

102. _____________________________ _____________________________ is the study of

business operations for the purpose of making recommendations to managers on how to
improve profitability.
________________________________________

103. The _____________________________ is the accounting, auditing, and investigating

agency of the U.S. Congress.
________________________________________

104. _____________________________ governmental auditing goes beyond an audit of

financial reports and compliance with laws and regulations to include
_____________________________ and _____________________________ and
_____________________________ _____________________________ audits.
________________________________________

105. The four basic requirements for becoming a CPA are

_____________________________, _____________________________,
_____________________________, and _____________________________.
________________________________________

106. _____________________________ _____________________________ is an auditor's

tendency not to believe management assertions.
________________________________________

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107. A _____________________________ consists of writing up the financial statements
from a client's books and records.
________________________________________

108. Through the process of _____________________________, after becoming a CPA

licensed in one state, a person can obtain a CPA certificate and license in another state.
________________________________________

109. Examples of _____________________________ _____________________________

are (1) economy and efficiency audits and (2) program audits.
________________________________________

Essay Questions

110. What are the differences between the American Accounting Association and AICPA
definitions and objectives of auditing?

111. What is operational auditing and by whom is it performed?

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112. What is information risk? What is business risk?

113. What are the four basic requirements for becoming a CPA?

114. Define assurance, attestation, and auditing in the context of "lending credibility."

This question is also in the Study Guide

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115. Audits may be characterized as (a) financial statement audits, (b) compliance audits, or
(c) operational audits. The work can be done by (a) independent (external) auditors, (b)
internal auditors, or (c) government auditors. Below is a list of several audit engagements. For
each engagement indicate (a) the type of audit and (b) who would typically do the audit.
1. Render an opinion on the fairness of the presentation of financial statements of a public
corporation.
2. Compare the cost of maintaining a fleet of delivery trucks with the option of using an
independent delivery service.
3. Audit reported income on a corporation's tax return.
4. Review contract cost of constructing aircraft engines for the armed services.
5. Report on how the installation of a new computer system would help a client reduce data
processing costs and improve financial reporting.

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Chapter 01 Auditing and Assurance Services Answer Key

Multiple Choice Questions

1. The audit objective that all transactions and accounts that should be presented in the
financial statements are in fact included is related to which of the PCAOB assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

2. To be proficient as an auditor, a person must first be able to accomplish which of these

tasks in a decision-making process?
A. Identify audit evidence relevant to the verification of assertions management makes in its
unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient,
competent evidence about assertions management makes in financial statements and notes.
C. Recognize the financial assertions made in management's financial statements and
footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide whether
management's assertions conform to generally accepted accounting principles and reality.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard

1-30
3. Which of the following is an underlying condition that in part creates the demand by users
for reliable information?
A. Economic transactions that are numerous and complex.
B. Decisions are time-sensitive.
C. Users separated from accounting records by distance and time.
D. Financial decisions that are important to investors and users.
E. All of the above.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

4. Which of the following is not included in The American Accounting Association (AAA)
definition of auditing?
A. Potential conflict of interest.
B. Systematic process.
C. Assertions about economic actions.
D. Established criteria.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-31
5. What is the term used to identify the risk that the client's financial statements may be
materially false and misleading?
A. Business risk.
B. Information risk.
C. Client risk.
D. Risk assessment.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy

6. Which of the following is not a recommendation usually made following the completion of
an operational audit?
A. Economic and efficient use of resources.
B. Effective achievement of business objectives.
C. Attesting to the fairness of the financial statements.
D. Compliance with company policies.

Original

AACSB: Communication
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Easy

1-32
7. In order to be considered as external auditors with respect to government agencies, GAO
auditors must be
A. Organizationally independent.
B. Empowered as the accounting and auditing agency by the U.S. Congress.
C. Funded by the federal government.
D. Guided by standards similar to GAAS.

