CHAPTER 1:

T/F: A financial statement audit is a systematic process of objectively obtaining

and evaluating evidence.
T
T/F: A free market can only exist if there is sharing of perfectly reliable
information.
F
Audit staff performing audit work must be appropriately supervised by partners
and managers.
T
Audited financial statements should be free from all errors and fraud.
F
Audited financial statements should be presented fairly according to the substance
of GAAP.
T
Auditing exists because users need unbiased information on which to assess
management performance and make economic decisions.
T
Auditors of public companies need not adhere to the requirements of statutory or
regulatory organizations.
F
Auditors need only understand the rules of accounting as the principles of
accounting are outdated.
F
Being free from material errors is the same as being free from all errors.
F
CPA certificates for auditors are issued by state boards of accountancy.
T
External auditors frequently serve on the audit committees of their clients.
F
In all states, a CPA must have completed at least 150 hours of college semester
hours to receive their license.
F
Internal auditors are considered part of the audit committee.
F
Internal controls are the responsibility of management.
T
The AICPA sets auditing standards for non-publicly traded companies.
T
The Center for Audit Quality has the primary authority to set auditing standards.
F
The Center for Audit Quality was started by the International Federation of
Accountants.
F
The external auditors are only responsible for their opinion of the financial
statements and internal controls.
T
The FASB provide the criteria against which the auditor can measure the fairness
of financial statement presentation.
T
The internal audit profession adheres exclusively to standards set by the Public
Company Accounting Oversight Board.
F
The PCAOB was established by the AICPA in response to Securities laws.
F
The Public Company Accounting Oversight Board provides the criteria against
which the auditor measures the fairness of financial statement presentation.
F
The purpose of auditing is to improve the quality of the information provided.
T
The SEC provides annual reports to the PCAOB
F
Though often relying on the FASB, the SEC has authority to establish GAAP for
publicly traded companies.
T
Users rely on the auditors' independent assessment of financial statement
presentation because few users have direct knowledge of the company's operations.
T
The SEC has authority to establish GAAP for all business enterprises.

F
Only the Big 4 audit firms can conduct audits of private companies in the United
States.
F
Internal auditing only provides assurance about internal control effectiveness.
F
The PCAOB is responsible for conducting audits in the United States.
F
A quality audit is one performed “in accordance with generally accepted auditing
standards (GAAS) to provide reasonable assurance that the audited financial
statements and related disclosures are presented in accordance with generally
accepted accounting principles (GAAP) and (2) are not materially misstated
whether due to errors or fraud.”
T
If the auditor has no reservations about management’s financial statements then the
auditor will issue a qualified opinion.
F
Auditors should conduct their work with an attitude of professional skepticism.
T
Auditing is the process of attesting to assertions about economic actions and
events.
T
In an audit, management is considered the "client".
F
The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor
independence requirements.
F
The need for assurance services arises because the interests of the users of
information may be different from that of the interests of those responsible for
providing information.
T
A bank using Milton Company's financial statements to determine the
creditworthiness of a potential loan to Milton is a good example of the need for
unbiased reporting.
T
The SEC is the governmental body with the oversight responsibility for the
efficient operation of capital markets in the United States.
T
The PCAOB is a public board, appointed by Congress, to provide oversight of the
firms that audit public companies registered with the SEC.
F
Audit quality is driven, in part, by the audit firm's culture.
T
Auditing is the process of verifying the accuracy of the financial statements.
F
 Bondholders are one of the users of financial statements.
T
An auditor must have a good understanding of the risks associated with a client's
industry in order to ensure that the financial statements reflect the underlying
substance of accounting transactions and the economic effects of such transactions.
T
An integrated audit requires the auditor to assess the effectiveness of internal
controls.
T

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Which one of the following is not an example of a typical review program?

A. Interoffice reviews
B. Engagement quality review
C. Peer reviews
D. Self reviews

Which of the following is most often the client's preferred audit report?
A. Qualified
B. Unqualified
C. Adverse
D. Disclaimer
What can users reasonably expect from the audited financial statements?
A. The audited financial statements are complete and contain all important
financial disclosures, are free from material misstatements, and are presented
fairly.
B. The audited financial statements are complete and contain all important
financial disclosures, are free from material misstatements, and are presented fairly
according to GAAP.
C. The audited financial statements are complete, accurate, and are presented fairly
according to GAAP.
D. The audited financial statements are complete, contain all important financial
disclosures, are free from all misstatements, and are presented fairly according to
the substance of GAAP.

