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. CPAs approach to the service. ANSWER: C 2. The primary goal of the CPA in performing the attest function is to a. Detect frau . !. E"amine in i#i ual transactions so that the au itor may certify as to their #ali ity. c. Determine $hether the client%s assertions are fairly state . . Assure the consistent application of correct accounting proce ures. ANSWER: C &. 'nternal au iting often e"ten s !eyon e"aminations lea ing to the e"pression of an opinion on the fairness of financial presentation an inclu es au its of efficiency( effecti#eness( an a. 'nternal control. !. E#aluation. c. Accuracy. . Compliance. ANSWER: D

!. c. .

.enerally accepte au iting stan ar s. 'nternal control. 'nformation systems control.

ANSWER: A /. Which of the follo$ing is not consi ere an assertion as formulate !y the Au iting Stan ar s 0oar ) a. 1aluation or allocation. b. 2athematical accuracy. c. Rights an o!ligations. d. Presentation an isclosure. ANSWER: 0

7.

Which of the follo$ing is not a istinguishing feature of ris,3!ase au iting) a. ' entifying areas posing the highest ris, of financial statement errors. b. Analysis of internal control. c. Collecting an e#aluating e#i ence. d. Concentrating au it resources in those areas presenting the highest ris, of financial statement errors. ANSWER: C

4.

To ma"imi+e in epen ence( the irector of internal au iting shoul report to the a. Audit committee. b. Controller. c. Chief financial officer. d. irector of information systems. A!S"#$% A

4.

Which of the follo$ing !est escri!es the operational au it) a. 't re*uires the constant re#ie$ !y internal au itors of the a ministrati#e controls as they relate to operations of the company. !. 't concentrates on implementing financial an accounting control in a ne$ly organi+e company. c. 't attempts an is esigne to #erify the fair presentation of a company%s results of operations. . 't concentrates on see,ing out aspects of operations in $hich $aste $oul !e re uce !y the intro uction of controls. ANSWER: D

5.

The auditor communicates the results of his or her &or' through the medium of the a. Engagement letter. b. 2anagement letter. c. Au it report. d. 6inancial statements. ANSWER: C

5.

The au itor%s -u gment concerning the o#erall fairness of the presentation of financial position( results of operations( an changes in financial position is applie $ithin the frame$or, of a. .enerally accepte accounting principles.

78. The !est escription of the scope of internal au iting is that it encompasses a. Primarily operational au iting. b. 0oth financial an operational au iting. c. Primarily the safeguar ing of assets an #erifying the e"istence of such assets. d. Primarily financial au iting. ANSWER: 0

c.

11.

A typical o!-ecti#e of an operational au it is to etermine $hether an entity%s a. 6inancial statements fairly present financial position and cash flo&s. !. (inancial statements present fairly the results of operations. c. 6inancial statements fairly present financial position( results of operations( an cash flo$s. . Specific operating units are functioning efficiently an effecti#ely. ANSWER: D

Assertions are the representations of management as to the fairness of the financial statements. Assertions are foun only in the footnotes to the financial statements.

ANSWER: C

16.

12.

The scope an nature of an au itor%s contractual o!ligation to a client is or inarily set forth in the a. Scope paragraph of the au itor9s report. b. :pinion paragraph of the au itor9s report. c. 2anagement letter. d. Engagement letter. ANSWER: D

Which of the follo$ing statements is not a istinction !et$een in epen ent au iting an internal au iting) a. 'n epen ent au itors represent thir party users e)ternal to the auditee entity, &hereas internal auditors report directly to management. b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost e)clusively &ith validity. c. *nternal auditors are employees of the auditee, &hereas independent auditors are independent contractors. . The internal au itor%s span of co#erage goes !eyon financial au iting to encompass operational and performance auditing. A!S"#$% 1,. +

7&.

The four ma-or steps in con ucting an au it are: a. Testing internal controls !. Au it report c. Planning . Testing transactions and balances The proper se*uence in applying the a!o#e steps is: a. ca ! !. c a! c. !c a . a c! ANSWER: A

13.

Which of the follo$ing statements is not true regar ing the competence of au it e#i ence) a. Rele#ance is enhance !y an effecti#e information system. !. To !e competent( e#i ence must !e !oth #ali an rele#ant. c. 1ali ity is relate to the *uality of the client9s information system. . Rele#ance must al$ays relate to au it o!-ecti#es. ANSWER: A 7;. As use in au iting( $hich of the follo$ing statements !est escri!es "assertions") a. Assertions are the representations of management as to the relia!ility of the information system. !. Assertions are the au itor%s fin ings to !e communicate in the au it report.

"hich of the follo&ing best describes the purpose of the engagement lettera. The engagement letter relieves the auditor of some responsibility for the e)ercise of due care. b. +y clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings bet&een CPA and client regarding the precise nature of the &or' 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. A!S"#$% +

1..