Original

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

8. Which of the following is the essential purpose of the audit function?

A. Detection of fraud.
B. Examination of individual transactions to certify as to their validity.
C. Determination of whether the client's financial statement assertions are fairly stated.
D. Assurance of the consistent application of correct accounting procedures.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Medium

1-33
9. The audit objective that all the transactions and accounts presented in the financial
statements represent real assets, liabilities, revenues, and expenses is related most closely to
which of the PCAOB assertions?
A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

10. The audit objective that all transactions are recorded in the proper period is related most
closely to which of the Audit Standards Board (ASB) transaction assertions?
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-34
11. The audit objective that all transactions are recorded in the proper account is related most
closely to which one of the ASB transaction assertions?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

12. The audit objective that all balances include items owned by the client is related most
closely to which one of the ASB balance assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-35
13. The audit objective that all balances include all items that should be recorded in that
account is related most closely to which one of the ASB balance assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

14. The audit objective that footnotes in the financial statements should be clear and
expressed such that the information is easily conveyed to the readers of the financial
statements is related most closely with which of the ASB presentation and disclosure
assertions?
A. Occurrence
B. Rights and obligations
C. Comprehensibility
D. Understandability

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-36
15. The engineering department at Omni Company built a piece of equipment in the
company's own shop for use in the company's operations. The auditor reviewed all work
orders that were capitalized as part of the equipment costs. Which of the following is the ASB
transaction assertion most closely related to the auditor's testing?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard

16. The engineering department at Omni Company built a piece of equipment in the
company's own shop for use in the company's operations. When looking at the ending balance
for the fixed asset account the auditor examined all work orders, purchased materials, labor
cost reports, and applied overhead that were capitalized as part of the equipment costs. Which
of the following is the ASB balance assertion most closely related to the auditor's testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard

1-37
17. Which of the following best describes the primary role and responsibility of independent
external auditor?
A. Produce a company's annual financial statements and notes.
B. Express an opinion on the fairness of a company's annual financial statements and
footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client's internal control structure and give management a
report about control problems and deficiencies.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

18. Which of the following best describes the main reason independent auditors report on
management's financial statements?
A. Management fraud may exist, and it is likely to be detected by independent auditors.
B. The management that prepares the statements and the persons who use the statements may
have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent audit work.
D. The management that prepares the statements may have a poorly designed system of
internal control.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Bloom's: Comprehension
Difficulty: Medium

1-38
19. The auditor's judgment concerning the overall fairness of the presentation of financial
position, results of operations, and cash flows is applied within the framework of
A. Quality control.
B. Generally accepted auditing standards, which include the concept of materiality.
C. The auditor's evaluation of the audited company's internal control.
D. The applicable financial reporting framework (i.e., GAAP in the United States).

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

20. Assurance services involve all of the following, except

A. Relevance as well as the reliability of information.
B. Nonfinancial information as well as traditional financial statements.
C. Providing absolute rather than reasonable assurance.
D. Electronic databases as well as printed reports.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-39
21. Because of the risk of material misstatement, an audit of financial statements in
accordance with generally accepted auditing standards should be planned and performed with
an attitude of
A. Objective judgment.
B. Independent integrity.
C. Professional skepticism.
D. Impartial conservatism.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium

22. Which of the following best describes assurance services?

A. Independent professional services that report on the client's financial statements.
B. Independent professional services that improve the quality of information for decision
makers.
C. Independent professional services that report on specific written management assertions.
D. Independent professional services that improve the operations of the client.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-40
23. Which of the following is not a PCAOB assertion about inventory related to presentation
and disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at its cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in notes.
D. All of the above are PCAOB presentation and disclosure assertions about inventory.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

24. Which of the following is not an ASB assertion about inventory related to presentation
and disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in notes.
D. All of the above are ASB presentation and disclosure assertions about inventory.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

