Chapter 5 Professional Audi

Chapter 5: Professional Auditing Standards and the Audit Opinion Formulation Process Student: ___________________________________________________________________________ 1. The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA. True False

2. The standards of the PCAOB consist of seven principles. True False

3. The PCAOB’s general standards provide guidance to audit firms in selecting and training their professionals. True False

4. The PCAOB’s second fieldwork standard requires auditors develop an understanding of the client’s controls as an important prerequisite to developing specific audit tests. True False

5. The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results. True False

6. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit. True False

7. An audit must be performed by persons who can make sound judgments relating to complex accounting issues. True False

8. The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement. True False

9. The Generally Accepted Auditing Standards represent the minimum standards for performing an audit. True False

10. The standards of the PCAOB encompass three broad categories including: general standards, fieldwork standards and reporting standards. True False

11. According to the AICPA, the purpose of an audit is to enhance the degree of confidence that users can place in the financial statement. True False

12. Auditing standards requires technical knowledge in auditing but not in the client's business. True False

13. Generally accepted auditing standards are the cornerstone for the interpretation of financial accounting. True False

14. The reporting standard of the PCAOB includes consistency, disclosure, and due professional care. True False

15. An auditor must be independent in fact and in appearance. True False

16. Without independence, the value of the auditor’s attestation function would be nil. True False

17. The PCAOB requires the audit be conducted with due professional care, which is a standard of care that would be expected of a reasonably prudent auditor. True False

18. Audit firms use close supervision and review of audit work to ensure that audits are conducted with due professional care. True False

19. The process of understanding the client includes the preparation of the audit program. True False

20. Part of the understanding the client process of an audit is identifying factors that may require extension or modification of the audit tests, such as potential related-party transactions or the possibility of material misstatements. True False

21. Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for audit conclusions. True False

22. The PCAOB’s fieldwork standards include planning and supervision, understanding the entity and its internal control structure, and obtaining sufficient appropriate audit evidence. True False

23. Developing an understanding of the client's business and industry is essential to proficiency as discussed in the PCAOB’s general standards. True False

24. Test of controls are a type of substantive procedure. True False

25. The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies. True False

26. Recalculation involves independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation. True False

27. Scanning is a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance. True False

28. Audit procedures can be classified as risk assessment procedures, test of controls or substantive tests. True False

29. Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred True False

30. The first stage in an audit is performing a risk assessment. True False

31. Physically examining a client’s assets is an audit procedure. True False

32. Audit documentation is frequently called working papers. True False

33. Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. True False

34. Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls. True False

35. The standards of fieldwork include the responsibility of the auditor to exercise due professional care. True False

36. The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work. True False

37. Planning is not required in an audit as long as an audit program has been developed. True False

38. A component of the reporting standards is the requirement that an opinion always be rendered on the subject matter. True False

39. An auditor must obtain an adequate amount of evidence and the evidence must be of the appropriate quality. True False

40. The Public Company Accounting Oversight Board obtains its authority to set audit standards for public companies from the U.S. Congress. True False

41. The American Institute of Certified Public Accountants no longer retains the right to set audit standards for any engagements as the Securities Exchange Commission has relinquished such power. True False

42. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements. True False

43. Presentation and disclosure assertions imply that all transactions and balances are properly presented, disclosures represent what actually happened, and the footnote disclosures are appropriate and adequate. True False

44. The PCAOB does not currently have a mandate for convergence with other auditing standards. True False

45. AICPA standards are frequently called ISAs. True False

46. The PCAOB has authority over the AICPA. True False

47. The PCAOB requires that the auditor will express an opinion on the financial statements as a whole. True False

48. The AICPA requires that auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed. True False

49. The AICPA, IASSB, and PCAOB have conceptually the same sets of financial statement assertions, but the technical wording varies among the standards. True False

50. All audit evidence is the result of the application of audit procedures. True False

51. The first general standard of the PCAOB requires that an audit be performed by which type of person? A. An auditor with seasoned judgment in varying degrees of supervision and review. B. An auditor with appropriate technical training and proficiency. C. An auditor with adequate knowledge of the standards of field work and reporting. D. An auditor satisfying the independence standards.

52. Which auditing standards apply to private companies? A. The AICPA Standards. B. The IASSB Standards. C. The Standards of the PCAOB. D. All of the above.

