Assurance Services Review Questions
Course Introduction
Assurance Services is a course that explores the theory and practice of providing independent professional services that improve the quality of information for decision makers. Students will study the nature, objectives, and scope of assurance services, with an emphasis on the audit of financial statements, internal controls, and compliance with regulations and standards. The course covers the professional, ethical, and legal responsibilities of assurance providers, risk assessment, evidence gathering, reporting techniques, and recent developments in the assurance industry. Through case studies and practical assignments, students will develop analytical and critical thinking skills essential for evaluating assurance engagements in a variety of organizational contexts.
Recommended Textbook Principles of Auditing and Other Assurance Services 19th Edition by Ray Whittington
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Chapter 1: The Role of the Public Accountant in the American Economy
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Q1) Which of the following best describes the reason why independent auditors report on financial statements?
A)A management fraud may exist and it is more likely to be detected by independent auditors.
B)Different interests may exist between the company preparing the statements and the persons using the statements.
C)A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.
D)Poorly designed internal control may be in existence.
Answer: B
Q2) An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):
A)Peer Review Engagement.
B)Quality Control Engagement.
C)Quality Assurance Engagement.
D)Attestation Engagement.
Answer: A
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Chapter 2: Professional Standards
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Sample Questions
Q1) An audit performed in accordance with generally accepted auditing standards generally should:
A)Be expected to provide absolute assurance that noncompliance with all laws will be detected where internal control is effective.
B)Be relied upon to disclose violations of truth in lending laws.
C)Encompass a plan to actively search for all illegalities which relate to operating aspects.
D)Not be relied upon to provide absolute assurance that all noncompliance with laws will be detected.
Answer: D
Q2) A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element?
A)Engagement performance.
B)Human resources.
C)Leadership responsibilities for quality with the firm.
D)Monitoring.
Answer: D
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Chapter 3: Professional Ethics
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Q1) The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists?
A)AICPA ethics examiner.
B)Peer.
C)PCAOB inspector.
D)Reasonably informed third party.
Answer: D
Q2) The communications between CPAs and their clients are privileged under federal law.
A)True
B)False
Answer: False
Q3) When an accountant is not independent,the accountant is precluded from issuing a:
A)Compilation report.
B)Review report.
C)Management advisory report.
D)Tax planning report.
Answer: B
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Chapter 4: Legal Liability of CPAS
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Q1) Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?
A)Ultramares v.Touche.
B)Restatement of Torts.
C)Rule 10b-5.
D)Rosenblum v.Adler.
Q2) Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?
A)Professional corporation.
B)Limited liability partnership.
C)Partnership.
D)Subchapter M Incorporation.
Q3) The precedent set by the Hochfelder v.Ernst case is generally believed to have increased auditors' legal liability.
A)True
B)False
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Chapter 5: Audit Evidence and Documentation
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Q1) Which of the following would not necessarily be considered a related party transaction?
A)Payment of a bonus to the president.
B)Purchases from another corporation that is controlled by the corporation's chief stockholder.
C)Loan from the corporation to a major stockholder.
D)Sale of land to the corporation by the spouse of a director.
Q2) Assertions with high inherent risk are least likely to involve:
A)Complex calculations.
B)Difficult accounting issues.
C)Routine transactions.
D)Significant judgment by management.
Q3) Adjusting journal entries are ordinarily recorded by the client,while reclassifying journal entries need not be recorded.
A)True
B)False
Q4) The professional standards consider calculating depreciation expense a "routine" transaction.
A)True
B)False
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Chapter 6: Audit Planning, understanding the Client, assessing
Risks, and Responding
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Sample Questions
Q1) Confirming a bank account establishes existence but not rights to the cash balance.
A)True
B)False
Q2) An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of:
A)Tests of transactions and balances.
B)An assessment of internal control.
C)Specialized audit programs.
D)Analytical procedures.
Q3) As a part of the planning process,the auditors often prepare an audit plan,an audit program,and a time budget.
a.Describe an audit plan and explain its purpose.
b.Describe an audit program and explain its purpose.
c.Describe a time budget and explain its purpose.
Q4) The substantive approach to an audit is appropriate for many small businesses.
A)True
B)False
Page 8
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Chapter 7: Internal Control
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Q1) An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and:
A)Compliance with laws.
B)Internal control over asset safeguarding.
C)Internal control over financial reporting.
D)Suitable criteria.
Q2) The Sarbanes-Oxley Act of 2002 requires that the audit committee:
A)Annually reassess control risk using information from the CPA firm.
B)Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm.
C)Require that the company's CPA firm rotate the partner in charge of the audit.
D)Review the level of management compensation.
Q3) The definition of internal control developed by the Committee of Sponsoring Organizations (COSO)includes controls related to the reliability of financial reporting,the effectiveness and efficiency of operations,and:
A)Compliance with applicable laws and regulations.
B)Effectiveness of prevention of fraudulent occurrences.
C)Safeguarding of entity equity.
D)Incorporation of ethical business practice standards.
