Assurance Services
Test Questions
Course Introduction
Assurance Services focuses on the examination, evaluation, and improvement of information, processes, and systems in organizations to increase the degree of confidence of intended users. The course covers the nature and types of assurance and attestation engagements, the role of assurance in corporate governance, and the regulatory environments affecting such services. Topics include risk assessment, internal control evaluation, evidence gathering techniques, reporting, ethics, and the expanding range of assurance services beyond traditional financial statement audits. Students will analyze case studies and apply relevant standards to develop an understanding of how assurance professionals add value and manage risk in a variety of settings.
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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Sample Questions
Q1) Independence standards are required for audits of public companies,but not for audits of private companies.
A)True
B)False
Answer: False
Q2) During the first phase of an audit,a CPA most likely would
A) Identify specific internal control activities that are likely to prevent fraud.
B) Evaluate the reasonableness of the client's accounting estimates.
C) Evaluate the integrity of management.
D) Inquire of the client's attorney as to whether any unrecorded claims are probable or asserted.
Answer: C
Q3) Information asymmetry seldom occurs.
A)True
B)False
Answer: False
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Chapter 2: The Financial Statement Auditing Environment
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Q1) The IAASB and the ASB have collaborated on the principles underlying an audit conducted in accordance with generally accepted auditing standards.These principles are grouped into four categories.What are the four categories?
Answer: The four categories of principles are: 1.Purpose and premise of an audit,2.Personal responsibilities of the auditor,3.Auditor actions in performing the audit and 4.Reporting.
Q2) Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
A) Audit firms cannot provide most types of nonaudit services to their public company audit clients.
B) Audit firms are required to rotate audit partners off audit engagements every five years for public company audits.
C) Firms that audit public companies are subject to inspection by the PCAOB.
D) A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.
Answer: D
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Chapter 3: Audit Planning,Types of Audit Tests,and Materiality
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Q1) Which of the following would not necessarily be a related party transaction?
A) Sales to another corporation with a similar name.
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.
Answer: A
Q2) As generally conceived,the audit committee of a publicly held company should be made up of
A) Representatives of the major equity interests (preferred stock, common stock).
B) The audit partner, the chief financial officer, the legal counsel, and at least one outsider.
C) Representatives from the client's management, investors, suppliers, and customers.
D) Members of the board of directors who are not officers or employees.
Answer: D
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Page 5
Chapter 4: Risk Assessment
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Sample Questions
Q1) The components of the audit risk model include inherent risk,control risk,and detection risk.
A)True
B)False
Q2) The achieved (actual)level of audit risk
A) Can always be accurately assessed by the auditor.
B) Should be greater than or equal to acceptable audit risk.
C) Can never be known with certainty.
D) Is the same for all audit clients.
Q3) Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A) Inability to generate cash flows from operations while reporting substantial earnings growth.
B) Management's lack of interest in increasing the entity's earnings trend.
C) Large amounts of liquid assets that are easily converted into cash.
D) Inability to borrow necessary capital without granting debt covenants.
Q4) 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.
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) The audit working papers belong to
A) The client.
B) The government.
C) The audit firm.
D) They are public record documents.
Q2) Who is responsible for the financial statements?
What does the term "assertions" mean?
Identify the assertion categories and the specific assertions for each category.
Q3) An example of audit evidence with a medium level of reliability is
A) Scanning.
B) Recalculation.
C) Observation.
D) All of the above.
Q4) According to the text,what are the two functions of working papers?
Q5) When using analytical procedures,the auditor first needs to develop an expectation with which to compare recorded results.What is meant by "precision of the expectation," and what factors affect the precision of analytical procedures?
Q6) For an auditor,how are management assertions useful?
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Chapter 6: Internal Control in a Financial Statement Audit
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Q1) It is important for the CPA to consider the competence of the audit client's employees because their competence bears directly and importantly upon the
A) Cost/benefit relationship of the system of internal control.
B) Achievement of the objectives of the system of internal control.
C) Comparison of recorded accountability with assets.
D) Timing of the tests to be performed.
Q2) Audit evidence concerning proper segregation of duties ordinarily is best obtained by
A) Preparation of a flowchart of duties performed by available personnel.
B) Inquiring whether control activities operated consistently throughout the period.
C) Reviewing job descriptions prepared by the Personnel Department.
D) Direct personal observation of the employees who apply control activities.
Q3) Once a level of control risk has been established,it cannot be changed.
A)True
B)False
Q4) What are two potential benefits and two potential risks of using IT for an entity's internal control?
Q5) Why might an auditor decide to test controls at an interim date?
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Page 8
Chapter 7: Auditing Internal Control Over Financial Reporting
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Q1) Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control?
A) Multiple locations and business units.
B) Service organizations.
C) The role of the auditor in internal control.
D) Safeguarding assets.
Q2) Public reporting on the effectiveness of internal control over financial reporting,as required by the Sarbanes-Oxley Act,includes
A) A statement that the public accounting firm that audited the financial statements has provided input on the design of internal controls.
B) A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting.
