Auditing, Attestation, and Assurance

1. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPA’s approach to the service.

ANSWER: C

2. The primary goal of the CPA in performing the attest function is to

a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their
validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.

ANSWER: C

3. Internal auditing often extends beyond examinations 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: D

4. 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.
d. It concentrates on seeking out aspects of operations in which waste
would be reduced by the introduction of controls.

ANSWER: D

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
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a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

ANSWER: A

6. Which of the following is not considered an assertion as formulated by the Auditing

Standards Board?
a. Valuation or allocation.
b. Mathematical accuracy.
c. Rights and obligations.
d. Presentation and disclosure.

ANSWER: B

7. Which of the following is not a distinguishing feature of

risk-based auditing?
a. Identifying areas posing the highest risk of financial 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: C

8. 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

9. The auditor communicates the results of his or her work

through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

ANSWER: C

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

ANSWER: B

11. A typical objective of an operational audit is to determine whether an entity's

a. Financial statements fairly present financial position
and cash flows.
b. Financial statements present fairly the results of
operations.
c. Financial statements fairly present financial position, results of operations, and
cash flows.
d. Specific operating units are functioning efficiently
and effectively.

ANSWER: D

12. 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: D

13. The four major steps in conducting an audit are:

a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances

The proper sequence in applying the above steps is:

a. cadb
b. cdab
c. bcda
d. adcb

ANSWER: A

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.
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ANSWER: A

15. 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: C

16. 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
beyond financial auditing to encompass operational
and performance auditing.

ANSWER: B

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: B

18. 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.
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c. Understand the economic substance of significant transactions completed by the
client.
d. Understand the entity and the industry in which it operates.

ANSWER: A

19. 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: C

COMPLETION

20. 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: RISK-BASED

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

ANSWER: GAAP

22. Independent auditing is considered necessary because

managers and stockholders have attitudes toward financial reporting.

ANSWER: DIVERGENT (CONFLICTING)

23. The most important characteristics contributing to

effective auditing are the ability of the auditor to
exercise and .

ANSWER: DUE CARE, SOUND JUDGMENT

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

ANSWER: COMPLETENESS

MATCHING:
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25. Match each of the listed procedures with the primary assertion that is
satisfied by the procedure

a. existence or occurrence
b. completeness
c. rights and obligations
d. valuation or allocation
e. presentation and disclosure

____ 1. Calculated depreciation expense for the year

____ 2. Test counted client’s year end inventory of materials

and finished goods

____ 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
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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:

Julia Jenkins Josh Lukins

Interim Audit

Test internal control over cash Audit property, plant, and

receipts equipment balances
Audit accounts receivable Test internal control over
balances cash disbursements

Final Audit

Test internal control over Audit cash balances

sales
Obtain signed copy of engagement Audit inventory balances
letter

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.
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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 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.