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Objective Question Chapter 1
Objective Question Chapter 1
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a: (3) Both attest and assurance services require independence.
Reason: Both the concept of auditing requires independence however assurance
encompasses broader range of activities to improve the quality of information for decision
makers.
b: (1) Client’s Management
Reason: Client’s Management is the primarily responsible for representations contained
in the financial statement as they are the one who are the decision maker of financial decision of
the clients. On the other hand, Auditors are the independent body for performing audit of those
financials. Audit committee also serve as a compliance body. AICPA is a regulatory body
providing guidance and shared standards for the practice.
c: (1) Provide assurance to investors and other outsiders that the financial statements are
reliable.
Reason: Having assurance that financial statements are reliable is very crucial for
investors as all the decision is based upon the accuracy of the financial statements therefore it is
expected that financial statements are verified by competent and independent body. Option 2 is
incorrect because, having a accounting firm does not avoid management misstatements. Option 3
gives no recognition to the fact that large companies with public capital should always continue
to provide audited statement even there is no such requirement from government. Option 4 is
unrelated because audit is designed to detect illegal acts irrespective of type or size of audit/audit
firms.
d: (2) Review financial reports filed with the SEC.
Reason: The PCAOB ordinarily does not review financial reports filed with the SEC.
Other options are the responsibilities of PCAOB.
e: (4) Public Company Accounting Oversight Board.
Reason: PCAOB was given the authority by the Sarbanes-Oxley Act of 2002 to establish
or adopt auditing standards for audits of public companies.
f: (4) Compliance.
Reason: Government auditing extends to audits of efficiency, effectiveness and
compliance of laws and regulations.
g: (3) Audit committee of the board of directors.
Reason: Reporting to audit committee will result in likelihood that internal auditors will
be able to act independently of those who is being audited. Reporting to any other position will
result in lesser degree of independence as they cannot objectively review their own
work/decisions.
h: (4) Ethical scandals at the AICPA.
Reason: Ethical scandals at the AICPA did not precipitate the passage of the Sarbanes-
Oxley Act of 2002. All of the other options contributed to passage of the Act.
i: (3) The Federal Accounting Standards Advisory Board.
Reason: it establishes standards for state and local government entities.
j: (4) Forensic audits are usually performed in situations in which fraud has been found or
is suspected.
Reason: Forensic audits are usually performed when fraud has been found or is
suspected. Option 1 is incorrect it is genralizing the concept of forensic nature by saying
all all audit are forensic in nature. Option 2 is incorrect because CPA firm may involved
in forensic audit. Option 3 is incorrect because compliance audit may find fraud which
might not need forensic audit.
k: (1) To determine the nature, timing, and extent of audit testing.
Reason: Because the auditors' purposes for considering internal control are to (a) plan the
audit and (b) to determine the nature, timing, and extent of the tests to be performed.
l: (3) (b) An audit of a company's policies and procedures for adhering to environmental
laws and regulations.
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