Assurance Services
Midterm Exam
Course Introduction
Assurance Services explores the key concepts, objectives, and practices surrounding the provision of independent assurance to enhance the reliability of information used by decision-makers. The course covers various types of assurance engagements beyond traditional financial statement audits, including reviews, agreed-upon procedures, and sustainability reports. Students will learn about the assurance process, standards, report types, and ethical and legal considerations. Through case studies and practical examples, the course emphasizes risk assessment, internal controls, evidence gathering, and reporting, preparing students to critically evaluate the quality and credibility of information in a variety of organizational contexts.
Recommended Textbook
Auditing and Assurance Services 16th Edition by Alvin A. Arens
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26 Chapters
2955 Verified Questions
2955 Flashcards
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Chapter 1: The Demand for Audit and Other Assurance Services
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate.
A)Client acceptance
B)Information
C)Business
D)Control Answer: B
Q2) 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.
Answer: C
Q3) To perform an audit,there must be information in a verifiable form and some criteria by which the auditor can evaluate the information.
A)True
B)False Answer: True
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Chapter 2: The Cpa Profession
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Sample Questions
Q1) The "Principles Underlying an Audit in Accordance with Generally Accepted Auditing Principles" provides a framework to help auditors
A)understand the ten GAAS standards.
B)obtain complete assurance that the financial statements are free from any error.
C)report on the financial statements.
D)prevent fraud.
Answer: C
Q2) Limited liability companies are structured and taxed like a general partnership,but their owners have limited personal liability similar to that of a general corporation.
A)True
B)False
Answer: True
Q3) The ASB has revised its audit standards to converge with international standards. A)True
B)False
Answer: True
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Chapter 3: Audit Reports
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157 Verified Questions
157 Flashcards
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Sample Questions
Q1) An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.
A)True
B)False
Answer: False
Q2) Under AICPA auditing standards,the primary auditor issuing the opinion on the financial statements is called the
A)component auditor.
B)principal auditor.
C)group engagement partner.
D)majority auditor.
Answer: C
Q3) The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date.
A)True
B)False
Answer: True
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Chapter 4: Professional Ethics
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Sample Questions
Q1) Which of the following is a prescribed set of moral principles or values?
A)codes of business ethics for professional groups
B)laws and regulations
C)codes of conduct within an organization
D)all of the above
Q2) Under the AICPA independence rules,the auditor
A)is prohibited from performing a company's audit and installing and designing the client's new information system.
B)does not need to document the understanding and willingness of the client to perform all management functions associated with the nonaudit service.
C)is prohibited from doing any bookkeeping services for the client if performing the audit.
D)must follow the more restrictive SEC independence rules when dealing with a public company.
Q3) If an action is considered legal,it must also be considered ethical.
A)True
B)False
Q4) What are the six Ethical Principles stated in the Code of Professional Conduct?
Briefly discuss each principle.Are these principles enforceable?
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Chapter 5: Legal Liability
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116 Flashcards
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Sample Questions
Q1) Several states have statutes that permit privileged communication between the client and auditor,allowing a CPA to refuse to testify in state and federal courts.
A)True
B)False
Q2) The Foreign Corrupt Practices Act (FCPA)of 1977
A)requires auditors to review and evaluate systems of internal control as a part of an audit.
B)requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control.
C)requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA.
D)requires auditors to file a report with the SEC if client's internal control system is inadequate.
Q3) Discuss the sanctions the Securities and Exchange Commission can impose on auditors.
Q4) Distinguish between "joint and several liability" and "separate and proportionate liability."
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Chapter 6: Audit Responsibilities and Objectives
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152 Flashcards
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Sample Questions
Q1) Which of the following management assertions is not associated with classes of transactions and events?
A)occurrence
B)classification
C)accuracy
D)rights and obligations
Q2) Misappropriation of assets
A)is generally committed by company management.
B)harms the users of the financial statements by providing them incorrect financial data for their decision making.
C)causes harm to stockholders because the assets are no longer available to their rightful owners.
D)causes the financial statements to be misstated since the misappropriation usually involves material amounts.
Q3) Errors are usually more difficult for an auditor to detect than frauds.
A)True
B)False
Q4) Describe what analytical procedures and tests of details of balances are and give an example of each.
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Chapter 7: Audit Evidence
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133 Verified Questions
133 Flashcards
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Sample Questions
Q1) A canceled check written by the client,made payable to a local supplier and drawn on the client's bank account is one type of internal document.
A)True
B)False
Q2) You are auditing the company's purchasing process for goods and services.You are primarily concerned with the company not recording all purchase transactions.Which audit procedure below would be the most effective audit procedure in this case?