53. The AICPA includes which of the following categories that guide the conduct of an audit? A. Purpose of an audit and premise upon which an audit is conducted. B. Responsibilities. C. Performance. D. All of the above.

54. What is the scope of applicability of the auditing standards of the AICPA? A. Nonpublic companies traded in non-U.S. markets. B. Nonpublic companies in the U.S. C. Public companies traded in non-U.S. markets. D. Public companies traded in the U.S.

55. To satisfy the fieldwork standards, what must an auditor do? A. Act with due care. B. Gather sufficient appropriate evidence. C. Be independent in mental attitude. D. Have adequate knowledge about the client’s industry. E. All of the above.

56. Which one of the following organizations provides auditing standards for public companies? A. GAO. B. AICPA. C. GAAP. D. PCAOB.

57. Which one of the following attributes is not required of an auditor? A. Independence. B. Bias. C. Integrity. D. Technical competence.

58. The standards of competence, independence, and due professional care are covered by what standards? A. General standards. B. Standards of fieldwork. C. Reporting standards. D. None of the above.

59. What are the PCAOB standards that present guidance in testing assertions and planning for the audit are known as? A. General standards. B. Fieldwork standards. C. Reporting standards. D. None of the above.

60. What are the PCAOB standards that cover the essential elements of communication, the criteria against which the assertions were tested, and an explanation of the basis for the auditor's opinion are known as? A. General standards. B. Standards of fieldwork. C. Standards of reporting. D. None of the above.

61. Which concept is referred to as the cornerstone of auditing? A. Due professional care. B. Independence. C. Technical training. D. None of the above.

62. Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included? A. Existence. B. Valuation. C. Completeness. D. Rights and Obligations

63. Which assertion addresses whether the financial statements items are properly classified in the financial statements? A. Completeness. B. Existence. C. Valuation. D. Presentation and Disclosure.

64. Which of the following groups are committed to the convergence of the auditing standards? A. IAASB. B. PCAOB. C. AICPA. D. Both A and C. E. All of the above.

65. Rather than keeping the ten standards, what did the AICPA develop? A. Seven Standards. B. Seven Concepts. C. Seven Fundamental Principles. D. Seven Governing Principles.

66. Which of the following is not a type of audit procedure? A. Analytical procedures. B. Scanning. C. Reviewing. D. Observation.

67. What does the quality of the evidence an auditor collects depend upon? A. The nature of the procedures. B. The extent of the procedures. C. The timing of the procedures. D. Both A and C. E. All of the above.

68. Which of the following is not required under the general standards of GAAS? A. Technical training of the professionals. B. Independence of the auditor in fact and appearance. C. Conduct of an audit with the skill and care of a professional. D. Review of the all of work and audit documentation of the audit staff. E. None of the above are required.

69. The proper supervision of audit assistants is a requirement of which of the Generally Accepted Auditing Standards? A. General Standards. B. Standards of Fieldwork. C. Standards of Reporting. D. Standards of Quality Control. E. None of the above.

70. Which one of the following is a reporting standard requirement? A. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. B. The auditor will identify in the auditor’s report, those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period. C. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate, the auditor must so state in the auditor’s report. D. The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an opinion can be expressed.

71. Which of the following statements about the auditing standards issued by the AICPA is true? A. The auditing standards issued by the AICPA are no longer recognized by the PCAOB. B. The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of existence. C. The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies. D. The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

72. Which of the following is a reason why an auditor needs an understanding of internal controls? A. To provide individual comments on internal control non-compliance. B. To become comfortable that the client will pay its audit bills. C. To assess materiality. D. To assess the risk of possible misstatements in the financial statements.

73. Which of the following is not a reason why an auditor obtains an understanding of internal controls? A. Understanding the entity's internal control is a requirement of GAAS. B. The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control. C. It is the primary basis for the audit report. D. It assists the auditor in designing the nature, timing and extent of further audit procedures.

74. How many auditing standards has the PCAOB issued? A. 7. B. 16. C. 22. D. 5.

75. Which of the following is not a typical accounting cycle? A. Revenue. B. Inventory. C. Cash. D. Internal Controls.

76. Which of the following statements about assertions is true? A. All assertions are equally important for all accounts. B. The importance of an assertion depends upon the account. C. Assertions are not related to accounts. D. None of the above.