1-41
25. In performing an attestation engagement, a CPA typically
A. Supplies litigation support services.
B. Assesses control risk at a low level.
C. Expresses a conclusion on an assertion about some type of subject matter.
D. Provides management consulting advice.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

26. An attestation engagement is one in which a CPA is engaged to

A. Issue, or does issue, a report on subject matter or an assertion about the subject matter that
is the responsibility of another party.
B. Provide tax advice or prepare a tax return based on financial information the CPA has not
audited or reviewed.
C. Testify as an expert witness in accounting, auditing or tax matters, given certain stipulated
facts.
D. Assemble prospective financial statements based on the assumptions of the entity's
management without expressing any assurance.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-42
27. The underlying conditions that create demand by users for reliable information include all
of the following, except:
A. Transactions are numerous and complex.
B. Users lack professional skepticism.
C. Users are separated from accounting records by distance and time.
D. Financial decisions are important to investors and users.
E. Decisions are time-sensitive.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

28. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about the PCAOB assertion of
A. Presentation.
B. Completeness.
C. Rights.
D. Existence.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-43
29. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory
items provide assurance about the PCAOB assertion of
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

30. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory
items provide assurance about the ASB balance assertion of
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
E. Rights and obligations.

AICPA

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-44
31. The probability that the information circulated by a company will be false or misleading is
referred to as
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium

32. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the
financial statements. Certification means that the company CEO and CFO must sign a
statement indicating:
A. They have read the financial statements.
B. They are not aware of any false or misleading statements (or any key omitted disclosures).
C. They believe that the financial statements present an accurate picture of the company's
financial condition.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-45
33. The process of a CPA obtaining a certificate and license in a state other than the state in
which the CPA's certificate was originally obtained is referred to as
A. Substantial equivalency.
B. Quid pro quo.
C. Relicensing.
D. Re-examination.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

34. The risk an entity will fail to meet its objectives is referred to as
A. Business risk.
B. Information risk.
C. Assurance risk.
D. Audit risk.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy

1-46
35. The four basic requirements for becoming a CPA in most states are
A. Education, the CPA Examination, experience, and substantial equivalency.
B. The CPA Examination, experience, continuing professional education, and a state
certificate.
C. Continuing professional education, the CPA Examination, experience, and an AICPA
certificate.
D. Education, the CPA Examination, experience, and a state certificate.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

36. The study of business operations for the purpose of making recommendations about the
efficient use of resources, effective achievement of business objectives, and compliance with
company policies is referred to as
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-47
37. The accounting, auditing, and investigating agency of the U.S. Congress, headed by the
U.S. Comptroller General is known as
A. The Federal Bureau of Investigation (FBI).
B. The U.S. General Accounting Office (GAO).
C. The Internal Revenue Service (IRS).
D. The United States Legislative Auditors (USLA).

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

38. Which of the following would be considered an assurance engagement?

Refer To: 01-38
A. Giving an opinion on a prize promoter's claims about the amount of sweepstakes prizes
awarded in the past.
B. Giving an opinion on the conformity of the financial statements of a university with
generally accepted accounting principles.
C. Giving an opinion on the fair presentation of a newspaper's circulation data.
D. Giving assurance about the average drive length achieved by golfers with a client's golf
balls.
E. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

1-48
39. It is always a good idea for auditors to begin an audit with the professional skepticism
characterized by the assumption that
Refer To: 01-38
A. A potential conflict of interest always exists between the auditor and the management of
the enterprise under audit.
B. In audits of financial statements, the auditor acts exclusively in the capacity of an auditor.
C. The professional status of the independent auditor imposes commensurate professional
obligations.
D. Financial statements and financial data are verifiable.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

40. In an attestation engagement, a CPA practitioner is engaged to

Refer To: 01-38
A. Compile a company's financial forecast based on management's assumptions without
expressing any form of assurance.
B. Prepare a written report containing a conclusion about the reliability of a management
assertion.
C. Prepare a tax return using information the CPA has not audited or reviewed.
D. Give expert testimony in court on particular facts in a corporate income tax controversy.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Medium

