(Test Bank) Auditing A Practical Approach With Data Analytics

Johnson,Wiley,Moroney, 2

Math & Statistics

Test Bank

2nd Edition

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Author(s): Johnson, Wiley, Moroney

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1 Test Bank for Auditing A Practical Approach With Data Analytics, 2e Raymond Johnson, Laura Davis Wiley, Robyn Moroney Auditing, 2e (Johnson) Chapter 1 Introduction and Overview of Audit and Assurance 1) GAAP and IFRS are examples of applicable financial reporting framework. Answer: TRUE Explanation: The applicable financial reporting framework refers to the set of standards used in prepar ing the historical financial statements, such as GAAP, IFRS or a Federal Income Tax Basis of Accounting. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: AC: Reporting 2) Review of financial forecasts falls under attestation services . Answer: TRUE Explanation: Attestation services (under the umbrella of assurance services) include review of historical financial statements, review of financial forecasts, and examination of internal control. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Measurement Analysis and Interpretation 3) Within a U.S. context, the applicable financial reporting framework is typically Generally Accepted Accounting Principles (GAAP). Answer: TRUE Explanation: Within a U.S. context, the ap plicable financial reporting framework is typically generally accepted accounting principles (GAAP). Diff: 1 LO: 2 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Measurement Analysis and Interpretation 2 4) Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit. Answer: TRUE Explanation: Private companies, or non -issuers, are not required by the U.S. government to have an annual financial statement audit, but often other interested users, such as a bank or lender, may request that a private company provide audited financial statements. Diff: 1 LO: 2 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Reporting 5) One of the reasons there is a demand for financia l statement audits is that users of financial statements often lack accounting and legal knowledge to fully understand complex accounting and disclosure choices. Answer: TRUE Explanation: Financial statements are complex, the amounts are often affected by significant estimates, and the disclosures often require significant knowledge and experience to evaluate. Most financial statement users do not have the accounting and legal knowledge to assess the reasonableness of complex accounting and disclosure ch oices being made by the company. Diff: 1 LO: 3 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: PC: Communication 6) In financial accounting, the balance sheet is a statement of financial position. Answer: TRUE Explanation: In financial accounting, the financial statements include the balance sheet (statement of financial position), income statement (statement of comprehensive income), statement of cash flows, statement of changes in equity and accompanying notes. Diff: 1 LO: 3 Bloom: K nowledge Min: 1 AACSB: Analytic AICPA: PC: Communication 3 7) Business valuation falls within the purview of non -assurance services. Answer: TRUE Explanation: Many of these accounting firms provide non -assurance (or non -audit) services as well as ass urance services. These non -assurance services include management consulting, business valuation, mergers and acquisitions, insolvency, tax and accounting services. Diff: 1 LO: 4 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Measurement Analysis a nd Interpretation 8) Securities Exchange Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company's financial statements. Answer: TRUE Explanation: The Securities Exchang e Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company's financial statements. Diff: 1 LO: 5 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: BC: Governance Perspective 9) The Securities Act of 1933 enhances annual financial disclosures for public companies and placed more emphasis on corporate responsibility. Answer: FALSE Explanation: The Securities Act of 1933 regulates the disclosure of financial information in a company's initial public offering of stock and requires that the financial information be audited. Diff: 1 LO: 5 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: BC: Governance Perspective 10) Neither client characteristics nor actions of the auditor affect the audit risk. Answer: FALSE Explanation: Audit risk is affected by client characteristics as well as actions of the auditor. Diff: 1 LO: 6 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Reporting 4 11) Materiality i s a relative concept, and it differs from company to company and from year to year for a given company. Answer: TRUE Explanation: Materiality is a relative concept, and it differs from company to company and from year to year for a given company. Auditor s design an audit to provide reasonable assurance that the financial statements are free of material misstatement. However, auditors do not design an audit to look for immaterial misstatements because they would not influence a financial statement user. Diff: 1 LO: 6 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Reporting 12) When auditors determine that the financial statements of a public company are presented fairly in accordance with the applicable financial reporting framework, they issue a type of report that PCAOB standards call "the standard clean report." Answer: FALSE Explanation: If auditors have determined the financial statements are presented fairly in accordance with the applicable financial reporting framework, they issue the sta ndard unqualified report. The PCAOB standards use the term "unqualified" report. Diff: 1 LO: 6 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Reporting 13) In an unqualified audit report on the financial statements of a public company, the concludi ng statement of the Basis for Opinion paragraph mentions reasonable basis for the audit firm's opinion. Answer: TRUE Explanation: The basis for opinion paragraph explains, in brief terms, the process of conducting an audit. It mentions the concept of re asonable assurance about whether the financial statements are free of material misstatement. It includes an explicit statement that PCAOB audit standards were followed because the audit pertains to a public company. The scope paragraph also includes a brie f discussion of the professional judgments made during the audit. Finally, it concludes with a statement that the audit firm believes that its audit provides a reasonable basis for its opinion. Diff: 1 LO: 6 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Reporting 5 14) In an audit report on the effectiveness of ICFR for a public company, the basis for opinion paragraph states the different responsibilities of management and auditors. Answer: FALSE Explanation: In an audit report on the effect iveness of ICFR for a public company, the basis for opinion paragraph states the different responsibilities of management and auditors. Like the audit report on the financial statements, this paragraph references registration with the PCAOB and independenc e requirements of the SEC and other federal securities laws. Diff: 1 LO: 7 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: BC: Governance Perspective 15) In an audit report on the effectiveness of ICFR for a public company, the Opinion on Internal Control over Financial Reporting paragraph mentions that auditors are only required to obtain reasonable assurance about whether the company maintained, in all material respects, effective ICFR. Answer: TRUE Explanation: In an audit report on th e effectiveness of ICFR for a public company, the Opinion on Internal Control over Financial Reporting paragraph explains that auditors conducted their audit in accordance with the standards of the PCAOB. In brief terms, it explains the process of conducti ng an audit of the effectiveness of ICFR. It mentions that auditors are only required to obtain reasonable assurance about whether the company maintained, in all material respects, effective ICFR. It concludes with a statement that the audit firm believes its audit provides a reasonable basis for its opinion. Diff: 1 LO: 7 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: BC: Governance Perspective 16) A financial statement user's expectations are only impacted by legislation. Answer: FALSE Explana tion: A financial statement user's expectations are often impacted by audit standards, ethical standards, regulations, legislation, and firm policy and procedures. Diff: 1 LO: 8 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: AC: Measurement Anal ysis and Interpretation 6 17) The audit expectation gap is caused by user expectations such as: The auditor will catch all instances of fraud. Answer: TRUE Explanation: The audit expectation gap is caused by unrealistic user expectations such as: the auditor is providing complete assurance; the auditor is guaranteeing the future viability of the entity; an unmodified audit opinion is an indicator of complete accuracy of the financial statements; the auditor will definitely find any and all fraud; and tha t the auditor has checked all transactions. Diff: 1 LO: 8 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: AC: Reporting 18) Identify a service that falls under audit services. A) examination of historical financial statements B) compilation of historical financial statements C) inspection of website security D) review of financial forecast Answer: A Explanation: Examination of historical financial statements comes under audit services. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Measurement Analysis and Interpretation 19) Examination of internal controls is a service that comes under ________ services, which fall under ________ services. A) audit; assurance B) assurance; attestation C) acceptable; assur ance D) attestation; audit Answer: A Explanation: Attestation services (under the umbrella of assurance services) include review of historical financial statements, review of financial forecast, and examination of internal control. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Measurement Analysis and Interpretation 7 20) Compared to an audit of historical financial statements, a review engagement is ________. A) less extensive and also less expensive B) more extensive and also more expensive C) less extensive but more expensive D) more extensive but less expensive Answer: A Explanation: In a review engagement, the practitioner expresses limited assurance that no material modifications need to be made to the financial statement s. So, a review of historical financial statements is a less extensive, and therefore, less expensive service that can be very useful for smaller private companies. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Ethics AICPA: AC: Measurement Analysi s and Interpretation 21) Who are the only licensed accounting professionals in the United States? A) Certified Public Accountants (CPA) B) Chartered Accounts (CA) C) Financial Accountants (FA) D) Chief financial and operating officer (CFOO) Answer: A Explanation: Certified Public Accountants (CPA) are the only licensed accounting professionals in the United States. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Ethics AICPA: AC: Measurement Analysis and Interpretation 22) As attestation services encompass more than just the inspection of historical financial statements, the term ________ is used rather than ________. A) practitioner; auditor B) auditor; practitioner C) intended user; auditor D) intended user; practitioner Answer: A Expla nation: In attestation services, the term practitioner is used rather than auditor because attestation services encompass more than just the audit of historical financial statements. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: A C: Reporting 8 23) What services are defined as independent professional services that improve the quality of information, or its context, for decision makers? A) assurance services B) attestation services C) absolute assurance D) audit services Answer: A Explanation: Assurance services are defined as independent professional services that improve the quality of information, or its context, for decision makers. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: AC: Reporting 24) The most common assurance service is the ________. A) audit of a company's historical financial statements B) compilation of financial statements C) review of a company's financial controls D) review of a company's historical financial statements Answer: A Explanation: The audit of a company's historical financial statements is the most common assurance service. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: AC: Reporting 25) A review of historical financial statements is an example of ________. A) attestation service B) absolute assurance C) financial forecast D) applicable financial reporting framework Answer: A Explanation: An example of an attestation service is a review of historical financial statements. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Communication AICPA: AC: Reporting 9 26) Assurance, attestation, and auditing are similar because all three represent a common process of ________. A) taking information prepared by someone else and comparing that information to an established set of criteria. B) compiling and reviewing historical financial statements and providing non -financial information. C) compiling historical financial statements and providing non -financial information and web security. D) rev iewing financial forecast, examining internal controls, and providing website security. Answer: A Explanation: The terms assurance, attestation, and auditing are sometimes used interchangeably, but they actually represent different types of services. The y are similar because they all represent a common process of an independent accounting firm taking information prepared by someone else and comparing that information to an established set of criteria. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: C ommunication AICPA: AC: Reporting 27) Which of the following is true of assurance services? A) Both attestation and auditing services fall under the term of assurance services. B) The term information refers to subject matter that is an entire system, no t standalone data. C) The services are performed by someone who was involved with the creation of the information. D) The intended user is an independent Certified Public Accountant qualified to perform the auditing service. Answer: A Explanation: Both a ttestation and auditing services fall under the term of assurance services. The term independent implies that the service is performed by someone who was not involved with the creation of the information and who is objective in the evaluation of the inform ation. The term information refers to subject matter that can be standalone data or entire systems. The auditor refers to an independent Certified Public Accountant, or CPA, who is qualified to perform the auditing service. Diff: 1 LO: 1 Bloom: Comprehen sion Min: 1 AACSB: Communication AICPA: AC: Reporting 10 28) When CPAs are hired to report on the integrity of financial forecasts and reports on financial reporting processes, it is called an ________. A) attestation service B) absolute assurance C) applicable financial reporting framework D) audit service Answer: A Explanation: Companies produce financial information that goes beyond historical financial statements. Examples include financial forecasts and reports on financial reportin g processes. When CPAs are hired to report on the integrity of this type of financial information, it is called an attestation service. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Communication AICPA: AC: Reporting 29) In assurance services, the term " information" refers to subject matter that is ________. A) historical or prospective B) created by independent or in -house services C) financial and outside the purview of the non -financial D) internal to a company only Answer: A Explanation: In t he assurance services, the term information refers to subject matter that can be financial or non -financial, historical or prospective, or standalone data or entire systems, internal or external to a company. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Communication AICPA: AC: Reporting 11 30) Which terms does the textbook claim are used interchangeably, but actually represent different types of services? A) assurance, attestation, and auditing B) accounting, auditing, and assurance C) accounting, attestation, and auditing D) assurance, attestation, and accounting Answer: A Explanation: Assurance, attestation and auditing are used interchangeably but represent different services. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Analyti c AICPA: AC: Reporting 31) Which of the following is included as a focus of assurance services? A) Compilation of historical financial statements B) Examination of internal controls C) Review of historical financial statements D) Review of financial forecast Answer: C Explanation: A review is a type of assurance service. