Assurance Services
Test Bank
Course Introduction
Assurance Services explores the principles and practices involved in providing independent assurance on financial and non-financial information, primarily focusing on the role of auditors in enhancing the reliability and relevance of information for decision-makers. The course covers topics such as the assurance engagement process, types of assurance services, risk assessment, evidence collection, internal controls evaluation, ethical responsibilities, and reporting standards. Students will gain an understanding of how assurance services support stakeholder confidence, mitigate information risk, and contribute to effective governance in both financial statement audits and other forms of attestation engagements.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 8th Edition by William F. Messier
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Q1) Auditors are most likely to use the most rigorous audit procedures to examine A) Routine transactions.
B) Management assertions that are deemed to be of low risk.
C) Only the rights and obligations assertion.
D) Management assertions that are deemed to be of high risk.
Answer: D
Q2) Before accepting an engagement to audit a new client,an auditor is required to
A) Make inquiries of the predecessor auditor.
B) Tell the client whether or not the auditor is willing to issue a "clean" opinion.
C) Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
D) Become a member of the client's board of directors.
Answer: A
Q3) Preliminary engagement activities include
A) Evaluating internal controls.
B) Assessing audit risk at the account balance level.
C) Setting materiality.
D) Performing background checks on top management.
Answer: D
Page 3
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) The auditor must be independent of the audit client unless
A) The lack of independence does not influence his or her professional judgment.
B) Both parties agree that the independence issue is not a problem.
C) The lack of independence is insignificant.
D) None of the above-the auditor cannot lack independence.
Answer: D
Q2) The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the
A) Partner assigned to the audit engagement.
B) Management of the company.
C) Auditor in charge of the fieldwork.
D) Securities and Exchange Commission.
Answer: B
Q3) PCAOB auditing standards must be followed on all audits of public companies' financial statements.
A)True
B)False
Answer: True
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Chapter 3: Audit Planning,Types of Audit Tests,and Materiality
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Sample Questions
Q1) Under the Sarbanes-Oxley Act,the audit committee of a public company has the following requirement(s):
A) Each member of the committee must be a board member and shall be independent.
B) The audit committee must preapprove all audit and nonaudit services.
C) The audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing.
D) All of the above.
Answer: D
Q2) An independent auditor might consider the procedures performed by the internal auditors because
A) They are employees whose work must be reviewed during substantive testing.
B) They are employees whose work might be relied upon.
C) Their work impacts the cost/benefit tradeoff in evaluating inherent limitations.
D) Their degree of independence may be inferred by the nature of their work.
Answer: B
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Chapter 4: Risk Assessment
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Sample Questions
Q1) Your classmate asserts,"Accountants shouldn't need to take business courses besides accounting,because they are only interested in the financial statements of a company." Defend or refute this statement.
Q2) On the basis of audit evidence gathered and evaluated,an auditor decides to increase the assessed level of risk of material misstatement from that originally planned.To achieve an overall audit risk level that is substantially the same as the planned audit risk level,the auditor would
A) Decrease amount of substantive testing.
B) Decrease detection risk.
C) Increase detection risk.
D) Increase materiality levels.
Q3) During the course of the audit of FF Financial,you find that some accounting entries have been altered.You believe this may be the result of management fraud and you have determined that the effect of this could be material to the financial statements.What steps should you take in response to the accounting entries and your concern about management fraud?
Q4) Define misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets in one sentence each.
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Page 6
Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must
A) Be well documented and cross-referenced in the audit documents.
B) Be based on sources that are considered reliable.
C) Bear a direct relationship to the audit assertion.
D) Be persuasive enough to enable the auditor to form an opinion.
Q2) Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?
A) Earnings per share.
B) Return on total assets before interest and taxes.
C) Accounts receivable turnover.
D) Operating cycle.
Q3) 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 planning phase of the audit by the use of
A) Tests of transactions and balances.
B) A preliminary review of internal controls.
C) Specialized audit programs.
D) Analytical procedures.
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Page 7
Chapter 6: Internal Control in a Financial Statement Audit
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Q1) After completing the preliminary phase of the review of internal control,the auditor decides not to rely on the system to restrict substantive procedures.Documentation may be limited to the auditor's
A) Understanding of the internal control.
B) Reasons for deciding not to extend the review.
C) Basis for concluding that errors and fraud will be prevented.
D) Completed internal control questionnaire.
Q2) Walkthroughs usually involve all of the following audit procedures except:
A) Reperformance.
B) Inquiry.
C) Observation.
D) Inspection.
Q3) An entity's control activities include all of the following except:
A) Performance reviews.
B) Information processing.
C) External auditor's tests of controls.
D) Segregation of duties.
Q4) What are some typical types of evidence that may be collected in testing a client's internal controls?
Q5) Why might an auditor decide to test controls at an interim date?
Page 8
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) Management's written representations concerning internal control are
A) Addressed to the users of the financial statements.
B) Normally drafted by management.
C) Included in the auditor's final report.
D) Signed by the CEO and CFO.
Q2) An "integrated audit"
A) Will, in most cases, lead to a substantive audit strategy.