77. Which of the following assertions would the auditor usually consider most relevant for accounts payable? A. Existence. B. Valuation. C. Disclosure. D. Completeness.

78. Which of the following is a use of audit documentation? A. Assisting the engagement team in planning and performing the audit. B. Assisting members of the engagement team responsible for supervising and reviewing the audit work. C. Retaining a record of matters of continuing significance to future audits of the same organization. D. All of the above.

79. Which of the following factors influence the risk of material misstatement? A. The business risks. B. Management incentives. C. IT risks. D. All of the above.

80. What does business risk include? A. Economic factors. B. Competitive factors. C. Regulatory risk. D. All of the above.

81. At what level does the auditor assess the risk of material misstatement? A. The financial statement level. B. The company level. C. The assertion level. D. Both A and C. E. All of the above.

82. What does the effectiveness of internal controls influence? A. Inherent risk. B. Control risk. C. Risk of material misstatement. D. Both B and C.

83. What organization continues to set auditing standards for firms auditing private companies? A. FASB. B. GAO. C. SEC. D. AICPA.

84. Which of the following statements about the AICPA is true? A. The AIPCA is historically self-regulated. B. The AIPCA is regulated by the federal government. C. The AIPCA is regulated the state governments. D. The AIPCA is a new organization established by an act of congress in 2002.

85. Which document is used by auditors to formally accept a new client? A. Management representation letter. B. Audit Report. C. Engagement Letter. D. Audit Contract.

86. Which of the following items is not included in the engagement letter? A. The responsibilities of the auditor. B. The responsibilities of management. C. The objective of the financial statements. D. Identification of the applicable financial reporting framework for the preparation of the financial statements.

87. With a substantive audit strategy, what is an auditor likely to do? A. Extensively tests internal controls. B. Limit the testing of internal controls. C. Not assess control risks. D. Issue an adverse opinion on the financial statements.

88. Which of the following is a type of control that the PCAOB recommends the auditor to consider in evaluating whether or not the organization has sufficiently addressed fraud risk? A. Controls over significant, unusual transactions, particularly those that result in late or unusual journal entries. B. Controls over entries that relate to foreign sales. C. Controls over related-party transactions. D. Both A and C E. All of the above.

89. Which of the following would not affect an auditor's judgment concerning internal controls? A. The assertion being tested. B. The design of the control. C. The operation of the control. D. The level of inherent risk.

90. With a dual purpose test, what is an auditor likely to do? A. Perform a substantive procedure concurrently with a test of a control. B. Perform a substantive procedure concurrently with a risk assessment test. C. Perform a risk assessment test concurrently with a test of a control. D. None of the above.

91. Which of the following is not a planning procedure performed to develop an audit program? A. Determination of client company risks. B. Determination of the audit opinion that will be rendered. C. Development of a preliminary understanding of the quality of the client's internal control. D. Anticipation of audit adjustments that will be required.

92. Which of the following factors affect the substantive procedures performed in an audit? A. The subjectivity of accounting process. B. Size of the account. C. Effectiveness of the relevant controls. D. All of the above affect the substantive procedure that are performed.

93. Which of the following factors suggest that control risk should be assessed at a low level? A. A lack of segregation of duties. B. A lack of approval for significant transactions. C. A competent objective internal auditor. D. Both A and C.

94. The Standards of the PCAOB can be broken up in to three categories, i.e., general, fieldwork, and reporting. Which of the following standards is one of the general standards? A. Training and proficiency. B. Internal control. C. Sufficient appropriate evidence. D. Consistency.

95. The Standards of the PCAOB can be broken up into three categories, i.e., general, fieldwork, and reporting. Which of the following concepts is considered in the reporting standards? A. Consistency in the application of accounting principles. B. Sufficient appropriate evidence. C. Internal control. D. Planning and supervision.

96. The Standards of the PCAOB can be broken up into three categories, i.e., general, fieldwork, and reporting. Which of the following is considered in the fieldwork standards? A. Independence. B. GAAP. C. Internal control. D. Disclosure.

97. The auditing standards Under the clarified auditing standards, what is the structure of each auditing standard issued by the ASB? What is the purpose of each section?

98. What are the AICPA’s fundamental principles?

99. Audit phases Identify at least five steps involved in an audit.

100. PCAOB Assertions Discuss the five management financial statement assertions identified in the PCAOB Standards. Provide examples.

