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| 1 | |
An independent audit aids in the communication of economic data because the audit |
| | A) | Confirms the exact accuracy of management’s financial representations. |
| | B) | Lends credibility to the financial statements. |
| | C) | Guarantees that financial data are fairly presented. |
| | D) | Assures the readers of financial statements that any fraudulent activity has been corrected. |
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| 2 | |
Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? |
| | A) | Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. |
| | B) | Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements. |
| | C) | A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor’s work. |
| | D) | An entity may have a poorly designed internal control system. |
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| 3 | |
Information asymmetry |
| | A) | Refers to an imbalance of information among stockholders in a company. |
| | B) | Refers to an imbalance of information between the auditor and the management of the company. |
| | C) | Refers to an imbalance of information between stockholders and the management of the company. |
| | D) | Refers to an imbalance of information between the auditor and the stockholders of the company. |
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| 4 | |
Which of the following best describes the primary reason an independent auditor reports on financial statements? |
| | A) | To give stockholders some assurance that any fraudulent activities will be detected. |
| | B) | To identify a poorly designed internal control structure that may produce unreliable financial statements. |
| | C) | To provide expertise to management, which may not be totally knowledgeable of the applicable financial reporting framework. |
| | D) | To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements. |
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| 5 | |
Financial statement users’ demand for assurance is similar to that of a potential home buyer who hires a building surveyor in that |
| | A) | The buyer [or user] pays directly for this assurance in both situations. |
| | B) | There are often information asymmetry and conflicts of interest. |
| | C) | The cost of obtaining information is not relevant. |
| | D) | Independence is not relevant in either situation. |
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| 6 | |
The fact that errors and/or omissions in certain relatively insignificant account balances would not affect an auditor’s decision when reporting on the financial statements as a whole relates most closely to which major audit concept? |
| | A) | Materiality. |
| | B) | Audit risk. |
| | C) | Management assertions. |
| | D) | Reasonable assurance. |
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| 7 | |
Audit evidence |
| | A) | May only be gathered from parties external to the auditee to be reliable. |
| | B) | May only be gathered from the auditee to be reliable since they are the most knowledgeable source of information. |
| | C) | May only be gathered from computerized sources to avoid human error. |
| | D) | to the underlying accounting data. |
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| 8 | |
Audit risk |
| | A) | Can be completely eliminated through appropriate sampling of transactions. |
| | B) | Is the risk that a 'clean' opinion will be issued when, in reality, the financial statements are materially misstated. |
| | C) | Is what creates the demand for an audit. |
| | D) | Is the risk that a company may hire an incompetent auditor. |
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| 9 | |
For what primary purpose does the auditor obtain an understanding of the entity and its environment? |
| | A) | To determine the audit fee. |
| | B) | To decide which facts about the entity to include in the audit report. |
| | C) | To plan the audit and determine the nature, timing, and extent of audit procedures to be performed. |
| | D) | To limit audit risk to an appropriately high level. |
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| 10 | |
Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting? |
| | A) | Understanding a client’s system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely. |
| | B) | Understanding a client’s system of internal control can help the auditor make valuable recommendations to management at the end of the engagement. |
| | C) | Understanding a client’s system of internal control can help the auditor sell consulting services to the client. |
| | D) | Understanding a client’s system of internal control is not a required part of the audit process. |
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| 11 | |
The examination of all of an entity’s transactions would make an audit very costly. Thus, auditors rely heavily on sampling as a way to obtain evidence. Which of the following would result in a smaller sample? |
| | A) | A decrease in the materiality level. |
| | B) | A decrease in the desired level of assurance. |
| | C) | An assessment that the account being audited is high risk. |
| | D) | An increase in the desired level of assurance. |
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| 12 | |
An auditor’s evaluation of the reasonableness of a company’s loan loss reserve would normally be made during which phase of the audit? |
| | A) | Gaining an understanding of the auditee’s industry. |
| | B) | Client acceptance. |
| | C) | Consideration of internal control systems. |
| | D) | Auditing business processes and related accounts. |
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| 13 | |
Which of the following statements best describes the role of materiality in a financial statement audit? |
| | A) | Materiality refers to the 'material' from which audit evidence is developed. |
| | B) | The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. |
| | C) | The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. |
| | D) | The level of materiality has no bearing on the amount of evidence the auditor must gather. |
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| 14 | |
Preliminary engagement activities include |
| | A) | Understanding the client and the client’s industry. |
| | B) | Determining audit engagement team requirements. |
| | C) | Ensuring the independence of the audit team and audit fi rm. |
| | D) | All of the above. |
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| 15 | |
A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider it to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor’s opinion. Which kind of audit opinion would an auditor most likely issue under these circumstances? |
| | A) | Unmodified opinion. |
| | B) | Qualified opinion due to departure from the applicable financial reporting framework. |
| | C) | Adverse opinion. |
| | D) | No opinion at all. |
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| 16 | |
The study and practice of auditing is unlike other areas in accounting because it |
| | A) | Requires the memorization of formulas and patterns. |
| | B) | Requires the knowledge of the applicable financial reporting framework. |
| | C) | Requires common sense and some creativity. |
| | D) | Is required by law for all companies. |
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