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 32) A key similarity between assurance, attestation, and auditing services is ________. A) the comparison of information prepared by someone else against an established set of criteria B) the comparison of actual output to projected output C) the comparison of financial accounting data to managerial accounting data D) the comparison of financial audit data to tax audit data Answer: A Explanation: Assurance, attestation, and auditing services involve the comparison of information prepared by someone else against an established set of criteria. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 12 33) The purpose of audit services is to provide ________. A) financial statement users with an opinion as to the fair presentation of the financial reporting B) management with an opinion as to the fairness o f the company's managerial accounting procedures C) investment advice to the company D) limited assurance that no material modifications need to be made to the financial statements Answer: A Explanation: The purpose of an audit is to provide financial s tatement users with an opinion as to the fair presentation of the financial reporting. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 34) Which are the most specific services provided by the auditor? A) Compilation services B) Audit services C) Attestation services D) Assurance services Answer: B Explanation: Audit services are the most specific. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 35) Which is the most inclusive or broadest service provided by the auditor? A) Audit services B) Attestation services C) Assurance services D) A review of historical financial statements Answer: C Explanation: Assurance services are the broadest service. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 13 36) The only professional who can audit a set of historical financial statements for a public or private company in the United States is ________. A) a Certified Public Accountant (CPA) B) a Certified Fraud Examiner (CFE) C) the IRS D) a loan officer Answer: A Explanation: A CPA is the only professional in the United States who can audit a set of historical financial statements for a public or private company. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Reporting 37) The set of standards used in preparing the historical financial statements, such as GAAP or IFRS, is referred to as ________. A) the applicable financial reporting framework B) Gen erally Accepted Auditing Standards (GAAS) C) material modifications D) a review of historical financial statements Answer: A Explanation: The set of standards used in preparing the historical financial statements is referred to as the applicable financia l reporting framework. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Reporting 38) Any group that will be using the financial statements to make decisions, such as investors and creditors, is known as ________. A) intended users B) groups of standing C) decision -makers D) practitioners Answer: A Explanation: Intended users are any group that will be using the financial statements to make decisions. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Repor ting 14 39) Which of the following is not one of the three E's needed to become a licensed CPA? A) Education B) Examination C) Experience D) Efficiency Answer: D Explanation: The three E's are education, examination, and experience. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Reporting 40) The only licensed accounting professionals in the United States are ________. A) Certified Public Accountants B) Chartered Accountants C) Certified Internal Auditors D) Certified Fraud Examiners Answer: A Explanation: CPAs are the only licensed accounting professionals in the United States. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 41) Assurance services are defined as ________. A) independent professional services that improve the quality of information, or its context, for decision makers B) individual provisional services to improve internal controls for financial statement users C) individual prospective financial statement quality D) indep endent information improvement Answer: A Explanation: Assurance services are independent professional services that improve the quality of information, or its context, for decision makers. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 15 42) Which type of entity generally finds a review of historical financial statements to be the most useful? A) Large public corporations B) Small public corporations C) Large private corporations D) Small private corporations Answer: D Explanation: Small private corporations typically find reviews to be the most useful. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Reporting 43) Which of the following is a characteristic of an audit o f historical financial statements? A) It provides limited assurance that no material modifications need to be made to the financial statements. B) It expresses an opinion on the fair presentation of the financial statements. C) It is the same as an examina tion of internal controls. D) It is broader than a review engagement. Answer: B Explanation: An audit expresses an opinion on the fair presentation of the financial statements. Diff: 1 LO: 1 Bloom: Comprehension Min: 1 AACSB: Analytic AICPA: AC: Rep orting 44) Which of the following is not one of the four sections tested on the CPA exam? A) Auditing and Attestation B) Business Environment and Concepts C) Regulation D) Internal Controls Answer: D Explanation: Internal controls are not one of the four parts of the CPA exam. Diff: 1 LO: 1 Bloom: Knowledge Min: 1 AACSB: Analytic AICPA: AC: Reporting