CPA AUDIT EXAM 1 (CH 1-4) QUESTIONS &ANSWERS
Accounting - Answers -the recording, classifying, and summarizing of economic events
in a logical manner for the purpose of providing financial information for decision making
Assurance service - Answers -an independent professional service that improves the
quality of information for decision makers
Attestation service - Answers -a type of assurance service in which the CPA firm issues
a report about a subject matter or assertion that is the responsibility of another party
Audit of historical financial statements - Answers -a form of attestation service in which
the auditor issues a written report stating whether the financial statements are in
material conformity with accounting standards
Most common form of attestation service
Audit report - Answers -the communication of audit findings to users
Auditing - Answers -the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and
established criteria
Certified public accountant - Answers -a person who has met state regulatory
requirements, including passing the Uniform Examination, and has thus been certified;
may have his or her primary responsibility the performance of the audit function on
published historical financial statements of commercial and noncommercial financial
entities
Compliance audit - Answers -(1) a review of an organization's financial records
performed to determine whether the organization is following specific procedures, rules,
or regulations set by some higher authority
Results are typically reported to management rather than outside users, since they will
find this information most beneficial.
Evidence - Answers -any information used by the auditor to determine whether the
information being audited is stated in accordance with established criteria
Financial statement audit - Answers -an audit conducted to determine whether the
overall financial statements of an entity are stated in accordance with specified criteria
(usually U.S. or international accounting standards)
GAO Auditor - Answers -an auditor working for the U.S. Government Accountability
Office (GAO); the GAO reports to and is responsible solely to congress
, Independent auditors - Answers -certified public accountants or accounting firms that
perform audits of commercial and non-commercial financial entities
Information risk - Answers -the risk that information upon which a business decision is
made is incorrect
Internal auditors - Answers -auditors employed by a company to audit for the
company's board of directors and management
The lack of independence is the major difference between these and those from CPA
firms.
Internal revenue agents - Answers -auditors who work for the IRS and conduct
examinations of taxpayers' returns
Operational audit - Answers -a review of any part of an organization's operating
procedures and methods for the purpose of evaluating efficiency and effectiveness
Sarbanes-Oxley Act - Answers -a federal securities law passed in 2002 that provides
for additional regulation of public companies and their auditors; the Act established the
Public Company Accounting Oversight Board and also requires auditors of large
companies to audit the effectiveness of internal control over financial reporting
Cause of information risk - Answers -1. Remoteness of information: because it is nearly
impossible to have firsthand information on every company, we must rely on info
provided by others (with chance it's wrong)
2. Biases and motives of the provider: if info is provided by someone whose goals are
inconsistent with those of decision maker, then info may be biased for the provider.
3. Voluminous data: chance of improperly recorded data is in records increases as
volume increases (large corporations)
4. Complex exchange transactions: because of complexity of certain transactions,
mistakes can and will happen
Reducing information risk - Answers -1. User verifies information: User may go to
business to physically verify information by looking at records. However, this can be
time-consuming and is especially costly.
2. User shares information risk with management: If users rely on inaccurate financial
statements and incur financial loss, then there may be basis for lawsuit against mgmt.
The issue is that sometimes users may not be able to collect on losses.
3. Audited financial statements are provided: the most common way is for an
independent audit.
Attestation of internal control over financial reporting - Answers -attestation service
where management asserts that internal controls have been developed and
implemented following well established criteria. Section 404 of the Sarbanes-Oxley Act
Accounting - Answers -the recording, classifying, and summarizing of economic events
in a logical manner for the purpose of providing financial information for decision making
Assurance service - Answers -an independent professional service that improves the
quality of information for decision makers
Attestation service - Answers -a type of assurance service in which the CPA firm issues
a report about a subject matter or assertion that is the responsibility of another party
Audit of historical financial statements - Answers -a form of attestation service in which
the auditor issues a written report stating whether the financial statements are in
material conformity with accounting standards
Most common form of attestation service
Audit report - Answers -the communication of audit findings to users
Auditing - Answers -the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between the information and
established criteria
Certified public accountant - Answers -a person who has met state regulatory
requirements, including passing the Uniform Examination, and has thus been certified;
may have his or her primary responsibility the performance of the audit function on
published historical financial statements of commercial and noncommercial financial
entities
Compliance audit - Answers -(1) a review of an organization's financial records
performed to determine whether the organization is following specific procedures, rules,
or regulations set by some higher authority
Results are typically reported to management rather than outside users, since they will
find this information most beneficial.
Evidence - Answers -any information used by the auditor to determine whether the
information being audited is stated in accordance with established criteria
Financial statement audit - Answers -an audit conducted to determine whether the
overall financial statements of an entity are stated in accordance with specified criteria
(usually U.S. or international accounting standards)
GAO Auditor - Answers -an auditor working for the U.S. Government Accountability
Office (GAO); the GAO reports to and is responsible solely to congress
, Independent auditors - Answers -certified public accountants or accounting firms that
perform audits of commercial and non-commercial financial entities
Information risk - Answers -the risk that information upon which a business decision is
made is incorrect
Internal auditors - Answers -auditors employed by a company to audit for the
company's board of directors and management
The lack of independence is the major difference between these and those from CPA
firms.
Internal revenue agents - Answers -auditors who work for the IRS and conduct
examinations of taxpayers' returns
Operational audit - Answers -a review of any part of an organization's operating
procedures and methods for the purpose of evaluating efficiency and effectiveness
Sarbanes-Oxley Act - Answers -a federal securities law passed in 2002 that provides
for additional regulation of public companies and their auditors; the Act established the
Public Company Accounting Oversight Board and also requires auditors of large
companies to audit the effectiveness of internal control over financial reporting
Cause of information risk - Answers -1. Remoteness of information: because it is nearly
impossible to have firsthand information on every company, we must rely on info
provided by others (with chance it's wrong)
2. Biases and motives of the provider: if info is provided by someone whose goals are
inconsistent with those of decision maker, then info may be biased for the provider.
3. Voluminous data: chance of improperly recorded data is in records increases as
volume increases (large corporations)
4. Complex exchange transactions: because of complexity of certain transactions,
mistakes can and will happen
Reducing information risk - Answers -1. User verifies information: User may go to
business to physically verify information by looking at records. However, this can be
time-consuming and is especially costly.
2. User shares information risk with management: If users rely on inaccurate financial
statements and incur financial loss, then there may be basis for lawsuit against mgmt.
The issue is that sometimes users may not be able to collect on losses.
3. Audited financial statements are provided: the most common way is for an
independent audit.
Attestation of internal control over financial reporting - Answers -attestation service
where management asserts that internal controls have been developed and
implemented following well established criteria. Section 404 of the Sarbanes-Oxley Act
