auditing and assurance services louwers 6th edition test bank

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Auditing and Assurance Services Louwers
6th Edition Test Bank
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Chapter 01
Auditing and Assurance Services
Multiple Choice Questions
1. The audit objective that all transactions and accounts that should be presented in the financial
statements are in fact included is related to which of the PCAOB assertions?
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation
2. Cutoff tests designed to detect purchases made before the end of the year that have been
recorded in the subsequent year provide assurance about management's assertion of
A. presentation and Disclosure.
B. completeness.
C. rights and obligations.
D. existence.
3. During an audit of an entity's stockholders' equity accounts, the auditor determines whether there
are restrictions on retained earnings resulting from loans, agreements or state law. This audit
procedure most likely is intended to verify management's assertion of
A. existence or occurrence.
B. completeness.
C. valuation or allocation.
D. presentation and disclosure.

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4. The confirmation of an account payable balance selected from the general ledger provides
primary evidence regarding which management assertion?
A. Completeness
B. Valuation
C. Allocation
D. Existence
5. What type of evidence would provide the highest level of assurance in an attestation
engagement?
A. Evidence secured solely from within the entity.
B. Evidence obtained from independent sources.
C. Evidence obtained indirectly.
D. Evidence obtained from multiple internal inquiries.
6. Which of the following management assertions is an auditor most likely testing if the audit
objective states that all inventory on hand is reflected in the ending inventory balance?
A. The entity has rights to the inventory.
B. Inventory is properly valued.
C. Inventory is properly presented in the financial statements.
D. Inventory is complete.
7. An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the
following management assertions is supported by this test?
A. Valuation and allocation.
B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.
8. An auditor has substantial doubt about the entity's ability to continue as a going concern for a
reasonable period of time because of negative cash flows and working capital deficiencies. Under
these circumstances, the auditor would be most concerned about the
A. control environment factors that affect the organizational structure.
B. correlation of detection risk and inherent risk.
C. effectiveness of the entity's internal control activities.
D. possible effects on the entity's financial statements.
9. Which of the following types of audit evidence provides the least assurance of reliability?
A. Receivable confirmations received from the client's customers.
B. Prenumbered receiving reports completed by the client's employees.
C. Prior months' bank statements obtained from the client.
D. Municipal property tax bills prepared in the client's name.

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10. Which of the following is a management assertion regarding account balances at the period end?
A. Transactions and events that have been recorded have occurred and pertain to the entity.
B. Transactions and events have been recorded in the proper accounts.
C. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
D. Amounts and other data related to the transactions and events have been recorded
appropriately.
11. A practitioner is engaged to express an opinion on management's assertion that the square
footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to
which of the following sources for professional guidance?
A. Statement of Auditing Standards.
B. Statements on Standards for Attestation Engagements.
C. Statements on Standards for Accounting and Review Services.
D. Statements on Standards for Consulting Services.
12. In auditing the long term debt account, an auditor's procedures most likely would focus primarily
on management's assertion of
A. existence.
B. completeness.
C. allocation.
D. rights and obligations.
13. An auditor selected items for test counts from the client's warehouse during the physical inventory
observation. The auditor then traced these test counts into the detailed inventory listing that
ultimately agreed to the financial statements. This procedure most likely provided evidence
concerning management's assertion of
A. completeness.
B. valuation.
C. presentation and disclosure.
D. existence.
E. rights and obligations.
14. An auditor selected items from the client's detailed inventory listing (that agreed to the financial
statements). During the physical inventory observation, the auditor then found each item selected
and counted the number of units on hand. Assuming that the amount on hand was the same as
the amount in the client's detailed inventory listing, this procedure most likely would provide
evidence concerning management's assertion of
A. completeness.
B. valuation.
D. existence.