A)vouching from the accounts payable account to the vendor invoices
B)tracing vendor invoices to recorded amounts in the accounts payable account
C)confirmation accounts payable recorded amounts
D)reconciling the accounts payable subsidiary ledger to the accounts payable account
Q3) The auditor must gather sufficient and appropriate evidence during the course of the audit.Sufficient evidence must
A)be well documented and cross-referenced in the audit documents.
B)be based on sources that are external to company.
C)provide evidence that prove or disprove an audit objective/assertion.
D)be persuasive enough to enable the auditor to issue an audit report.
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Page 9
Chapter 8: Audit Planning and Analytical Procedures
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Sample Questions
Q1) Which is a liquidity activity ratio?
A)profit margin
B)inventory turnover
C)return on assets
D)times interest earned
Q2) If the auditor approaches the audit of the accounts in s sequential manner,the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.
A)True
B)False
Q3) Which of the following would most likely not be classified as a related-party transaction?
A)an advance of one week's salary to an employee
B)sales of merchandise between affiliated companies
C)loans or credit sales to the principal owner of the client company
D)exchanges of equipment between two companies owned by the same person
Q4) A 100 % audit risk is complete certainty.
A)True
B)False
Q5) Discuss the essential activities involved in the initial planning of an audit.
Page 10
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Chapter 9: Materiality and Risk
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Sample Questions
Q1) Auditors frequently refer to the terms audit assurance,overall assurance,and level of assurance instead of A)detection risk.
B)audit report risk.
C)acceptable audit risk.
D)inherent risk.
Q2) Acceptable audit risk and the amount of substantive evidence required are inversely related.
A)True
B)False
Q3) When the auditor is attempting to determine the extent to which external users rely on a client's financial statements,they may consider several factors except for A)client size.
B)concentration of ownership.
C)nature and amounts of liabilities.
D)assessment of detection risk.
Q4) The auditing profession has established guidelines for setting inherent risk.
A)True
B)False
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Chapter 10: Fraud Auditing
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110 Flashcards
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Sample Questions
Q1) Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings.
A)income smoothing
B)cookie jar reserves
C)cash
D)sales
Q2) Management and the board of directors are responsible for setting the "tone at the top."
A)True
B)False
Q3) Which of the following best defines fraud in a financial statement auditing context?
A)Fraud is an unintentional misstatement of the financial statements.
B)Fraud is an intentional misstatement of the financial statements.
C)Fraud is either an intentional or unintentional misstatement of the financial statements,depending on materiality.
D)Fraud is either an intentional or unintentional misstatement of the financial statements,depending on consistency.
Q4) List and briefly describe the three conditions for fraud.
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Chapter 11: Internal Control and Coso Framework
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Sample Questions
Q1) Management has a legal and professional responsibility to be sure that the financial statements are prepared in accordance with reporting requirements of applicable accounting frameworks.
A)True
B)False
Q2) Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control?
A)Transaction-related audit objectives typically have no impact on the rights and obligations objectives.
B)Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value.
C)Auditors generally emphasize internal control over account balances rather than classes of transactions.
D)Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.
Q3) IT controls are classified as either input controls or output controls.
A)True
B)False
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Chapter 12: Assessing Control Risk and Reporting on
Internal Controls
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Sample Questions
Q1) Discuss the advantages and benefits of using generalized audit software.
Q2) A company's size should have no impact on the nature of internal control and the controls that are implemented.
A)True
B)False
Q3) Which of the following is True regarding the relationship between tests of controls and procedures to obtain an understanding?
A)In obtaining an understanding of internal control,the procedures to obtain an understanding are applied to all controls identified during that phase.
B)Tests of controls are applied only when the assessed control risk has not been satisfied by the procedures to obtain an understanding.
C)Procedures to obtain an understanding are performed only on one or a few transactions.
D)All of the above are correct.
Q4) Control risk is generally set at minimum for most private companies.
A)True
B)False
Q5) Describe three computer auditing techniques available to the auditor.
Page 14
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Chapter 13: Overall Audit Strategy and Audit Program
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Sample Questions
Q1) In a computerized environment,the auditor can often perform substantive tests of transactions quickly for a large sample of transactions.
A)True
B)False
Q2) An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tests of controls do not reveal whether monetary misstatements have actually occurred.
A)True
B)False
Q3) Auditors follow a four step approach to reduce assessed control risk.Which of the following is not one of the four?
A)Apply transaction-related audit objectives to a class of transactions.
B)Identify accounts that have high inherent risk.
C)Identify key controls that reduce control risk.
D)For potential misstatements,design appropriate substantive tests of transactions.
Q4) In accumulating final evidence upon which to base an audit opinion,the auditor should perform four activities.List the activities below.
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Chapter 14: Audit of the Sales and Collection Cycle: Tests of Controls
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Sample Questions
Q1) Tracing from source documents to the journal is useful for testing the existence objective.