B) Denies the auditor access to information about the client's controls.
C) May be performed by two separate audit firms.
D) Is comprised of audits of internal control over financial reporting and of financial statements.
Q3) The main goal of auditing internal control is
A) To allow the auditor to fix any internal control deficiencies.
B) To form an opinion on the ability of internal controls to prevent fraud.
C) To assure management that internal control is preventing all material misstatements on the financial statements.
D) To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.
Q4) Discuss entity-level controls and provide examples of these types of controls.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Q1) An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
A) Afford greater assurance than a nonstatistical sample of equal size.
B) Provide an objective basis for quantitatively evaluating sample risks.
C) Can more easily convert the sample into a dual-purpose test useful for substantive testing.
D) Eliminate the need to use judgment in determining appropriate sample sizes.
Q2) In attributes sampling,a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample?
A) Population size.
B) Tolerable deviation rate.
C) Expected population deviation rate.
D) Standard deviation.
Q3) An underlying feature of random-based selection of items is that each
A) Stratum of the accounting population be given equal representation in the sample.
B) Item in the accounting population be randomly ordered.
C) Item in the accounting population should have an opportunity to be selected.
D) Item must be systematically selected using replacement.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) What is one advantage and one disadvantage of classical variables sampling?
Q2) The assurance factor for nonstatistical sampling is based on
A) The number of items in the account.
B) Auditor judgment.
C) The risk of misstatement in the account and the level of desired assurance.
D) Variability in the population and the risk of misstatement in the account.
Q3) Whenever a statistical method is used,a decision rule determines whether the population is acceptable.The decision rule for monetary-unit sampling is "Accept the conclusion that the book value is not misstated by a material amount if _________________________."
Q4) In a monetary-unit sample with a sampling interval of $5,000,an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000.If this were the only error discovered by the auditor,the projected misstatement for this sample would be
A) $5,000.
B) $4,000.
C) $2,000.
D) $1,000.
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Q5) Describe two advantages and two disadvantages of monetary-use sampling (MUS).
Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of
A) Valuation or allocation.
B) Completeness.
C) Existence or occurrence.
D) Rights and obligations.
Q2) Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?
A) Compare shipping documents with sales records.
B) Apply gross profit rates to inventory disposed of during the period.
C) Trace payments received subsequent to the balance sheet date.
D) Send accounts receivable confirmation requests.
Q3) Revenue is realized when a product or service is exchanged for cash or a promise to pay cash or other assets that can be converted into cash.
A)True
B)False
Q4) Describe the two types of confirmations and indicate which one is more reliable and why.
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Chapter 11: Auditing the Purchasing Process
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Q1) There are several important disclosure items to consider when auditing the purchasing process.Discuss what they are and why they are important.
Q2) Which of the following procedures would an auditor least likely perform before the balance sheet date?
A) Assessment of inherent risk.
B) Observation of merchandise inventory.
C) Assessment of control risk.
D) Identification of related parties.
Q3) The principal business objectives of the purchasing process are acquiring goods and services and paying for those goods and services.
A)True
B)False
Q4) A voucher
A) Is a bill from the vendor.
B) Is a document that records the receipt of goods.
C) Is a document that requests goods from an authorized individual in the entity.
D) Serves as the basis for recording a vendor's invoice in the purchases journal.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) In the weekly computer run to prepare payroll checks,a check was printed for an employee who had been terminated the previous week.Which of the following controls,if properly utilized,would have been most effective in preventing the error or ensuring its prompt detection?
A) A control total for hours worked, prepared from time cards collected by the Timekeeping Department.
B) Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the EDP department for the processing of the payroll.
C) Use of a check digit for employee numbers.
D) Use of a header label for the payroll input sheet.
Q2) In an IT payroll system environment,an auditor would be least likely to use test data to test controls related to
A) Missing employee numbers.
B) Proper approval of overtime by supervisors.
C) Time cards with invalid job numbers.
D) Agreement of hours per clock cards with hours on time cards.
Q3) FASB ASC Topic 715 requires specific disclosures regarding human resources,which of course must be verified and audited by the CPA.What are those disclosures?
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Sample Questions
Q1) Inventory should be valued using the lower-of-cost-or-market rule.
A)True
B)False
Q2) In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances,an auditor most likely would
A) Review the entity's description of inventory policies and procedures.
B) Perform test counts of inventory during the entity's physical count.
C) Analyze inventory turnover statistics to identify slow-moving and obsolete items.
D) Analyze monthly production reports to identify variances and unusual transactions.
Q3) A client's physical count of inventories was higher than the inventory quantities per the perpetual records.This situation could be the result of the failure to record
A) Sales.
B) Sales discounts.
C) Purchases.
D) Purchase returns.
Q4) Explain the importance of observing physical inventory during an audit.
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Page 15
Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) Assets no longer used in operations are accounted for in essentially the same manner as those used in operations.
A)True
B)False
Q2) Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of presentation and disclosure and
A) Valuation and allocation.
B) Completeness.
C) Rights and obligations.
D) Existence.
