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CHAPTER 1
Multiple-Choice Questions
1.
easy
c
Recording, classifying, and summarizing economic events in a logical manner for the purpose
of providing financial information for decision making is commonly called:
a. finance.
b. auditing.
c. accounting.
d. economics.
2.
easy
c
In the audit of historical financial statements, which of the following accounting bases is the
most common?
a. Regulatory accounting principles.
b. Cash basis of accounting.
c. Generally accepted accounting principles.
d. Liquidation basis of accounting.
3.
easy
b
Any service that requires a CPA firm to issue a report about the reliability of an assertion that
is made by another party is a(n):
a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.
4.
easy
a
5. (SOX)
easy
d
The organization that is responsible for providing oversight for auditors of public companies is
called the ________.
a. Auditing Standards Board.
b. American Institute of Certified Public Accountants.
c. Public Oversight Board.
d. Public Company Accounting Oversight Board.
6. (SOX)
easy
c
7.
medium
d
Providing quantitative information that management and others can use to make decisions is
the function of:
a. management information systems.
b. auditing.
c. finance.
d. accounting.
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8.
medium
d
9.
medium
c
The ___________ rate may be defined as approximately the rate a bank could earn by
investing in U.S. treasury notes for the same length as the length of a business loan.
a. nominal
b. stated
c. risk-free
d. prevailing
10.
medium
b
11.
medium
c
12.
medium
d
An audit of historical financial statements is most often performed to determine whether the:
a. organization is operating efficiently and effectively.
b. entity is following specific procedures or rules set down by some higher authority.
c. management team is fulfilling its fiduciary responsibilities to shareholders.
d. none of these choices.
13.
medium
a
14.
medium
b
An audit to determine whether an entity is following specific procedures or rules set down by
some higher authority is classified as a(n):
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.
15.
medium
d
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16.
medium
a
Which of the following services provides the lowest level of assurance on a financial
statement?
a. A review.
b. An audit.
c. Neither service provides assurance on financial statements.
d. Each service provides the same level of assurance on financial statements.
17.
medium
c
The three requirements for becoming a CPA include all but which of the following?
a. Uniform CPA examination requirement.
b. Educational requirements.
c. Character requirements.
d. Experience requirement.
18.
medium
a
19.
medium
d
Financial statement users often receive unreliable financial information from companies.
Which of the following is not a common reason for this?
a. Complex business transactions.
b. Large amounts of data.
c. Lack of firsthand knowledge about the business.
d. Each of these choices is a common reason for unreliable financial information.
20.
challenging
d
Which of the following is not a Trust Services principle as defined by the AICPA or CICA?
a. Online privacy.
b. Availability.
c. Processing integrity.
d. Operational integrity.
21.
challenging
c
22. (SOX)
challenging
c
The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing
which of the following types of services to that company?
a. Reviews of quarterly financial statements.
b. Preparation of corporate tax returns.
c. Most consulting services.
d. All of above are prohibited services.
23.
challenging
a
Which of the following audits can be regarded as generally being a compliance audit?
a. IRS agents examinations of taxpayer returns.
b. GAO auditors evaluation of the computer operations of governmental units.
c. An internal auditors review of a companys payroll authorization procedures.
d. A CPA firms audit of the local school district.
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24.
challenging
b
25.
challenging
d
26.
challenging
b
Essay Questions
27.
easy
28.
easy
Two types of attestation services provided by CPA firms are audits and reviews. Discuss the
similarities and differences between these two types of attestation services. Which type
provides the least assurance?
Answer:
Two primary types of attestation services are: audits of historical financial statements and
reviews of historical financial statements. While both services involve the accumulation
and evaluation of evidence regarding assertions made by management in the companys
financial statements, a review involves a less extensive examination and provides a lower
level of assurance about the clients financial statements than an audit.
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29.
medium
Discuss the differences and similarities between the roles of accountants and auditors. What
additional expertise must an auditor possess beyond that of an accountant?
Answer:
The role of accountants is to record, classify, and summarize economic events in a logical
manner for the purpose of providing financial information for decision making. To do
this, accountants must have a sound understanding of the principles and rules that
provide the basis for preparing the financial information. In addition, accountants are
responsible for developing systems to ensure that the entitys economic events are
properly recorded on a timely basis and at a reasonable cost.
