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Auditing And Assurance Services 16th Edition By Alvin A. Arens – Test Bank 

 

 

 

 

 

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 1   The Demand for Audit and Other Assurance Services

 

1.1   Learning Objective 1-1

1) In the auditing process

  1. A) the types and amounts of evidence remain constant from audit to audit.
  2. B) the criteria for evaluating information will not vary depending on the information being audited.
  3. C) the audit report communicates the auditor’s findings to users.
  4. D) records are gathered by the auditor to determine whether the audited information is stated in accordance with SEC standards.

2) Which of the following is considered audit evidence?

  1. A)
Oral statements

made by management

Written

Communications

Auditor

Observation

Y N N
  1. B)
Oral statements

made by management

Written

Communications

Auditor

Observation

N Y Y
  1. C)
Oral statements

made by management

Written

Communications

Auditor

Observation

Y Y Y
  1. D)
Oral statements

made by management

Written

Communications

Auditor

Observation

N N Y

3) Which of the following can be used as a criteria for evaluating information being audited?

  1. A) International Financial Reporting Standards (IFRS)
  2. B) Generally Accepted Accounting Principles (GAAP)
  3. C) Internal Revenue Code (IRC)
  4. D) all of the above

4) Evidence is paramount to audit and attestation engagements. List the four basic types of audit evidence.

Answer:  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)

5) The criteria by which an auditor evaluates the information under audit may vary with the information being audited.

6) One criteria used by an external auditor to evaluate published financial statements is known as generally accepted auditing standards.

7) Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports.

8) To perform an audit, there must be information in a verifiable form and some criteria by which the auditor can evaluate the information.

9) An auditor must be competent and have an independent mental attitude.

Terms:  Criteria used by external auditor to evaluate published financial statements

1.2   Learning Objective 1-2

1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called

  1. A) finance.
  2. B) auditing.
  3. C) accounting.
  4. D) economics.

2) An accountant

  1. A) must possess expertise in the accumulation of audit evidence.
  2. B) must decide the number and types of items to test.
  3. C) must have an understanding of the principles and rules that provide the basis for preparing the accounting information.
  4. D) must be a CPA.

3) When auditing accounting data, auditors focus on

  1. A) determining whether recorded information properly reflects the economic events that occurred during the accounting period.
  2. B) determining if fraud has occurred.
  3. C) determining if taxable income has been calculated correctly.
  4. D) analyzing the financial information to be sure that it complies with government requirements.

4) The trait that distinguishes auditors from accountants is the

  1. A) auditor’s ability to interpret accounting principles generally accepted in the United States.
  2. B) auditor’s education beyond the bachelor’s degree.
  3. C) auditor’s ability to interpret FASB Statements.
  4. D) auditor’s expertise in the accumulation and interpretation of audit evidence.

5) Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant?

6) Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period.

7) Both accountants and auditors must possess expertise in the accumulation and interpretation of audit evidence.

1.3   Learning Objective 1-3

1) ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate.

  1. A) Client acceptance
  2. B) Information
  3. C) Business
  4. D) Control

2) The possibility that a business may not be able to repay a bank loan because of an economic downturn is referred to as

  1. A) materiality risk.
  2. B) information risk.
  3. C) interest rate risk.
  4. D) business risk.

3) Auditing can have a significant effect on both information risk and business risk.

Terms:  Business risk and information risk

1.4   Learning Objective 1-4

1) A correct relationship among the auditor, the client, and the external users is

  1. A) management of a public company hires the independent auditor.
  2. B) the audit committee of a private company hires the independent auditor.
  3. C) the client provides capital to the external users.
  4. D) the external users can rely upon the auditor’s report to reduce information risk.

2) The most common way for users to obtain reliable information is to

  1. A) have an internal audit.
  2. B) have an independent audit.
  3. C) verify all information individually.
  4. D) verify the information with management.