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15. According to PCAOB Auditing Standard No. 5 (AS 5), the auditor should identify significant
accounts and disclosures and their relevant assertions. Which of the following financial statement
assertions is not explicitly identified in AS 5?
A. Completeness
B. Valuation or Allocation
C. Accuracy
D. Existence or Occurrence
E. All of these are assertions identified in AS 5.
16. When testing the completeness assertion for a liability account, an auditor ordinarily works from
the
A. financial statements to the potentially unrecorded items.
B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. trial balance to the subsidiary ledger.
17. If an auditor is performing procedures related to the information that is contained in the client's
pension footnote, he/she is most likely obtain evidence concerning management's assertion
about
A. rights and obligations.
B. existence.
C. valuation.
18. Which of the following questions would be inappropriate for an auditor to ask a client when
exhibiting an appropriate level of professional skepticism while completing an audit procedure
related to the internal control system?
A. What can go wrong in this process?
B. Which of your employees is a fraudster?
C. What else is important to know about this process?
D. What happens when a key employees goes on vacation?
19. To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a
decision-making process?
A. Identify audit evidence relevant to the verification of assertions management makes in its
unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent
evidence about assertions management makes in financial statements and notes.
C. Recognize the financial assertions made in management's financial statements and footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide whether
management's assertions conform to generally accepted accounting principles and reality.

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20. Which of the following is an underlying condition that in part creates the demand by users for
reliable information?
A. Economic transactions that are numerous and complex
B. Decisions are time-sensitive
C. Users separated from accounting records by distance and time
D. Financial decisions that are important to investors and users
E. All of these
21. Which of the following is not included in The American Accounting Association (AAA) definition of
auditing?
A. Potential conflict of interest
B. Systematic process
C. Assertions about economic actions
D. Established criteria
22. What is the term used to identify the risk that the client's financial statements may be materially
false and misleading?
A. Business risk
B. Information risk
C. Client risk
D. Risk assessment
23. Which of the following is not a recommendation usually made following the completion of an
operational audit?
A. Economic and efficient use of resources
B. Effective achievement of business objectives
C. Attesting to the fairness of the financial statements
D. Compliance with company policies
24. In order to be considered as external auditors with respect to government agencies, GAO
auditors must be
A. organizationally independent.
B. empowered as the accounting and auditing agency by the U.S. Congress.
C. funded by the federal government.
D. guided by standards similar to GAAS.

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25. Which of the following is the essential purpose of the audit function?
A. Detection of fraud
B. Examination of individual transactions to certify as to their validity
C. Determination of whether the client's financial statement assertions are fairly state
D. Assurance of the consistent application of correct accounting procedures
26. The audit objective that all the transactions and accounts presented in the financial statements
represent real assets, liabilities, revenues, and expenses is related most closely to which of the
PCAOB assertions?
A. Existence or occurrence
C. Completeness
D. Presentation and disclosure
27. The audit objective that all transactions are recorded in the proper period is related most closely
to which of the Audit Standards Board (ASB) transaction assertions?
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy
28. The audit objective that all transactions are recorded in the proper account is related most closely
to which one of the ASB transaction assertions?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
29. The audit objective that all balances include items owned by the client is related most closely to
which one of the ASB balance assertions?
A. Existence
C. Completeness
D. Valuation
30. The audit objective that all balances include all items that should be recorded in that account is
related most closely to which one of the ASB balance assertions?
A. Existence
C. Completeness
D. Valuation

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31. The audit objective that footnotes in the financial statements should be clear and expressed such
that the information is easily conveyed to the readers of the financial statements is related most
closely with which of the ASB presentation and disclosure assertions?
A. Occurrence
C. Comprehensibility
D. Understandability
32. The engineering department at Omni Company built a piece of equipment in the company's own
shop for use in the company's operations. The auditor reviewed all work orders that were
capitalized as part of the equipment costs. Which of the following is the ASB transaction assertion
most closely related to the auditor's testing?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
33. The engineering department at Omni Company built a piece of equipment in the company's own
shop for use in the company's operations. When looking at the ending balance for the fixed asset
account the auditor examined all work orders, purchased materials, labor cost reports, and
applied overhead that were capitalized as part of the equipment costs. Which of the following is
the ASB balance assertion most closely related to the auditor's testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation
34. Which of the following best describes the primary role and responsibility of independent external
auditor?
A. Produce a company's annual financial statements and notes.
B. Express an opinion on the fairness of a company's annual financial statements and footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client's internal control structure and give management a
report about control problems and deficiencies.
35. Which of the following best describes the main reason independent auditors report on
management's financial statements?
A. Management fraud may exist and it is likely to be detected by independent auditors.
B. The management that prepares the statements and the persons who use the statements may
have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent audit work.
D. The management that prepares the statements may have a poorly designed system of internal
control.

