Assurance Services
Textbook Exam Questions
Course Introduction
Assurance Services explores the principles, practices, and regulatory environment of auditing and other types of assurance engagements. The course examines the roles and responsibilities of assurance providers in enhancing the reliability and relevance of information for decision makers. Topics include the fundamentals of financial statement audits, internal controls, risk assessment, ethical standards, and emerging trends such as IT assurance and sustainability reporting. Students will also analyze the impact of professional standards, independence, and quality control in conducting assurance services, preparing them for careers in public accounting, internal audit, and related fields.
Recommended Textbook
Auditing and Assurance Services 5th Edition by Timothy J. Louwers
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Chapter 1: Auditing and Assurance Services
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Q1) Assurance service is the systematic process of objectively obtaining and evaluating evidence.
A)True
B)False
Answer: False
Q2) The four basic requirements for becoming a CPA are
Answer: education; examination; experience; state certificate and license
Q3) The AICPA Statement on Auditing Standards defines auditing more broadly than the AAA definition of auditing.
A)True
B)False
Answer: False
Q4) Financial decision makers obtain their accounting information from lenders of funds.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Professional Standards
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Sample Questions
Q1) When financial statements do not present fairly the financial condition,results of operations,and cash flows of an entity,an auditor would mostly likely issue a(n):
A) Adverse opinion.
B) Disclaimer of opinion.
C) Qualified opinion.
D) Unqualified opinion.
Answer: A
Q2) The concept of due care reflects the need to plan and perform the audit with an appropriate level of professional skepticism.
A)True
B)False
Answer: True
Q3) Which concept recognizes that a GAAS audit may fail to detect all material misstatements?
A) Absolute assurance.
B) Due care.
C) Reasonable assurance.
D) Risk of material misstatement.
Answer: C
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Page 4
Chapter 3: Engagement Planning
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Sample Questions
Q1) A major reason for thinking about overall materiality at the planning stage is to try to fine-tune the audit for effectiveness and efficiency.
A)True
B)False
Answer: True
Q2) A second audit partner is required for audits of financial statements filed with the SEC.
A)True
B)False
Answer: True
Q3) The characteristics that distinguish computer processing from manual processing would not include
A) A decrease of management supervision of operations.
B) Automatic initiation and execution of transactions.
C) The possible concentration of control activities.
D) A high potential for unauthorized access to data.
Answer: A
Q4) Planning becomes a basis for preparing the
Answer: audit plan
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Chapter 4: Management Fraud and Audit Risk
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Sample Questions
Q1) An auditor who encounters significant risks at the client should do all of the following except
A) Inform the SEC.
B) Perform extended procedures.
C) Include more experienced auditors on the engagement.
D) Perform tests closer to year-end.
Q2) A.Audit risks for particular accounts can be expressed in the model: Audit risk (AR)= Inherent risk (IR)x Internal control risk (CR)x Detection risk (DR).If an audit risk is set at 5 percent,the inherent risk at 80 percent,and the internal control risk at 25 percent,what would be the detection risk?
A. Detection risk =.05/(.80 X .25) = .25
B. .01/(.80 X .25) =.05
B. If the audit team wanted to reduce the audit risk to 1 percent, what would be the detection risk?
C. The audit team would have to increase the amount and effectiveness of evidence gathered from substantive procedures.
C. What would the audit team have to do to reduce the audit risk?
Q3) _____________________________ involving senior management are never
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Page 6
Chapter 5: Risk Assessment: Internal Control Evaluation
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Q1) The strengths and weaknesses of a control system should be documented in bridge workpapers connecting the control evaluation to subsequent audit procedures.
A)True
B)False
Q2) When completing the audit of internal controls for an issuer,AS 5 requires auditors to test
A) Operating effectiveness only.
B) Design effectiveness only.
C) Both operating and design effectiveness.
D) Neither operating nor design effectiveness
Q3) Regardless of the assessed level of control risk,an auditor of a nonpublic company would perform some
A) Tests of controls to determine the effectiveness of internal control policies.
B) Analytical procedures to verify the design of internal control activities.
C) Substantive tests to restrict detection risk for significant transaction classes.
D) Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.
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Chapter 6: Employee Fraud and the Audit of Cash
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Q1) A set of telltale signs of erroneous accounting,missing or altered documents,or a "dangling debt" is referred to as a _____________________________.
Q2) The assertions by management regarding the cash accounts in the financial statements include all of the following except A) Cash in all accounts exists in the name of the company. B) Proper internal control activities exist for all cash accounts.
C) Cash balance properly reflects all cash on hand, in transit, or on deposit with third parties.
D) All restrictions on the use of cash are disclosed.
Q3) Fraud consists of unintentional misstatements or omissions in financial statements. A)True B)False
Q4) Auditors use a(n)______________________________________ to obtain independent evidence of the proper listing of outstanding checks and deposits in transit on a bank reconciliation.
Q5) The term _____________________________ refers to the application of accounting and auditing skills to civil and criminal problems.
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Chapter 7: Revenue and Collection Cycle
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Sample Questions
Q1) What is dual direction testing?
