Solution Manual for Principles of Auditing and Other Assurance Services 22nd Edition by Ray Whittington, Kurt Pany

1. The primary objective of an financial statement audit is to: a) Detect all instances of fraud. b) Provide absolute assurance that the financial statements are free from error. c) Express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. d) Assure the future profitability of the entity. ANSWER: c) Express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. 2. Which of the following best describes "reasonable assurance"? a) A guarantee that the financial statements are completely accurate. b) A high, but not absolute, level of assurance. c) A low level of assurance, indicating that no procedures were performed. d) Absolute assurance regarding the detection of fraud. ANSWER: b) A high, but not absolute, level of assurance. 3. The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) to: a) Replace the Financial Accounting Standards Board (FASB). b) Oversee the audits of public companies. c) Manage the internal audit functions of all publicly traded companies. d) Set accounting standards for private companies. ANSWER: b) Oversee the audits of public companies. 4. An audit of financial statements is conducted to determine whether the: a) Client's internal controls are operating effectively. b) Overall financial statements are stated in accordance with specified criteria. c) Audited company will remain in business for the foreseeable future. d) Firm is operating efficiently and effectively. ANSWER: b) Overall financial statements are stated in accordance with specified criteria. 5. Which of the following is an example of a "principles-based" financial reporting framework? a) International Financial Reporting Standards (IFRS) b) U.S. Generally Accepted Accounting Principles (GAAP) c) Both IFRS and U.S. GAAP d) The Internal Revenue Code ANSWER: a) International Financial Reporting Standards (IFRS) 6. The three fundamental principles underlying an audit are planning and supervision, understanding the entity and its environment, and: a) Issuing a management letter. b) Obtaining sufficient appropriate audit evidence. c) Preparing the financial statements. d) Reporting all errors to the board of directors. ANSWER: b) Obtaining sufficient appropriate audit evidence. 7. The risk that an auditor will give an inappropriate audit opinion when the financial statements are materially misstated is known as: a) Audit risk. b) Inherent risk. c) Control risk. d) Detection risk. ANSWER: a) Audit risk. 8. Inherent risk is: a) The risk that a material misstatement will not be prevented or detected by the client's internal controls. b) The risk that the auditor's procedures will not detect a material misstatement. c) The susceptibility of an assertion to a material misstatement, assuming no related internal controls. d) The overall risk of material misstatement in the financial statements. ANSWER: c) The susceptibility of an assertion to a material misstatement, assuming no related internal controls. 9. Control risk is: a) The risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal control. b) The risk that the auditor will fail to detect a material misstatement. c) The risk that is inherent in the client's business and environment. d) The same as detection risk. ANSWER: a) The risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal control. 10. Detection risk is: a) The risk that the client's internal controls will fail. b) The risk that a misstatement could occur before the auditor's consideration of internal control. c) The risk that the auditor's substantive procedures will not detect a material misstatement that exists. d) The combination of inherent and control risk. ANSWER: c) The risk that the auditor's substantive procedures will not detect a material misstatement that exists. 11. The audit risk model is: a) Audit Risk = Inherent Risk × Control Risk b) Audit Risk = Inherent Risk × Control Risk × Detection Risk c) Audit Risk = Control Risk + Detection Risk d) Audit Risk = Detection Risk / (Inherent Risk × Control Risk) ANSWER: b) Audit Risk = Inherent Risk × Control Risk × Detection Risk 12. If inherent risk and control risk are assessed as high, the auditor should: a) Set detection risk as high to maintain audit risk at an acceptable level. b) Set detection risk as low to maintain audit risk at an acceptable level. c) Withdraw from the engagement. d) Issue a disclaimer of opinion. ANSWER: b) Set detection risk as low to maintain audit risk at an acceptable level. 13. Materiality is defined as: a) The same for all clients. b) A monetary amount set by the PCAOB. c) The magnitude of an omission or misstatement that could influence the economic decisions of users. d) Any error in the financial statements, regardless of size. ANSWER: c) The magnitude of an omission or misstatement that could influence the economic decisions of users. 14. Performance materiality is: a) The materiality level for the financial statements as a whole. b) An amount set at less than materiality for the financial statements as a whole to reduce the probability that the aggregate of uncorrected misstatements exceeds materiality. c) The same as tolerable misstatement. d) The materiality level for particular classes of transactions. ANSWER: b) An amount set at less than materiality for the financial statements as a whole to reduce the probability that the aggregate of uncorrected misstatements exceeds materiality. 