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36. The auditor's judgment concerning the overall fairness of the presentation of financial position,
results of operations, and cash flows is applied within the framework of
A. quality control.
B. generally accepted auditing standards, which include the concept of materiality.
C. the auditor's evaluation of the audited company's internal control.
D. the applicable financial reporting framework (i.e., GAAP in the United States).
37. Assurance services involve all of the following, except
A. relevance as well as the reliability of information.
B. nonfinancial information as well as traditional financial statements.
C. providing absolute rather than reasonable assurance.
D. electronic databases as well as printed reports.
38. Because of the risk of material misstatement, an audit of financial statements in accordance with
generally accepted auditing standards should be planned and performed with an attitude of
A. objective judgment.
B. independent integrity.
C. professional skepticism.
D. impartial conservatism.
39. Which of the following best describes assurance services?
A. Independent professional services that report on the client's financial statements
B. Independent professional services that improve the quality of information for decision makers
C. Independent professional services that report on specific written management assertions
D. Independent professional services that improve the operations of the client
40. Which of the following is not a PCAOB assertion about inventory related to presentation and
disclosure?
A. Inventory is properly classified as a current asset on the balance sheet.
B. Inventory is properly stated at its cost on the balance sheet.
C. Major inventory categories and their valuation bases are adequately disclosed in notes.
D. All of these are PCAOB presentation and disclosure assertions about inventory
41. Which of the following is not an ASB assertion about inventory related to presentation and
disclosure?
B. Inventory is properly stated at cost on the balance sheet.
D. All of these are ASB presentation and disclosure assertions about inventory.

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42. In performing an attestation engagement, a CPA typically
A. supplies litigation support services.
B. assesses control risk at a low level.
C. expresses a conclusion on an assertion about some type of subject matter.
D. provides management consulting advice.
43. An attestation engagement is one in which a CPA is engaged to
A. issue, or does issue, a report on subject matter or an assertion about the subject matter that is
the responsibility of another party.
B. provide tax advice or prepare a tax return based on financial information the CPA has not
audited or reviewed.
C. testify as an expert witness in accounting, auditing or tax matters, given certain stipulated
facts.
D. assemble prospective financial statements based on the assumptions of the entity's
management without expressing any assurance.
44. The underlying conditions that create demand by users for reliable information include all of the
following, except
A. transactions are numerous and complex.
B. users lack professional skepticism.
C. users are separated from accounting records by distance and time.
D. financial decisions are important to investors and users.
E. decisions are time-sensitive.
45. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about the PCAOB assertion of
A. presentation.
B. completeness.
C. rights.
D. existence.
46. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items
provide assurance about the PCAOB assertion of
A. completeness.
B. existence.
C. presentation.
D. valuation.

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47. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items
provide assurance about the ASB balance assertion of
A. completeness.
B. existence.
C. presentation.
D. valuation.
48. The probability that the information circulated by a company will be false or misleading is referred
to as
A. business risk.
B. information risk.
C. assurance risk.
D. audit risk.
49. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial
statements. Certification means that the company CEO and CFO must sign a statement
indicating
A. they have read the financial statements.
B. they are not aware of any false or misleading statements (or any key omitted disclosures).
C. they believe that the financial statements present an accurate picture of the company's
financial condition.
D. All of these.
50. The process of a CPA obtaining a certificate and license in a state other than the state in which
the CPA's certificate was originally obtained is referred to as
A. substantial equivalency.
B. quid pro quo.
C. relicensing.
D. re-examination.
51. The risk an entity will fail to meet its objectives is referred to as
A. business risk.
C. assurance risk.
D. audit risk.