C) An explicit statement as to whether management agrees with the public accounting firm's assessment of internal controls.
D) A detailed statement describing changes or additions to the internal control environment that occurred in the current year.
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
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) Define sampling risk and nonsampling risk.
Q3) For an attributes sampling plan,the tolerable deviation rate is 4.5%,the computed upper deviation rate is 7%,the sample deviation rate is 3%,and the desired confidence level is 95%.What is the allowance for sampling risk included in the computed upper deviation rate?
A) 1.5%.
B) 3%.
C) 4%.
D) 5%.
Q4) A Type II error is the risk of incorrect acceptance.
A)True
B)False
Page 10
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Q1) An auditor is preparing to sample a client's customer receivables for overstatement.A statistical sampling method that automatically provides stratification when using systematic selection is
A) Attribute sampling.
B) Ratio-estimation sampling.
C) Monetary-unit sampling.
D) Mean-per-unit sampling.
Q2) In a monetary-unit sample with a sampling interval of $10,000,an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000.The projected misstatement of this sample was
A) $3,000.
B) $4,000.
C) $6,000.
D) $8,000.
Q3) The objective of monetary-unit sampling is to test the assertion that no material misstatements exist in an account balance or class of transactions.
A)True
B)False
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Chapter 10: Auditing the Revenue Process
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Q1) Mill Company uses a batch processing method to process its sales transactions.Data on Mill's sales transaction tapes are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices,sales journals,and updated customer account balances.One of the direct outputs of the creation of these tapes most likely would be a
A) Report showing exceptions and control totals.
B) Printout of the updated inventory records.
C) Report showing overdue accounts receivable.
D) Printout of the sales price master file.
Q2) Describe the two types of confirmations and indicate which one is more reliable and why.
Q3) Assume you are working on a 12/31 year-end audit.It is now March 31<sup>st</sup> and the 12/31 accounts receivable aging shows a large receivable that was outstanding on 12/31 for 120 days.Further,the client's receivables are typically collected in less than 45 days.You anticipate that the client's allowance for doubtful account should be increased and inform the client about your disposition.The client disagrees.Is there an alternative substantive procedure that you could perform that would provide convincing evidence that this balance is collectible? If so,explain.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of
A) Accuracy.
B) Occurrence.
C) Cutoff.
D) Classification.
Q2) Which type of confirmation is used more frequently by auditors accounts receivable confirmations or accounts payable confirmations?
Why?
Q3) If payables turnover has increased significantly since the prior year,this is an indication that which of the following assertions for accounts payable might be violated?
A) Existence or occurrence.
B) Completeness.
C) Rights and obligations.
D) Valuation and allocation.
Q4) There are several important disclosure items to consider when auditing the purchasing process.Discuss what they are and why they are important.
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Chapter 12: Auditing the Human Resource Management Process
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Q1) An auditor would consider internal control over a client's payroll procedures to be ineffective if the payroll department supervisor is responsible for
A) Hiring subordinate payroll department employees.
B) Having custody over unclaimed paychecks.
C) Updating employee earnings records.
D) Applying pay rates to time tickets.
Q2) Which of the following is an effective internal control used to prove that production department employees are properly validating payroll timecards at a time-recording station?
A) Timecards should be carefully inspected by those persons who distribute pay envelopes to the employees.
B) One person should be responsible for maintaining records of employee time for which salary payment is not to be made.
C) Daily reports showing time charged to jobs should be approved by the foreman and compared to the total hours worked on the employee timecards.
D) Internal auditors should make observations of distribution of paychecks on a surprise basis.
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Q1) The accuracy of perpetual inventory records may be established,in part,by comparing perpetual inventory records with
A) Purchase requisitions.
B) Receiving reports.
C) Purchase orders.
D) Vendor payments.
Q2) In a manufacturing company,which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date?
A) Testing the computation of standard overhead rates.
B) Examining paid vendors' invoices.
C) Reviewing direct labor rates.
D) Obtaining confirmation of inventories pledged under loan agreements.
Q3) An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of
A) Valuation.
B) Rights and obligations.
C) Existence.
D) Completeness.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Q1) List two ways an auditor can test the existence and completeness of insurance policies.
Q2) Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals?
A) Examination of insurance policies for evidence of a dropped or cancelled policy.
B) Review of repairs and maintenance expense.
C) Review of property tax files.
D) Scanning of invoices for fixed asset additions for evidence of a purchase to replace a previously owned fixed asset.
Q3) Which of the following is the most important control activity over acquisitions of property,plant,and equipment?
A) Establishing a written company policy distinguishing between capital and revenue expenditures.
B) Using a budget to forecast and control acquisitions and retirements.
C) Analyzing monthly variances between authorized expenditures and actual costs.
D) Requiring acquisitions to be made by user departments.
Q4) Identify the types of transactions that occur in the property management process.
Page 16
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Q1) For most companies,stockholders' equity includes the following three accounts: preferred stock,paid-in capital,and retained earnings.
A)True
B)False
Q2) Generally,all dividends that are declared and paid will be audited.