1-49
41. Determination of cost savings obtained by outsourcing cafeteria services is most likely to
be an objective of
Refer To: 01-38
A. Environmental auditing.
B. Financial auditing.
C. Compliance auditing.
D. Operational auditing.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

42. The primary difference between operational auditing and financial auditing is that in
operational auditing
Refer To: 01-38
A. The operational auditor is not concerned with whether the audited activity is generating
information in compliance with financial accounting standards.
B. The operational auditor is seeking to help management use resources in the most effective
manner possible.
C. The operational auditor starts with the financial statements of an activity being audited and
works backward to the basic processes involved in producing them.
D. The operational auditor can use analytical skills and tools that are not necessary in
financial auditing.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-50
43. According to the AICPA, the purpose of an audit of financial statements is to
Refer To: 01-38
A. Enhance the degree of confidence that intended users can place in the financial statements.
B. Express an opinion on the fairness with which they present financial position, results of
operations, and cash flows in conformity with accounting standards promulgated by the
Financial Accounting Standards Board.
C. Express an opinion on the fairness with which they present financial position, result of
operations, and cash flows in conformity with accounting standards promulgated by the U.S.
Securities and Exchange Commission.
D. Obtain systematic and objective evidence about financial assertions and report the results
to interested users.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

44. Bankers who are processing loan applications from companies seeking large loans will
probably ask for financial statements audited by an independent CPA because
Refer To: 01-38
A. Financial statements are too complex to analyze themselves.
B. They are too far away from company headquarters to perform accounting and auditing
themselves.
C. The consequences of making a bad loan are very undesirable.
D. 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.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

1-51
45. The Sarbanes-Oxley Act of 2002 prohibits professional service firms from providing
which of the following services to an audit client?
Refer To: 01-38
A. Bookkeeping services.
B. Internal audit services.
C. Valuation services.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

46. Independent auditors of financial statements perform audits that reduce

Refer To: 01-38
A. Business risks faced by investors.
B. Information risk faced by investors.
C. Complexity of financial statements.
D. Timeliness of financial statements.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-52
47. The primary objective of compliance auditing is to
Refer To: 01-38
A. Give an opinion on financial statements.
B. Develop a basis for a report on internal control.
C. Perform a study of effective and efficient use of resources.
D. Determine whether an audit client's personnel are following laws, rules, regulations, and
policies.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

48. What requirements are usually necessary to become licensed as a CPA?

Refer To: 01-38
A. Successful completion of the Uniform CPA Examination.
B. Experience in the accounting field.
C. Education.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-53
49. The organization primarily responsible for ensuring that public officials are using public
funds efficiently, economically, and effectively is the
Refer To: 01-38
A. Governmental Internal Audit Agency (GIAA).
B. Central Internal Auditors (CIA).
C. Securities and Exchange Commission (SEC).
D. Government Accountability Office (GAO).

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

50. Performance audits usually include (two answers)

Refer To: 01-38
A. Financial audits.
B. Economy and efficiency audits.
C. Compliance audits.
D. Program audits.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-54
51. The objective in an auditor's review of credit ratings of a client's customers is to obtain
evidence related to management's financial statement assertion about
Refer To: 01-38
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

52. 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
Refer To: 01-38
A. Is sufficient evidence for Jones to conclude that the completeness assertion is supported for
expenses.
B. Can enable Jones to minimize the work on the gathering of evidence to support Rhonda's
completeness assertion.
C. Should be disregarded because it is not in writing.
D. Is not considered a sufficient basis for Jones to conclude that all expenses have been
recorded.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

1-55
53. The risk to investors that a company's financial statements may be materially misleading
is called
Refer To: 01-38
A. Client acceptance risk.
B. Information risk.
C. Moral hazard.
D. Business risk.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

54. 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?
Refer To: 01-38
A. Cutoff.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