Q2) The ____________________________ confirmation form is used when individual balances are ____________________________ or accounts are in
Q3) Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?
A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
C) Have customers send payments directly to the company's depository bank.
D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.
Q4) The SEC requires all of the following for revenue to be recognized except A) Cash is collected.
B) Persuasive evidence of an arrangement exists.
C) Delivery has occurred or services have been rendered.
D) The seller's price to the buyer is fixed or determinable.
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Page 9
Chapter 8: Acquisition and Expenditure Cycle
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Sample Questions
Q1) When auditing liabilities account balances,auditors are most concerned with management' assertion about
A) Existence.
B) Rights and obligations.
C) Completeness.
D) Valuation and allocation.
Q2) Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of
A) Clock cards.
B) The voucher system.
C) Cash in bank.
D) Accrued payroll.
Q3) Which of the following accounts does not appear in the acquisition and expenditure cycle?
A) Cash.
B) Purchases Returns.
C) Sales Returns.
D) Prepaid Insurance.
Q4) After checks are signed for vendor invoices,why should vouchers be marked PAID or otherwise mutilated?
10
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Chapter 9: Production Cycle
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Sample Questions
Q1) Prepare an audit plan for inventory pricing and compilation.
Q2) L.Martinez,CPA,was auditing a client,Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports.This procedure was intended to satisfy which POCAOB assertion?
A) Rights and obligations.
B) Completeness.
C) Existence or occurrence.
D) Valuation or allocation.
Q3) Explain briefly the two directions of inventory test counts.
A. Basic transaction files to perpetual inventory records (completeness assertion).
B. Perpetual inventory records to the detail source documents (existence or occurrence assertion).
Q4) To make a year-to-year comparison of inventory turnover most meaningful,the auditor will perform the analysis
A) For the company as a whole.
B) By division.
C) By product.
D) All of the above.
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Chapter 10: Finance and Investment Cycle
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Sample Questions
Q1) It is very common for auditors to perform substantive procedures on 100 percent of the details in the finance and investment accounts.
A)True
B)False
Q2) In connection with the audit of an issue of long-term bonds payable,the audit team should
A) Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond.
B) Calculate the effective interest rate to see if it is substantially the same as the rates for similar issues.
C) Decide whether the bond issue was made without violating state or local law.
D) Ascertain that the client has obtained the opinion of counsel on the legality of the issue.
Q3) The primary audit concern with the verification of long-term liabilities is that all _________________ are recorded and that the ___________________ is properly paid or ____________.
Q4) An ___________________________________ is an approximation of a financial statement element,item,or account.
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Page 12
Chapter 11: Completing the Audit
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Sample Questions
Q1) ______________________________________ are matters that come to the auditors' attention following the date of the auditors' report.
Q2) Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously issued financial statements?
A) An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.
B) A contingency that had been disclosed in the audited financial statements is resolved.
C) New information concerning undisclosed lease transactions during the period under audit is discovered.
D) A subsidiary that accounts for 25% of the entity's consolidated net income is sold.
Q3) The auditor ordinarily requests the attorney letter directly from the attorneys. A)True B)False
Q4) Auditors should communicate matters such as the quality of the client's accounting principles to _________________________________.
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13
Chapter 12: Reports on Audited Financial Statements
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Q1) The scope paragraph of the auditors' report contains a general description of the audit work and reference to standards of the Public Company Accounting Oversight Board.
A)True
B)False
Q2) Auditors would be more likely to issue a disclaimer of opinion when a scope limitation is client imposed as opposed to circumstance imposed.
A)True
B)False
Q3) R.Wolfe became the new auditor for Royal Corporation,succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year
A) Only if Mason's opinion last year was qualified.
B) Describing the prior audit and the opinion but not naming Mason as the predecessor auditor.
C) Describing the audit but not revealing the type of opinion Mason gave.
D) Describing the audit and the opinion and naming Mason as the predecessor auditor.
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Chapter 13: Other Public Accounting Services
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Sample Questions
Q1) Delta Life Insurance Co.prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission.Wall,CPA,is Delta's auditor.If Wall discovers that the statements are not suitably titled,Wall should
A) Disclose any reservations in an explanatory paragraph and qualify the opinion.
B) Apply to the state insurance commission for an advisory opinion.
C) Issue a special statutory basis report that clearly disclaims any opinion.
D) Explain in the notes to the financial statements the terminology used.
Q2) Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonpublic entity?
A) Communicate reportable conditions discovered during the assessment of control risk.
B) Obtain a client representation letter from members of management.
C) Send bank confirmation letters to the entity's financial institutions.
D) Examine cash disbursements in the subsequent period for unrecorded liabilities.
Q3) Engagements to perform ______________ - ______________ procedures are not considered audits because they have a
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Chapter 14: Professional Ethics
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Sample Questions
Q1) Rule 201 of the Rules of Conduct contains no requirement that members of the AICPA comply with which of the following standards and interpretations designated by the AICPA Council?
A) Independence.
B) Due professional care.
C) Planning and supervision.
D) Professional competence.
Q2) Which of the following is not a restriction placed on audit partners by Sarbanes-Oxley?
