Which of the following best describes what is meant by u.s. auditing standards?

INSTRUCTION: Select the BEST answer among the following choices. Shade the corresponding letter on your answer sheet. Avoid erasures.

1. For an internal auditor to render impartial and unbiased judgments, he or she must be independent of the entity's a. Stockholders. b. Personnel and operating activities. c. Independent (external) auditors. d. Board of directors.

ANS: B

1. Usually, an operational audit is performed a. By independent external auditors. b. By a team consisting of an equal number of external and internal auditors. c. Only when an operating division is experiencing declines in productivity or profitability. d. By internal auditors at the request of top management or the board of directors.

ANS: D

1. Which of the following activities is typically associated with operational auditing? a. Determining whether the financial statements are an accurate representation of the entity's operations. b. Evaluating the feasibility of attaining the entity's operational objectives. c. Making recommendations for improving performance. d. Reporting on the entity's relative success in meeting profitability goals.

ANS: C

1. Program audits performed for governmental entities include a. Determining the extent to which the desired results or benefits established by the legislature are being achieved. b. Determining whether the entity is acquiring resources economically and efficiently. c. Determining whether the financial statements are presented fairly. d. Determining whether the entity has adhered with specific financial compliance requirements.

ANS: A

1. An independent auditor might consider the procedures performed by the internal auditors because a. They are employees whose work must be reviewed during substantive testing. b. They are employees of the client, but their work might be relied on. c. Their work impacts upon the cost-benefit tradeoff in evaluating inherent limitations. d. Their degree of independence may be inferred by the nature of their work.

ANS: B

1. Usually, an operational audit is performed

a. By independent external auditors. b. By a team consisting of an equal number of external and internal auditors. c. Only when an operating division is experiencing declines in productivity or profitability. d. By internal auditors at the request of top management or the board of directors.

ANS: D

1. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the

a. Financial vice-president. b. Corporate controller. c. Board of directors. d. Corporate stockholders.

ANS: C

1. An accountant who is not independent may issue a

a. Compilation report. b. Review report. c. Comfort letter. d. Qualified opinion.

ANS: A

1. An auditor's report would be designated as a special report when it is issued in connection with which

of the following financial statements?

a. Financial statements for an interim period that are subjected to a limited review. b. Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP. c. Financial statements that purport to be in accordance with GAAP but do not include a statement of cash flows. d. Financial statements that are unaudited and are prepared from a client's accounting records.

ANS: B

1. When an independent audit report is incorporated by reference in a SEC registration statement, a

prospectus that includes a statement about the independent accountant's involvement should refer to the independent accountant as

a. Auditor of the financial reports. b. Management's designate before the SEC. c. Certified preparer of the report. d. Expert in auditing and accounting.

ANS: D

1. If information accompanying the basic financial statements in an auditor-submitted document has

been subjected to auditing procedures, the auditor may express an opinion which states that the

accompanying information is fairly stated in

a. Conformity with generally accepted accounting principles. b. Terms of negative assurance. c. All material respects in relation to the basic financial statements taken as a whole. d. Conformity with principles for presenting accompanying information.

ANS: C

1. Which of the following would not be included in an accountant's review report on the financial

statements of a nonpublic entity?

a. A statement that the review was made in accordance with generally accepted auditing standards. b. A statement that all information included in the financial statements is the representation of management. c. A statement describing the principal procedures performed. d. A statement describing the auditor's conclusions based on the results of the review.

ANS: A

1. Which of the following best describes what is meant by generally accepted auditing standards?

a. Acts to be performed by the auditor. b. Measures of the quality of an auditor's performance. c. Procedures used to gather evidence to support financial statements. d. Audit objectives generally determined on audit engagements.

ANS: B

d. Confirmation of material accounts receivable balances.

ANS: A

1. In pursuing its quality control objectives with respect to assigning personnel to engagements, a public accounting firm may use policies and procedures such as

a. Rotating employees from assignment to assignment on a random basis to aid in the staff training effort. b. Requiring timely identification of the staffing requirements of specific engagements so that enough qualified personnel can be made available. c. Allowing staff to select the assignments of their choice to promote better client relationships. d. Assigning a number of employees to each engagement in excess of the number required so as not to overburden the staff and interfere with the quality of the audit work performed.

ANS: B

1. Which of the following statements best describes the primary purpose of Statements on Auditing Standards?

a. Guides intended to set forth auditing procedures that are applicable to a variety of situations. b. Outlines intended to narrow the areas of inconsistency and divergence of auditor opinion. c. Authoritative statements, enforced through the code of professional conduct, and intended to limit the degree of auditor judgment. d. Interpretations intended to clarify the meaning of generally accepted auditing standards.

ANS: D

1. The fourth generally accepted auditing standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements. The overall purpose of the fourth standard of reporting is to require that reports

a. Assure that the auditor is independent with respect to the financial statements audited. b. State that the audit has been conducted in accordance with generally accepted auditing standards. c. Indicate the character of the engagement and the degree of responsibility assumed by the auditor. d. Express whether the accounting principles used in preparing the financial statements have been applied consistently in the period audited.