1-56
55. When auditing merchandise inventory 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?
Refer To: 01-38
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

56. 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
Refer To: 01-38
A. Completeness.
B. Existence.
C. Valuation and allocation.
D. Rights and obligations.
E. Occurrence.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

1-57
57. The Sarbanes-Oxley Act of 2002 generally prohibits professional service firms from
Refer To: 01-38
A. Acting in a managerial decision-making role for an audit client.
B. Auditing the firm's own work on an audit client.
C. Providing tax consulting to an audit client without audit committee approval.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

58. Substantial equivalency refers to

Refer To: 01-38
A. An auditor's tendency not to believe management's assertions without sufficient
corroboration.
B. Providing consulting work for another firm's audit client in exchange for the other firm's
providing consulting services to one of your clients.
C. The waiving of certification exam parts for an individual holding an equivalent
certification from another professional organization.
D. Permitting a CPA to practice in another state without having to obtain a license in that
state.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-58
59. Which of the following best describes the relationship between auditing and attestation
engagements?
Refer To: 01-38
A. Auditing is a subset of attestation engagements that focuses on the certification of financial
statements.
B. Attestation is a subset of auditing that provides lower assurance than that provided by an
audit engagement.
C. Auditing is a subset of attestation engagements that focuses on providing clients with
advice and decision support.
D. Attestation is a subset of auditing that improves the quality of information, or its context,
for decision makers.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

1-59
60. Which of the following best describes the focus of the following engagements?

Refer To: 01-38

A. Option A
B. Option B
C. Option C
D. Option D

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard

61. Which of the following is a reason to obtain professional certification?

Refer To: 01-38
A. Certification provides credibility that an individual is technically competent.
B. Certification often is a necessary condition for advancement and promotion within a
professional services firm.
C. Obtaining certification is often monetarily rewarded by an individual's employer.
D. All of the above.

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-60
Question also found in Study Guide

62. Which of the following is not an underlying condition that creates demand by users for
reliable financial information?
A. Remoteness
B. Vagueness
C. Consequences
D. Complexity

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

63. According to the American Accounting Association (AAA), the definition of auditing
includes the following statement
A. an independent appraisal function established within an organization to examine and
evaluate its activities.
B. a process of reducing to a socially acceptable level the information risk to users of financial
statements.
C. an expression of opinion on the fairness of financial statements.
D. a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

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64. Which of the following is not a major element of assurance services?
A. Independence
B. Improving the quality of information
C. Improving profitability of the client
D. Improving the context of information

Original

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

65. The goal of operational auditing is to

A. Help managers discharge their management responsibilities and improve profitability.
B. Evaluate compliance with specific laws and regulations.
C. Reduce to a socially acceptable level the information risk to users of financial statements.
D. Express an opinion on the fairness of financial statements.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

66. The PCAOB assertions made by management in financial statements do not include
A. Existence.
B. Compliance.
C. Completeness.
D. Presentation.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

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67. Which of the following is not a role of the AICPA?
A. Refine the body of professional knowledge, regulate membership admissions, and police
conduct of members.
B. Prepare and grade the uniform CPA examination.
C. License the practices of CPAs in the various states.
D. Issue public statements on practice standards.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

68. The ASB transaction objective that requires the auditor to establish evidence that all
transactions and accounts that should be presented in the financial statements are included is?
A. Completeness.
B. Existence or occurrence.
C. Rights and obligations.
D. Valuation or allocation.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

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69. Which of the following is an example of a regulatory auditor?
A. Internal auditors
B. Big 4 auditors
C. U.S. Internal Revenue Service auditors
D. Operational auditors

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

70. The definition of performance audits does not include

A. economy audits.
B. efficiency audits.
C. financial audits.
D. program audits.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