3) External users of the financial statements

  1. A) value the auditor’s report because of the auditor’s independence from the client.
  2. B) look to the auditor’s report as an indication of the statements’ reliability.
  3. C) use the audited information on the assumption that it is reasonably complete, accurate, and unbiased.
  4. D) all of the above.

4) Explain what is meant by information risk, and list the four causes of this risk.

Answer:  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.

5) As society becomes more complex, decision makers are more likely to receive reliable information.

6) Management is required by GAAP to reduce information risk, even if the costs outweigh the benefits.

1.5   Learning Objective 1-5

1) In the audit of historical financial statements, management asserts that the financial statements are fairly stated in accordance with what standards?

  1. A) regulatory accounting principles
  2. B) applicable international accounting standards
  3. C) applicable U.S. accounting standards
  4. D) B and C

2) 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)

  1. A) accounting and bookkeeping service.
  2. B) attestation service.
  3. C) assurance service.
  4. D) tax service.

3) Three common types of attestation services are

  1. A) audits of historical financial statements, reviews of historical financial statements, and audits of internal control over financial reporting.
  2. B) audits of historical financial information, verifications of historical financial information, and attestations regarding internal controls.
  3. C) reviews of historical financial information, verifications of future financial information, and attestations regarding internal controls.
  4. D) audits of historical financial information, reviews of controls related to investments, and verifications of historical financial information.

4) Which of the following services provides the lowest level of assurance on a financial statement?

  1. A) review
  2. B) audit
  3. C) Neither service provides assurance on financial statements.
  4. D) Each service provides the same level of assurance on financial statements.

5) Which of the following is an accurate statement regarding assurance services?

  1. A) Assurance services must be performed by a CPA.
  2. B) An attestation service is not a type of assurance service.
  3. C) Assurance services improve the quality of information for decision makers.
  4. D) Assurance services can only be performed on financial data.

6) Audits

  1. A) are an assurance service, but not an attestation service.
  2. B) are designed to provide absolute assurance that the financial statements are free of material misstatement.
  3. C) are required for publicly traded companies in the United States.
  4. D) do not require the auditor to express their opinion in a written report.

7) A high, but not absolute, level of assurance is called

  1. A) probable assurance.
  2. B) reasonable assurance.
  3. C) limited assurance.
  4. D) incomplete assurance.

8) Which of the following is an accurate statement regarding the various types of other assurance services?

  1. A) Assurance services must be about the reliability of another party’s assertion about compliance with specified criteria.
  2. B) Other assurance services must meet the definition of an attestation service.
  3. C) The primary purpose of a management consulting engagement is to improve the quality of information.
  4. D) The market for other forms of assurance services is open to non-CPA competitors.

9) 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?

10) What is an audit of internal control over financial reporting?

Topic:  SOX

11) What are the four categories of attestation services?

Answer:  The four categories of attestation services include

  • Audit of historical financial statements
  • Audit of internal control over financial reporting
  • Review of historical financial statements
  • Other attestation services that may be applied to a broad range of subject matter.

12) CPA firms perform numerous services that generally fall outside the scope of assurance services. Give three examples of such services.

Answer:  Three specific examples of services performed by CPAs that generally fall outside the scope of assurance services are

  • accounting and bookkeeping services
  • tax services
  • management and consulting services.

13) CPA firms are never allowed to provide bookkeeping services for clients.

14) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting.

Topic:  SOX

15) Most public companies’ audited financial statements are available on the SEC’s EDGAR database.

16) The primary purpose of a management consulting engagement is to generate a recommendation to management.

1.6   Learning Objective 1-6

1) One objective of an operational audit is to

  1. A) determine whether the financial statements fairly present the entity’s operations.
  2. B) determine if the auditee is in compliance with GAAP.
  3. C) make recommendations for improving performance.
  4. D) report on the entity’s relative success in attaining profit maximization.

2) An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit?

  1. A) operational audit
  2. B) compliance audit
  3. C) financial statement audit
  4. D) production audit

3) An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n)

  1. A) audit of financial statements.
  2. B) compliance audit.
  3. C) operational audit.
  4. D) production audit.

4) Which one of the following is more difficult to evaluate objectively?

