Financial Statement Auditing
Exam Solutions
Course Introduction
Financial Statement Auditing focuses on the principles, standards, and procedures involved in examining an organizations financial statements to ensure their accuracy and compliance with relevant accounting and regulatory frameworks. The course explores the audit process from planning and risk assessment through evidence gathering, evaluation, and the issuance of audit opinions. Key topics include the roles and responsibilities of auditors, internal controls, audit sampling, fraud detection, ethical considerations, and the application of technology in the audit process. Students gain practical insights through real-world cases and simulations, equipping them with the foundational skills required for professional auditing practice.
Recommended Textbook
Auditing Assurance Services A Systematic Approach 11th Edition by William F Messier Jr
Available Study Resources on Quizplus
21 Chapters
1456 Verified Questions
1456 Flashcards
Source URL: https://quizplus.com/study-set/2400 Page 2
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/47722
Sample Questions
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) Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements?
A)A management fraud may exist and it is more likely to be detected by auditors if they are independent.
B)Different interests may exist between the company preparing the statements and the parties using the statements.
C)A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated.
D)A poorly designed internal control system may be in place.
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
3
Chapter 2: The Financial Statement Auditing Environment
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/47723
Sample Questions
Q1) Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants?
A)Purpose of an Audit and Premise upon which an Audit is Conducted.
B)Performance.
C)Reporting.
D)Responsibilities.
Answer: D
Q2) Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:
A)objective cynicism.
B)independent differentialism.
C)professional skepticism.
D)impartial conservatism.
Answer: C
Q3) A financial statement audit must be conducted based on GAAP.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/47724
Sample Questions
Q1) An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by:
A)scanning the general journal for unusual entries.
B)performing a revenue cutoff test at year-end.
C)tracing a sample of journal entries to the general ledger.
D)examining documentary evidence of sales returns and allowances recorded after year-end.
Answer: A
Q2) Which of the following is not an audit procedure that is commonly used in performing tests of controls?
A)Inquiring.
B)Observing.
C)Confirming.
D)Inspecting.
Answer: C
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Risk Assessment
Available Study Resources on Quizplus for this Chatper
57 Verified Questions
57 Flashcards
Source URL: https://quizplus.com/quiz/47725
Sample Questions
Q1) The objectives of the engagement partner's communication with the audit team include:
A)maintaining an adversarial atmosphere between the auditor and management.
B)complying with SEC rules.
C)complying with FASB rules.
D)emphasizing the importance of professional skepticism.
Q2) Stacey, the partner in charge of the audit of GHER Corporation, calculates that detection risk to be 5.7% for the audit of accounts payable. GHER Corporation and RIF Enterprises are in the same industry, close to the same size, and have similar balances in accounts payable. What do the different detection risks tell you about the planned audit evidence that will be gathered for the GHER Corporation audit?
Q3) All of the following are inherent risk factors that are pervasive to the financial statements except:
A)highly complex significant transactions.
B)non-routine transactions.
C)classes of transactions are not processed systematically.
D)supplies inventory is difficult to count.
Q4) What is the difference between audit risk and engagement risk?
To view all questions and flashcards with answers, click on the resource link above.
Page 6
Chapter 5: Evidence and Documentation
Available Study Resources on Quizplus for this Chatper
87 Verified Questions
87 Flashcards
Source URL: https://quizplus.com/quiz/47726
Sample Questions
Q1) Audit documentation:
A)must be in electronic form.
B)must be in paper form only.
C)is not required, but is strongly recommended.
D)may be in paper, electronic, or some other medium.
Q2) Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
A)Quick assets divided by accounts payable.
B)Accounts receivable divided by inventory.
C)Interest payable divided by interest receivable.
D)Total debt divided by stockholders' equity.
Q3) Name the three types of analytical procedures and provide a definition and example for each.
Q4) The auditor gathers audit evidence to test management's assertions.
A)True
B)False
Q5) Discuss the reliability of the types of audit evidence and identify the level of reliability for each type of evidence.
Q6) According to the text, what are the three functions of working papers?
Page 7
To view all questions and flashcards with answers, click on the resource link above.
Chapter 6: Internal Control in a Financial Statement Audit
Available Study Resources on Quizplus for this Chatper
94 Verified Questions
94 Flashcards
Source URL: https://quizplus.com/quiz/47727
Sample Questions
Q1) As the acceptable level of detection risk increases, an auditor may change the:
A)assessed level of control risk from a lower level to a higher level.
