Ch01 - Auditing, Attestation, And Assurance

 Auditing, Attestation, Attestation, and Assurance Assurance 1.

The sing The single le fea featu ture re tha that t most most cle clear arly ly dis disti ting ngui uish shes es auditing, attestation, and assurance is a. Type of service. b. Trai Tr aini ning ng re requ quir ired ed to pe perf rfor orm m th the e se serv rvic ice. e. c. Scope of services. d. CPA PA’ ’s a ap pproach t to o t th he s se ervice. ANSWER:

2.

The pri The prima mary ry go goal al of th the e CPA CPA in in per perfo form rmin ing g the the att attes est t function is to a. Detect fraud. b. Exam Ex amin ine e indi indivi vidu dual al tra trans nsac acti tion ons s so tha that t the the audi audito tor r may certify as to their validity. c. Deter Det ermi mine ne wh whet ethe her r the cl clie ient nt's 's as asse serti rtion ons s ar are e fa fair irly ly stated. d. Assu As sure re th the e con consi sist sten ent t app appli lica cati tion on of co corr rrec ect t accounting procedures. ANSWER:

3.

C

Intern Inte rnal al au audi diti ting ng of ofte ten n ex exte tend nds s be beyo yond nd exa exami mina nati tion ons s leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and a. Internal control. b. Evaluation. c. Accuracy. d. Compliance. ANSWER:

4.

C

D

Which of the following best describes the operational audit? a. It requires the constant review by internal auditors of the administrative controls as they relate to operations of the company. b. It concentrates on implementing financial and accounting control in a newly organized company. c. It attempts and is designed to verify the fair presentation of a company's results of operations.

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Chapter 1 Auditing, Attestation, and Assurance

d.

It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls.

ANSWER: 5.

The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and changes in financial position is applied within the framework of a. Generally accepted accounting principles. b. Generally accepted auditing standards. c. Internal control. d. Information systems control. ANSWER:

6.

B

Which of the following is not a distinguishing feature of risk-based auditing? Identifying areas posing the highest risk of financial a. statement errors.  b. Analysis of internal control. c. Collecting and evaluating evidence. d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors. ANSWER:

8.

A

Which of the following is not considered an assertion as formulated by the Auditing Standards Board? a. Valuation or allocation.  b. Mathematical accuracy. Rights and obligations. c. Presentation and disclosure. d. ANSWER:

7.

D

C

To maximize independence, the director of internal auditing should report to the a. Audit committee. b. Controller. c. Chief financial officer. d. Director of information systems. ANSWER:

A

Chapter 1 Auditing, Attestation, and Assurance

9.

The auditor communicates the results of his or her work through the medium of the Engagement letter. a. Management letter.  b. Audit report. c. d. Financial statements. ANSWER:

10.

The best description of the scope of internal auditing is that it encompasses a. Primarily operational auditing. Both financial and operational auditing.  b. Primarily the safeguarding of assets and verifying the c. existence of such assets. Primarily financial auditing. d. ANSWER:

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B

A typical objective of an operational audit is to determine whether an entity's a. Financial statements fairly present financial position and cash flows. Financial statements present fairly the results of  b. operations. c. Financial statements fairly present financial position, results of operations, and cash flows. d. Specific operating units are functioning efficiently and effectively. ANSWER:

12.

C

D

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the a. Scope paragraph of the auditor’s report.  b. Opinion paragraph of the auditor’s report. c. Management letter. d. Engagement letter. ANSWER:

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The a. b. c.

D

four major steps in conducting an audit are: Testing internal controls Audit report Planning

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Chapter 1 Auditing, Attestation, and Assurance

d.

Testing transactions and balances

The proper sequence in applying the above steps is: a. cadb b. cdab c. bcda d. adcb ANSWER: 13.

Which of the following statements is not true regarding the competence of audit evidence? a. Relevance is enhanced by an effective information system. b. To be competent, evidence must be both valid and relevant. c. Validity is related to the quality of the client’s information system. d. Relevance must always relate to audit objectives. ANSWER:

15.

A

As used in auditing, which of the following statements best describes "assertions"? a. Assertions are the representations of management as to the reliability of the information system. b. Assertions are the auditor's findings to be communicated in the audit report. c. Assertions are the representations of management as to the fairness of the financial statements. d. Assertions are found only in the footnotes to the financial statements. ANSWER:

16.

A

C

Which of the following statements is not a distinction between independent auditing and internal auditing? a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors report directly to management. b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity. c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors. d. The internal auditor's span of coverage goes

Chapter 1 Auditing, Attestation, and Assurance

beyond financial auditing to encompass operational and performance auditing. ANSWER: 17.

