Audit Exam 1 ACTUAL UPDATED Exam
Questions and CORRECT Answers
Which of the following statements about the study of auditing is NOT true?
The study of auditing begins with the understanding of a coherent logical framework and
techniques useful for gathering and analyzing evidence about others' assertions.
The study of auditing can be valuable to future accountants and business decision makers
whether or not they plan to become auditors.
The study of auditing focuses on learning the analytical and logical skills necessary to evaluate
the relevance and reliability of information.
The study of auditing focuses on learning the rules, techniques, and computations required to
analyze financial statements. - CORRECT ANSWER - The study of auditing focuses on
learning the rules, techniques, and computations required to analyze financial statements.
Evidence is reliable if it
Applies to the period being audited.
Is consistent with management's assertions.
Signals the true state of a management assertion.
Relates to the audit assertion being tested. - CORRECT ANSWER - Signals the true state
of a management assertion.
Which of the following statements relating to attest and assurance services is not correct?
Financial statement auditing is a form of attest service but it is not an assurance service.
In performing an attest service, the CPA determines the correspondence of the subject matter (or
an assertion about the subject matter) against criteria that are suitable and available to users.
Assurance services can be performed to improve the quality or context of information for
decision makers.
Independence is an important attribute of assurance service providers. - CORRECT
ANSWER - Financial statement auditing is a form of attest service but it is not an
assurance service.
,Which of the following would best be described as an assurance service?
Offering an opinion concerning the accuracy of statements made on an entity's website relating
to its online privacy policies.
Preparing a report representing a client's position during an IRS audit.
Assisting a company in identifying potential sources of capital for potential acquisitions.
Working with a company to develop a more efficient method of processing financial
transactions. - CORRECT ANSWER - Offering an opinion concerning the accuracy of
statements made on an entity's website relating to its online privacy policies.
Preliminary engagement activities include
ensuring the independence of the audit team and audit firm.
understanding the client and the client's industry.
determining audit engagement team requirements.
All of these. - CORRECT ANSWER - All of these.
In the context of agency theory, information asymmetry refers to the idea that
Management likely will not act in the best interests of the absentee owners.
Information can vary in its relevance.
Information can vary in its reliability.
Management has more information about the entity's true financial position than do the absentee
owners (i.e. stockholders). - CORRECT ANSWER - Management has more information
about the entity's true financial position than do the absentee owners (i.e. stockholders).
Assurance services may improve all of the following except
Periodicity.
Credibility.
Reliability.
Relevance. - CORRECT ANSWER - Periodicity.
,An independent audit adds value to the communication of financial information because the
audit
lends credibility to the financial statements.
confirms the exact accuracy of management's financial representations.
assures the readers of financial statements that any fraudulent activity has been corrected.
guarantees that financial data are fairly presented. - CORRECT ANSWER - lends
credibility to the financial statements.
An investor is reading the financial statements of the Stankey Corporation and observes that the
statements are accompanied by an auditor's unqualified report. From this, the investor may
conclude that
The auditor has determined that Stankey's management is not qualified to lead the company.
The auditor is certain that Stankey's financial statements have been prepared accurately and that
all account balances are precisely correct.
The auditor is satisfied that Stankey will be highly profitable in the future.
Any disputes over significant accounting issues have been settled to the auditor's satisfaction. -
CORRECT ANSWER - Any disputes over significant accounting issues have been settled
to the auditor's satisfaction.
During the first phase of an audit, a CPA most likely would
Evaluate the integrity of management.
Evaluate the reasonableness of the company's accounting estimates.
Identify specific internal control activities that are likely to prevent fraud.
Inquire of the company's attorney as to whether any unrecorded claims are probable or asserted. -
CORRECT ANSWER - Evaluate the integrity of management.
The auditor's report is generally addressed to the
Chief financial officer.
Stockholders of the company.
Securities and Exchange Commission.
Chief operating officer. - CORRECT ANSWER - Stockholders of the company.
, Why do auditors generally use a sampling approach to evidence gathering?
Auditors must balance the cost of the audit with the need for precision.
Auditors are experts and do not need to look at much to know whether the financial statements
are correct or not.
Auditors must limit their exposure to their auditee to maintain independence.
The auditor's relationship with the auditee is generally adversarial, so the auditor will not have
access to all of the financial information of the company. - CORRECT ANSWER -
Auditors must balance the cost of the audit with the need for precision.
Which of the following best describes the reason why an independent auditor is often retained to
report on financial statements?
Management fraud may exist, and it is more likely to be detected by independent auditors than
by internal auditors.
An entity may have a poorly designed internal control system.
A misstatement of account balances may exist, and all misstatements are generally corrected as a
result of the independent auditor's work.
Different interests may exist between the entity preparing the statements and the persons using
the statements, and thus outside assurance is needed to enhance the credibility of the statements.
- CORRECT ANSWER - Different interests may exist between the entity preparing the
statements and the persons using the statements, and thus outside assurance is needed to enhance
the credibility of the statements.
Which of the following statements best describes the role of materiality in a financial statement
audit?
The level of materiality has no bearing on the amount of evidence the auditor must gather.
Materiality refers to the "material" from which audit evidence is developed.
The higher the level at which the auditor assesses materiality, the greater the amount of evidence
the auditor must gather.
The lower the level at which the auditor assesses materiality, the greater the amount of evidence
the auditor must gather. - CORRECT ANSWER - The lower the level at which the auditor
assesses materiality, the greater the amount of evidence the auditor must gather.
