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Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 1 The Demand for Audit and Other Assurance Services

1.1 Learning Objective 1-1

1) In the auditing process,

A) the types and amounts of evidence remain constant from audit to audit.
B) the criteria for evaluating information will not vary depending on the information being
audited.
C) the audit report communicates the auditor's findings to users.
D) records are gathered by the auditor to determine whether the audited information is stated in
accordance with SEC standards.

2) Which of the following is considered audit evidence?

A)
Oral statements Written Auditor
made by management Communications Observations
Y N N

B)
Oral statements Written Auditor
made by management Communications Observations
N Y Y

C)
Oral statements Written Auditor
made by management Communications Observations
Y Y Y

D)
Oral statements Written Auditor
made by management Communications Observations
N N Y

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 3) Which of the following can be used as a criterion for evaluating information being audited?
A) International Financial Reporting Standards (IFRS)
B) Generally Accepted Accounting Principles (GAAP)
C) Internal Revenue Code (IRC)
D) all of the above

4) Auditors do not provide which of the following?

A) assurance on financial statements
B) assurance on the effectiveness of internal controls over financial reporting
C) assurance on corporate sustainability reports
D) absolute assurance on the financial statements including assuming responsibility for them

5) The accumulation and evaluation of evidence about information to determine and report on
the degree of correspondence between the information and some established criteria is defined as
A) accounting.
B) financial reporting.
C) tax reporting.
D) auditing.

1.2 Learning Objective 1-2

1) 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) An accountant
A) must possess expertise in the accumulation of audit evidence.
B) must decide the number and types of items to test.
C) must have an understanding of the principles and rules that provide the basis for preparing the
accounting information.
D) must be a CPA.

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 3) When auditing accounting data, auditors focus on
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.

4) The trait that distinguishes auditors from accountants is the

A) auditor's ability to interpret accounting principles generally accepted in the United States.
B) auditor's education beyond the bachelor's degree.
C) auditor's ability to interpret FASB Statements.
D) auditor's expertise in the accumulation and the interpretation of audit evidence.
E)
1.3 Learning Objective 1-3

1) risk reflects the possibility that the information upon which the business decision
was made was inaccurate.
A) Client acceptance
B) Information
C) Business
2) Control The possibility that a business may not be able to repay a bank loan because of an
economic downturn is referred to as
A) materiality risk.
B) information risk.
C) interest rate risk.
D) business risk.

3) A bank loan officer is trying to decide whether the bank should make a loan to a particular
company. The interest rate the bank will charge the company is determined by many factors.
Which of the following factors is influenced by the auditor's report?
A) the risk-free interest rate risk
B) information risk
C) the business risk for/of the customer
D) All of the above are influenced by the auditor's report.

1.4 Learning Objective 1-4

1) A correct relationship among the auditor, the client, and the external users is
A) management of a public company hires the independent auditor.
B) the audit committee of a private company hires the independent auditor.
C) the client provides capital to the external users.
D) the external users can rely upon the auditor's report to reduce information risk.
Answer: D

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2) The most common way for users to obtain reliable information is to
A) have an internal audit.
B) have an independent audit.
C) verify all information individually.
D) verify the information with management.

3) External users of the financial statements

A) value the auditor's report because of the auditor's independence from the client.
B) look to the auditor's report as an indication of the statements' reliability.
C) use the audited information on the assumption that it is reasonably complete, accurate, and
unbiased.
D) all of the above.

4) Which of the following is not a cause of information risk?

A) Society, today, is not as complex as it used to be.
B) Remoteness of information.
C) The volume and the complexity of data and exchange transactions.
D) The biases and the motives of the information provider.

5) Large businesses, especially, have the ability to reduce information risk. Which of the
following is not a way for a large business to reduce information risk?
A) Paying higher interest rates on loans.
B) The user verifies the information they need by any possible means.
C) The user of information shares information risk with management.
D) Having an independent audit performed of the financial statements.

1.5 Learning Objective 1-5

1) In the audit of historical financial statements, management asserts that the financial statements
are fairly stated in accordance with what standards?
A) regulatory accounting principles
B) applicable international accounting standards
C) applicable U.S. accounting standards
D) B and C

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 2) 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.

3) Three common types of attestation services are

A) audits of historical financial statements, reviews of historical financial statements, and audits
of internal control over financial reporting.
B) audits of historical financial information, verifications of historical financial information, and
attestations regarding internal controls.
C) reviews of historical financial information, verifications of future financial information, and
attestations regarding internal controls.
D) audits of historical financial information, reviews of controls related to investments, and
verifications of historical financial information.