71. CPA certificates and licenses to practice are issued by the

A. AICPA.
B. States or territories.
C. AICPA Examinations Division.
D. GAO.

Original

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

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Matching Questions

Question also found in Study Guide

72. Which of the PCAOB assertions (A - E) are best verified by the following audit
procedures (1-4)?

1. Valuation or Confirming inventory held on consignment by the

allocation client with independent third party. 4
2. Valuation or Consulting the Wall Street Journal for year-end prices
allocation of securities held by the client. 1
3. Existence or Physically examine all major property and equipment
occurrence additions. 3
4. Rights and Review the aged trial balance for significant past due
obligations accounts. 1

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard

73. ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the
revenue of ABC Company. The auditors performed the audit procedures listed 1 - 3. For each
audit procedure select the ASB transaction assertion that is most likely being tested.

The auditor reviewed the shipping documents to check the

1. Completeness date that product was shipped to XYZ Company. 2
The auditor reviewed the shipping documents to ensure
that all product included in the sales revenue to XYZ had
2. Cutoff been shipped. 1
The auditor reviewed the invoice sent to XYZ Company to
3. Accuracy ensure that XYZ had been properly billed. 3

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard

1-65
74. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed
the audit procedures listed 1 - 5. For each audit procedure select the ASB balance assertion
that is most likely being tested.

The auditors walked through the warehouse looking for

1. Valuation obsolete inventory. 1
The auditors compared invoices received from
2. Rights and suppliers with the cost of inventory listed in the inventory
obligations accounts. 5
The auditors reviewed purchase orders to determine if
3. Valuation any inventory was on consignment. 2
The auditors reviewed vendor invoices to determine if
freight costs, taxes, tariffs or other costs had been included
4. Completeness in inventory costs. 1
The auditors selected items from the inventory and
reviewed inventory records to ensure these items were
5. Accuracy included in those records. 4

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard

True / False Questions

Questions also found in Study Guide

75. Financial decision makers demand reliable information that is provided by accountants.
TRUE

76. Financial decision makers obtain their accounting information from lenders of funds.
FALSE

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77. Four conditions that create demand for reliable information are complexity, remoteness,
timeliness, and consequences.
TRUE

78. The lending of credibility to financial information is known as certification.

FALSE

79. Independent auditors are employees of the client.

FALSE

80. Assurance service is the systematic process of objectively obtaining and evaluating
evidence.
FALSE

81. Evidence consists of assertions about economic actions and events.

FALSE

82. The purpose of obtaining and evaluating evidence is to ascertain the degree of
correspondence between the assertions and established criteria.
TRUE

83. The AICPA Statement on Auditing Standards defines auditing more broadly than the AAA
definition of auditing.
FALSE

84. The PCAOB audit objective related to the completeness assertion is to establish evidence
that assets, liabilities, and equities actually exist.
FALSE

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85. The ASB balance audit objective related to valuation or accuracy is to determine whether
proper values have been assigned to assets, liabilities, equities, revenues, and expenses.
TRUE

86. The objective of internal auditing is to assist members of an organization to effectively

perform their obligations.
TRUE

87. Internal auditors perform only operational audits.

FALSE

88. Government auditors perform both financial and performance audits.

TRUE

89. Expanded scope governmental auditing includes economy and efficiency and program
results audits.
TRUE

90. The AICPA licenses CPAs to practice in the United States.

FALSE

91. Professional skepticism is an auditor's tendency not to believe anyone.

FALSE

92. Assurance services are independent professional services that improve the quality of
information or its context for decision makers.
TRUE

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93. The concept "professional skepticism" requires that auditors assume management is
dishonest and should not be trusted.
FALSE

94. For independent auditors of financial statements in the United States, established criteria
largely consist of the generally accepted accounting principles (GAAP).
TRUE

Fill in the Blank Questions

Questions also found in Study Guide

95. The risk that the information disseminated by a company will be materially false or
misleading is called _____________________________
_____________________________.
information risk

96. The audit process involves obtaining and evaluating _____________________________.

evidence

97. The purpose of obtaining and evaluating evidence is to ascertain the degree of
correspondence between the _____________________________ and
_____________________________.
assertions, established criteria