A)True
B)False
Q2) Credit should be approved before goods are shipped to a customer.
A)True
B)False
Q3) To determine that sales are accurately recorded,the unit prices on the duplicate sales invoices are normally compared with
A)the original invoices.
B)an approved master price list.
C)the amounts recorded in the sales journal for that transaction.
D)the amounts posted to the customer's account in the accounts receivable master file.
Q4) The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.
A)True
B)False
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Chapter 15: Audit Sampling for Tests of Controls and
Substantive Tests of Transactions
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Sample Questions
Q1) What is the key advantage and disadvantage associated with systematic sample selection?
How must auditors address this disadvantage?
Q2) When evaluating the results of attributes sampling,
A)the acceptable risk of overreliance (ARO)is set at high or low.
B)tables are used to compute the computed upper exception rate (CUER).
C)if the sample size is not equal to those provided for in the attributes sampling evaluation tables,the tables cannot be used.
D)the True exception rate is computed from various tables.
Q3) Which of the following statements is most correct?
A)A sample of all items of a population will eliminate sampling risk,but increase nonsampling risk.
B)The use of an appropriate sample selection technique ensures a representative sample.
C)The auditor's failure to recognize an exception is a significant cause of sampling risk.
D)The use of inappropriate audit procedures is a significant cause of nonsampling risk.
Q4) Discuss what is meant by "sampling risk" and "nonsampling risk."
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Chapter 16: Completing the Tests in the Sales and Collection
Cycle: Accounts Receivable
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Sample Questions
Q1) The most important test of details of balances to determine the existence of recorded accounts receivable is
A)tracing details of sales invoices to shipping documents.
B)tracing the credits in accounts receivable to bank deposits.
C)tracing sales returns entries to credit memos issued and receiving room reports.
D)the confirmation of customers' balances.
Q2) The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to
A)perform extensive detailed testing of cutoff.
B)evaluate the client's control procedures around cutoff.
C)confirm a sample of transactions near period end with customers.
D)confirm transaction with customers.
Q3) An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years.A possible misstatement this procedure could uncover is
A)overstatement or understatement of sales.
B)overstatement or understatement of accounts receivable.
C)overstatement or understatement of bad debt expense.
D)overstatement or understatement of sales returns and allowances.
Page 18
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Chapter 17: Audit Sampling for Tests of Details of Balances
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Sample Questions
Q1) One of the steps involved in planning the sample for the tests of details of balances is to
A)select the sample.
B)perform the audit procedures.
C)define a misstatement.
D)analyze the misstatements.
Q2) The method used to measure the estimated total misstatement amount in a population when there is both a recorded value and an audited value for each item in the sample is
A)difference estimation.
B)mean-per-unit estimation.
C)ratio estimation.
D)monetary unit sampling.
Q3) There are four steps to generalize from the sample to the population using difference estimation sampling.Identify each of these four steps.
Q4) Auditors should attempt to minimize ARIA and maximize ARIR.
A)True
B)False
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Chapter 18: Audit of the Acquisition and Payment Cycle:
Tests of Controls,
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Sample Questions
Q1) Which of the following should sign checks under conditions of effective internal control?
A)treasurer
B)purchasing agent
C)accounts payable clerk
D)person preparing the checks
Q2) You are the in-charge auditor and are designing audit procedures for accounts payable.Which of the following management assertions would you normally be most concerned about?
A)occurrence
B)accuracy
C)completeness
D)existence
Q3) At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?
A)when the purchase order is issued
B)when the vendor acknowledges receipt of the order
C)when the goods or services are received
D)when the vendor invoice is received
Q4) List the four business functions in the acquisition and payment cycle.
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Chapter 19: Completing the Tests in the Acquisition and Payment
Cycle:
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Sample Questions
Q1) In testing acquisitions the auditor needs to understand the appropriate accounting guidance related to acquisition accounting.Which of the following is not an accounting consideration for the auditor as regards to acquisition cost?
A)inclusion of material transportation and installation costs
B)recording of trade-in costs
C)allocating costs when building and equipment are purchased at one price
D)verifying that purchased equipment amounts correspond to the budgeted amount
Q2) When auditing insurance expense,auditors normally rely on analytical procedures and limited testing of the debits to ensure that they arose from credits to prepaid insurance.
A)True
B)False
Q3) When an auditor recomputes the unexpired portion of prepaid insurance,they are satisfying which audit objective?
A)completeness
B)existence
C)accuracy and detail tie-in
D)rights
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Chapter 20: Audit of the Payroll and Personnel Cycle
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Sample Questions
Q1) While most cycles include at least two classes of transactions,the payroll and personnel cycle includes only one class of transactions.
A)True
B)False
Q2) Which of the following is not one of the business functions for the payroll and personnel cycle?