15. Tolerable misstatement is: a) The application of performance materiality to a particular sampling procedure. b) The same as overall materiality. c) The aggregate of all uncorrected misstatements. d) An error that the auditor is willing to accept. ANSWER: a) The application of performance materiality to a particular sampling procedure. 16. The primary purpose of an engagement letter is to: a) Document the internal control deficiencies. b) Provide a written understanding of the terms of the engagement between the auditor and the client. c) Serve as the auditor's representation letter. d) Outline the audit procedures to be performed. ANSWER: b) Provide a written understanding of the terms of the engagement between the auditor and the client. 17. An auditor would most likely withdraw from an engagement if: a) The client does not provide a representation letter. b) The auditor detects fraud perpetrated by a low-level employee. c) The client's management is dishonest and the auditor concludes that reliance on management's representations is unreasonable. d) The client has a significant related party transaction. ANSWER: c) The client's management is dishonest and the auditor concludes that reliance on management's representations is unreasonable. 18. The first standard of field work requires that the audit be performed by persons with adequate technical training and: a) Independence. b) Proficiency. c) Professional skepticism. d) Due professional care. ANSWER: b) Proficiency. 19. Professional skepticism requires that the auditor: a) Assume management is dishonest. b) Be independent from the client. c) Critically assess audit evidence. d) Be a guarantor of the financial statements' accuracy. ANSWER: c) Critically assess audit evidence. 20. The concept of due care requires the auditor to: a) Exercise the same level of skill and judgment as any other auditor. b) Exercise the level of skill and judgment of a prudent auditor. c) Guarantee the accuracy of the financial statements. d) Detect all material misstatements. ANSWER: b) Exercise the level of skill and judgment of a prudent auditor. 21. Independence in appearance refers to: a) The auditor's state of mind. b) The perception of a reasonable third party with knowledge of all relevant information. c) The auditor's financial relationship with the client. d) The fact that the auditor is not an employee of the client. ANSWER: b) The perception of a reasonable third party with knowledge of all relevant information. 22. An auditor would impair independence by: a) Owning a single share of stock in a large, diversified client. b) Having a brother who is the controller of the client. c) Providing bookkeeping services for a private company audit client. d) All of the above. ANSWER: d) All of the above. 23. The primary purpose of audit documentation (working papers) is to: a) Provide a basis for reviewing the quality of the work. b) Provide proof that the auditor is independent. c) Serve as a reference for the client's accounting staff. d) Replace the client's accounting records. ANSWER: a) Provide a basis for reviewing the quality of the work. 24. The permanent file of an audit typically includes: a) Details of the current year's transactions. b) Analyses of current year's balance sheet accounts. c) Copies of the corporate charter, bylaws, and bond indentures. d) Schedules supporting the current year's income statement. ANSWER: c) Copies of the corporate charter, bylaws, and bond indentures. 25. The current file of an audit typically includes: a) Copies of the client's financial statements from the last five years. b) Analyses of current year's income and expense accounts. c) The client's organizational chart. d) The engagement letter from the prior year. ANSWER: b) Analyses of current year's income and expense accounts. 26. The primary objective of internal control is to: a) Ensure the accuracy and reliability of the accounting records. b) Provide absolute assurance against fraud. c) Eliminate the need for an external audit. d) Comply with all laws and regulations. ANSWER: a) Ensure the accuracy and reliability of the accounting records. 27. The five components of internal control per COSO are: a) Integrity, Ethical Values, Competence, Authority, Responsibility. b) Control Environment, Risk Assessment, Control Activities, Information & Communication, Monitoring. c) Planning, Organizing, Directing, Controlling, Decision-making. d) Prevention, Detection, Investigation, Correction, Reporting. ANSWER: b) Control Environment, Risk Assessment, Control Activities, Information & Communication, Monitoring. 28. The control environment is: a) The policies and procedures that help ensure management directives are carried out. b) The foundation for all other components of internal control, setting the tone of the organization. c) The process of identifying and analyzing risks to the achievement of objectives. d) The process of assessing the quality of internal control performance over time. ANSWER: b) The foundation for all other components of internal control, setting the tone of the organization. 29. Which of the following is an example of a preventive control? a) Reconciling the bank statement. b) Using pre-numbered documents. c) Performing a monthly review of an aged trial balance. d) Conducting a physical inventory count. ANSWER: b) Using pre-numbered documents. 