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52. The four basic requirements for becoming a CPA in most states are
A. education, the CPA Examination, experience, and substantial equivalency.
B. the CPA Examination, experience, continuing professional education, and a state certificate.
C. continuing professional education, the CPA Examination, experience, and an AICPA
certificate.
D. education, the CPA Examination, experience, and a state certificate.
53. The study of business operations for the purpose of making recommendations about the efficient
use of resources, effective achievement of business objectives, and compliance with company
policies is referred to as
A. environmental auditing.
B. financial auditing.
C. compliance auditing.
D. operational auditing.
54. The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S.
Comptroller General is known as
A. the Federal Bureau of Investigation (FBI).
B. the U.S. General Accountability Office (GAO).
C. the Internal Revenue Service (IRS).
D. the United States Legislative Auditors (USLA).
Short Answer Questions

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55. Which of the PCAOB assertions (A-E) are best verified by the following audit procedures (1-4)?
C. Valuation or allocation
D. Completeness
E. Presentation and disclosure
1. Confirming inventory held on consignment by the client with independent third party.
2. Consulting the Wall Street Journal for year-end prices of securities held by the client.
3. Physically examine all major property and equipment additions.
4. Review the aged trial balance for significant past due accounts.
56. ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of
ABC Company. The auditors performed the audit procedures listed 1-3. For each audit procedure
select the ASB transaction assertion that is most likely being tested.
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy
E. Classification
1. The auditor reviewed the shipping documents to check the date that product was shipped to
XYZ Company.
2. The auditor reviewed the shipping documents to ensure that all product included in the sales
revenue to XYZ had been shipped.
3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been properly
billed.

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57. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit
procedures listed 1-5. For each audit procedure select the ASB balance assertion that is most
likely being tested.
A. Existence
C. Completeness
D. Accuracy
E. Valuation
1. The auditors walked through the warehouse looking for obsolete inventory.
2. The auditors compared invoices received from suppliers with the cost of inventory listed in the
inventory accounts.
3. The auditors reviewed purchase orders to determine if any inventory was on consignment.
4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs
had been included in inventory costs.
5. The auditors selected items from the inventory and reviewed inventory records to ensure these
items were included in those records.
Essay Questions
58. What are the differences between the American Accounting Association and AICPA definitions
and objectives of auditing?

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59. What is operational auditing and by whom is it performed?
60. What is information risk? What is business risk?
61. What are the four basic requirements for becoming a CPA?
62. Define assurance, attestation, and auditing in the context of "lending credibility."

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Chapter 01 Auditing and Assurance Services Answer Key
Multiple Choice Questions
1. The audit objective that all transactions and accounts that should be presented in the financial
statements are in fact included is related to which of the PCAOB assertions?
A. Existence
C. Completeness
D. Valuation
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-03 Describe and define the assertions that management makes about the recognition; measurement;
presentation; and disclosure of the financial statements and explain why auditors use them as the focal point of the audit.
Source: Original
Topic: Management's Financial Statement Assertions
2. Cutoff tests designed to detect purchases made before the end of the year that have been
recorded in the subsequent year provide assurance about management's assertion of
A. presentation and Disclosure.
B. completeness.
C. rights and obligations.
D. existence.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 2 Medium
Source: Original

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3. During an audit of an entity's stockholders' equity accounts, the auditor determines whether
there are restrictions on retained earnings resulting from loans, agreements or state law. This
audit procedure most likely is intended to verify management's assertion of
A. existence or occurrence.
B. completeness.
C. valuation or allocation.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
4. The confirmation of an account payable balance selected from the general ledger provides
primary evidence regarding which management assertion?
A. Completeness
B. Valuation
C. Allocation
D. Existence
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
5. What type of evidence would provide the highest level of assurance in an attestation
engagement?
A. Evidence secured solely from within the entity.
B. Evidence obtained from independent sources.
C. Evidence obtained indirectly.
D. Evidence obtained from multiple internal inquiries.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 01-02 Define and contrast financial statement auditing; attestation; and assurance services.
Source: AICPA
Topic: Auditing, Attestation, and Assurance Services