A)True
B)False
Q3) The auditor typically begins an audit of retained earnings by obtaining a schedule of account activity for the period.
A)True
B)False
Q4) The registrar is responsible for preparing stock certificates and maintaining adequate stockholders' records.
A)True
B)False
Q5) Valuation and allocation is most likely an issue for long-term debt if
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A) Bonds are sold on the open market.
B) Bonds are issued at a discount or premium.
C) The loans are from banks.
D) The company has many short-term leases.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Q1) The least crucial element of internal control over cash is
A) Separation of cash record-keeping from custody of cash.
B) Preparation of the monthly bank reconciliation.
C) Batch processing of checks.
D) Separation of cash receipts from cash disbursements.
Q2) An auditor ordinarily should send a standard confirmation request to all banks with which the client has done business during the year under audit,regardless of the year-end balance,because this procedure
A) Provides for confirmation regarding compensating balance arrangements.
B) Detects kiting activities that may not otherwise be discovered.
C) Seeks information about indebtedness to the bank.
D) Verifies securities held by the bank in safekeeping.
Q3) Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?
A) Occurrence.
B) Completeness.
C) Authorization.
D) Cutoff.
Q4) Identify 3 of the 6 tests an auditor uses on the bank reconciliation.
Page 19
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Chapter 17: Completing the Audit Engagement
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Q1) Which of the following statements extracted from a client's lawyer's letter concerning litigation,claims,and assessments most likely would cause the auditor to request clarification?
A) "I believe that the possible liability to the company is nominal in amount."
B) "I believe that the action can be settled for less than the damages claimed."
C) "I believe that the plaintiff's case against the company is without merit."
D) "I believe that the company will be able to defend this action successfully."
Q2) The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with
A) A description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet.
B) An expert opinion as to whether a loss is possible, probable, or remote.
C) The opportunity to examine the documentation concerning litigation, claims, and assessments.
D) Corroboration of the information furnished by management concerning litigation, claims, and assessments.
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?
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Chapter 18: Reports on Audited Financial Statements
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Q1) Auditing standards define special purpose financial statements as including those prepared under the following base(s)
A) Regulatory basis.
B) Tax basis.
C) Contractual basis.
D) All of the above.
Q2) In an engagement to express an opinion on one or more specified elements,accounts,or items of a financial statement,the auditor can generally audit only those specified elements and not the entire set of financial statements.However,the auditor is required to audit the entire set of financial statements if the elements specified include
A) Net Income.
B) Stockholders' Equity.
C) Both A & B.
D) None of the above.
Q3) An auditor must disclaim an opinion when the auditor lacks independence.
A)True
B)False
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Chapter 19: Professional Conduct,Independence,and Quality Control
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Q1) The independence standards issued by the PCAOB do not prohibit the provision of tax services to an attest client.
A)True
B)False
Q2) Which of the following is required for a firm to designate itself as a "Member of the American Institute of Certified Public Accountants" on its letterhead?
A) At least one of the partners must be a member.
B) The partners whose names appear in the firm name must be members.
C) All partners must be members.
D) The firm must be a dues-paying member.
Q3) A basic objective of a CPA firm is to provide professional services that conform to professional standards.Reasonable assurance of achieving this basic objective is provided through
A) Compliance with generally accepted reporting standards.
B) A system of quality control.
C) A system of peer review.
D) Continuing professional education.
Q4) Distinguish between the following theories of ethical behavior: utilitarianism,a rights-based approach,and a justice-based approach.
Page 22
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Chapter 20: Legal Liability
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Q1) The Securities Exchange Act of 1934
A) Established a voluntary disclosure mechanism for issuers of publicly traded securities.
B) Primarily relates to initial sales of securities to the public.
C) Regulates all sales of securities.
D) Regulates trading of securities subsequent to issuance.
Q2) Under the liability provisions of Section 11 of the Securities Act of 1933,a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement.Under Section 11,a CPA usually will not be liable to the purchaser
A) If there is contributory negligence on the part of the purchaser.
B) If the CPA can prove due diligence.
C) Unless the purchaser can prove privity with the CPA.
D) Unless the purchaser can prove scienter on the part of the CPA.
Q3) A CPA will most likely be negligent when the CPA fails to
A) Correct errors discovered in the CPA's previously issued audit reports.
B) Detect all of a client's fraudulent activities.
C) Include a negligence disclaimer in the CPA's engagement letter.
D) Warn a client's customers of embezzlement by the client's employees.
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Q1) How has the advancement in technology led to the creation of the Trust Services?
Q2) A practitioner is allowed to perform either of two types of attestation engagements for reporting on internal control: (1)examination or (2)review.
A)True
B)False
Q3) Which set of standards was created by the AICPA to cover services relating to unaudited financial statements?
A) Standards on Selective Audits and Review Services (SSARS).
B) Statement on Auditing Standards (SAS).
C) Statements on Compilation and Review Standards (SCRS).
D) Statements on Standards for Accounting and Review Services (SSARS).
Q4) 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.
Q5) Explain each of the three PrimePlus Services typically offered by practitioners.
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