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Chapter 8: Consideration of Internal Control in an Information Technology Environment
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Q1) Which of the following is not a data transmission control?
A)Data encryption.
B)Parity check.
C)Message acknowledgment techniques
D)Distributed data processing.
Q2) For good internal control,programmers should not be given access to complete program documentation for the programs they work on.
A)True
B)False
Q3) If a control total were to be computed on each of the following data items,which would best be identified as a hash total for a payroll computer application?
A)Net pay.
B)Department numbers.
C)Hours worked.
D)Total debits and total credits.
Q4) Magnetic tape drives have the advantage of direct access to stored data.
A)True
B)False
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Chapter 9: Audit Sampling
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Sample Questions
Q1) The 2000 accounts receivable of ABC Company have a total book value of $40,000.Bob Rotter,CPA,has selected and audited a sample of 100 accounts with a total book value of $1,950.The audited value of the 100 accounts in the sample is $1,875. Using the mean-per-unit estimation technique,Rotter's estimate (to the nearest dollar)of year-end accounts receivable balance would be:
A)$37,500
B)$38,462
C)$38,500
D)$41,600
Q2) In the past,the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e.,large accounts have large misstatements and small accounts have small misstatements).Which of the following techniques is most likely to be efficient?
A)Mean-per-unit estimation.
B)Ratio estimation.
C)Difference estimation.
D)Sequential sampling estimation.
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Chapter 10: Cash and Financial Investments
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Q1) Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading)provides evidence about the:
A)Completeness of recording of sales transactions.
B)Occurrence of sales transactions.
C)Billing of all sales transactions.
D)Presentation of payables.
Q2) As one of the year-end audit procedures,the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year.After the client's treasurer has signed the request,it was mailed by the assistant treasurer.What is the major flaw in this audit procedure?
A)The confirmation request was signed by the treasurer.
B)Sending the request was meaningless because the account was closed before the year end.
C)The request was mailed by the assistant treasurer.
D)The CPA did not sign the confirmation request before it was mailed.
Q3) A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.
A)True
B)False
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Chapter 11: Accounts Receivable, Notes Receivable, and Revenue
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Q1) Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.
A)True
B)False
Q2) Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?
A)Footing the sales journal.
B)Confirming accounts receivable.
C)Tracing the total sales in the sales journal to the general ledger.
D)Observation of the physical inventory count at year-end.
Q3) The audit working papers often include a client-prepared,aged trial balance of accounts receivable as of the balance sheet date.This aging is best used by the auditors to:
A)Consider internal control over credit sales.
B)Test the accuracy of recorded charge sales.
C)Estimate credit losses.
D)Verify the validity of the recorded receivables.
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Page 13
Chapter 12: Inventories and Cost of Goods Sold
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Q1) An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise.When vendors' invoices arrive,one of the employees approves the invoices for payment.After the invoices are paid,the employee destroys the invoices and the related vouchers.In gathering evidence regarding the fraud,the auditor most likely would select items for testing from the file of all
A)Cash disbursements.
B)Approved vouchers.
C)Receiving reports.
D)Vendors' invoices.
Q2) Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?
A)To document every test count.
B)For subsequent comparison with the completed inventory listing.
C)To document compliance with generally accepted accounting principles.
D)For use in subsequent audits.
Q3) Observation of inventories is a generally accepted auditing standard.
A)True
B)False
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Page 14
Chapter 13: Property Plant and Equipment: Depreciation and Depletion
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Q1) Which of the following is not one of the auditors' objectives in auditing depreciation?
A)Establishing the reasonableness of the client's replacement policy.
B)Establishing that the methods used are appropriate.
C)Establishing that the methods are consistently applied.
D)Establishing the reasonableness of depreciation computations.
Q2) A plant manager would be most likely to provide information on which of the following?
A)Adequacy of the provision for uncollectible accounts.
B)Appropriateness of physical inventory valuation techniques.
C)Existence of obsolete inventory.
D)Deferral of certain purchases of office supplies.
Q3) Material purchases of assets from an affiliated company should be disclosed in the financial statements.
A)True
B)False
Q4) The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.
A)True
B)False
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Chapter 14: Accounts Payable and Other Liabilities
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Q1) It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable.
A)True
B)False
Q2) Which of the following statements is correct regarding accounts payable and the auditor's procedures?
A)Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances.
B)A judgment whether an unrecorded payable should be recorded before the financial statements are prepared depends entirely upon the source of the payable.
C)The confirmation of accounts payable selected from the year-end trial balance of such accounts is most effective in discovering unrecorded liabilities.
D)Unrecorded payables are often discovered through examining vouchers payable entered into the voucher register prior to the balance sheet date.
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Chapter 15: Debt and Equity Capital
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Q1) The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income.
A)True
B)False
Q2) Which of the following most likely would approve the issuance of notes payable?
A)Controller.
B)Payroll.
C)Personnel.
D)Treasurer.
Q3) For audit purposes,a corporation's articles of incorporation are normally:
A)Copied and placed on the owners' equity lead schedule.
B)Copied and placed in the permanent file.