The role of auditors is to determine whether the financial information prepared by
accountants properly reflects the economic events that occurred. To do this, the auditor
must not only understand the principles and rules that provide the basis for preparing
financial information, but must also possess expertise in the accumulation and evaluation
of audit evidence. It is this latter expertise that distinguishes auditors from accountants.
30.
medium
Discuss the similarities and differences between financial statement audits, operational audits,
and compliance audits. Give an example of each type.
Answer:
Financial statement audits, operational audits, and compliance audits are similar in that
each type of audit involves accumulating and evaluating evidence about information to
ascertain and report on the degree of correspondence between the information and
established criteria. The differences between each type of audit are the information being
examined and the criteria used to evaluate the information. An example of a financial
statement audit would be the annual audit of IBM Corporation, in which the external
auditors examine IBMs financial statements to determine the degree of correspondence
between those financial statements and generally accepted accounting principles. An
example of an operational audit would be an internal auditors evaluation of whether the
companys computerized payroll-processing system is operating efficiently and effectively.
An example of a compliance audit would be an IRS auditors examination of an entitys
federal tax return to determine the degree of compliance with the Internal Revenue Code.
31.
medium
Discuss the similarities and differences between the roles of independent auditors, GAO
auditors, internal revenue agents, and internal auditors.
Answer:
The roles of all four types of auditors are similar in that they involve the accumulation
and evaluation of evidence about information to ascertain and report on the degree of
correspondence between the information and established criteria. The differences in their
roles center around the information audited and the criteria used to evaluate that
information. Independent auditors primarily audit companies financial statements. GAO
auditors primary responsibility is to perform the audit function for Congress. IRS
auditors are responsible for the enforcement of federal tax laws. Internal auditors
primarily perform operational and compliance audits for their employing company.
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32. (SOX)
medium
33.
challenging
34.
challenging
Explain what is meant by information risk, and discuss the four causes of this risk.
35.
challenging
Attestation services fall into five categories. What are these categories?
Answer:
The five categories of attestation services include:
audits of historical financial statements,
attestation on internal control over financial reporting,
reviews of historical financial statements,
attestation services on information technology, and
other attestation services that may be applied to a broad range of subject matter.
Answer:
Information risk is the possibility that information upon which a business decision is
made is inaccurate. Four causes of information risk are:
remoteness of information,
biases and motives of the provider,
voluminous data, and
complex exchange transactions.
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36.
challenging
Discuss four factors that are likely to significantly reduce information risk in the next five to
ten years.
Answer:
Four factors that are likely to significantly reduce information risk in the next five to ten
years are:
technological advances,
more companies will go on-line, reducing the risk of investors obtaining outdated
information,
new accounting and auditing standards, and
auditors will find more efficient and effective audit techniques.
The criteria by which an auditor evaluates the information under audit may vary with the
information being audited.
a. True
b. False
38.
easy
b
The criteria used by an external auditor to evaluate published financial statements are known
as generally accepted auditing standards.
a. True
b. False
39. (SOX)
easy
b
The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies.
a. True
b. False
40. (SOX)
easy
a
The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing
and financial reporting.
a. True
b. False
41.
easy
b
Only companies that file annual statements with the Securities and Exchange Commission are
required to have an annual external audit.
a. True
b. False
42.
easy
b
The financial statements most commonly audited by external auditors are the balance sheet,
the income statement, and the statement of changes in retained earnings.
a. True
b. False
43.
medium
b
The primary purpose of a compliance audit is to determine whether the financial statements
are prepared in compliance with generally accepted accounting principles.
a. True
b. False
44.
medium
a
Results of compliance audits are typically reported to someone within the organizational unit
being audited rather than to a broad spectrum of outside users.
a. True
b. False
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45.
medium
b
The primary role of the United States General Accounting Office is the enforcement of the
federal tax laws as defined by Congress and interpreted by the courts.
a. True
b. False
46.
medium
b
CPA firms are never allowed to provide bookkeeping services for audit clients.
a. True
b. False
47. (SOX)
medium
a
Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor
attest to their internal control over financial reporting.
a. True
b. False
48. (SOX)
challenging
b
The Sarbanes-Oxley Act requires a companys chairman of the board of directors, CEO, and
CFO to certify the companys financial statements.
a. True
b. False
49. (SOX)
challenging
b
The criterion that is most likely to be used as a framework in evaluating a companys internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act is the Enterprise
Risk Management framework.
a. True
b. False
50.
challenging
a
Most public companies audited financial statements are available on the SECs EDGAR
database.
a. True
b. False
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