  1. A) presentation of financial statements in accordance with generally accepted accounting principles
  2. B) compliance with government regulations
  3. C) efficiency and effectiveness of operations
  4. D) All three of the above are equally difficult.

5) Which of the following audits can be regarded as generally being a compliance audit?

  1. A) IRS agents’ examinations of taxpayer returns
  2. B) GAO auditor’s evaluation of the computer operations of governmental units
  3. C) an internal auditor’s review of a company’s payroll authorization procedures
  4. D) a CPA firm’s audit of a public company

6) Which of the following are required to have a written report regarding the assertion of another party?

  1. A)
Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement
Y Y Y Y Y
  1. B)
Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement
Y Y Y Y N
  1. C)
Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement
Y Y Y N N
  1. D)
Financial Statement Audit Operational Audit Compliance Audit Attestation Engagement Assurance Engagement
N N N Y Y

7) In a financial statement audit, the auditor

  1. A) gathers evidence to determine whether the statements contain material errors or other misstatements.
  2. B) must have a thorough understanding of the entity and its environment.
  3. C) determines whether the financial statements are stated in accordance with specified criteria.
  4. D) all of the above.

8) Discuss the similarities and differences between financial statement audits, operational audits, and compliance audits. Give an example of each type.

9) To perform an audit, it is necessary for the information to be in a verifiable form and there must be some criteria by which the auditor can evaluate the information. Detail the information and criteria that would be used when

(A) an independent CPA firm audits a company’s historical financial statements.

(B) an Internal Revenue Service auditor audits that same company’s tax return.

(C) an internal auditor performs an operational audit to evaluate whether the company’s computerized payroll processing system is operating efficiently and effectively.

10) The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles.

11) Results of compliance audits are typically reported to the company’s management rather than to a broad spectrum of outside users.

12) An integrated approach to auditing considers both the risk of misstatements and operating controls intended to prevent misstatements.

1.7   Learning Objective 1-7

1) Internal auditors

  1. A) must be independent of the entity that employs them.
  2. B) generally report to the accounting department.
  3. C) are employed by all types of organizations.
  4. D) must be CPAs.

2) Which type of auditor audits the financial information prepared by various federal government agencies before it is submitted to Congress?

  1. A) internal auditor
  2. B) revenue agent
  3. C) independent auditor
  4. D) GAO auditor

3) Match the engagement described to the (A) type of audit and (B) auditor that would most likely perform the engagement. Each engagement will have an answer from List-A and List-B. An answer can be used once, more than once, or not at all.

List A – Type of Audit: List B – Type of Auditor:
a. Financial Statement

b. Compliance

c. Operational

d. Internal

e. External

f. Government

g. IRS

Engagement:

  1. Evaluate a company’s payroll processing for economy.
  2. Evaluate/determine if bank covenants are being met.
  3. Evaluate financial statements that are to be submitted to a bank.
  4. Evaluate the promptness of materials inspection in a manufacturer’s receiving department.
  5. Determine if Medicare reimbursements are in accordance with the Healthcare Financing Administration (HCFA).
  6. Determine if the tax return of a multinational corporation is in accordance with the tax code.
  7. Determine if a public school is properly applying their reimbursement for the payment-in-kind program.
  8. Determine the effectiveness of a Department of Defense project.

4) Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors.

5) The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts.

1.8   Learning Objective 1-8

1) The three requirements for becoming a CPA include all but which of the following?

  1. A) uniform CPA examination requirement
  2. B) education requirements
  3. C) character requirements
  4. D) experience requirement

2) The use of the Certified Public Accountant title is regulated by

  1. A) the federal government.
  2. B) state law through the licensing departments of each state.
  3. C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees.
  4. D) the Securities and Exchange Commission.

3) List and discuss the three primary requirements to become a CPA.