C)Confirmed with the transfer agent.
D)Ignored since they are not normally considered to be related to the internal control structure.
Q4) The auditors are required to confirm bond holdings directly with the bondholders.
A)True
B)False
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Chapter 16: Auditing Operations and Completing the Audit
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Q1) A CPA reviews a client's payroll procedures.The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
A)Reviewing and approving time reports for subordinate employees.
B)Distributing payroll checks to employees.
C)Hiring subordinate employees.
D)Initiating requests for salary adjustments for subordinate employees.
Q2) When auditing the statement of cash flows of a profitable,growing company which combination is most likely? \(\begin{array} { c } &\text { Cash flows}&\text { Cash flows}\\ & \text { from operations } & \text { from investing } \\ \text { A) } & \text { Positive } & \text { Positive } \\ \text { B) } & \text { Positive } & \text { Negative } \\ \text { C) } & \text { Negative } & \text { Positive } \\ \text { D) } & \text { Negative } & \text { Negative } \end{array}\)
A)Option A
B)Option B
C)Option C
D)Option D
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Chapter 17: Auditors Report
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Q1) When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented,the successor auditor should indicate in the report:
A)The reasons why the predecessor auditor's report is not presented.
B)The identity of the predecessor auditor who examined the financial statements of the prior year.
C)Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.
D)The type of opinion expressed by the predecessor auditor.
Q2) After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording.The predecessor auditors should:
A)Delete the date of the report.
B)Dual-date the report.
C)Use the reissue date.
D)Use the date of the previous report.
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Chapter 18: Integrated Audits of Public Companies
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Q1) Which must the auditor communicate to management? \[\begin{array}{c} \begin{array} {c }
&\text { Known Material Weaknesses}& \text{Known Significant Deficiencies }\\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No }
\end{array}
\end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q2) The lack of effective antifraud programs is always considered a material weakness. A)True
B)False
Q3) The amount involved with a significant deficiency is at least a material amount. A)True B)False
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Chapter 19: Additional Assurance Services: Historical Financial Information
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Q1) Which of the following is accurate relating to audit reports on tax basis financial statements?
A)No emphasis-of-matter paragraph is included in the audit report.
B)Use of the report need not be restricted.
C)The purpose of the financial statements should be described in the audit report.
D)Only reports with modified opinions are appropriate.
Q2) An audit opinion on cash basis financial statements is an example of an opinion on financial statements that follow a special purpose financial reporting framework.
A)True
B)False
Q3) Which of the following is correct relating to compiled financial statements when third party reliance upon those statements is anticipated?
A)A compilation report must be issued.
B)Omission of note disclosures is unacceptable.
C)A written engagement letter is required.
D)Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only".
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Chapter 20: Additional Assurance Services: Other Information
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Q1) In an engagement relating to a nonpublic company,conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination performed following the attestation standards.The CPA's conclusion may be on: \[\begin{array} {c}
&\text { Subject Matter } & \text { Written Assertion }\\
\text { A) } & \text { Yes } & \text { Yes } \\
\text { B) } & \text { Yes } & \text { No } \\
\text { C) } & \text { No } & \text { Yes } \\
\text { D) } & \text { No } & \text { No }
\end{array}\]
A)Option A
B)Option B
C)Option C
D)Option D
Q2) Many new services assurance services are performed in accordance with Statements on
A)Standards for Attestation Services.
B)Generally Accepted Assurance Standards.
C)Auditing Standards.
D)Accounting for other Assurance Services.
Page 22
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Chapter 21: Internal, Operational, and Compliance Auditing
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Q1) Internal auditing is considered to be part of an organization's:
A)Accounting system.
B)Control activities.
C)Monitoring.
D)External controls.
Q2) For the highest degree of independence the director of internal auditing should report directly to:
A)The controller.
B)The audit committee of the board of directors.
C)The executive vice-president.
D)The chief accountant.
Q3) When performing an audit of a city in accordance with the Single Audit Act,an auditor should adhere to:
A)Standards for the Professional Practice of Internal Auditing.
B)Government Auditing Standards.
C)Operational Auditing Standards.
D)Financial Accounting Standards.
Q4) Compliance procedures are tests of an organization's controls.
A)True
B)False
Page 23
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Chapter 22: Probability-Proportion-To-Size Sampling
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Q1) When using probability-proportional-to-size sampling,the allowance for sampling risk is the combination of basic precision and the:
A)Projected misstatement.
B)Incremental allowance.
C)Upper limit on misstatements.
D)Tainting.
Q2) The use of probability-proportional-to-size sampling would be least likely to be efficient if:
A)Commercial receivable accounts are being audited.
B)Statistical inferences are to be made.
C)Many accounts are known to be in error.
D)The population has a high total dollar value.
Q3) In a probability-proportional-to-size sample with a sampling interval of $10,000,an auditor discovered that a selected account with a book value of $6,000 had an audited value of $4,000.The projected misstatement is:
A)$2,000.
B)$3,333.
C)$6,000.
D)$10,000.
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