Auditing Exam 1 Chapter 1 – Flashcards
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The Sarbanes-Oxley Act applies to which of the following companies? A. All Companies B. Privately held companies C. Public Companies D. All public companies and privately held companies with assets greater than $500 million
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C. Public Companies
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What is considered Audit Evidence. a. Oral Statements made by management b. Written Communications c. Auditor Observation d. All the above
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a. Yes b. Yes c. Yes
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Evidence is paramount to audit and attestation engagements. List the four basic types of audit evidence.
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The four types of audit and attestation evidence include: 1. Electronic and documentary data about transactions 2. Written and electronic communications with outsiders 3. Observations by the auditor 4. Oral testimony of the auditee (client)
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The criteria by which an auditor evaluates the information under audit may vary with the information being audited. A) True B) False
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A) True
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The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards. A) True B) False
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False
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The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies. A) True B) False
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False
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The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting. A) True B) False
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A) True
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An auditor must be competent and have an independent mental attitude. A) True B) False
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True
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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.
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C) accounting.
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An accountant: A) must possess expertise in the accumulation of audit evidence. B) must decide the number and types of items to test. C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information. D) must be a CPA
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C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information.
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In "auditing" financial accounting data, the primary concern is with: A) determining whether recorded information properly reflects the economic events that It occurred during the accounting period. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements.
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A) determining whether recorded information properly reflects the economic events that It occurred during the accounting period.
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The trait that distinguishes auditors from accountants is the: A) auditor's ability to interpret accounting principles generally accepted in the United States. B) auditor's education beyond the Bachelor's degree. C) auditor's ability to interpret FASB Statements. D) auditor's accumulation and interpretation of evidence related to a company's financial statements.
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D) auditor's accumulation and interpretation of evidence related to a company's financial statements.
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Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant?
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The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. To provide relevant information, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information. In addition, accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost. The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period. Because US or international standards provide the criteria for evaluating whether financial information is properly recorded, auditors must thoroughly understand those accounting standards. In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants. Determining the proper audit procedures, deciding the number and types of items to test, and evaluating the results are unique to the auditor. Terms: Roles of accountants and auditors
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________ risk reflects the possibility that the information upon which the business decision was made was inaccurate. A) Client acceptance B) Information C) Business D) Control
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B) Information
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A correct relationship among the auditor, the client, and the external users is: A) management of a public company hires the independent auditor. B) the audit committee of a private company hires the independent auditor. C) the client provides capital to the external users. D) the external users can rely upon the auditor's report to reduce information risk.
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D) the external users can rely upon the auditor's report to reduce information risk.
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The most common way for users to obtain reliable information is to: A) have an internal audit. B) have an independent audit. C) verify all information individually. D) verify the information with management.
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B) have an independent audit.
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Explain what is meant by information risk, and list the four causes of this risk
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Information risk reflects the possibility that the information upon which the business . risk decision was made was inaccurate Four causes of information risk are: - remoteness of information - biases and motives of the provider - voluminous data, and - complex exchange transactions
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In the audit of historical financial statements, what accounting criteria is most common? A) Regulatory accounting principles B) Applicable international accounting standards C) Applicable US accounting standards D) B and C E) All of the above
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D) B and C
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Any service that requires a CPA firm to issue 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) assurance service. D) tax service.
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B) attestation service.
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Three common types of attestation services are: A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting. B) audits of historical financial information, verifications of historical financial information, and attestations regarding internal controls. C) reviews of historical financial information, verifications of future financial information, and attestations regarding internal controls. D) audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information.
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A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting.
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Which of the following services provides the lowest level of assurance on a financial statement? A) A review B) An audit C) Neither service provides assurance on financial statements. D) Each service provides the same level of assurance on financial statements.