A) It limits engagement partners to a five-year term as the engagement partner.
B) It limits other partners associated with the engagement to a seven-year term.
C) Engagement partners must review nonaudit work to ensure that independence has not been compromised.
D) Partners who engage in selling services other than audit, review and attestation, to an audit client are not independent with respect to that client.
Q3) What are the powers of the AICPA trial board in ethics violations?
Q4) What are (a)the AICPA Principles of Professional Conduct,(b)Rules of Conduct,and (c)Interpretation of Rules of Conduct?
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Page 16
Chapter 15: Legal Liability
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Sample Questions
Q1) Which of the following statements concerning the Ultramares Corp.v.Touche case is not true?
A) This case was brought under common law liability.
B) This case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence.
C) This case established the rights of third parties to bring suits against auditors under common law liability.
D) This case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud.
Q2) The general registration form for new issues of securities is Form 10-K.
A)True
B)False
Q3) Under the antifraud provisions of section 10(b)of the Securities Exchange Act of 1934,auditors may be liable if they acted
A) With ordinary negligence.
B) With independence.
C) Without due diligence.
D) Without good faith.
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Chapter 16: Internal Governmental and Fraud Audits
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Sample Questions
Q1) What are the different types of government audits?
Q2) Which of the following would you not expect to see in an auditor's report(s)on the financial statements of an independent government agency?
A) A statement that the audit was conducted in accordance with generally accepted government audit standards.
B) A report on the agency's compliance with applicable laws and regulations.
C) Commentary by the agency's managers on the audit findings and recommendations.
D) A report on the agency's internal controls.
Q3) Auditors of governmental units would not be presumed to be independent if they are
A) Free from sources of personal impairment.
B) Independent under AICPA Code of Professional Conduct rules.
C) Auditing the branch of government to which they are assigned.
D) Elected or appointed and reporting to a legislative body of government.
Q4) Efficiency,economy,and program outputs may be measured only in terms of monetary expenditures.
A)True
B)False
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Chapter 17: Overview of Sampling
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Sample Questions
Q1) __________________ sampling is used to examine a population when the auditor wants to estimate the amount (or value)of some characteristic of that population.
Q2) An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
A) Eliminate the risk of nonsampling error.
B) Reduce the level of audit risk and overall materiality to a relatively low level.
C) Measure the sufficiency of the evidence gathered.
D) Minimize the failure to detect misstatements and irregularities.
Q3) Which of the following statements is not true with respect to nonstatistical sampling?
A) It cannot be used in an audit conducted in accordance with generally accepted auditing standards.
B) It considers a number of factors in determining the appropriate sample size.
C) When using it, an individual makes some estimate of the characteristic of interest.
D) It requires the use of judgment on the part of the individual performing the sampling application.
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Chapter 18: Attributes Sampling
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Sample Questions
Q1) Which of the following is not true with respect to the risk of overreliance?
A) This risk has an inverse relationship with sample size.
B) This risk may occur when the auditor's sample indicates that the control is functioning as expected.
C) This risk may occur when the true (but unknown) population deviation rate is higher than the tolerable rate of deviation.
D) All of the above are true with respect to the risk of overreliance.
Q2) The auditor determines the tolerable rate of deviation based on the anticipated _____________________ on the client's internal control.
Q3) The tolerable rate of deviation has an inverse relationship with control risk; that is,as the acceptable level of control risk decreases,the appropriate tolerable rate of deviation increases.
A)True
B)False
Q4) The difference between the sample rate of deviation and the upper limit rate of deviation is the ________________________________________.
Q5) When performing tests of controls,the auditor typically uses __________________ sampling.
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Chapter 19: Variables Sampling
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Sample Questions
Q1) Which of the following components is not used in determining the upper limit on misstatements?
A) Basic allowance for sampling risk.
B) Incremental allowance for sampling risk.
C) Projected misstatement.
D) Tolerable misstatement.
Q2) The risk of _____________________________ occurs when the auditor's sample indicates the account balance is fairly stated when,in fact,it is materially misstated.
Q3) One of the primary advantages of monetary unit sampling is the fact that A) It is an effective method of sampling for evidence of understatement in asset accounts.
B) The sample selection automatically achieves high-value selection and stratification. C) The sample selection provides for including a representative number of small-value components.
D) Expanding the sample for additional evidence is relatively simple.
Q4) The "adjustment" to the projected misstatement that controls the auditor's exposure to sampling risk is referred to as the
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Chapter 20: Auditing in a Computerized Environment
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Q1) _____________________________ processing occurs when a group of similar transactions is accumulated and processed simultaneously.
Q2) In end-user computing environments,the processing control procedures would ordinarily not include
A) Transaction logs.
B) Control totals.
C) Comparing input to output.
D) Online editing and sight verification.
Q3) Input controls are one of the major categories of general controls.
A)True
B)False
Q4) Which of the following methods allow fictitious and actual transactions to be processed together without client operating personnel being aware of the testing process?
A) Integrated test facility.
B) Input controls matrix.
C) Parallel simulation.
D) Data entry monitor.
Q5) What is the difference between the use of test data and parallel simulation?
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