101. Write the three general auditing standards of the PCAOB.

102. Explain the meaning of due professional care.

103. What are the three broad types of audit procedures? What is the purpose of each test?

104. There are nine specific actions an auditor can undertake to collect evidence. Identify each action and provide an example.

Chapter 5: Professional Auditing Standards and the Audit Opinion Formulation Process Key

1. The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA. FALSE

2. The standards of the PCAOB consist of seven principles. FALSE

3. The PCAOB’s general standards provide guidance to audit firms in selecting and training their professionals. TRUE

4. The PCAOB’s second fieldwork standard requires auditors develop an understanding of the client’s controls as an important prerequisite to developing specific audit tests. TRUE

5. The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results. TRUE

6. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit. TRUE

7. An audit must be performed by persons who can make sound judgments relating to complex accounting issues. TRUE

8. The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement. FALSE

9. The Generally Accepted Auditing Standards represent the minimum standards for performing an audit. TRUE

10. The standards of the PCAOB encompass three broad categories including: general standards, fieldwork standards and reporting standards. TRUE

11. According to the AICPA, the purpose of an audit is to enhance the degree of confidence that users can place in the financial statement. TRUE

12. Auditing standards requires technical knowledge in auditing but not in the client's business. FALSE

13. Generally accepted auditing standards are the cornerstone for the interpretation of financial accounting. FALSE

14. The reporting standard of the PCAOB includes consistency, disclosure, and due professional care. FALSE

15. An auditor must be independent in fact and in appearance. TRUE

16. Without independence, the value of the auditor’s attestation function would be nil. TRUE

17. The PCAOB requires the audit be conducted with due professional care, which is a standard of care that would be expected of a reasonably prudent auditor. TRUE

18. Audit firms use close supervision and review of audit work to ensure that audits are conducted with due professional care. TRUE

19. The process of understanding the client includes the preparation of the audit program. TRUE

20. Part of the understanding the client process of an audit is identifying factors that may require extension or modification of the audit tests, such as potential related-party transactions or the possibility of material misstatements. TRUE

21. Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for audit conclusions. TRUE

22. The PCAOB’s fieldwork standards include planning and supervision, understanding the entity and its internal control structure, and obtaining sufficient appropriate audit evidence. TRUE

23. Developing an understanding of the client's business and industry is essential to proficiency as discussed in the PCAOB’s general standards. TRUE

24. Test of controls are a type of substantive procedure. FALSE

25. The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies. FALSE

26. Recalculation involves independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation. FALSE

27. Scanning is a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance. TRUE

28. Audit procedures can be classified as risk assessment procedures, test of controls or substantive tests. TRUE

29. Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred TRUE

30. The first stage in an audit is performing a risk assessment. FALSE

31. Physically examining a client’s assets is an audit procedure. TRUE

32. Audit documentation is frequently called working papers. TRUE

33. Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. TRUE

34. Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls. FALSE

35. The standards of fieldwork include the responsibility of the auditor to exercise due professional care. FALSE

36. The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work. TRUE

37. Planning is not required in an audit as long as an audit program has been developed. FALSE

38. A component of the reporting standards is the requirement that an opinion always be rendered on the subject matter. FALSE

39. An auditor must obtain an adequate amount of evidence and the evidence must be of the appropriate quality. TRUE

40. The Public Company Accounting Oversight Board obtains its authority to set audit standards for public companies from the U.S. Congress. TRUE

41. The American Institute of Certified Public Accountants no longer retains the right to set audit standards for any engagements as the Securities Exchange Commission has relinquished such power. FALSE

42. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements. TRUE

43. Presentation and disclosure assertions imply that all transactions and balances are properly presented, disclosures represent what actually happened, and the footnote disclosures are appropriate and adequate. TRUE

44. The PCAOB does not currently have a mandate for convergence with other auditing standards. TRUE

45. AICPA standards are frequently called ISAs. FALSE

46. The PCAOB has authority over the AICPA. FALSE

47. The PCAOB requires that the auditor will express an opinion on the financial statements as a whole. FALSE

48. The AICPA requires that auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed. TRUE

49. The AICPA, IASSB, and PCAOB have conceptually the same sets of financial statement assertions, but the technical wording varies among the standards. TRUE

50. All audit evidence is the result of the application of audit procedures. TRUE

51. The first general standard of the PCAOB requires that an audit be performed by which type of person? A. An auditor with seasoned judgment in varying degrees of supervision and review. B. An auditor with appropriate technical training and proficiency. C. An auditor with adequate knowledge of the standards of field work and reporting. D. An auditor satisfying the independence standards.