Q3) Describe the types of information that should be included in the schedule of prepaid insurance that is used by the auditor as the basis for auditing prepaid insurance.
Q4) Testing depreciation calculations for a sample of property,plant,and equipment tests the assertion of
A) Existence.
B) Completeness.
C) Valuation and allocation.
D) Rights and obligations.
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Q1) During the year under audit,a company has completed a private placement of a substantial amount of bonds.Which of the following is the most important step in the auditor's program for the audit of bonds payable?
A) Confirming the interest rate with the bond trustee.
B) Tracing the cash received from the issue to the accounting records.
C) Examining the bond agreement for a sinking fund provision.
D) Recomputing the annual interest cost and the effective yield.
Q2) One major issue associated with long-term debt is the classification of the short-term portion of long-term debt that is due in the next year.
A)True
B)False
Q3) Generally,all dividends that are declared and paid will be audited.
A)True
B)False
Q4) The repurchase of stock includes the reacquisition of stock (treasury stock),but not the retirement of stock.
A)True
B)False
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
B) The cashier makes the daily deposit at a local bank.
C) The cashier prepares the daily deposit.
D) The cashier endorses the checks.
Q2) As one of the year-end audit procedures,the auditor instructed the client's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year.After the client's treasurer had signed the request,it was mailed to the bank 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) What should an auditor look for when testing for proper classification of securities?
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Chapter 17: Completing the Audit Engagement
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Q1) Harvey,CPA is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles.Which one of the following procedures would be least appropriate for this purpose?
A) Confirm, as of the completion of field work, accounts receivable that have increased significantly from the year-end date.
B) Read the minutes of the board of directors.
C) Inquire of management concerning events that may have occurred.
D) Obtain a lawyer's letter as of the completion of field work.
Q2) Which of the following auditing procedures is ordinarily performed last?
A) Confirming accounts payable.
B) Testing the purchasing function.
C) Reading the minutes of directors' meetings.
D) Obtaining a management representation letter.
Q3) What is an unasserted claim and why would an attorney and/or client be reluctant to disclose an unasserted claim in the financial statements?
Q4) State the two primary purposes of the client letter of representation.
Q5) What is the difference between a contingent liability and a commitment?
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Chapter 18: Reports on Audited Financial Statements
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Q1) An auditor would issue an adverse opinion if
A) The audit was begun by other independent auditors who withdrew from the engagement.
B) A qualified opinion cannot be given because the auditor lacks independence.
C) A restriction on the scope of the audit was significant.
D) The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
Q2) Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records.Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance,which is not auditable,is a material factor in the determination of cost of goods sold for the current year.Cravens will probably
A) Decline the engagement.
B) Express an unqualified/unmodified opinion on the balance sheet and income statement except for inventory.
C) Issue a disclaimer of opinion.
D) Issue an adverse opinion.
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Page 20
Chapter 19: Professional Conduct,Independence,and Quality Control
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Q1) The quality control standards are concerned primarily with A) Actions of individual auditors.
B) A firm's monitoring of its practice.
C) Disciplinary actions against individual auditors.
D) Preventing legal action.
Q2) Principles are stated at a conceptual level,not a detailed level.
A)True
B)False
Q3) Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?
A) The SEC.
B) The AICPA.
C) A state CPA society.
D) A state board of accountancy.
Q4) When auditing a public company,a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB.
A)True
B)False
Q5) Identify the primary purposes of Rules 201-203 of the Rules of Conduct.
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Chapter 20: Legal Liability
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Q1) Hark,CPA,failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements.Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing.Relying on the statements,Third Bank gave Long a loan.Long defaulted on the loan.In a jurisdiction applying the Ultramares doctrine,if Third sues Hark,Hark will
A) Win because there was no privity of contract between Hark and Third.
B) Lose because Hark knew that banks would be relying on the financial statements.
C) Win because there was contributory negligence on the part of Third in granting the loan.
D) Lose because Hark was negligent in performing the audit.
Q2) When performing an audit,a CPA
A) Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.
B) Must strictly adhere to generally accepted accounting principles.
C) Is strictly liable for failing to discover client fraud.
D) Is not liable under any legal standard unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Q1) As with most professionals,internal auditors must follow guidelines promoting ethical conduct.The IIA Code of Ethics is important for internal auditors because the reliability of their work depends on a reputation for a high level of personal integrity.The Code of Ethics consists of four main principles of ethical conduct and some associated rules that underpin the expected conduct of IIA members.List the four main principles of the Code of Ethics and explain each.
Q2) Explain each of the three PrimePlus Services typically offered by practitioners.
Q3) During a review of the financial statements of a nonpublic entity,the CPA finds that the financial statements contain a material departure from generally accepted accounting principles.If management refuses to correct the problem,the CPA should
A) Disclose the departure in a separate paragraph of the report.
B) Issue an adverse opinion.
C) Attach a footnote explaining the effects of the departure.
D) Issue a compilation report.
Q4) Reasonable assurance is provided in
A) An audit engagement.
B) A compilation engagement.
C) A review engagement.
D) None of the above.
Page 23
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