TEST BANK for Auditing: A Practical Approach with Data Analytics 2nd Edition by Laura Davis Wiley, Raymond N. Johnson and Robyn Moroney, All Chapters 1-16 (Complete Download).

Chapter 1
Introduction and Overview of Audit
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and Assurance
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Question Type: True or False


1. GAAP and IFRS are examples of applicable financial reporting framework.
A. True
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B. False
Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB:
Communication, Learning Objective: LO1.1, Solution: The applicable financial reporting
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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.
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2. Review of financial forecasts falls under attestation services.
A. True
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B. False
Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis and
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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.
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3. Within a U.S. context, the applicable financial reporting framework is typically Generally
Accepted Accounting Principles (GAAP).
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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
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applicable financial reporting framework is typically generally accepted accounting principles
(GAAP).
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,4. Private companies, or non-issuers, are not required by the U.S. government to have an
annual financial statement audit
A. True
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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
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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
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financial statements often lack accounting and legal knowledge to fully understand
complex accounting and disclosure choices.
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A. True
B. False
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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
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accounting and legal knowledge to assess the reasonableness of complex accounting and
disclosure choices being made by the company.
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6. In financial accounting, the balance sheet is a statement of financial position
A. True
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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
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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.
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A. True
B. False
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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 non-
assurance services include management consulting, business valuation, mergers and
acquisitions, insolvency, tax and accounting services.



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,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
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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
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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.
C
A. True
B. False
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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.
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10. Neither client characteristics nor actions of the auditor affect the audit risk.
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A. True
B. False
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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.
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11. Materiality is a relative concept, and it differs from company to company and from year
to year for a given company.
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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
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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
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influence a financial statement user.




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, 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
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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
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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.
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A. True
B. False
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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
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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
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concludes with a statement that the audit firm believes that its audit provides a reasonable basis
for its opinion.
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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.
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A. True
B. False
Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA BB: Governance Perspective, AACSB:
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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.
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