A)payment of payroll
B)timekeeping and payroll preparation
C)reconciliation of payroll account
D)human resources and employment
Q3) Discuss each of the following primary documents and records used in the personnel and employment function in the payroll and personnel cycle: human resource records,deduction authorization form,and the rate authorization form.
Q4) Auditors should determine whether the client has fulfilled its legal obligation in submitting payments of all payroll withholdings as part of their payroll tests.
A)True
B)False
Q5) What events initiate and terminate the payroll and personnel cycle?
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Chapter 21: Audit of the Inventory and Warehousing Cycle
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Sample Questions
Q1) The test of details of balance procedure which requires the auditor to perform tests of lower of cost or market,selling price,and obsolescence is an attempt to satisfy the objective of A)existence.
B)completeness.
C)accuracy.
D)realizable value.
Q2) Which of the following is an accurate statement regarding inventory and risk?
A)Inventory with a high business risk includes products with potential obsolescence.
B)Auditors often have a greater concern for misstatements when inventory is stored in one warehouse.
C)Inherent risk is generally set at low for manufacturing companies.
D)Performance materiality for inventory is determined before assessing client business risk.
Q3) Discuss the key control procedures relating to the client's physical count of inventory.
Q4) In process cost systems,costs are accumulated by individual jobs.
A)True
B)False
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Chapter 22: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) The starting point for the audit of notes payable is a schedule of notes payable and accrued interest.Discuss the information typically included in the schedule.
Q2) Discuss the internal controls related to owners' equity that are of concern to the auditor.
Q3) Which of the following balance-related audit objectives is not applicable to the audit of notes payable?
A)realizable value
B)detail tie-in
C)cutoff
D)classification
Q4) Notes payable are generally for a period of sixty days or less.
A)True
B)False
Q5) State the four most important audit objectives for capital stock and describe how the auditor typically verifies each of the four objectives.
Q6) What are two important internal control procedures that companies should implement to prevent misstatements in owners' equity when a company maintains its own records of stock transactions and outstanding stock?
Page 24
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Chapter 23: Audit of Cash and Financial Instruments
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Sample Questions
Q1) Tests for kiting are performed using only a schedule of intrabank transfers.
A)True
B)False
Q2) When auditing financial instruments,a confirmation is sent to the broker-dealer
A)only if the client has poor internal controls.
B)to confirm interest and dividends.
C)to provide assurance on realizable value.
D)to confirm year-end holdings.
Q3) The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both banks is referred to as kiting.
A)True
B)False
Q4) Prices in an active market for identical assets is a level ________ fair value estimate.
Q5) Explain kiting,and discuss how it is performed.
Page 25
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Chapter 24: Completing the Audit
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Q1) At the completion of the audit,management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities.This statement would appear in the
A)management letter.
B)letter of inquiry.
C)letters testamentary.
D)management letter of representation.
Q2) The auditor is responsible for communicating significant internal control deficiencies to the audit committee,or those charged with governance.This communication
A)may be oral or written.
B)must be oral.
C)must be written.
D)must be oral via direct communication.
Q3) What are the three required conditions for a contingent liability to exist?
Q4) At the completion of the audit,management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities.
A)True
B)False
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Chapter 25: Other Assurance Services
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Sample Questions
Q1) Which of the following is not an element of the examination of prospective financial statements?
A)evaluating the preparation of the prospective financial statements
B)understanding internal controls
C)evaluating the support underlying the assumptions
D)issuing an examination report
Q2) State three types of assurance services that fall within the auditing standards but are not audits,reviews,or compilations of financial statements in accordance with GAAP.
Q3) Auditors frequently audit statements prepared on bases other than GAAP.Discuss four commonly used bases other than GAAP.
Q4) When performing compilation services,the accountant is not required to obtain an understanding of the client's internal control.
A)True
B)False
Q5) Discuss each of the three types of compilation reports and the circumstances in which each should be used.
Q6) Define forecast and projection.
Q7) Briefly describe each of the five Trust Services principles.
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Chapter 26: Internal and Governmental Financial Auditing and
Operational
Auditing
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Sample Questions
Q1) Which of the following is a performance standard under the International Standards for the Professional Practice of Internal Auditing?
A)proficiency and due professional care
B)independence and objectivity
C)requirement that the internal audit must be a CPA
D)engagement planning
Q2) Which of the following groups could be involved in an operational audit?
A)CPA firms
B)internal auditors
C)government auditors
D)All of the above could be involved.
Q3) External auditors would consider internal auditors effective if they
A)are independent of the operating units being evaluated.
B)are competent and well trained.
C)apply a systematic and disciplined approach,including quality control.
D)all of the above.
Q4) Independence is a fundamental ethical principle for internal auditors.
A)True
B)False
Q5) List the three purposes of a program audit.
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