Which of the following best describes the purpose of the engagement letter? a. The engagement letter relieves the auditor of some responsibility for the exercise of due care. b. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings between CPA and client regarding the precise nature of the work to be performed and the type of report to be issued. c. The engagement letter conveys to management the detailed steps to be applied in the audit process. d. The engagement letter should be signed by both the client and the CPA and should be used only for independent audits. ANSWER:

18.

B

In assessing audit risk, the CPA needs to do all of the following except a. Gather audit evidence in support of recorded transactions. b. Obtain an understanding of the client's system of internal control. c. Understand the economic substance of significant transactions completed by the client. d. Understand the entity and the industry in which it operates. ANSWER:

19.

B

A

Which of the following tasks should be performed prior to the final audit? a. Determining the fairness of property, plant, and equipment. b. Confirming accounts receivable. c. Testing internal control. d. Collecting and evaluating evidence supporting the fairness of inventory values. ANSWER:

COMPLETION

C

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20.

Chapter 1 Auditing, Attestation, and Assurance

An audit approach that attempts to identify areas posing the highest probability of financial statement errors and allocate audit resources to those areas is known as _________ - ___________ auditing. ANSWER:

21.

Because is the standard for measuring fairness, independent auditors must be expert in accounting matters. ANSWER:

22.

DIVERGENT (CONFLICTING)

The most important characteristics contributing to effective auditing are the ability of the auditor to exercise and . ANSWER:

24.

GAAP

Independent auditing is considered necessary because managers and stockholders have attitudes toward financial reporting. ANSWER:

23.

RISK-BASED

DUE CARE, SOUND JUDGMENT

The assertion stating that no assets, equities, or transactions have been omitted from the financial statements is known as the ____________ assertion. ANSWER:

COMPLETENESS

 MATCHING:

25.

Match each of the listed procedures with the primary assertion that is satisfied by the procedure a. b. c. d. e.

existence or occurrence completeness rights and obligations valuation or allocation presentation and disclosure

____ 1. Calculated depreciation expense for the year ____ 2. Test counted client’s year end inventory of materials and finished goods

Chapter 1 Auditing, Attestation, and Assurance

____ 3. Examined vehicle title applicable to new truck purchased during the current year ____ 4. Considered need for a footnote describing a lawsuit pending against the client ____ 5. Conducted a search for unrecorded liabilities ____ 6. Advised client of the need to reclassify the current portion of a long term mortgage note ____ 7. Performed tests to determine that overhead had been properly applied to ending inventory and cost of sales ____ 8. Reconciled client’s bank accounts as of year end ____ 9. Examined appraisal reports applicable to land donated by the city ____ 10. Obtained written confirmation from customers regarding year end balances in selected accounts receivable SOLUTION: 1. d 2. a 3. c 4. e 5. b 6. e 7. d 8. d 9. d 10.d

Problem/Essay 26.

George & Washington, CPAs, has just accepted an engagement to audit Ginger and Cinnamon, a small manufacturer of spice products. Julia Jenkins has been selected as the in-charge auditor for the engagement, and Josh Lukins will be her assistant. In planning the audit field work, Jenkins makes the following assignments of audit tasks:

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Chapter 1 Auditing, Attestation, and Assurance

Julia Jenkins

Josh Lukins

Interim Audit Test internal control over cash receipts Audit accounts receivable balances

Audit property, plant, and equipment balances Test internal control over cash disbursements

Final Audit Test internal control over sales Obtain signed copy of engagement letter

Audit cash balances Audit inventory balances

Required  : a. Identify the steps to be followed in completing an audit. b. What is meant by the term "systematic process" as contained in the definition of auditing? c. Explain the strengths and weaknesses in Jenkins’ audit planning. SOLUTION: a. Audit planning; interim audit; final audit; audit report. b. Systematic auditing means that the auditor studies and tests the system of internal control before testing the substance of transactions and balances. Strong internal control increases the level of confidence and decreases the extent of transaction and balance testing. c. Strengths: The auditors tested internal control over cash receipts and disbursements before auditing cash balances. Weaknesses: 1. Jenkins and Lukins audited property, plant, and equipment balances and accounts receivable balances during the interim audit. These procedures are typically applied on the final audit. Moreover, internal controls over sales and property transactions were not tested and evaluated prior to auditing the balances. 2. Either Jenkins or Lukins should have tested internal controls over both cash receipts and disbursements transactions. Dividing these duties was inappropriate and failed to maximize efficiency and effectiveness. 3. Internal control

Chapter 1 Auditing, Attestation, and Assurance

over sales transactions should have been performed during the interim audit. 4. A signed copy of the engagement letter should have been obtained as a first step in the acceptance process prior to conducting any of the audit field work. 5. There is no indication that internal controls over property or inventory transactions were ever tested. 6. Internal control over sales should have been tested on the interim, rather than on the final audit.

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