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 2   The CPA Profession

 

2.1   Learning Objective 2-1

1) The legal right to perform audits is granted to a CPA firm by regulation of

  1. A) each state.
  2. B) the Financial Accounting Standards Board (FASB).
  3. C) the American Institute of Certified Public Accountants (AICPA).
  4. D) the Auditing Standards Board.

2) Which of the following is not a characteristic of a small firm?

  1. A) Most small firms have fewer than 25 professionals.
  2. B) Small firms perform audits on small and not-for-profit businesses.
  3. C) Tax services are more important than auditing services to the small firm.
  4. D) Small firms are prohibited by the SEC from auditing publicly traded companies.

3) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. Which of the following is true for auditors of publicly traded companies?

  1. They are restricted from providing consulting services to privately held companies.
  2. There is no restriction on providing consulting services to non-audit clients.
  3. A) I only
  4. B) II only
  5. C) I and II
  6. D) Neither I nor II

4) Which of the following does not describe a size category for a CPA firm?

  1. A) Big Four national firms
  2. B) Big Four international firms
  3. C) local firms
  4. D) national and regional firms

5) ________ is one of the Big Four international CPA firms.

  1. A) Deloitte
  2. B) KPMG
  3. C) Ernst & Young
  4. D) All of the above are classified as Big Four international CPA firms.

6) In which type of service does the CPA assemble the financial statements but provide no assurance to third parties?

  1. A) audit
  2. B) compilation
  3. C) review
  4. D) bookkeeping

7) In addition to attestation and assurance services, CPA firms provide other services to their clients. List three of these services.

8) Many small, local accounting firms perform audits as their primary service to their clients.

9) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

2.2   Learning Objective 2-2

1) Which of the following statements is true as it relates to limited liability partnerships?

  1. A) Only senior partners are liable for the partnerships debts.
  2. B) Partners have no liability in a limited liability partnership arrangement.
  3. C) Partners are personally liable for the acts of those under their supervision.
  4. D) All partners must be AICPA members.

2) Which staff level in a CPA firm performs most of the detailed audit work?

  1. A) partner
  2. B) staff assistant
  3. C) senior auditor
  4. D) senior manager

3) List and describe the three factors that influence the organizational structure of all CPA firms. What are the most common forms of CPA firm organization?

4) List and describe the six organizational structures available to CPA firms.

5) All of the Big Four accounting firms and many of the smaller CPA firms now operate as limited liability partnerships.

6) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation.

7) In a CPA firm, the audit partner coordinates the performance of audit procedures.

2.3   Learning Objective 2-3

1) The organization that is responsible for providing oversight for auditors of public companies is called the

  1. A) Auditing Standards Board.
  2. B) American Institute of Certified Public Accountants.
  3. C) Public Oversight Board.
  4. D) Public Company Accounting Oversight Board.

2) Members of the Public Company Accounting Oversight Board are appointed and overseen by the

  1. A) U.S. Congress.
  2. B) American Institute of Certified Public Accountants.
  3. C) Auditing Standards Board.
  4. D) Securities and Exchange Commission.

3) The Public Company Accounting Oversight Board

  1. A) performs inspections of the quality controls of firms that audit public companies.
  2. B) establishes auditing standards that must be followed by CPAs on all audits.
  3. C) oversees auditors of private companies.
  4. D) performs all of the above functions.

4) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm. The PCAOB

  1. A)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
Yes Yes Yes
  1. B)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
Yes Yes No
  1. C)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
Yes No No
  1. D)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
No No No

5) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB’s primary functions?

6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publicly traded and private companies.

7) The PCAOB requires annual inspections of accounting firms that audit more than ten public companies.

2.4   Learning Objective 2-4

1) The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the

  1. A) Form S-1.
  2. B) Form 8-K.
  3. C) Form 10-K.
  4. D) Form 10-Q.

2) The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the

  1. A) Form S-1.
  2. B) Form 8-K.
  3. C) Form 10-K.
  4. D) Form 10-Q.

3) Which of the following is a correct statement regarding the SEC?