Questions and CORRECT Answers
Which of the following statements about the study of auditing is NOT true?
The study of auditing begins with the understanding of a coherent logical framework and
techniques useful for gathering and analyzing evidence about others' assertions.
The study of auditing can be valuable to future accountants and business decision makers
whether or not they plan to become auditors.
The study of auditing focuses on learning the analytical and logical skills necessary to evaluate
the relevance and reliability of information.
The study of auditing focuses on learning the rules, techniques, and computations required to
analyze financial statements. - CORRECT ANSWER - The study of auditing focuses on
learning the rules, techniques, and computations required to analyze financial statements.
Evidence is reliable if it
Applies to the period being audited.
Is consistent with management's assertions.
Signals the true state of a management assertion.
Relates to the audit assertion being tested. - CORRECT ANSWER - Signals the true state
of a management assertion.
Which of the following statements relating to attest and assurance services is not correct?
Financial statement auditing is a form of attest service but it is not an assurance service.
In performing an attest service, the CPA determines the correspondence of the subject matter (or
an assertion about the subject matter) against criteria that are suitable and available to users.
Assurance services can be performed to improve the quality or context of information for
decision makers.
Independence is an important attribute of assurance service providers. - CORRECT
ANSWER - Financial statement auditing is a form of attest service but it is not an
assurance service.
,Which of the following would best be described as an assurance service?
Offering an opinion concerning the accuracy of statements made on an entity's website relating
to its online privacy policies.
Preparing a report representing a client's position during an IRS audit.
Assisting a company in identifying potential sources of capital for potential acquisitions.
Working with a company to develop a more efficient method of processing financial
transactions. - CORRECT ANSWER - Offering an opinion concerning the accuracy of
statements made on an entity's website relating to its online privacy policies.
Preliminary engagement activities include
ensuring the independence of the audit team and audit firm.
understanding the client and the client's industry.
determining audit engagement team requirements.
All of these. - CORRECT ANSWER - All of these.
In the context of agency theory, information asymmetry refers to the idea that
Management likely will not act in the best interests of the absentee owners.
Information can vary in its relevance.
Information can vary in its reliability.
Management has more information about the entity's true financial position than do the absentee
owners (i.e. stockholders). - CORRECT ANSWER - Management has more information
about the entity's true financial position than do the absentee owners (i.e. stockholders).
Assurance services may improve all of the following except
Periodicity.
Credibility.
Reliability.
Relevance. - CORRECT ANSWER - Periodicity.
,An independent audit adds value to the communication of financial information because the
audit
lends credibility to the financial statements.
confirms the exact accuracy of management's financial representations.
assures the readers of financial statements that any fraudulent activity has been corrected.
guarantees that financial data are fairly presented. - CORRECT ANSWER - lends
credibility to the financial statements.
An investor is reading the financial statements of the Stankey Corporation and observes that the
statements are accompanied by an auditor's unqualified report. From this, the investor may
conclude that
The auditor has determined that Stankey's management is not qualified to lead the company.
The auditor is certain that Stankey's financial statements have been prepared accurately and that
all account balances are precisely correct.
The auditor is satisfied that Stankey will be highly profitable in the future.
Any disputes over significant accounting issues have been settled to the auditor's satisfaction. -
CORRECT ANSWER - Any disputes over significant accounting issues have been settled
to the auditor's satisfaction.
During the first phase of an audit, a CPA most likely would
Evaluate the integrity of management.
Evaluate the reasonableness of the company's accounting estimates.
Identify specific internal control activities that are likely to prevent fraud.
Inquire of the company's attorney as to whether any unrecorded claims are probable or asserted. -
CORRECT ANSWER - Evaluate the integrity of management.
The auditor's report is generally addressed to the
Chief financial officer.
Stockholders of the company.
Securities and Exchange Commission.
Chief operating officer. - CORRECT ANSWER - Stockholders of the company.
, Why do auditors generally use a sampling approach to evidence gathering?
Auditors must balance the cost of the audit with the need for precision.
Auditors are experts and do not need to look at much to know whether the financial statements
are correct or not.
Auditors must limit their exposure to their auditee to maintain independence.
The auditor's relationship with the auditee is generally adversarial, so the auditor will not have
access to all of the financial information of the company. - CORRECT ANSWER -
Auditors must balance the cost of the audit with the need for precision.
Which of the following best describes the reason why an independent auditor is often retained to
report on financial statements?
Management fraud may exist, and it is more likely to be detected by independent auditors than
by internal auditors.
An entity may have a poorly designed internal control system.
A misstatement of account balances may exist, and all misstatements are generally corrected as a
result of the independent auditor's work.
Different interests may exist between the entity preparing the statements and the persons using
the statements, and thus outside assurance is needed to enhance the credibility of the statements.
- CORRECT ANSWER - Different interests may exist between the entity preparing the
statements and the persons using the statements, and thus outside assurance is needed to enhance
the credibility of the statements.
Which of the following statements best describes the role of materiality in a financial statement
audit?
The level of materiality has no bearing on the amount of evidence the auditor must gather.
Materiality refers to the "material" from which audit evidence is developed.
The higher the level at which the auditor assesses materiality, the greater the amount of evidence
the auditor must gather.
The lower the level at which the auditor assesses materiality, the greater the amount of evidence
the auditor must gather. - CORRECT ANSWER - The lower the level at which the auditor
assesses materiality, the greater the amount of evidence the auditor must gather.
