Test Bank For Auditing; A Practical Approach With Data Analytics, Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton.

Table of Contents Chapter 1: Introduction and Overview of Audit and Assurance Chapter 2: Professionalism and Professional Responsibilities Chapter 3: Risk Assessment Part I: Audit Risk and Audit Strategy Chapter 4: Risk Assessment Part II: Understanding the Client Chapter 5: Audit Evidence Chapter 6: Gaining an Understanding of the Client's System of Internal Control Chapter 7: Audit Data Analytics Chapter 8: Risk Response: Performing Tests of Controls Chapter 9: Risk Response: Performing Substantive Procedures Chapter 10: Risk Response: Evaluating Audit Data Analytics and Audit Sampling Chapter 11: Auditing the Revenue Process Chapter 12: Auditing the Purchasing and Payroll Processes Chapter 13: Auditing Various Balance Sheet Accounts (and Related Income Statement Accounts) Chapter 14: Completing the Audit Chapter 15: Reporting on the Audit Chapter 1 Introduction and Overview of Audit and Assurance Question Type: True or False 1. GAAP and IFRS are examples of applicable financial reporting framework. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Communication, Learning Objective: LO1.1, Solution: The applicable financial reporting framework refers to the set of standards used in preparing the historical financial statements, such as GAAP, IFRS or a Federal Income Tax Basis of Accounting. 2. Review of financial forecasts falls under attestation services. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis and Interpretation, AACSB: Ethics, Learning Objective: LO1.1, Solution: Attestation services (under the umbrella of assurance services) include review of historical financial statements, review of financial forecasts, and examination of internal control. 3. Within a U.S. context, the applicable financial reporting framework is typically Generally Accepted Accounting Principles (GAAP). A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis and Interpretation, AACSB: Ethics, Learning Objective: LO1.2, Solution: Within a U.S. context, the applicable financial reporting framework is typically generally accepted accounting principles (GAAP). 1 4. Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning Objective: LO1.2, Solution: Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit, but often other interested users, such as a bank or lender, may request that a private company provide audited financial statements. 5. 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. A. True B. False Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA PC: Communication, AACSB: Analytic, Learning Objective: LO1.3, Solution: Complexity: Financial statements are complex, the amounts are often affected by significant estimates, and the disclosures often require significant knowledge and experience to evaluate. Most financial statement users do not have the accounting and legal knowledge to assess the reasonableness of complex accounting and disclosure choices being made by the company. 6. In financial accounting, the balance sheet is a statement of financial position A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA PC: Communication, AACSB: Analytic, Learning Objective: LO1.3, Solution: In financial accounting, the financial statements include the balance sheet (statement of financial position), income statement (statement of comprehensive income), statement of cash flows, statement of changes in equity and accompanying notes. 7. Business valuation falls within the purview of non-assurance services. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis and Interpretation, AACSB: Analytic, Learning Objective: LO1.4, Solution: Many of these accounting firms provide non-assurance (or non-audit) services as well as assurance services. These nonassurance services include management consulting, business valuation, mergers and acquisitions, insolvency, tax and accounting services. 2 8. 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. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB: Ethics, Learning Objective: LO1.5, Solution: The 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. 9. The Securities Act of 1933 enhances annual financial disclosures for public companies and placed more emphasis on corporate responsibility. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB: Ethics, Learning Objective: LO1.5, Solution: The Securities Act of 1933 regulates the disclosure of financial information in a company’s initial public offering of stock and requires that the financial information be audited. 10. Neither client characteristics nor actions of the auditor affect the audit risk. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics, Learning Objective: LO1.6, Solution: Audit risk is affected by client characteristics as well as actions of the auditor. 11. Materiality is a relative concept, and it differs from company to company and from year to year for a given company. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics, Learning Objective: LO1.6, Solution: Materiality is a relative concept, and it differs from company to company and from year to year for a given company. Auditors design an audit to provide reasonable assurance that the financial statements are free of material misstatement. However, auditors do not design an audit to look for immaterial misstatements because they would not influence a financial statement user. 3 12. 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.” A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics, Learning Objective: LO1.6, Solution: If auditors have determined the financial statements are presented fairly in accordance with the applicable financial reporting framework, they issue the standard unqualified report. The PCAOB standards use the term “unqualified” report. 13. 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. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Ethics, Learning Objective: LO1.6, Solution: The scope paragraph explains, in brief terms, the process of conducting an audit. It mentions the concept of reasonable assurance about whether the financial statements are free of material misstatement. It includes an explicit statement that PCAOB audit standards were followed because the audit pertains to a public company. The scope paragraph also includes a brief discussion of the professional judgments made during the audit. Finally, it concludes with a statement that the audit firm believes that its audit provides a reasonable basis for its opinion. 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. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB: Communication, Learning Objective: LO1.7, Solution: In an audit report on the effectiveness of ICFR for a public company, the basis for opinion paragraph states the different responsibilities of management and auditors. Like the audit report on the financial statements, this paragraph references registration with the PCAOB and independence requirements of the SEC and other federal securities laws.