ANS: C

1. Which of the following underlies the application of generally accepted auditing standards, particularly

the standards of fieldwork and reporting?

a. The elements of materiality and risk. b. The element of internal control. c. The element of corroborating evidence. d. The element of reasonable assurance. ANS: A

1. A public accounting firm studies its personnel advancement experience to determine whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to

a. Generally accepted auditing standards. b. Quality control standards. c. Attestation standards. d. Supervision and review.

ANS: B

1. The concept of materiality would be least important to an auditor in determining

a. Transactions that should be reviewed.

b. The need for disclosing a particular transaction or event. c. The extent of audit work planned for particular accounts. d. The effects of an auditor's direct financial interest in a client.

ANS: D

1. Kimberly Corporation has a few large accounts receivable that total P1,000,000. Charmaine Corporation has a great number of small accounts receivable that also total P1,000,000. The importance of an error in any one account is, therefore, greater for Kimberly than for Charmaine. This is an example of the auditor's concept of

a. Account bias. b. Audit risk. c. Materiality. d. Reasonable assurance

ANS: C

1. Which of the following best describes the character of the three generally accepted auditing standards classified as general standards?

a. Criteria for competence, independence, and professional care of individuals performing the audit. b. Criteria for the content of the financial statements and related footnote disclosures. c. Criteria for the content of the auditor's report. d. The requirements for planning and supervision.

ANS: A

1. The first general standard requires that a person or persons have adequate technical training and proficiency as an auditor. This standard is met by

a. Understanding business and finance. b. Education and experience in auditing. c. Continuing professional education. d. Knowledge of Statements of Auditing Standards

ANS: B

1. The third general standard states that due care is to be exercised in the performance of an audit, and

should be interpreted to mean that an auditor who undertakes an engagement assumes a duty to perform

a. With reasonable diligence and without fault or error. b. As a professional who will assume responsibility for losses consequent upon error of judgment. c. To the satisfaction of the client and third parties. d. As a professional possessing the degree of skill commonly possessed by others in the field.

ANS: D

1. In connection with the third generally accepted auditing standard of fieldwork, an auditor examines corroborating evidential matter that includes all of the following except

a. Client accounting manuals. b. Vendor invoices. c. Written client representations. d. Minutes of board meetings.

ANS: C

1. The first standard of fieldwork, which states that the work is to be adequately planned, and assistants, if any, are to be properly supervised, recognizes that

a. Early appointment of the auditor is advantageous both to the auditor and to the client.

b. A professional activity that attests to the fair presentation of financial statements. c. A professional activity that measures and communicates financial accounting data. d. A regulatory activity that prevents the issuance of improper financial information.

ANS: B

1. Which of the following has historically had the least influence on the practice of public accounting?

a. The Governmental Accounting Standards Board. b. The Institute of Internal Auditors. c. The Securities and Exchange Commission. d. The PH Congress.

ANS: D

1. Which of the following in correctly matches the authoritative body with its authoritative

pronouncements?

a. Accounting and Review Services Committee: "Statements on Standards for Accounting and Review Services" b. Auditing Standards Board: "Statements on Auditing Standards" c. Auditing Standards Executive Committee: "Statements on Auditing Procedure" d. Securities and Exchange Commission: "Financial Reporting Releases"

ANS: C

1. The purpose of a compliance audit for a governmental entity is to determine whether

a. Financial statements comply with GAAP and whether the entity is operating efficiently. b. Financial statements comply with GAAP and the entity has complied with applicable laws and regulations. c. The entity has complied with applicable laws and regulations. d. Financial statements comply with GAAP.

ANS: B

1. An operational audit is designed to

a. Assess the efficiency and effectiveness of management's operating procedures. b. Assess the presentation of management's financial statements in accordance with generally accepted accounting principles. c. Determine whether management has complied with applicable laws and regulations. d. Determine whether the audit committee of the board of directors is effectively discharging its responsibility to oversee management's operations.

ANS: A

1. Which of the following criteria is unique to the independent auditor's attest function?

a. General competence. b. Familiarity with the particular industry of each client. c. Due professional care. d. Independence

ANS: D

1. The essence of the attest function is to

a. Detect fraud. b. Examine individual transactions so that the auditor can certify as to their validity. c. Determine whether the client's financial statements are fairly stated. d. Ensure the consistent application of correct accounting procedures.

ANS: C

1. An independent audit aids in the communication of economic data because the audit

a. Confirms the accuracy of management's financial representations. b. Lends credibility to the financial statements. c. Guarantees that financial data are fairly presented. d. Assures the readers of financial statements that any fraudulent activity has been corrected.

ANS: B

1. Which of the following is least likely to be included in an agreed-upon procedures attestation

engagement report?

a. The specified party takes responsibility for the sufficiency of procedures. b. Use of the report is restricted. c. Limited assurance on the information presented. d. A summary of procedures performed.