B)assurance provided by tests of controls by using a larger sample size than planned.
C)timing of substantive procedures from year-end to an interim date.
D)nature of substantive procedures from less effective to more effective procedures.
Q2) In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:
A)operational efficiency has been achieved in accordance with management plans.
B)material misstatements have been prevented, or detected and corrected.
C)controls have not been circumvented by collusion.
D)management cannot override the system.
Q3) Internal control has become a very important focus for publicly traded and privately-held companies alike. Internal control is intended to accomplish at least three objectives and consists of five components of internal control. List the three objectives and five components of internal control.
Q4) What are the differences between document flowcharts, system flowcharts, and program flowcharts?
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Auditing Internal Control Over Financial Reporting
Available Study Resources on Quizplus for this Chatper
59 Verified Questions
59 Flashcards
Source URL: https://quizplus.com/quiz/47728
Sample Questions
Q1) The PCAOB Auditing Standards require the auditor to provide which of the following?
A)Reasonable assurance on the financial statements, absolute assurance on internal control.
B)Reasonable assurance on internal control, absolute assurance on the financial statements.
C)Absolute assurance on both the financial statements and internal control.
D)Reasonable assurance on both the financial statements and internal control.
Q2) Based on PCAOB guidelines, the audit of ICFR and financial statements audit should be conducted as an "integrated audit."
A)True
B)False
Q3) The advantages of generalized audit software include all of the following except:
A)it involves auditing while the data are being processed (real-time).
B)it is easy to use.
C)the time to develop the application is usually short.
D)an entire population can be examined in some instances.
Q4) Identify indicators of a material weakness in internal control over financial reporting.
To view all questions and flashcards with answers, click on the resource link above. Page 9
Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/47729
Sample Questions
Q1) Which of the following risks is related to effectiveness of testing?
A)The risk of incorrect rejection.
B)Inherent risk.
C)The risk of incorrect acceptance.
D)None of these.
Q2) For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control?
A)Tolerable deviation rate and confidence level.
B)Expected deviation rate and confidence level.
C)Population size and tolerable deviation rate.
D)Tolerable deviation rate and expected deviation rate.
Q3) In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a:
A)higher tolerable deviation rate.
B)lower expected deviation rate.
C)larger sample size.
D)smaller sample size.
Q4) Why must an auditor use sampling? What tradeoffs occur when an auditor uses sampling?
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
Available Study Resources on Quizplus for this Chatper
53 Verified Questions
53 Flashcards
Source URL: https://quizplus.com/quiz/47730
Sample Questions
Q1) Which of the following sampling methods would be used to estimate a numerical measurement of population, such as the dollar value of an account?
A)Attributes sampling.
B)Stop-or-go sampling.
C)Classical variables sampling.
D)Random-number sampling.
Q2) MUS Upper misstatement limit
A)an individual dollar
B)the total of the projected misstatement plus the allowance for sampling risk
C)the difference between monetary amounts in the entity's records and amounts supported by audit evidence
D)the account or transaction that contains the selected dollar
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
Q4) Haphazard selection allows the auditor to select items with bias.
A)True
B)False
11
To view all questions and flashcards with answers, click on the resource link above.
Chapter 10: Auditing the Revenue Process
Available Study Resources on Quizplus for this Chatper
88 Verified Questions
88 Flashcards
Source URL: https://quizplus.com/quiz/47731
Sample Questions
Q1) The return of vendor purchases is a part of the revenue process.
A)True
B)False
Q2) To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would:
A)validate the sender of electronic information.
B)examine subsequent cash receipts for the accounts in question.
C)consider the electronic responses to the confirmations to be exceptions.
D)mail second requests to the electronic respondents.
Q3) Which of the following is a test of controls for the transaction assertion of completeness for revenue?
A)Test a sample of sales invoices for authorized customer orders.
B)Review sales orders for proper credit approval.
C)Trace shipping documents to sales invoices and the sales journal.
D)Examine reconciliation of subsidiary ledger to general ledger control account.
Q4) Explain how revenue recognition is important to the audit of the revenue process.
Q5) What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: Auditing the Purchasing Process
Available Study Resources on Quizplus for this Chatper
84 Verified Questions
84 Flashcards
Source URL: https://quizplus.com/quiz/47732
Sample Questions
Q1) Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time?
A)Vouchers should be prepared by individuals who are responsible for signing disbursement checks.
B)Disbursement vouchers should be approved by at least two responsible management officials.