  1. A) The Securities Act of 1934 requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.
  2. B) All public companies must file monthly statements with the SEC.
  3. C) The Form 10-K must be filed within 30 days after the close of the fiscal year.
  4. D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission.

4) With respect to the SEC,

  1. A) the attitude of the SEC is generally considered in any major change proposed by the FASB.
  2. B) the SEC is the sole agency responsible for setting generally accepted accounting principles.
  3. C) the SEC requirements of greatest interest to CPAs are set forth in the their enforcement regulations.
  4. D) the SEC has the power to establish rules for all CPAs.

5) Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles.

6) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements.

7) Form 10-K must be filed with the SEC whenever a public company experiences a significant event.

8) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.

2.5   Learning Objective 2-5

1) Statements on Standards for Accounting and Review Services (SSARS) are issued by the

  1. A) Accounting and Review Services Committee.
  2. B) Professional Ethics Executive Committee.
  3. C) Securities and Exchange Commission.
  4. D) Financial Accounting Standards Board.

2) The American Institute of Certified Public Accountants (AICPA)

  1. A) is responsible for issuing licenses to new CPAs.
  2. B) restricts its membership to CPAs who are independent auditors.
  3. C) sets auditing standards for both public and private companies.
  4. D) sets rules of conduct that CPAs are required to meet.

3) What are the major functions of the AICPA?

4) Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors.

5) Membership in the AICPA is mandatory for all licensed practicing CPAs.

6) A CPA must meet continuing education requirements to maintain their license to practice.

2.6   Learning Objective 2-6

1) Which of the following are audit standards used in professional practice by audit firms?

  1. A)
International

Standards

on Auditing

AICPA Auditing Standards PCAOB Auditing Standards
Yes No No
  1. B)
International

Standards

on Auditing

AICPA Auditing Standards PCAOB Auditing Standards
Yes Yes No
  1. C)
International

Standards

on Auditing

AICPA Auditing Standards PCAOB Auditing Standards
Yes Yes Yes
  1. D)
International

Standards

on Auditing

AICPA Auditing Standards PCAOB Auditing Standards
No Yes Yes

2) Who is responsible for establishing auditing standards for privately held companies?

  1. A) Securities and Exchange Commission
  2. B) Public Company Accounting Oversight Board
  3. C) Auditing Standards Board
  4. D) National Association of Accounting

3) Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit

  1. A) both private and public companies.
  2. B) public companies only.
  3. C) private companies, public companies, and nonprofit entities.
  4. D) private companies only.

4) The International Standards on Auditing (ISA)

  1. A) are issued by the AICPA.
  2. B) override a country’s regulations governing the audit of a company.
  3. C) has many of the same standards as the Auditing Standards Board (ASB).
  4. D) must be followed by companies whose stock is traded in the U.S.

5) ________ are referred to as U.S. generally accepted auditing standards (GAAS).

  1. A) AICPA auditing standards
  2. B) SEC auditing standards
  3. C) PCAOB auditing standards
  4. D) Sarbanes-Oxley standards

6) Which of the following is a true statement regarding auditing standards?

  1. A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies.
  2. B) PCAOB auditing standards are applicable to entities outside the U.S.
  3. C) There are no similarities between PCAOB standards and International Standards on Auditing.
  4. D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

7) Which of the following is true with regards to the various auditing standards?

  1. A) Statements on Auditing Standards (SASs) are issued by the PCAOB.
  2. B) The ASB Clarity Project was intended to make the U.S. auditing standards easier to read, understand, and apply.
  3. C) The ASB redrafted existing AICPA auditing standards to align them with respective ISAs.
  4. D) Both B and C are correct.

8) The PCAOB considers International Standards on Auditing (ISA) when developing its standards.

9) International Standards on Auditing are issued by the International Auditing and Assurance Standards Board (IAASB).

10) The ASB has revised its audit standards to converge with international standards.