Deck 4: Fundamentals II: The Auditing Environment

Question 1

The Institute of Internal Auditors (IIA) publishes what?

A) FASB Statements.
B) GAAP.
C) SIAS.
D) SAIS.

Answer 1

C

Question 2

Auditing is the process of:

A) Developing internal controls.
B) Testing internal controls.
C) Gathering and evaluating evidence.
D) Proving standards of SOX 2002 are upheld.

Answer 2

C

Question 3

A tolerable misstatement is:

A) A percentage threshold, such as 2%, of variance allowed in net income.
B) Zero as all accounts must represent 100% accuracy.
C) A set amount, such as $100,000, that an account can be misstated before an auditor will call for a preliminary judgment.
D) An amount set by the FASB based upon the industry the company is in.

Answer 3

C

Question 4

The relationship of risks for a specific client may change:

A) Daily.
B) Monthly.
C) From year to year.
D) From audit to audit.

Question 5

A segment for the allocation of a preliminary judgment may be:

A) The income statement.
B) The balance sheet.
C) The accounts receivable and allowance for doubtful accounts.
D) The retained earnings statement.

Question 6

In what year was the Securities and Exchange Commission formed?

A) 1928.
B) 1933.
C) 1942.
D) 2002.

Question 7

The FASB issues financial standards that are collectively known as:

A) Financial Accounting Standards.
B) Internal Revenue Code.
C) Audit Review Standards.
D) Generally Accepted Accounting Principles.

Question 8

The Public Company Accounting Oversight Board has the power to do what?

A) Enforce internal controls within auditing firms.
B) Audit the firms who perform audits.
C) Impose sanctions against auditing firms that fail to fulfill their professional responsibilities when auditing public companies.
D) Challenge audit findings of internal auditing committees.

Question 9

In 2003, what board replaced the AICPA as the auditing standard-setter for companies that are publicly held?

A) SOX.
B) SEC.
C) FASB.
D) PCAOB.

Question 10

Which of the following is not a component of risk?

A) Acceptable Detection Risk.
B) Audit Risk.
C) Inherent Risk.
D) Control Risk.

Question 11

An error or omission is considered to be material if:

A) The act was intentional.
B) The results would have affected the judgment of a reasonable user.
C) The act was unintentional.
D) The omission was more than $100,000.

Question 12

After individuals become licensed in accounting, such as earning their CPA status, they typically must do what?

A) Work for an auditing firm for 120 hours.
B) Continue their education by acquiring CPE's.
C) Become an Enrolled Agent with the IRS.
D) Open a public practice in accounting.

Question 13

Why is risk in financial misstatements too important not to recognize?

A) Because the employees need good information to ask for appropriate raises from.
B) So suppliers will know how much to charge for future deliveries.
C) Due to SEC regulations.
D) Users of the financial statements will be harmed if they are not correct.

Question 14

The Public Company Accounting Oversight Board was created by the ________?

A) Sarbanes-Oxley Act of 2002.
B) Securities and Exchange Commission.
C) Financial Accounting Standards Board.
D) United States Congress.

Question 15

Investors in a company often want assurance that the financial statements are true and accurate. They can achieve this assurance by using:

A) Auditors.
B) Internal controls.
C) Forensic accountants.
D) Ratio analysis.

Question 16

What is the model for the relationship of the four components of risk?

A) ADR = IR/(AAR x CR).
B) ADR = AAR/(IR x CR).
C) AAR = ADR x IR / CR.
D) IR = AAR/ADR x CR.

Question 17

Which of the following is NOT an international board that effects the accounting profession?

A) Financial Accounting Standards Board.
B) International Auditing and Assurance Standards Board.
C) The International Accounting Standards Board.
D) None of the above.

Question 18

The board that is similar to the FASB but provides rules for governmental entities is called:

A) Securities and Exchange commission.
B) House Ethics committee.
C) Governmental Accounting Standards Board.
D) Governmental Board for Accounting Reporting.

Question 19

When auditors are judging materiality, they are concerned with:

A) Magnitude.
B) Errors.
C) Intentional omissions.
D) All of the above.

Question 20

Who makes rules effecting the auditing profession?

A) Public Company Accounting Oversight Board.
B) Governmental Standards Accounting Board.
C) Financial Accounting Standards Board.
D) All of the above.