30. Which of the following is an example of a detective control? a) Segregation of duties. b) Requiring authorization for transactions. c) Reconciling the bank statement. d) Using a password to access the accounting system. ANSWER: c) Reconciling the bank statement. 31. An effective system of segregation of duties should separate: a) Authorization, record-keeping, and custody of assets. b) Hiring, training, and supervision. c) Planning, executing, and reporting. d) Marketing, sales, and collections. ANSWER: a) Authorization, record-keeping, and custody of assets. 32. When an auditor tests the operating effectiveness of internal controls, they are performing: a) Tests of controls. b) Substantive tests of transactions. c) Analytical procedures. d) Tests of details of balances. ANSWER: a) Tests of controls. 33. The purpose of tests of controls is to provide evidence about: a) The monetary correctness of accounts. b) The operating effectiveness of controls in preventing or detecting material misstatements. c) The client's compliance with all laws and regulations. d) The future profitability of the entity. ANSWER: b) The operating effectiveness of controls in preventing or detecting material misstatements. 34. A significant deficiency is: a) A deficiency, or combination of deficiencies, that results in a reasonable possibility that a material misstatement will not be prevented or detected. b) A deficiency that is less severe than a significant deficiency. c) A deficiency that must be communicated only to management. d) The same as a material weakness. ANSWER: a) A deficiency, or combination of deficiencies, that results in a reasonable possibility that a material misstatement will not be prevented or detected. 35. A material weakness is: a) A deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis. b) Always related to fraud. c) Less severe than a significant deficiency. d) Not required to be communicated to those charged with governance. ANSWER: a) A deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis. 36. The auditor's communication of internal control deficiencies identified in an audit is required to be in writing and is referred to as a(n): a) Management letter. b) Internal control report. c) Letter to the SEC. d) Written communication. ANSWER: d) Written communication. 37. Which of the following is a general type of audit procedure? a) Inspection of tangible assets. b) Confirmation. c) Analytical procedures. d) All of the above. ANSWER: d) All of the above. 38. Inspection of records and documents provides evidence about: a) The physical existence of an asset. b) The valuation of an asset. c) The occurrence of a transaction (e.g., a recorded sale actually occurred). d) The rights and obligations of an asset. ANSWER: c) The occurrence of a transaction (e.g., a recorded sale actually occurred). 39. Observation as an audit procedure involves: a) Looking at a process or procedure being performed by others. b) Examining tangible assets. c) Seeking information from knowledgeable persons outside the entity. d) Checking the mathematical accuracy of documents. ANSWER: a) Looking at a process or procedure being performed by others. 40. Confirmation is the process of obtaining: a) A representation from management. b) A representation from a third party. c) An understanding of internal control. d) An understanding of the entity's industry. ANSWER: b) A representation from a third party. 41. Recalculation involves: a) Checking the mathematical accuracy of documents. b) Comparing data to identify significant fluctuations. c) Tracing transactions through the accounting system. d) Inspecting tangible assets. ANSWER: a) Checking the mathematical accuracy of documents. 42. Reperformance involves: a) The auditor's independent execution of procedures or controls that were originally performed by the client. b) Checking the mathematical accuracy of documents. c) Observing the client's employees perform a task. d) Confirming a balance with a third party. ANSWER: a) The auditor's independent execution of procedures or controls that were originally performed by the client. 43. Analytical procedures are: a) Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. b) Tests of details of transactions and balances. c) The same as tests of controls. d) Used only in the planning stage of the audit. ANSWER: a) Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. 44. The primary purpose of analytical procedures in the planning phase is to: a) Identify unusual transactions and events that might indicate a material misstatement. b) Reduce detailed substantive testing. c) Serve as the sole source of audit evidence. d) Test the operating effectiveness of controls. ANSWER: a) Identify unusual transactions and events that might indicate a material misstatement. 45. Which of the following would be the most reliable type of audit evidence? a) A confirmation from a bank. b) A copy of a sales invoice. c) An oral representation from the CEO. d) A purchase order generated by the client. ANSWER: a) A confirmation from a bank. 46. Audit sampling involves applying audit procedures to: a) All items in an account balance. b) Less than 100% of the items in a population. c) Only material items. d) Only those items selected by the client. ANSWER: b) Less than 100% of the items in a population. 47. The risk that the auditor's conclusion based on a sample is different from the conclusion if the entire population were tested is: a) Audit risk. b) Sampling risk. c) Non-sampling risk. d) Inherent risk. ANSWER: b) Sampling risk.