C)The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
D)The official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid."
Q2) Operating control over the check signature plate normally should be the responsibility of the:
A)Secretary.
B)Chief accountant.
C)Vice President of Finance.
D)Treasurer.
Q3) Describe three categories of expenses outlined in FASB Concept Statement No. 5.
To view all questions and flashcards with answers, click on the resource link above.
13
Chapter 12: Auditing the Human Resource Management Process
Available Study Resources on Quizplus for this Chatper
58 Verified Questions
58 Flashcards
Source URL: https://quizplus.com/quiz/47733
Sample Questions
Q1) Transactions processed through the payroll process include all of the following except:
A)payments to employees for services rendered.
B)payments to independent contractors for services rendered.
C)accrual of social security taxes.
D)payment of unemployment taxes.
Q2) Which of the following could test the existence assertion for payroll-related liabilities?
A)Compare items in accrued payroll taxes to the supporting payroll tax return.
B)Search for unrecorded liabilities.
C)Examine payroll tax returns to determine that the expense was recorded in the proper period.
D)Review payroll liabilities for proper classification as short- or long-term.
Q3) Comparing selected items from the payroll register to employee time records that have been approved by supervisory personnel tests which of the following assertions for payroll expense?
A)Occurrence.
B)Completeness.
C)Authorization.
D)Cutoff.
14
To view all questions and flashcards with answers, click on the resource link above.
Chapter 13: Auditing the Inventory Management Process
Available Study Resources on Quizplus for this Chatper
69 Verified Questions
69 Flashcards
Source URL: https://quizplus.com/quiz/47734
Sample Questions
Q1) An approved purchase requisition form authorizes shipment of goods to customers.
A)True
B)False
Q2) Inherent risk is typically assessed at a low to moderate level for inventory due to the nature of the asset.
A)True
B)False
Q3) An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that:
A)the final inventory is valued at cost.
B)all inventory represented by an inventory tag is listed on the inventory sheets.
C)all inventory represented by an inventory tag is bona fide.
D)inventory sheets do not include untagged inventory items.
Q4) A high inventory turnover ratio normally indicates inefficient inventory policies.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
15
Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
Available Study Resources on Quizplus for this Chatper
68 Verified Questions
68 Flashcards
Source URL: https://quizplus.com/quiz/47735
Sample Questions
Q1) There are a number of important disclosure items to consider when auditing the property management process. List two. Where in the financial statements can some of the disclosures relating to property, plant, and equipment be found?
Q2) To achieve effective control over fixed-asset additions, a company should establish activities that require:
A)capitalization of the cost of fixed asset additions in excess of a specific dollar amount. B)performance of recurring fixed asset maintenance work solely by maintenance department employees.
C)any fixed asset additions that are not used in the business to be classified as investments.
D)authorization and approval of major fixed asset additions.
Q3) The purchase of capital assets should be consistent with the authorization table used by the entity to approve such transactions. However, no such table is normally used for lease transactions.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders' Equity, and Income
Statement Accounts
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/47736
Sample Questions
Q1) Investments
A)Depreciation expense
B)Insurance expense
C)Investment income
D)Interest expense
E)Bad debt expense
Q2) For each of the following substantive procedures, first note whether it is a test of details of transactions or a test of details of account balances. Then decide for which assertion the test provides the best evidence.
1. Trace large cash receipts and payments to the general ledger.
2. Examine copies of note, bond, and financing lease agreements.
3. Recompute accrued interest payable.
4. Review debt activity for a few days before and after year-end to determine whether transactions are included in the proper period.
5. Examine due dates on notes and bonds for proper classification between current and long-term debt.
Q3) Generally, all dividends that are declared and paid will be audited.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
Available Study Resources on Quizplus for this Chatper
69 Verified Questions
69 Flashcards
Source URL: https://quizplus.com/quiz/47737
Sample Questions
Q1) Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
A)There is no access to securities between the year-end and the date of the auditor's security count.
B)Proceeds from the sale of investments are received by an employee who does not have access to securities.
C)Investment acquisitions are authorized by a member of the Board of Directors before execution.
D)When securities are held by the entity, they are stored in a safe or safe-deposit box and periodically inspected.
Q2) Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?
A)Authorization.
B)Completeness.
C)Cutoff.
D)Accuracy.
Q3) Explain how cash plays a role in all business processes.
To view all questions and flashcards with answers, click on the resource link above.