Question 21

Why might an auditor use sampling?

A) Because testing and entire accounting system is impractical and unnecessary.
B) Because the client has not paid for full testing of the financial statements.
C) The auditor deems that there is no fraud in a certain area of the business.
D) The auditor deems that there is fraud in a certain area of a business.

Question 22

Beyond publishing findings of internal controls, fraud and misstatements, auditors must also publish findings on:

A) Compliance with certain contractual agreements or regulatory requirements.
B) Compliance with other auditors findings.
C) Adherence to industry ratio standards.
D) All of the above.

Question 23

Which of the following is another auditing function?

A) Internal Auditing.
B) Operational Auditing.
C) Governmental Auditing.
D) All of the above.

Question 24

Information from third parties can never be used during an auditor's duty.

Question 25

An unqualified report means that the auditor who is doing the report feels unqualified to make any sound judgments about the company.

Question 26

The auditor's objective is to determine whether the financial statements are free of material misstatement, whether from error or fraud.

Question 27

Within the Scope paragraph of the audit report, the auditor provides __________ that the financial statements are free from material misstatements.

A) Reasonable assurance.
B) Guaranteed assurance.
C) Auditing assurance.
D) Unqualified assurance.

Question 28

If auditors work together on areas of a report, they must disclose this in the report.

Question 29

The reperformance procedure is not used often because of the time it takes to reperform; however, it is a useful tool when highly reliable evidence is sought.

Question 30

On every audit, the auditor is required to assess the ability of the audited entity to continue to operate for a period not to exceed one year from the balance sheet date.

Question 31

Which of the following is not a type of test that an auditor might perform?

A) Tests of Controls.
B) Tests of Principles.
C) Substantive tests of transactions.
D) Substantive tests of balances.

Question 32

Which of the following is not a report that OMB Circular A-133 requires?

A) A report that includes an opinion on whether the financial statements are presented in accordance with GAAP.
B) A report that includes an opinion on whether the schedule of Federal awards is presented fairly and is consistent with the financial statements.
C) A report on the entity's internal controls over financial reporting and its major programs.
D) A report that other auditor's findings of errors/misrepresentations have been addressed and corrected.

Question 33

Auditors may be employed to audit:

A) Part of a financial statement.
B) Part of a balance sheet.
C) The internal controls of a company.
D) All of the above.

Question 34

All auditors are regulated by the SEC as given authority by SOX 2002.

Question 35

Which of the following is a phase of an audit?

A) The engagement letter.
B) Meeting with the audit committee.
C) Industry comparisons.
D) Completion of the audit and issuance of the audit report.

Question 36

The effects of potentially bad financial statements being used by business stakeholders is called risk and is the fundamental reason why audits are performed.

Question 37

There are no standard setting boards for auditors as their trade is more of an art than a specific science.

Question 38

An auditor may want to observe the physical count of inventory.

Question 39

If a company has changed accounting principles, the auditor will issue what type of statement?

A) Lack of accounting standards.
B) Change in costing principles.
C) Lack of consistency.
D) Misstatement of accounting principles.

Question 40

The auditor communicates his or her conclusions by issuing a(n)

A) Auditors Statement.
B) Certificate of Assurance.
C) Audit Report.
D) White Paper of Findings.

Question 41

What is an estimation of misstatement and comparison to tolerable misstatement?

Question 42

What two conditions must be met in order to issue a qualified statement?

Question 43

What is materiality and why is it important to auditors?

Question 44

Compare and contrast sampling for risk and sampling for attributes.

Question 45

What does the model ADR = AAR/(IR x CR) represent?

Question 46

Describe what rule making bodies are and provide an example of at least one of them.

Question 47

Explain why there is a demand for auditing.

Question 48

What are tests of controls used for?

Question 49

What are the seven evidence gathering procedures?

Question 50

How are acceptable audit risk and acceptable detection risk related?
Acceptable audit risk is the level of audit risk the auditor is willing to accept. Similarly, while detection risk is a risk the auditor wants to avoid, acceptable detection risk is the level of detection risk the auditor is willing to accept. How does the level of acceptable audit risk or the level of acceptable detection risk affect the audit? If, for example, the level of audit risk the auditor is willing to accept increases, this increase generally acts to decrease the nature, timing, and extent of testing the auditor performs. The same is true for an increase in acceptable detection risk.