4) Which of the following services provides the lowest level of assurance on a financial
statement?
A) review
B) audit
C) Neither service provides assurance on financial statements.
D) Each service provides the same level of assurance on financial statements.

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5) Which of the following is an accurate statement regarding assurance services?
A) Assurance services must be performed by a CPA.
B) An attestation service is not a type of assurance service.
C) Assurance services improve the quality of information for decision makers.
D) Assurance services can only be performed on financial data.

6) Audits
A) are an assurance service, but not an attestation service.
B) are designed to provide absolute assurance that the financial statements are free of material
misstatement.
C) are required for publicly traded companies in the United States.
D) do not require the auditor to express their opinion in a written report.

7) A high, but not absolute, level of assurance is called

A) probable assurance.
B) reasonable assurance.
C) limited assurance.
D) incomplete assurance.

8) Which of the following is an accurate statement regarding the various types of other assurance
services?
A) Assurance services must be about the reliability of another party's assertion about compliance
with specified criteria.
B) Other assurance services must meet the definition of an attestation service.
C) The primary purpose of a management consulting engagement is to improve the quality of
information.
D) The market for other forms of assurance services is open to non-CPA competitors.

1.6 Learning Objective 1-6

1) One objective of an operational audit is to

A) determine whether the financial statements fairly present the entity's operations.
B) determine if the auditee is in compliance with GAAP.
C) make recommendations for improving performance.
D) report on the entity's relative success in attaining profit maximization.

2) 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) operational audit
B) compliance audit
C) financial statement audit
D) production audit

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3) 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.

4) Which one of the following is more difficult to evaluate objectively?

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.

5) Which of the following audits can be regarded as generally being a compliance audit?
A) IRS agents' examinations of taxpayer returns
B) GAO auditor's evaluation of the computer operations of governmental units
C) an internal auditor's review of a company's payroll authorization procedures
D) a CPA firm's audit of a public company

6) Which of the following are required to have a written report regarding the assertion of another
party?
A)
Financial
Statement Operational Compliance Attestation Assurance
Audit Audit Audit Engagement Engagement
Y Y Y Y Y

B)
Financial
Statement Operational Compliance Attestation Assurance
Audit Audit Audit Engagement Engagement
Y Y Y Y N

C)
Financial
Statement Operational Compliance Attestation Assurance
Audit Audit Audit Engagement Engagement
Y Y Y N N

D)
Financial Operational Compliance Attestation Assurance
Statement Audit Audit Engagement Engagement
Audit
N N N Y Y

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7) In a financial statement audit, the auditor
A) gathers evidence to determine whether the statements contain material errors or other
misstatements.
B) must have a thorough understanding of the entity and its environment.
C) determines whether the financial statements are stated in accordance with specified criteria.
D) all of the above.

8) Which of the following is not an example of a compliance audit?

A) The accounting personnel at the Chinese subsidiary following the financial statement
preparation procedures prescribed in writing by the corporate controller.
B) Is the company paying the minimum wage rates required by state laws?
C) Determine if a company is meeting the financial covenants of a loan agreement with its
lenders.
D) Is the computerized processing of payroll at the Indian subsidiary operating effectively
and efficiently?

1.7 Learning Objective 1-7

1) Internal auditors
A) must be independent of the entity that employs them.
B) report to the accounting department.
C) are employed by all types of organizations.
D) must be CPAs.

2) Which type of auditor audits the financial information prepared by various federal government
agencies before it is submitted to Congress?
A) internal auditor
B) revenue agent
C) independent auditor
D) GAO auditor

1.8 Learning Objective 1-8

1) The three requirements for becoming a CPA include all but which of the following?
A) uniform CPA examination requirement
B) education requirements
C) character requirements
D) experience requirement

2) The use of the Certified Public Accountant title is regulated by

A) the federal government.
B) state law through the licensing departments 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.

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 3) The AICPA completed a significant revision of the CPA examination effective April 1, 2017.
In total, the CPA Examination has four sections, and the total number of hours these four
sections involve when taking the Examination is
A) 16 hours, 4 hours for each section.
B) 20 hours, 5 hours for each section.
C) 16 hours, 5 hours each for two of the sections, 3 hours for the other two sections.
D) 20 hours, 6 hours for two of the sections, 4 hours for the other two sections.

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