ANS: C

1. When performing an attestation examination engagement, which of the following is not always

required?

a. Assertion. b. Practitioner independence. c. Subject matter. d. Suitable criteria.

ANS: A

1. Which of the following engagements is most likely to consider availability, security, integrity, and maintainability of a company's computer systems?

a. Internal control over financial reporting. b. Trust Services. c. Website Asssociate d. Financial statement audit.

ANS: B

1. Which of the following is the least likely to be considered subject matter of an attestation engagement?

a. Assertion b. Behavior c. Historical event d. Systems and processes.

ANS: A

1. Arel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modit Co. regarding Modit's written assertion about its compliance with contractual requirements to pay royalties. Arel's report on these agreed-upon procedures should contain a (an).

a. Disclaimer of opinion about the fair presentation of Modit's financial statements. b. List of the procedures performed (or reference thereto) and Arel's findings. c. Opinion about the effectiveness of Modit's internal control activities concerning royalty payments. d. Acknowledgment that the sufficiency of the procedures is solely Arel's responsibility.

ANS: B

1. Which of the following is not necessarily an attest engagement?

2. Under the attestation standards, in which of the following circumstances is a review report least likely to be issued?

a. Criteria are agreed-upon or only available to specified users. b. Established criteria exist, but other criteria are used. c. The subject matter departs from the criteria. d. A significant limitation on the scope of the engagement has occurred.

ANS: D

1. When a CPA is associated with a forecast, all of the following should be disclosed except the:

a. Sources of information. b. Character of the work performed by the CPA. c. Major assumptions in the preparation of the forecast. d. Probability of achieving estimates

ANS: D

1. The party responsible for assumptions identified in the preparation of prospective financial statements is usually:

a. A third-party lending institution. b. The client's management. c. The reporting accountant. d. The client's independent auditor.

ANS: B

1. In an audit in accordance with generally accepted auditing standards, the auditors must test compliance with those laws and regulations that:

a. Have a direct and material effect on the financial statements. b. Have a direct and material effect on major federal programs. c. Have a material direct or indirect effect on the financial statements. d. Have a material effect on major or nonmajor programs.

ANS: A

1. For the highest degree of independence the director of internal auditing should report directly to:

a. The controller. b. The audit committee of the board of directors. c. The executive vice-president. d. The chief accountant.

ANS: B

1. Internal auditing is considered to be part of an organization's:

a. Accounting system. b. Control activities. c. Monitoring. d. External controls.

ANS: C

1. It is the end of his client's first quarter and Bill Smith, CPA is performing a compilation of his client's interim financial statements. He has discovered that the client does not wish to present notes to the

financial statements. The appropriate CPA report includes:

a. Qualified opinion ("subject to" the omission of the notes).

b. Compilation report with an adverse opinion due to inadequate disclosure. c. Standard compilation report. d. Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

ANS: D

1. Which of the following would be used on a review engagement?

a. Examination of board minutes. b. Confirmation of cash and accounts receivable. c. Comparison of current-year to prior-year account balances. d. Recalculation of depreciation expense.

ANS: C

1. An audit should be designed to achieve reasonable assurance of detecting material misstatements due to:

a. Errors. b. Errors and fraud. c. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts. d. Errors, fraud and illegal acts.

ANS: C

1. To qualify as "generally accepted," an accounting principle must:

a. Have substantial authoritative support. b. Be covered in one or more of the SASs issued by the AICPA. c. Be set forth in a Financial Reporting Release issued by the SEC. d. Have received the approval of the FASB.

ANS: A

1. Which of the following best describes a portion of the auditors' responsibility regarding illegal acts by clients?

a. The auditors have a responsibility to discover all material illegal acts. b. If audit procedures reveal illegal acts, the auditors should take appropriate actions. c. If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the company. d. The auditors' responsibility for the detection of all illegal acts is the same as their responsibility regarding material misstatements due to errors and fraud.

ANS: D

1. The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

a. Management fails to take appropriate corrective action. b. Illegal act has material financial statement implications. c. Illegal act has received widespread publicity. d. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.

ANS: A

1. When a conflict exists between an accounting principle supported by a pronouncement of an authoritative body and an accounting principle supported by widely recognized practice, which standard prevails?

a. The authoritative body pronouncement. b. The widely recognized pronouncement. c. Both are of equal authority and the form of the transaction prevails over its substance.

1. The risk that information is misstated is referred to as:

a. Information risk. b. Inherent risk. c. Relative risk. d. Business risk.

ANS: A

1. The attest function:

a. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or other services. b. Includes the preparation of a report of the CPA's findings. c. Requires a consideration of internal control. d. Requires a complete review of all transactions during the period under examination.

ANS: B

1. An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?

a. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement. b. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period. c. Operational audits do not ordinarily result in the preparation of a report. d. The operational audit deals with pre-tax income.

ANS: B

1. The review of a company's financial statements by a CPA firm:

a. Is substantially less in scope of procedures than an audit. b. Requires detailed analysis of the major accounts. c. Is of similar scope as an audit and adds similar credibility to the statements. d. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.

ANS: A

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