Question 1

Materiality is a relative concept, and it differs from company to company and from year to year for a given company.

Accepted Answer

Materiality is determined by the nature and size of an item in relation to the financial statements as a whole, as well as the context of the business and industry. Therefore, materiality can vary between different companies and even within the same company from year to year.

Question 2

Neither client characteristics nor actions of the auditor affect the audit risk.

Accepted Answer

Both client characteristics (such as financial stability and complexity of transactions) and actions of the auditor (such as the audit procedures and level of professional skepticism) can affect the audit risk.

Question 3

Private companies, or non-issuers, are not required by the U.S.government to have an annual financial statement audit

Accepted Answer

Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit. However, they may choose to have one for various reasons, such as obtaining financing or providing assurance to stakeholders.

Question 4

Review of financial forecasts falls under attestation services.

Accepted Answer

Review of financial forecasts is included in attestation services, which are performed by a CPA to provide assurance on financial information or other subject matter.

Question 5

Identify a service that falls under audit services.
A)examination of historical financial statements
B)compilation of historical financial statements
C)inspection of website security
D)review of financial forecast

Accepted Answer

Audit services involve the examination of historical financial statements to assess their accuracy and ensure compliance with accounting standards and regulations. Compilation of financial statements and financial forecast review also fall under the category of accounting services, but they are not specifically categorized as audit services. Inspection of website security is a type of information technology (IT) service.

Question 6

In an audit report on the effectiveness of ICFR for a public company, the scope paragraph mentions that auditors are only required to obtain reasonable assurance about whether the company maintained, in all material respects, effective ICFR.

Accepted Answer

This is correct according to the PCAOB Auditing Standard No. 5, which states that auditors are only required to obtain reasonable assurance about whether the company maintained, in all material respects, effective ICFR.

Question 7

The Securities Act of 1933 enhances annual financial disclosures for public companies and placed more emphasis on corporate responsibility.

Accepted Answer

The Securities Act of 1933 primarily focused on requiring companies to provide financial statements and other significant information when issuing new securities, aiming to ensure transparency and protect investors from fraud in the initial sale of securities. The emphasis on annual financial disclosures and corporate responsibility is more closely associated with the Securities Exchange Act of 1934.

Question 8

In an unqualified audit report on the financial statements of a public company, the concluding statement of the scope paragraph mentions reasonable basis for the audit firm's opinion.

Accepted Answer

In an unqualified audit report, the scope paragraph concludes by stating that the financial statements are presented fairly in all material respects and that the audit was conducted in accordance with generally accepted auditing standards, which provide a reasonable basis for the auditor's opinion.

Question 9

A financial statement user's expectations are only impacted by legislation.

Accepted Answer

A financial statement user's expectations can be influenced by various factors such as economic conditions, industry trends, corporate culture, and regulatory requirements in addition to legislation.

Question 10

When auditors determine that the financial statements of a public company are presented fairly in accordance with the applicable financial reporting framework, they issue a type of report that PCAOB standards call "the standard clean report."

Accepted Answer

The answer of When auditors determine that the financial statements...

Question 11

Within a U.S.context, the applicable financial reporting framework is typically Generally Accepted Accounting Principles (GAAP).

Accepted Answer

GAAP is the primary financial reporting framework used in the United States.

Question 12

Securities Exchange Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company's financial statements.

Accepted Answer

The Securities Exchange Act of 1934 does indeed regulate the ongoing trading of securities and requires public companies to file annual reports on their financial condition, which includes audited financial statements.

Question 13

Compared to an audit of historical financial statements, a review engagement is _______.
A)less extensive and also less expensive
B)more extensive and also more expensive
C)less extensive but more expensive
D)more extensive but less expensive

Accepted Answer

A review engagement is less extensive than an audit and is also typically less expensive. However, it still provides limited assurance on the financial statements.

Question 14

In an audit report on the effectiveness of ICFR for a public company, the scope paragraph states the different responsibilities of management and auditors.

Accepted Answer

The answer of In an audit report on the effectiveness...

Question 15

The audit expectation gap is caused by user expectations such as: The auditor will catch all instances of fraud.

Accepted Answer

The audit expectation gap is the difference between the expectations of users of financial statements and what auditors can reasonably be expected to do. One common misconception is that auditors can catch all instances of fraud, which is not always the case.

Question 16

GAAP and IFRS are examples of applicable financial reporting framework.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are both applicable financial reporting frameworks used by companies to prepare their financial statements. These frameworks provide guidelines for recording and reporting financial transactions in a consistent manner, ensuring that financial information can be understood and compared across different companies and countries.

Question 17

Examination of internal controls is a service that comes under _______ services, which fall under _______ services.
A)attestation; assurance
B)assurance; attestation
C)acceptable; assurance
D)attestation; audit

Accepted Answer

Examination of internal controls falls under attestation services, which in turn fall under assurance services. Assurance services involve evaluating and providing an independent opinion on the reliability of information. Attestation services involve a practitioner issuing a report on the reliability of a statement made by another party, such as management. Therefore, option A is the correct answer, as it correctly identifies the relationship between attestation and assurance services.

Question 18

In financial accounting, the balance sheet is a statement of financial position

Accepted Answer

The balance sheet is a statement of financial position that presents a company's financial position at a specific point in time, including the company's assets, liabilities, and equity.

Question 19

Business valuation falls within the purview of non-assurance services.

Accepted Answer

Business valuation is a non-assurance service as it involves estimating the value of a business or its assets, which does not involve providing an assurance or opinion on the accuracy or reliability of financial information.

Question 20

One of the reasons there is a demand for financial statement audits is that users of financial statements often lack accounting and legal knowledge to fully understand complex accounting and disclosure choices.

Accepted Answer

Users of financial statements may include investors, creditors, regulators, and other stakeholders who may not have expertise in accounting or legal matters. As financial statements contain complex information and disclosures, financial statement audits provide assurance to these users that the financial statements are prepared in accordance with accounting standards and provide a fair view of the company's financial position and performance.

Quiz 1: Introduction and Overview of Audit and Assurance