52. Which auditing standards apply to private companies? A. The AICPA Standards. B. The IASSB Standards. C. The Standards of the PCAOB. D. All of the above.

53. The AICPA includes which of the following categories that guide the conduct of an audit? A. Purpose of an audit and premise upon which an audit is conducted. B. Responsibilities. C. Performance. D. All of the above.

54. What is the scope of applicability of the auditing standards of the AICPA? A. Nonpublic companies traded in non-U.S. markets. B. Nonpublic companies in the U.S. C. Public companies traded in non-U.S. markets. D. Public companies traded in the U.S.

55. To satisfy the fieldwork standards, what must an auditor do? A. Act with due care. B. Gather sufficient appropriate evidence. C. Be independent in mental attitude. D. Have adequate knowledge about the client’s industry. E. All of the above.

56. Which one of the following organizations provides auditing standards for public companies? A. GAO. B. AICPA. C. GAAP. D. PCAOB.

57. Which one of the following attributes is not required of an auditor? A. Independence. B. Bias. C. Integrity. D. Technical competence.

58. The standards of competence, independence, and due professional care are covered by what standards? A. General standards. B. Standards of fieldwork. C. Reporting standards. D. None of the above.

59. What are the PCAOB standards that present guidance in testing assertions and planning for the audit are known as? A. General standards. B. Fieldwork standards. C. Reporting standards. D. None of the above.

60. What are the PCAOB standards that cover the essential elements of communication, the criteria against which the assertions were tested, and an explanation of the basis for the auditor's opinion are known as? A. General standards. B. Standards of fieldwork. C. Standards of reporting. D. None of the above.

61. Which concept is referred to as the cornerstone of auditing? A. Due professional care. B. Independence. C. Technical training. D. None of the above.

62. Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included? A. Existence. B. Valuation. C. Completeness. D. Rights and Obligations

63. Which assertion addresses whether the financial statements items are properly classified in the financial statements? A. Completeness. B. Existence. C. Valuation. D. Presentation and Disclosure.

64. Which of the following groups are committed to the convergence of the auditing standards? A. IAASB. B. PCAOB. C. AICPA. D. Both A and C. E. All of the above.

65. Rather than keeping the ten standards, what did the AICPA develop? A. Seven Standards. B. Seven Concepts. C. Seven Fundamental Principles. D. Seven Governing Principles.

66. Which of the following is not a type of audit procedure? A. Analytical procedures. B. Scanning. C. Reviewing. D. Observation.

67. What does the quality of the evidence an auditor collects depend upon? A. The nature of the procedures. B. The extent of the procedures. C. The timing of the procedures. D. Both A and C. E. All of the above.

68. Which of the following is not required under the general standards of GAAS? A. Technical training of the professionals. B. Independence of the auditor in fact and appearance. C. Conduct of an audit with the skill and care of a professional. D. Review of the all of work and audit documentation of the audit staff. E. None of the above are required.

69. The proper supervision of audit assistants is a requirement of which of the Generally Accepted Auditing Standards? A. General Standards. B. Standards of Fieldwork. C. Standards of Reporting. D. Standards of Quality Control. E. None of the above.

70. Which one of the following is a reporting standard requirement? A. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. B. The auditor will identify in the auditor’s report, those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period. C. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate, the auditor must so state in the auditor’s report. D. The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an opinion can be expressed.

71. Which of the following statements about the auditing standards issued by the AICPA is true? A. The auditing standards issued by the AICPA are no longer recognized by the PCAOB. B. The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of existence. C. The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies. D. The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

72. Which of the following is a reason why an auditor needs an understanding of internal controls? A. To provide individual comments on internal control non-compliance. B. To become comfortable that the client will pay its audit bills. C. To assess materiality. D. To assess the risk of possible misstatements in the financial statements.

73. Which of the following is not a reason why an auditor obtains an understanding of internal controls? A. Understanding the entity's internal control is a requirement of GAAS. B. The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control. C. It is the primary basis for the audit report. D. It assists the auditor in designing the nature, timing and extent of further audit procedures.

