Accounting and Financial Control Department Auditing

W 2019
Tutorial (1): Chapter (1) The Auditing Profession

Question 1: MCQs
1. Recording, classifying, and summarizing economic events in a logical manner for the
purpose of providing financial information for decision making is commonly called

a) Finance.
b) Auditing.
c) Accounting.
d) Economics.

2. In the Audit Report the auditors gives their opinion on which of the following:

a) The fairness of the financial statements prepared by management.

b) The risk management system within the organization.
c) Whether the financial statements were prepared in accordance with the appropriate
criteria.
d) A and C

3. Any service in which the CPA firm issues a report about the reliability of an
assertion that is made by another party is a(n)

a) Accounting and bookkeeping service.

b) Attestation service.
c) Management advisory service.
d) Tax service.

4. Which of the following best describes the relationship between attestation services and
audit services?

a) Attestation is a subset of auditing that improves the quality of information for

decision makers.
b) Auditing is a subset of attestation and focuses on providing clients with advisory
services and decision support.
c) Auditing is a subset of attestation that involves the issuance of an opinion
regarding the fairness of financial statements.
d) Attestation is a subset of auditing that provides more assurance than does an audit
engagement

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5. Which of the following can be used as criteria for evaluating information being
audited?

a) Tax Law
b) Generally Accepted Accounting Principles (GAAP)
c) Internal Revenue Code (IRC)
d) all of the above

6. Which of the following statements referring to review engagements are correct?

a) A review is not as detailed as audit.
b) A review provides a very high level of assurance.
c) A review is part of non-assurance services
d) none of the above

Question 2:

1- The criteria by which an auditor evaluates the information under audit may not vary
regardless of the information being audited.
a. True
b. False

2- Audit firms are never allowed to provide bookkeeping services for their audit
clients.
a. True
b. False

3- The financial statements most commonly audited by external auditors are the
balance sheet, the income statement, and the statement of cash flows and budgeted
operating income.
a. True
b. False

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Question 3: The list below indicates various audit, attestation, and

assurance engagements involving auditors.
1. An auditor’s report on whether the financial statements are fairly presented in
accordance with GAAP. An Audit of historical financial statements
2. A report stating whether the company has complied with restrictive conditions related
to officer compensation and payment of dividends contained in bank loan agreement.
An attestation service other than an audit service.
3. An electronic seal indicating that an electronic seller observes certain practices. An
Assurance service that is not an attestation service.
4. Evaluating the voting process and certifying the outcome for Rolling Stone
Magazine’s “Greatest Singer of All Time” poll. An attestation service other than
an audit service
5. A report indicating whether a governmental entity has complied with certain
government regulations. An attestation service other than an audit service
6. A report on the examination of a financial forecast. An attestation service other
than an audit service
7. A review report that provides limited assurance about whether financial statements
are fairly stated in accordance with GAAP. An attestation service other than an
audit service

Required:
1. Explain or use a diagram to indicate the relationships between audit services,
attestation services, and assurance services.

2. For each of the services listed above, indicate the type of service from the list
that follows.
An Audit of historical financial statements
An attestation service other than an audit service of historical financial statements
An Assurance service that is not an attestation service

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Question 4: Busch Corporation has an existing loan in the amount of $6 million with an
annual interest rate of 6%. The company provides an internal company prepared financial
statement to the bank under the loan agreement.

Two competing banks have offered to replace Busch Corporation’s existing loan agreement
with a new one. United National Bank has offered to loan Busch $6 million at a rate of 5%
but requires Busch to provide financial statements that have been reviewed by an audit firm.
First City Bank has offered to loan Busch $6 million at a rate of 4% but requires Busch to
provide financial statements that have been audited by an audit firm.

Busch Corporation’s controller estimated the cost of performing a review to be $ 35,000 and
$60,000 to perform an audit.

Required:
1. Explain why the interest rate for the loan that requires a review report is lower
than that for the loan that did not require a review. Explain why the interest
rate for the loan that requires an audit report is lower than the interest rate for
the other two loans.

The interest rate for the loan that requires a review report is lower than the loan
that did not require a review because of lower information risk. A review report
provides moderate assurance to financial statement users, which lowers
information risk. An audit report provides further assurance and lower
information risk. As a result of reduced information risk, the interest rate is
lowest for the loan with the audit report.

2. Discuss why Busch may desire to have an audit, ignoring the potential reduction
in interest rates.
Busch may desire to have an audit because of the many other benefits that an
audit provides including :
 Assurance about annual financial information used for decision-making
purposes
 Detecting errors or fraud
 Providing management with information about the effectiveness of
controls.
 Recommendations to management that will improve efficiency or
effectiveness.