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6. Which of the following management assertions is an auditor most likely testing if the audit
objective states that all inventory on hand is reflected in the ending inventory balance?
A. The entity has rights to the inventory.
B. Inventory is properly valued.
C. Inventory is properly presented in the financial statements.
D. Inventory is complete.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA
7. An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the
following management assertions is supported by this test?
A. Valuation and allocation.
B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA
8. An auditor has substantial doubt about the entity's ability to continue as a going concern for a
reasonable period of time because of negative cash flows and working capital deficiencies.
Under these circumstances, the auditor would be most concerned about the
A. control environment factors that affect the organizational structure.
B. correlation of detection risk and inherent risk.
C. effectiveness of the entity's internal control activities.
D. possible effects on the entity's financial statements.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA

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9. Which of the following types of audit evidence provides the least assurance of reliability?
A. Receivable confirmations received from the client's customers.
B. Prenumbered receiving reports completed by the client's employees.
C. Prior months' bank statements obtained from the client.
D. Municipal property tax bills prepared in the client's name.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA
10. Which of the following is a management assertion regarding account balances at the period
end?
A. Transactions and events that have been recorded have occurred and pertain to the entity.
B. Transactions and events have been recorded in the proper accounts.
C. The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
D. Amounts and other data related to the transactions and events have been recorded
appropriately.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA
11. A practitioner is engaged to express an opinion on management's assertion that the square
footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to
which of the following sources for professional guidance?
A. Statement of Auditing Standards.
B. Statements on Standards for Attestation Engagements.
C. Statements on Standards for Accounting and Review Services.
D. Statements on Standards for Consulting Services.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: AICPA

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12. In auditing the long term debt account, an auditor's procedures most likely would focus
primarily on management's assertion of
A. existence.
B. completeness.
C. allocation.
D. rights and obligations.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
13. An auditor selected items for test counts from the client's warehouse during the physical
inventory observation. The auditor then traced these test counts into the detailed inventory
listing that ultimately agreed to the financial statements. This procedure most likely provided
evidence concerning management's assertion of
A. completeness.
B. valuation.
D. existence.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original

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14. An auditor selected items from the client's detailed inventory listing (that agreed to the financial
statements). During the physical inventory observation, the auditor then found each item
selected and counted the number of units on hand. Assuming that the amount on hand was
the same as the amount in the client's detailed inventory listing, this procedure most likely
would provide evidence concerning management's assertion of
A. completeness.
B. valuation.
D. existence.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
15. According to PCAOB Auditing Standard No. 5 (AS 5), the auditor should identify significant
accounts and disclosures and their relevant assertions. Which of the following financial
statement assertions is not explicitly identified in AS 5?
A. Completeness
B. Valuation or Allocation
C. Accuracy
D. Existence or Occurrence
E. All of these are assertions identified in AS 5.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original

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16. When testing the completeness assertion for a liability account, an auditor ordinarily works
from the
A. financial statements to the potentially unrecorded items.
B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. trial balance to the subsidiary ledger.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
17. If an auditor is performing procedures related to the information that is contained in the client's
pension footnote, he/she is most likely obtain evidence concerning management's assertion
about
A. rights and obligations.
B. existence.
C. valuation.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
18. Which of the following questions would be inappropriate for an auditor to ask a client when
exhibiting an appropriate level of professional skepticism while completing an audit procedure
related to the internal control system?
A. What can go wrong in this process?
B. Which of your employees is a fraudster?
C. What else is important to know about this process?
D. What happens when a key employees goes on vacation?
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-04 Define professional skepticism and explain its key characteristics.
Source: Original
Topic: Professional Skepticism

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19. To be proficient as an auditor, a person must first be able to accomplish which of these tasks
in a decision-making process?
A. Identify audit evidence relevant to the verification of assertions management makes in its
unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient,
competent evidence about assertions management makes in financial statements and
notes.
C. Recognize the financial assertions made in management's financial statements and
footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide whether
management's assertions conform to generally accepted accounting principles and reality.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 3 Hard
Source: Original
20. Which of the following is an underlying condition that in part creates the demand by users for
reliable information?
A. Economic transactions that are numerous and complex
B. Decisions are time-sensitive
C. Users separated from accounting records by distance and time
D. Financial decisions that are important to investors and users
E. All of these
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Learning Objective: 01-01 Define information risk and explain how the financial statement auditing process helps to reduce this
risk; thereby reducing the cost of capital for a company.
Source: Original
Topic: User Demand for Reliable Information