74. How many auditing standards has the PCAOB issued? A. 7. B. 16. C. 22. D. 5.

75. Which of the following is not a typical accounting cycle? A. Revenue. B. Inventory. C. Cash. D. Internal Controls.

76. Which of the following statements about assertions is true? A. All assertions are equally important for all accounts. B. The importance of an assertion depends upon the account. C. Assertions are not related to accounts. D. None of the above.

77. Which of the following assertions would the auditor usually consider most relevant for accounts payable? A. Existence. B. Valuation. C. Disclosure. D. Completeness.

78. Which of the following is a use of audit documentation? A. Assisting the engagement team in planning and performing the audit. B. Assisting members of the engagement team responsible for supervising and reviewing the audit work. C. Retaining a record of matters of continuing significance to future audits of the same organization. D. All of the above.

79. Which of the following factors influence the risk of material misstatement? A. The business risks. B. Management incentives. C. IT risks. D. All of the above.

80. What does business risk include? A. Economic factors. B. Competitive factors. C. Regulatory risk. D. All of the above.

81. At what level does the auditor assess the risk of material misstatement? A. The financial statement level. B. The company level. C. The assertion level. D. Both A and C. E. All of the above.

82. What does the effectiveness of internal controls influence? A. Inherent risk. B. Control risk. C. Risk of material misstatement. D. Both B and C.

83. What organization continues to set auditing standards for firms auditing private companies? A. FASB. B. GAO. C. SEC. D. AICPA.

84. Which of the following statements about the AICPA is true? A. The AIPCA is historically self-regulated. B. The AIPCA is regulated by the federal government. C. The AIPCA is regulated the state governments. D. The AIPCA is a new organization established by an act of congress in 2002.

85. Which document is used by auditors to formally accept a new client? A. Management representation letter. B. Audit Report. C. Engagement Letter. D. Audit Contract.

86. Which of the following items is not included in the engagement letter? A. The responsibilities of the auditor. B. The responsibilities of management. C. The objective of the financial statements. D. Identification of the applicable financial reporting framework for the preparation of the financial statements.

87. With a substantive audit strategy, what is an auditor likely to do? A. Extensively tests internal controls. B. Limit the testing of internal controls. C. Not assess control risks. D. Issue an adverse opinion on the financial statements.

88. Which of the following is a type of control that the PCAOB recommends the auditor to consider in evaluating whether or not the organization has sufficiently addressed fraud risk? A. Controls over significant, unusual transactions, particularly those that result in late or unusual journal entries. B. Controls over entries that relate to foreign sales. C. Controls over related-party transactions. D. Both A and C E. All of the above.

89. Which of the following would not affect an auditor's judgment concerning internal controls? A. The assertion being tested. B. The design of the control. C. The operation of the control. D. The level of inherent risk.

90. With a dual purpose test, what is an auditor likely to do? A. Perform a substantive procedure concurrently with a test of a control. B. Perform a substantive procedure concurrently with a risk assessment test. C. Perform a risk assessment test concurrently with a test of a control. D. None of the above.

91. Which of the following is not a planning procedure performed to develop an audit program? A. Determination of client company risks. B. Determination of the audit opinion that will be rendered. C. Development of a preliminary understanding of the quality of the client's internal control. D. Anticipation of audit adjustments that will be required.

92. Which of the following factors affect the substantive procedures performed in an audit? A. The subjectivity of accounting process. B. Size of the account. C. Effectiveness of the relevant controls. D. All of the above affect the substantive procedure that are performed.

93. Which of the following factors suggest that control risk should be assessed at a low level? A. A lack of segregation of duties. B. A lack of approval for significant transactions. C. A competent objective internal auditor. D. Both A and C.

94. The Standards of the PCAOB can be broken up in to three categories, i.e., general, fieldwork, and reporting. Which of the following standards is one of the general standards? A. Training and proficiency. B. Internal control. C. Sufficient appropriate evidence. D. Consistency.

95. The Standards of the PCAOB can be broken up into three categories, i.e., general, fieldwork, and reporting. Which of the following concepts is considered in the reporting standards? A. Consistency in the application of accounting principles. B. Sufficient appropriate evidence. C. Internal control. D. Planning and supervision.

96. The Standards of the PCAOB can be broken up into three categories, i.e., general, fieldwork, and reporting. Which of the following is considered in the fieldwork standards? A. Independence. B. GAAP. C. Internal control. D. Disclosure.