*n assessing audit ris', the CPA needs to do all of the follo&ing e)cept a. /ather audit evidence in support of recorded transactions. b. 0btain an understanding of the client1s system of internal control. c. 2nderstand the economic substance of significant transactions completed by the client. d. 2nderstand the entity and the industry in &hich it operates.

A!S"#$% 75.

"hich of the follo&ing tas's should be performed prior to the final audita. etermining 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 28. An au it approach that attempts to i entify areas posing the highest pro!a!ility of financial statement errors an allocate au it resources to those areas is ,no$n as <<<<<<<<< 3 <<<<<<<<<<< au iting. ANSWER: R'S=30ASED 27. 0ecause is the standard for measuring fairness, independent auditors must be e)pert in accounting matters. A!S"#$% 22. /AAP

<<<< &. E"amine #ehicle title applica!le to ne$ truc, purchase uring the current year <<<< C. Consi ere nee for a footnote escri!ing a la$suit pen ing against the client <<<< ;. Con ucte a search for unrecor e lia!ilities <<<< /. A #ise client of the nee to reclassify the current portion of a long term mortgage note <<<< D. Performe tests to etermine that o#erhea ha !een properly applie to en ing in#entory an cost of sales <<<< 4. Reconcile client9s !an, accounts as of year en <<<< 5. E"amine appraisal reports applica!le to lan onate !y the city <<<< 78. :!taine $ritten confirmation from customers regar ing year en !alances in selecte accounts recei#a!le S:?AT':N: 7. 2. a &. c C. e ;. ! /. e D. 4. 5. 78. Problem/Essa 2/. .eorge E Washington( CPAs( has -ust accepte an engagement to au it .inger an Cinnamon( a small manufacturer of spice pro ucts. Bulia Ben,ins has !een selecte as the in3charge au itor for the engagement( an Bosh ?u,ins $ill !e her assistant. 'n planning the au it fiel $or,( Ben,ins ma,es the follo$ing assignments of au it tas,s: Julia Jenkins 'nterim Au it Josh Lukins

*ndependent auditing is considered necessary because managers and stoc'holders have attitudes to&ard financial reporting. ANSWER: D'1ER.ENT >C:N6?'CT'N.@

23.

The most important characteristics contri!uting to effective auditing are the ability of the auditor to e)ercise and . ANSWER: DAE CARE( S:AND BAD.2ENT

2C.

The assertion stating that no assets( e*uities( or transactions ha#e !een omitte from the financial statements is ,no$n as the <<<<<<<<<<<< assertion. ANSWER: C:2P?ETENESS

Test internal control o#er cash Au it property( plant( an receipts e*uipment !alances Au it accounts recei#a!le internal control o#er !alances cash disbursements (inal Audit Test internal control over cash balances sales 0btain signed copy of engagement inventory balances ?etter

Test

MATCHING: 2;. 2atch each of the liste proce ures $ith the primary assertion that is satisfie !y the proce ure a. e"istence or occurrence !. completeness c. rights an o!ligations . #aluation or allocation e. presentation an isclosure <<<< 7. Calculate epreciation e"pense for the year <<<< 2. Test counte client9s year en in#entory of materials an finishe goo s

Audit Audit

Required % a. *dentify the steps to be follo&ed in completing an audit. b. "hat is meant by the term 3systematic process3 as contained in the definition of auditing-

c. #)plain the strengths and &ea'nesses in 4en'ins audit planning. S:?AT':N: a. !. Au it planningF interim au itF final au itF au it report. Systematic au iting means that the au itor stu ies an tests the system of internal control !efore testing the su!stance of transactions an !alances. Strong internal control increases the le#el of confi ence an ecreases the e"tent of transaction an !alance testing. Strengths: The au itors teste internal control o#er cash receipts an is!ursements !efore au iting cash !alances. Wea,nesses: 7. Ben,ins an ?u,ins au ite property( plant( an e*uipment !alances an accounts recei#a!le !alances uring the interim au it. These proce ures are typically applie on the final au it. 2oreo#er( internal controls o#er sales an property transactions $ere not teste an e#aluate prior to au iting the !alances. 2. Either Ben,ins or ?u,ins shoul ha#e teste internal controls o#er !oth cash receipts an is!ursements transactions. Di#i ing these uties $as inappropriate an faile to ma"imi+e efficiency an effecti#eness. &. 'nternal control o#er sales transactions shoul ha#e !een performe uring the interim au it. C. A signe copy of the engagement letter shoul ha#e !een o!taine as a first step in the acceptance process prior to con ucting any of the au it fiel $or,. ;. There is no in ication that internal controls o#er property or in#entory transactions $ere e#er teste . /. 'nternal control o#er sales shoul ha#e !een teste on the interim( rather than on the final au it.

c.