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A) A review
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Which of the following is not a SysTrust Services principle as defined by the AICPA? A) Online privacy B) Availability C) Processing integrity D) Operational integrity
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D) Operational integrity
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The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company? A) Reviews of quarterly financial statements B) Preparation of corporate tax returns C) Most consulting services D) Tax services
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C) Most consulting services
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Attestation services on information technology include WebTrust services and SysTrust services. Which of the following statements most accurately describes SysTrust services? A) SysTrust services provide assurance on business processes, transaction integrity and information processes. B) SysTrust services provide assurance on system reliability in critical areas such as security and data integrity. C) SysTrust services provide assurance on internal control over financial reporting. D) SysTrust services provide assurance as to whether accounting personnel are following procedures prescribed by the company controller
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B) SysTrust services provide assurance on system reliability in critical areas such as security and data integrity.
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Two types of attestation services provided by CPA firms are audits and reviews. Discuss the similarities and differences between these two types of attestation services. Which type provides the least assurance?
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In both the review and audit of the historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards. The CPA provides a lower level of assurance for reviews of financial statements compared to the high level for audits, therefore less evidence is needed. A review is often adequate to meet financial statement users' needs. It can be provided by a CPA firm at a much lower fee than an audit because less evidence is needed. An audit is the most common assurance service provided by CPA firms. Publicly traded companies in the US are required to have audits under the federal securities acts. Many nonpublic companies have a review to limit auditor fees.
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What is an engagement to attest on internal control over financial reporting?
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For an audit of internal control over financial reporting, management asserts that internal controls have been developed and implemented following well established criteria. Section 404 of the Sarbanes-Oxley Act requires public companies to report management's assessment of the effectiveness of internal control over financial reporting. The Act also requires auditors for larger public companies to attest to the effectiveness of internal control over financial reporting. This evaluation, which is integrated with the audit of financial statements, increases user confidence about future financial reporting, because effective internal controls reduce the likelihood of future misstatements in the financial statements.
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What are the five categories of attestation services?
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The five categories of attestation services include: • Audit of historical financial statements • Audit of internal control over financial reporting • Review of historical financial statements • Attestation services on information technology • Other attestation services that may be applied to a broad range of subject matter
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CPA firms are never allowed to provide bookkeeping services for clients. A) True B) False
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B
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Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting. A) True B) False
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A
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Most public companies' audited financial statements are available on the SEC's EDGAR database. A) True B) False
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A
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One objective of an operational audit is to: A) determine whether the financial statements fairly present the entity's operations. B) determine if the auditee is in compliance with GAAP. C) make recommendations for improving performance. D) report on the entity's relative success in attaining profit maximization.
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C) make recommendations for improving performance.
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An examination of part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit? A) Operational audit B) Compliance audit C) Financial statement audit D) Production audit
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A) Operational audit
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An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a (n): A) audit of financial statements. B) compliance audit. C) operational audit. D) production audit.
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B) compliance audit.
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Which one of the following is more difficult to evaluate objectively? A) Presentation of financial statements in accordance with generally accepted accounting principles B) Compliance with government regulations C) Efficiency and effectiveness of operations D) All three of the above are equally difficult
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C) Efficiency and effectiveness of operations
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Which of the following audits can be regarded as generally being a compliance audit? A) IRS agents' examinations of taxpayer returns B) GAO auditor's evaluation of the computer operations of governmental units C) An internal auditor's review of a company's payroll authorization procedures D) A CPA firm's audit of a public company
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A) IRS agents' examinations of taxpayer returns
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Which of the following are required to have a written report regarding the assertion of another party? a. Financial Statement Audit b. Operational Audit c. Compliance Audit d. Attestation Engagement e. Assurance Engagement
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E is no all the rest yes
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The primary purpose of a compliance audit is to determine whether the financial statements It is prepared in compliance with generally accepted accounting principles. A) True B) False
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B) False
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Results of compliance audits are typically reported to the company's management rather than to a broad spectrum of outside users. A) True B) False
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A) True
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The use of the Certified Public Accountant title is regulated by: A) the federal government. B) state law through a licensing department or agency of each state. C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees. D) the Securities and Exchange Commission.
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Answer: B B) state law through a licensing department or agency of each state.