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21. Which of the following is not included in The American Accounting Association (AAA) definition
of auditing?
A. Potential conflict of interest
B. Systematic process
C. Assertions about economic actions
D. Established criteria
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
22. What is the term used to identify the risk that the client's financial statements may be
materially false and misleading?
A. Business risk
B. Information risk
C. Client risk
D. Risk assessment
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Source: Original
23. Which of the following is not a recommendation usually made following the completion of an
operational audit?
A. Economic and efficient use of resources
B. Effective achievement of business objectives
C. Attesting to the fairness of the financial statements
D. Compliance with company policies
AACSB: Communication
AICPA: BB Legal
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-06 Describe the audits and auditors in governmental; internal; and operational auditing.
Source: Original
Topic: Other Kinds of Engagements and Information Professionals

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24. In order to be considered as external auditors with respect to government agencies, GAO
auditors must be
A. organizationally independent.
B. empowered as the accounting and auditing agency by the U.S. Congress.
C. funded by the federal government.
D. guided by standards similar to GAAS.
AACSB: Ethics
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
25. Which of the following is the essential purpose of the audit function?
A. Detection of fraud
B. Examination of individual transactions to certify as to their validity
C. Determination of whether the client's financial statement assertions are fairly state
D. Assurance of the consistent application of correct accounting procedures
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Reporting
Blooms: Remember
Source: Original
26. The audit objective that all the transactions and accounts presented in the financial statements
represent real assets, liabilities, revenues, and expenses is related most closely to which of
the PCAOB assertions?
C. Completeness
D. Presentation and disclosure
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original

1-25
27. The audit objective that all transactions are recorded in the proper period is related most
closely to which of the Audit Standards Board (ASB) transaction assertions?
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
28. The audit objective that all transactions are recorded in the proper account is related most
closely to which one of the ASB transaction assertions?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
29. The audit objective that all balances include items owned by the client is related most closely
to which one of the ASB balance assertions?
A. Existence
C. Completeness
D. Valuation
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original

1-26
30. The audit objective that all balances include all items that should be recorded in that account
is related most closely to which one of the ASB balance assertions?
A. Existence
C. Completeness
D. Valuation
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
31. The audit objective that footnotes in the financial statements should be clear and expressed
such that the information is easily conveyed to the readers of the financial statements is
related most closely with which of the ASB presentation and disclosure assertions?
A. Occurrence
C. Comprehensibility
D. Understandability
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original

1-27
32. The engineering department at Omni Company built a piece of equipment in the company's
own shop for use in the company's operations. The auditor reviewed all work orders that were
capitalized as part of the equipment costs. Which of the following is the ASB transaction
assertion most closely related to the auditor's testing?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Difficulty: 3 Hard
Source: Original
33. The engineering department at Omni Company built a piece of equipment in the company's
own shop for use in the company's operations. When looking at the ending balance for the
fixed asset account the auditor examined all work orders, purchased materials, labor cost
reports, and applied overhead that were capitalized as part of the equipment costs. Which of
the following is the ASB balance assertion most closely related to the auditor's testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Difficulty: 3 Hard
Source: Original

1-28
34. Which of the following best describes the primary role and responsibility of independent
external auditor?
A. Produce a company's annual financial statements and notes.
B. Express an opinion on the fairness of a company's annual financial statements and
footnotes.
C. Provide business consulting advice to audit clients.
D. Obtain an understanding of the client's internal control structure and give management a
report about control problems and deficiencies.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
35. Which of the following best describes the main reason independent auditors report on
management's financial statements?
A. Management fraud may exist and it is likely to be detected by independent auditors.
B. The management that prepares the statements and the persons who use the statements
may have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent audit work.
D. The management that prepares the statements may have a poorly designed system of
internal control.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Understand
Source: Original