Page 18
Chapter 17: Completing the Audit Engagement
Available Study Resources on Quizplus for this Chatper
81 Verified Questions
81 Flashcards
Source URL: https://quizplus.com/quiz/47738
Sample Questions
Q1) An example of a Type I subsequent event is:
A)a tornado that destroys an entity's factory after the balance sheet date.
B)an event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the entity's fiscal year)that a large portion of the entity's inventory is obsolete.
C)notification of an IRS audit after the balance sheet date.
D)the entity's Board of Directors unexpectedly resigns after the balance sheet date.
Q2) While auditing other business processes, an auditor may identify information about contingent liabilities. What specific audit procedures relating to other business processes could uncover these liabilities?
Q3) When auditing contingent liabilities, which of the following procedures would be least effective?
A)Reading the minutes of the board of directors.
B)Obtaining a legal letter.
C)Examining customer confirmation replies.
D)Examining invoices for legal services.
Q4) What is the difference between a contingent liability and a commitment?
Q5) State the two primary purposes of the management representation letter.
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Reports on Audited Financial Statements
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/47739
Sample Questions
Q1) If the principal auditor decides to make reference to the other auditor's audit, the opinion section must specifically indicate the:
A)portion of the financial statements examined by the other auditor.
B)name of the other auditor.
C)name of the consolidated subsidiary examined by the other auditor.
D)type of opinion expressed by the other auditor.
Q2) Which of the following would be considered a change that affects comparability and requires an explanatory paragraph?
A)Change in accounting estimate.
B)Change in accounting principle.
C)Change in classification from one acceptable classification to another.
D)All of the other options are correct.
Q3) If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n):
A)disclaimer of opinion.
B)qualified opinion.
C)review report.
D)unqualified opinion with a separate explanatory paragraph.
To view all questions and flashcards with answers, click on the resource link above.
Page 20
Chapter 19: Professional Conduct, Independence, and Quality Control
Available Study Resources on Quizplus for this Chatper
69 Verified Questions
69 Flashcards
Source URL: https://quizplus.com/quiz/47740
Sample Questions
Q1) 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 CPA owners must be members of the institute.
D)The firm must be a dues-paying member.
Q2) As per the Conceptual Framework for AICPA Independence Standards, a CPA is required to identify and assess the extent to which a threat to independence exists.
A)True
B)False
Q3) With respect to ethics, the rights-based approach:
A)suggests that auditors should always verify ownership of a client's material tangible assets.
B)is primarily concerned with equity and impartiality.
C)suggests that an individual's actions should not violate the rights of any individual.
D)recognizes that decisions involve trade-offs between costs and benefits.
Q4) When can a CPA disclose confidential information without the client's consent?
To view all questions and flashcards with answers, click on the resource link above. Page 21
Chapter 20: Legal Liability
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/47741
Sample Questions
Q1) Which of the following is something that the plaintiff must prove in order for an accountant to be liable for damages under Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934?
A)The accountant was ordinarily negligent.
B)There was a material omission.
C)The security involved was stock.
D)The security was part of an original issuance.
Q2) Common law requires the auditor perform professional services with due care.
A)True
B)False
Q3) Auditors can be held liable under two classes of law when sued by clients, investors, creditors, or the government. Identify and briefly explain both classes of law.
Q4) Under the antifraud provisions of Section 10(b)of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted:
A)negligently.
B)with independence.
C)without due diligence.
D)without good faith.
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: Assurance, Attestation, and Internal Auditing Services
Available Study Resources on Quizplus for this Chatper
76 Verified Questions
76 Flashcards
Source URL: https://quizplus.com/quiz/47742
Sample Questions
Q1) Processing integrity
A)Personal information is collected, used, retained, and disclosed and disposed to meet the entity's objectives.
B)Information and systems are protected against unauthorized access, unauthorized disclosure of information, and damage to systems that could compromise the availability, integrity, confidentiality, and privacy of information or systems and affect the entity's ability to meet its objectives.
C)System processing is complete, valid, accurate, timely, and authorized to meet the entity's objectives.
D)Information designated as private is protected to meet the entity's objectives.
E)Information and systems are available for operation and use to meet the entity's objectives.
Q2) Which of the following procedures is usually included in a review engagement of a nonpublic entity?
A)The confirmation of accounts receivable.
B)A study and evaluation of internal control.
C)An inquiry concerning subsequent events.
D)The observation of physical inventory counts.
To view all questions and flashcards with answers, click on the resource link above. Page 23