98. The objective of the ordinary examination of financial statements by the independent
auditor is the expression of a(n) _____________________________ on the
_____________________________ of financial statements.
opinion, fairness

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99. _____________________________ refers to recognizing assets and liabilities as of proper
date and accounting for revenue, expense, and other transactions in the proper period.
Cutoff

100. The ASB balance objective related to _____________________________ is to establish

with evidence that all transactions and accounts that should be presented in the financial
statements are included.
completeness

101. The ASB transaction objective related to _____________________________ is to

determine whether proper values have been assigned to all financial transactions.
accuracy

102. _____________________________ _____________________________ is the study of

business operations for the purpose of making recommendations to managers on how to
improve profitability.
Operational auditing

103. The _____________________________ is the accounting, auditing, and investigating

agency of the U.S. Congress.
GAO

104. _____________________________ governmental auditing goes beyond an audit of

financial reports and compliance with laws and regulations to include
_____________________________ and _____________________________ and
_____________________________ _____________________________ audits.
Expanded-scope, economy, efficiency, program results

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105. The four basic requirements for becoming a CPA are
_____________________________, _____________________________,
_____________________________, and _____________________________.
education, examination, experience, state certificate and license

106. _____________________________ _____________________________ is an auditor's

tendency not to believe management assertions.
Professional skepticism

107. A _____________________________ consists of writing up the financial statements

from a client's books and records.
compilation

108. Through the process of _____________________________, after becoming a CPA

licensed in one state, a person can obtain a CPA certificate and license in another state.
Substantial equivalency

109. Examples of _____________________________ _____________________________

are (1) economy and efficiency audits and (2) program audits.
performance audits

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Essay Questions

110. What are the differences between the American Accounting Association and AICPA
definitions and objectives of auditing?

The AAA definition is broad and general enough to encompass independent, internal, and
governmental auditing. The AICPA has not defined auditing but its statement on objectives of
financial audits restricts auditing to independent CPA's audit of the traditional financial
statements and their footnotes. The AICPA SAS also offers guides to report on internal
control, letters to underwriters, and special reports.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

111. What is operational auditing and by whom is it performed?

Operational auditing is the evaluation of business operations for various purposes.

Operational auditing includes: (1) testing for compliance with laws and regulations and
company policies and procedures, (2) evaluating the effectiveness of operations in achieving
goals and objectives, and (3) evaluating the efficiency and economy of operations.
Operational audits are normally performed by internal auditors. However, operational audits
also may be conducted by independent CPA firms as part of their management advisory
services.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium

1-72
112. What is information risk? What is business risk?

Information risk is the risk that financial statements will be materially false or misleading.
Business risk is the risk an entity will fail to meet its objectives.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

113. What are the four basic requirements for becoming a CPA?

Education, the CPA Examination, experience, and a state certificate.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy

114. Define assurance, attestation, and auditing in the context of "lending credibility."

Assurance is the "lending of credibility" to information. Attestation is the "lending of

credibility" to assertions made by a third party. Auditing is the "lending of credibility" to
financial statements.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium

This question is also in the Study Guide

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115. Audits may be characterized as (a) financial statement audits, (b) compliance audits, or
(c) operational audits. The work can be done by (a) independent (external) auditors, (b)
internal auditors, or (c) government auditors. Below is a list of several audit engagements. For
each engagement indicate (a) the type of audit and (b) who would typically do the audit.
1. Render an opinion on the fairness of the presentation of financial statements of a public
corporation.
2. Compare the cost of maintaining a fleet of delivery trucks with the option of using an
independent delivery service.
3. Audit reported income on a corporation's tax return.
4. Review contract cost of constructing aircraft engines for the armed services.
5. Report on how the installation of a new computer system would help a client reduce data
processing costs and improve financial reporting.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Hard

1-74