1-29
36. The auditor's judgment concerning the overall fairness of the presentation of financial position,
results of operations, and cash flows is applied within the framework of
A. quality control.
B. generally accepted auditing standards, which include the concept of materiality.
C. the auditor's evaluation of the audited company's internal control.
D. the applicable financial reporting framework (i.e., GAAP in the United States).
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: Original
37. Assurance services involve all of the following, except
A. relevance as well as the reliability of information.
B. nonfinancial information as well as traditional financial statements.
C. providing absolute rather than reasonable assurance.
D. electronic databases as well as printed reports.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Source: Original
38. Because of the risk of material misstatement, an audit of financial statements in accordance
with generally accepted auditing standards should be planned and performed with an attitude
of
A. objective judgment.
B. independent integrity.
C. professional skepticism.
D. impartial conservatism.
AACSB: Analytic
AICPA: BB Legal
Blooms: Remember
Learning Objective: 01-04 Define professional skepticism and explain its key characteristics.
Source: AICPA
Topic: Professional Skepticism

1-30
39. Which of the following best describes assurance services?
A. Independent professional services that report on the client's financial statements
B. Independent professional services that improve the quality of information for decision
makers
C. Independent professional services that report on specific written management assertions
D. Independent professional services that improve the operations of the client
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Source: Original
40. Which of the following is not a PCAOB assertion about inventory related to presentation and
disclosure?
B. Inventory is properly stated at its cost on the balance sheet.
D. All of these are PCAOB presentation and disclosure assertions about inventory
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Source: Original
41. Which of the following is not an ASB assertion about inventory related to presentation and
disclosure?
B. Inventory is properly stated at cost on the balance sheet.
D. All of these are ASB presentation and disclosure assertions about inventory.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Source: Original

1-31
42. In performing an attestation engagement, a CPA typically
A. supplies litigation support services.
B. assesses control risk at a low level.
C. expresses a conclusion on an assertion about some type of subject matter.
D. provides management consulting advice.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: AICPA
43. An attestation engagement is one in which a CPA is engaged to
A. issue, or does issue, a report on subject matter or an assertion about the subject matter
that is the responsibility of another party.
B. provide tax advice or prepare a tax return based on financial information the CPA has not
audited or reviewed.
C. testify as an expert witness in accounting, auditing or tax matters, given certain stipulated
facts.
D. assemble prospective financial statements based on the assumptions of the entity's
management without expressing any assurance.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: AICPA

1-32
44. The underlying conditions that create demand by users for reliable information include all of
the following, except
A. transactions are numerous and complex.
B. users lack professional skepticism.
C. users are separated from accounting records by distance and time.
D. financial decisions are important to investors and users.
E. decisions are time-sensitive.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Source: Original
45. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about the PCAOB assertion of
A. presentation.
B. completeness.
C. rights.
D. existence.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: AICPA

1-33
46. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory
items provide assurance about the PCAOB assertion of
A. completeness.
B. existence.
C. presentation.
D. valuation.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: AICPA
47. Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory
items provide assurance about the ASB balance assertion of
A. completeness.
B. existence.
C. presentation.
D. valuation.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Source: AICPA

1-34
48. The probability that the information circulated by a company will be false or misleading is
referred to as
A. business risk.
C. assurance risk.
D. audit risk.
AACSB: Analytic
AICPA: BB Legal
Blooms: Remember
Source: Original
49. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial
statements. Certification means that the company CEO and CFO must sign a statement
indicating
A. they have read the financial statements.
B. they are not aware of any false or misleading statements (or any key omitted disclosures).
C. they believe that the financial statements present an accurate picture of the company's
financial condition.
D. All of these.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-05 Describe the organization of public accounting firms and identify the various services that they offer.
Source: Original
Topic: Public Accounting
50. The process of a CPA obtaining a certificate and license in a state other than the state in
which the CPA's certificate was originally obtained is referred to as
A. substantial equivalency.
B. quid pro quo.
C. relicensing.
D. re-examination.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-07 List and explain the requirements for becoming a certified public accountant (CPA) and other
certifications available to an accounting professional.
Source: Original
Topic: Become a Professional and Get Certified!

