Chapter 1 Multiple-Choice Questions 1.

easy Recording, classifying, and summarizing economic events in

a logical manner for the purpose of providing financial information for decision making is commonly
called: c a. finance. b. auditing. c. accounting. d. economics. 2. E In the audit of historical financial
statements, which of the following accounting bases is the most common? c a. Regulatory accounting
principles. b. Cash basis of accounting. c. Generally accepted accounting principles. d. Liquidation basis
of accounting. 3. easy 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): b a. accounting and bookkeeping service. b. attestation
service. c. assurance service. d. tax service. 4. Three common types of attestation services are: easy a.
audits, reviews, and “other” attestation services. a b. audits, verifications, and “other” attestation
services. c. reviews, verifications, and “other” attestation services. d. audits, reviews, and verifications.
5. Easy The organization that is responsible for providing oversight for auditors of public companies is
called the ________. D a. Auditing Standards Board. b. American Institute of Certified Public
Accountants. c. Public Oversight Board. d. Public Company Accounting Oversight Board. 6. The Sarbanes-
Oxley Act applies to which of the following companies? easy a. All companies. C b. Privately held
companies. c. Public companies. d. All public companies and privately held companies with assets
greater than $500 million. 7. Med Providing quantitative information that management and others can
use to make decisions is the function of: D a. management information systems. b. auditing. c. finance.
d. accounting. 8. An audit of historical financial statements most commonly includes the: MED a. balance
sheet, the income statement, and the statement of cash flows. D b. income statement, the statement of
cash flows, and the statement of net working capital. c. statement of cash flows, the balance sheet, and
the retained earnings statement. d. balance sheet, the income statement, and the statement of cash
flows. 9. MED 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. c a. nominal b.
stated c. risk-free d. prevailing 10. The use of the Certified Public Accountant title is regulated by: MED a.
the federal government. b b. state law through a licensing department or agency of each state. c. the
American Institute of Certified Public Accountants through the licensing departments of the tax and
auditing committees. d. the Securities and Exchange Commission. 11. An operational audit has as one of
its objectives to: MED a. determine whether the financial statements fairly present the entity’s
operations. c b. evaluate the feasibility of attaining the entity’s operational objectives. c. make
recommendations for improving performance. d. report on the entity’s relative success in attaining
profit maximization. 12. An audit of historical financial statements is most often performed to determine
whether the: MED a. organization is operating efficiently and effectively. d 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. MED An examination of part of an
organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is
what type of audit? a a. Operational audit. b. Compliance audit. c. Financial statement audit. d.
Production audit. 14. MED An audit to determine whether an entity is following specific procedures or
rules set down by some higher authority is classified as a(n): b a. audit of financial statements. b.
compliance audit. c. operational audit. d. production audit. 15. Which of the following is a type of audit
evidence? MED a. Oral responses to the auditor from employees of the company under audit. d b.
Written communications from company employees or outsiders. c. Observations made by an auditor. d.
Evidence may take any of the above forms. 16. Which of the following services provides the lowest level
of assurance on a financial statement? MED a. A review. a b. An audit. c. Neither service provides
assurance on financial statements. d. Each service provides the same level of assurance on financial
statements. 17. The three requirements for becoming a CPA include all but which of the following? MED
a. Uniform CPA examination requirement. c b. Educational requirements. c. Character requirements. d.
Experience requirement. 18. In “auditing” financial accounting data, the primary concern is with: MED a
a. determining whether recorded information properly reflects the economic events that occurred
during the accounting period. b. determining if fraud has occurred. c. determining if taxable income has
been calculated correctly. d. analyzing the financial information to be sure that it complies with
government requirements. 19. MED Financial statement users often receive unreliable financial
information from companies. Which of the following is not a common reason for this? d 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. Which of the
following is not a Trust Services principle as defined by the AICPA or CICA? hard a. Online privacy. d b.
Availability. c. Processing integrity. d. Operational integrity. 21. Which one of the following is more
difficult to evaluate objectively? hard c a. Presentation of financial statements in accordance with
generally accepted accounting principles. b. Compliance with government regulations. c. Efficiency and
effectiveness of operations. d. All three of the above are equally difficult.