In the United States,what is the most common criteria against which the auditor
measures the fairness of financial statement presentation?
A. Auditing standards
B. GAAP
C. GAAS
D. Governmental accounting principles

What must audit firms do to perform financial statement audits for public
companies?
A. Register with the AICPA
B. Register with the Institute of Internal Auditors
C. Register with the US General Accounting Office
D. Register with the PCAOB

An Integrated Audit Report provides opinion(s) on which of the following?

A. The financial statements
B. Internal controls
C. Both financial statements and internal controls
D. Neither financial statements or internal controls

Which organization issued the Internal Control, Integrated Framework which

serves as the primary criterion for evaluating the quality of a company’s internal
control system?
A. PCAOB
B. COSO
C. AICPA
D. GAO

Which type of auditor may perform a financial statement audit?

A. Public company auditors
B. Internal auditors
C. External auditor
D. A and C

Which of the following is not required of auditors to satisfy the interdependence

standards?
A. The auditor must be appointed by the SEC.
B. The auditor must be intellectually honest.
C. The auditor must be unbiased.
D. The auditor must be objective.

What document communicates the conclusions of the financial statement audit?

A. The financial statement
B. Written management assertion
C. The audit report
D. None of the above
Which one of the following is not an example of an independence violation?
A. Audit partner's spouse is the CFO at a client.
B. Audit firm accepts money for conducting the audit.
C. Auditors owning a small amount of stock in a client.
D. Providing investment tips to friends about clients.
The Center for Audit Quality is dedicated to enhancing investor confidence in
what?
A. The financial markets
B. Management
C. Auditors
D. Both B and C.
E. All of the above.

What must an auditor do in an audit?

A. Consider how the economic activity is portrayed in the financial statements.
B. Force management to make operational decisions that will improve the
company’s financial performance.
C. Disregard independence in order to find the underlying truth of the evidence.
D. Establish new criteria by which financial statements may be compared.

What is the role of the court system for the auditing profession?
A. To act as a quality-control mechanism.
B. To provide guidance on unclear legislation.
C. To punish audit firms that issue the wrong audit report.
D. All of the above

Audit committees play an important role in promoting independence of both

internal and external auditors. Which of the following is the most important
limitation on the effectiveness of audit committees?
A. Audit committees may have close personal and professional friendships with
management.
B. Audit committee members are compensated by the PCAOB.
C. Audit committees devote their efforts to external audit concerns and do not pay
much attention to internal auditing.
D. Audit committee members are required to have degrees in non-accounting
fields.

What is the term used to describe a systematic process of objectively obtaining

evidence regarding assertions about economic actions and events to ascertain the
degree of correspondence between those assertions and established criteria and
communicating the results to interested users?
A. Internal audit
B. Financial audit
C. External audit
D. Integrated audit

An "integrated audit" includes an audit of what?

A. The company's internal controls.
B. The company's financial statements.
C. The company's compliance with its rules and policies.
D. Both A and B.

Why is auditing important in a free market society?

A. The public requires auditors to function as divisions of regulatory bodies.
B. Auditors detect all errors and fraud perpetrated by company employees.
C. It provides reliable information upon which to judge economic performance.
D. The auditor is an amiable insurance policy for investors.
E. All of the above are true.

What is the management of a company responsible for?

A. Hiring the auditor
B. Preparing the financial statements
C. The audit workpapers
D. Ensuring auditor independence

According to the Financial Reporting Council (FRC), when is the culture of an

audit firm likely to provide a positive contribution to audit quality?
A. When the leadership of the audit firm ensures partners and other staff have
sufficient time and resources to deal with difficult issues as they arise.
B. When the leadership of the audit firm ensures robust systems for client
acceptance and continuation based on ability to pay fees.
C. When the leadership of the audit firm creates an environment where achieving
efficiency is valued, invested in and rewarded.
D. When the leadership of the audit firm ensures financial considerations drive
actions.

Why does the AICPA remain a valuable organization?

A. Its continued involvement in the enforcement of auditing standards, particularly
for public companies.
B. Its continued involvement in the regulation and enforcement of the audit
profession.
C. Its continued involvement in the education and administration of the CPA exam.
D. Its continued involvement in the promulgation of accounting standards

Which of the following groups is not a user of the audited financial statements?
A. Management
B. Vendors
C. Retired employees
D. Competitors
 
Who licenses CPAs?
A. The PCAOB
B. The AICPA
C. The state boards of accountancy
D. The SEC

Who is responsible for internal controls within an organization?