1-35
51. The risk an entity will fail to meet its objectives is referred to as
A. business risk.
C. assurance risk.
D. audit risk.
AACSB: Analytic
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Source: Original
52. The four basic requirements for becoming a CPA in most states are
A. education, the CPA Examination, experience, and substantial equivalency.
B. the CPA Examination, experience, continuing professional education, and a state
certificate.
C. continuing professional education, the CPA Examination, experience, and an AICPA
certificate.
D. education, the CPA Examination, experience, and a state certificate.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
53. The study of business operations for the purpose of making recommendations about the
efficient use of resources, effective achievement of business objectives, and compliance with
company policies is referred to as
A. environmental auditing.
B. financial auditing.
C. compliance auditing.
D. operational auditing.
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original

1-36
54. The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S.
Comptroller General is known as
A. the Federal Bureau of Investigation (FBI).
B. the U.S. General Accountability Office (GAO).
C. the Internal Revenue Service (IRS).
D. the United States Legislative Auditors (USLA).
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
Short Answer Questions
55. Which of the PCAOB assertions (A-E) are best verified by the following audit procedures (1-
4)?
C. Valuation or allocation
D. Completeness
E. Presentation and disclosure
1. Confirming inventory held on consignment by the client with independent third party.
2. Consulting the Wall Street Journal for year-end prices of securities held by the client.
3. Physically examine all major property and equipment additions.
4. Review the aged trial balance for significant past due accounts.
1. B, 2. C, 3. A, 4. C
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Difficulty: 3 Hard
Source: Original

1-37
56. ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the
revenue of ABC Company. The auditors performed the audit procedures listed 1-3. For each
audit procedure select the ASB transaction assertion that is most likely being tested.
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy
E. Classification
1. The auditor reviewed the shipping documents to check the date that product was shipped to
XYZ Company.
2. The auditor reviewed the shipping documents to ensure that all product included in the
sales revenue to XYZ had been shipped.
3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been
properly billed.
1. C, 2. B, 3. D
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Difficulty: 3 Hard
Source: Original

1-38
57. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the
audit procedures listed 1-5. For each audit procedure select the ASB balance assertion that is
most likely being tested.
A. Existence
C. Completeness
D. Accuracy
E. Valuation
1. The auditors walked through the warehouse looking for obsolete inventory.
2. The auditors compared invoices received from suppliers with the cost of inventory listed in
the inventory accounts.
3. The auditors reviewed purchase orders to determine if any inventory was on consignment.
4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other
costs had been included in inventory costs.
5. The auditors selected items from the inventory and reviewed inventory records to ensure
these items were included in those records.
1. E, 2. D, 3. B, 4. E, 5. C
AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Blooms: Understand
Difficulty: 3 Hard
Source: Original
Essay Questions

1-39
58. What are the differences between the American Accounting Association and AICPA definitions
and objectives of auditing?
The AAA definition is broad and general enough to encompass independent, internal, and
governmental auditing. The AICPA has not defined auditing but its statement on objectives of
financial audits restricts auditing to independent CPA's audit of the traditional financial
statements and their footnotes. The AICPA SAS also offers guides to report on internal
control, letters to underwriters, and special reports.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Understand
Source: Original
59. What is operational auditing and by whom is it performed?
Operational auditing is the evaluation of business operations for various purposes. Operational
auditing includes: (1) testing for compliance with laws and regulations and company policies
and procedures, (2) evaluating the effectiveness of operations in achieving goals and
objectives, and (3) evaluating the efficiency and economy of operations. Operational audits
are normally performed by internal auditors. However, operational audits also may be
conducted by independent CPA firms as part of their management advisory services.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Source: Original
60. What is information risk? What is business risk?
Information risk is the risk that financial statements will be materially false or misleading.
Business risk is the risk an entity will fail to meet its objectives.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original

1-40
61. What are the four basic requirements for becoming a CPA?
Education, the CPA Examination, experience, and a state certificate.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
62. Define assurance, attestation, and auditing in the context of "lending credibility."
Assurance is the "lending of credibility" to information. Attestation is the "lending of credibility"
to assertions made by a third party. Auditing is the "lending of credibility" to financial
statements.
AACSB: Analytic
AICPA: BB Industry
AICPA: FN Research
Blooms: Understand
Source: Original

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