97. The auditing standards Under the clarified auditing standards, what is the structure of each auditing standard issued by the ASB? What is the purpose of each section? Introduction explains the purpose and scope of the standard. Objective defines the context in which the requirements are set. Definitions include, where relevant, specific meanings of terms in the standards. Requirements identify what the auditor is required to do to achieve the objective of the standard. Requirements are expressed using the words “the auditor should ” or “the auditor must.” Application and Other Explanatory Material include cross-references to the requirements and provide further guidance for applying the requirements of the standard

98. What are the AICPA’s fundamental principles? In place of the ten historical standards that governed the auditing profession, as part of the clarity project the AICPA developed seven fundamental principles that govern audits. The four categories, with their specific principles, are: Purpose of an Audit and Premise upon Which an Audit Is Conducted 1. The purpose of an audit is to enhance the degree of confidence that users can place in the financial statement. This purpose is achieved when an auditor expresses an opinion on the financial statements. 2. An audit is based on the premise that management has responsibility to prepare the financial statements, maintain internal control over financial reporting, and provide the auditor with relevant information and access to personnel. Responsibilities 3. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit. Performance 4. The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement. 5. Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality levels, identify risks of material misstatement, and design and implement appropriate audit responses to the assessed risks. 6. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement. Reporting 7. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed.

99. Audit phases Identify at least five steps involved in an audit.

Phase I Phase II Phase III Phase IV Phase V

Making Client Acceptance and Continuance Decisions Performing Risk Assessment Obtaining Evidence about Internal Control Operating Effectiveness Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions Completing the Audit and Making Reporting Decisions

100. PCAOB Assertions Discuss the five management financial statement assertions identified in the PCAOB Standards. Provide examples. Existence or Occurrence: Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred. Example: Management asserts that sales recorded in the income statement represent transactions in which the exchange of goods or services with customers for cash or other consideration had occurred. Completeness: Assertions about completeness address whether all transactions and accounts that should be included in the financial statements are included. Example: Management asserts that notes payable in the balance sheet include all such obligations of the organization. Valuation or Allocation: Assertions about valuation or allocation address whether accounts have been included in the financial statements at appropriate amounts. Example: Management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Rights and Obligations: Assertions about rights address whether assets are the rights of the organization, while assertions about obligations address whether liabilities are the obligations of the organization. Example: Management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property and that the corresponding lease liability represents an obligation of the entity. Presentation and Disclosure: Assertions about presentation and disclosure address whether components of the financial statements are properly classified, described, and disclosed. Example: Management asserts that obligations classified as long-term liabilities in the balance sheet will not mature within one year

101. Write the three general auditing standards of the PCAOB. The general audit standards are: 1. 2.

Technical Training and proficiency: The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor. Independence: An independence is mental attitude is to be maintained by the auditor or auditors.

3.

Due Professional Care: Due professional care is to be exercised in the performance of the examination and the preparation of the report.

102. Explain the meaning of due professional care. Due professional care refers to the skill and care of a professional expected in an audit. Following Generally Accepted Auditing Standards (GAAS) is one benchmark for due professional care. However, following GAAS is not always sufficient. If a reasonably prudent person would have done more, the professional should do at least as much. Due professional care is also determined by evaluating whether someone with similar skills in a similar situation would have performed the same way as the auditor.

103. What are the three broad types of audit procedures? What is the purpose of each test? Risk assessment procedures. Procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion, but are used for purposes of planning the audit. Tests of controls. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level. Substantive procedures. Audit procedures designed to detect material misstatements in accounts which include tests of details and substantive analytical procedures.

104. There are nine specific actions an auditor can undertake to collect evidence. Identify each action and provide an example. Types of Audit Procedure (examples in italics) Inspection of documentation Examining a client document for evidence of authorization Inspection of assets Physically examining a client’s equipment Observation Looking at a process or procedure, such as observing the client use of a restricted access area External confirmation Obtaining a direct written response to the auditor from a third party, such the client’s customers, confirming the amount owed to the client Recalculation Checking the mathematical accuracy of a document or record, such as an inventory count sheet Reperformance Independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation Analytical procedures Analyzing plausible relationships among both financial and non-financial data Scanning Performing a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance Inquiry Seeking information of persons within or outside of the client organization, such as communicating with the CFO or general counsel about changes in accounting policy