A. The internal auditor
B. The external auditor
C. Management
D. The PCAOB

Who does the public expect the auditor will recognize as the primary users of the
audited financial statements?
A. Their clients
B. The PCAOB
C. Members of management
D. Third-party users

What is the audit committee of the board of directors of a company responsible

for?
A. Hiring the auditor
B. Preparing the financial statements
C. The audit workpapers
D. Obtaining evidence

Who are the users of the financial statements?

A. Management
B. Auditors
C. Taxing Authorities
D. Both A and C

Which one of the following is not a management expectation for independent

auditors? A. An outside source of expertise on accounting matters
B. Individuals who perform tests and draw conclusions on assertions
C. A participant in a management decision making
D. A provider of written communication

Which one of the following is not a key attribute needed to perform an audit?
A. Subject matter knowledge
B. Independence
C. Established criteria or standards
D. Accounting skills

Which one of the following is a potential problem with management's

communication of financial information that causes third parties to desire the
independent auditor's assessment of the financial statement presentation?
A. Complexity of transactions affecting the financial statements
B. Lack of criteria on which to base information
C. Remoteness of the user from the organization
D. Both A and C
E. Both A and B

Which of the following procedures do third-party users of the audit report not
expect the auditor to perform?
A. Evaluate measurements and disclosures made by management.
B. Provide a biased evaluation of the financial statements.
C. Determine whether financial statements are presented in accordance with
GAAP.
D. Gather sufficient appropriate evidence to support their opinion.

Which of the following is not part of the systematic process called auditing?
A. Communicating results of the audit to users
B. Procuring and evaluating evidence
C. Providing important managerial decisions for a client
D. Comparing evidence regarding assertions to certain established criteria

Which of the following is not a reason for a public company to receive an audit?
A. Potential bias in providing information.
B. Closeness between a user and the organization
C. Complexity of the processing systems
D. Remoteness between a user and the organization

Which of the following is a driver of audit quality?

A. Audit firm culture
B. Engagement team skills and attributes
C. Factors outside control of auditors
D. Investor requirements
E. A, B, and C

Which of the following does the public expect of auditors?

A. Understand and enforce principles that best portray the spirit of FASB concepts.
B. Be neutral to preparers and users of financial information.
C. Recognize that the investing public is the primary user of audit services.
D. Take responsibility for the discovery of fraud.
E. All of the above

Which governing board performs quality reviews on registered audit firms that
audit public companies?
A. PCAOB
B. GAO
C. AICPA
D. FASB
What should internal controls be designed to do?
A. Detect errors
B. Detect and prevent errors
C. Prevent errors
D. Eliminate the possibility of fraud

What is the primary objective of the independent auditor’s report on financial

statements?
A. To report on all incidence of fraud.
B. To assist the board in evaluating management's effectiveness.
C. To express the auditors opinion on the internal controls.
D. To give credibility to management's prepared financial statements.

What is the first phase in an audit?

A. Client acceptance or client continuance.
B. Understanding the client
C. Understanding the internal controls
D. Testing of account balances

What can users of the audit report reasonably expect from the audited financial
statements?
A. The financial statements are complete and contain many of the important
financial disclosures.
B. The financial statements are presented fairly according to the substance of
GAAP.
C. The financial statements are free from all errors.
D. All of the above.
E. None of the above.

To conduct an audit, what must an auditor do?

A. Comply with relevant ethical standards
B. Exercise perfect judgment
C. Obtain sufficient appropriate evidence to provide absolute assurance
D. All of the above

Congress authorized which of the following organizations to establish GAAP?

A. SEC
B. APB
C. AICPA
D. FASB

About what should an auditor assure audit committees have an accurate

understanding?
A. Any meaningful threats to auditor objectivity
B. The scope of the audit
C. The qualitative aspects of the entity's accounting and reporting and potential
ways of improving financial reporting.
D. All of the above

According to the AICPA, which of the following is not a safeguards to the auditing
profession?
A. Education
B. Professional standards
C. External reviews
D. Legislation concerning competency requirements

As it relates to an audit, which following statement about professional skepticism

is true?
A. Professional skepticism is not taken into consideration.
B. Professional skepticism relates only to the nature of procedures performed.
C. Professional skepticism is an attitude.
D. Professional skepticism is determined based upon the importance to a user of
the financial statements.