Financial Statement Auditing
Exam Solutions
Course Introduction
Financial Statement Auditing is a course designed to introduce students to the fundamental concepts and practices of auditing financial statements. The course covers the objectives and principles of auditing, the regulatory and ethical frameworks governing the profession, and the methodologies auditors use to gather and evaluate evidence. Students learn about risk assessment, audit planning, internal controls, sampling techniques, and audit reporting. Emphasis is placed on the practical application of audit procedures for various accounts and transactions, as well as the analysis and resolution of audit findings. By the end of the course, students will understand the auditor's role in ensuring the integrity of financial information, as well as the processes and challenges involved in the independent review of financial statements.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 8th Edition by William F. Messier
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21 Chapters
1545 Verified Questions
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Page 2
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Sample Questions
Q1) Which of the following best describes the concept of audit risk?
A) The risk of the auditor being sued because of association with an audit client.
B) The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated.
C) The overall risk that a material misstatement exists in the financial statements.
D) The risk that auditors use audit procedures that are inappropriate.
Answer: B
Q2) You are a new staff auditor and you are auditing a client's inventory account.Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.
Answer: Student answers will vary.The following answer provides an example: To obtain direct evidence,an auditor can physically examine and count the items included in the ending balance of the inventory account.To obtain indirect evidence,an auditor can examine invoices from suppliers relating to purchases of inventory or could test whether the internal controls over the inventory process were working properly.
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Page 3
Chapter 2: The Financial Statement Auditing Environment
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63 Flashcards
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Sample Questions
Q1) What auditing standards are used to conduct an audit for a privately-held corporation?
What auditing standards are used to conduct an audit for a publicly-traded corporation?
What organization is responsible for setting each of these sets of standards?
Answer: Auditing standards developed by the AICPA's Auditing Standards Board (ASB)are used to conduct an audit for a privately-held corporation or other entities that are not public companies.This includes the principles underlying an audit conducted in accordance with generally accepted auditing standards and the ASB's Statements on Auditing Standards (SAS).Auditing standards developed by the Public Company Accounting Oversight Board (PCAOB)must be used to conduct an audit for a publicly-traded corporation.These standards include all those issued by the ASB through 2003,which were codified by the PCAOB,and any new standards issued by the PCAOB after that point.
Q2) The primary audit context with which an auditor is concerned is the client's industry or business.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Audit Planning,Types of Audit Tests,and Materiality
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Sample Questions
Q1) In assessing the competence of an internal auditor,an independent CPA most likely would obtain information about the
A) Quality of the internal auditor's work.
B) Organization's commitment to integrity and ethical values.
C) Influence of management on the scope of the internal auditor's duties.
D) Organizational levels to which the internal auditor reports.
Answer: A
Q2) Which of the following relatively small misstatements most likely would have a material effect on an entity's financial statements?
A) An illegal payment to a foreign official that was not recorded.
B) A piece of obsolete office equipment that was not retired.
C) A petty cash fund disbursement that was not properly authorized.
D) An uncollectible account receivable that was not written-off.
Answer: A
Q3) Define the engagement letter and discuss its importance.
Answer: An engagement letter formalizes the arrangement reached between the auditor and the client.This letter serves as a contract,outlining the responsibilities of both parties and preventing misunderstandings between the two parties.
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Chapter 4: Risk Assessment
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Sample Questions
Q1) A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
A) Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion.
B) An audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud.
C) The factors considered in assessing control risk indicated an increased risk of error but only a low risk of fraud in the financial statements.
D) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
Q2) All of the following represent an increased opportunity for management to commit fraud except:
A) Significant related party transactions.
B) The auditor's relationship with management is strained.
C) Management is dominated by a single person.
D) The financial statements included highly subjective estimates.
Q3) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Name two account balance management assertions pertaining to inventory and explain why they are considered in an audit.
Q2) 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 form.
Q3) Explain the occurrence and completeness assertions.How does failure to meet each assertion affect the financial statements?
Q4) The text discusses three main purposes for performing audit procedures.List and describe these three main categories of audit procedures and describe their purpose.
Q5) An example of audit evidence with a medium level of reliability is
A) Scanning.
B) Recalculation.
C) Observation.
D) All of the above.
Q6) Discuss the reliability of the types of audit evidence and identify the level of reliability for each type of evidence.
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) When preparing a record of a client's internal control,the independent auditor sometimes uses a systems flowchart,which can best be described as a
A) Pictorial presentation of the flow of instructions in a client's internal computer system.
B) Diagram which clearly indicates an organization's internal reporting structure.
C) Graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire.
D) Symbolic representation of a system or series of sequential processes.
Q2) After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system,the auditor would perform tests of controls on all control activities
A) Documented in the flowchart.
B) Considered to be weaknesses that might allow errors to enter the accounting system.
C) That the auditor plans to rely on.
D) That would aid in preventing fraud.
Q3) Why might an auditor decide to test controls at an interim date?
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8
Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) The auditor is least likely to use generalized audit software to
A) Perform analytical procedures on the client's data.
B) Access information stored on the client's IT files.
C) Identify material weaknesses in the client's IT controls.
D) Test the accuracy of the client's computations.
Q2) 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.
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.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) An auditor is testing internal control procedures that are evidenced on an entity's vouchers.To select the vouchers for testing,the auditor obtains random numbers between the first and last voucher number in the period.If a random number matches the number of a voided voucher,that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
A) Constitutes a deviation.
B) Has been properly voided.
C) Cannot be located.
D) Represents an immaterial dollar amount.
Q2) The larger the sample,the lower the confidence level and the lower the sampling risk.
A)True
B)False
Q3) The term precision relates to
A) The difference between confidence level and estimated error.
B) The difference between confidence level and tolerable error.
C) The difference between expected and tolerable deviation rate.
D) The difference between expected and sample deviation rate.
Q4) Define Type I and Type II errors.
Q5) Define sampling risk and nonsampling risk.
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) After a sample is drawn randomly,the allowance for sampling risk must be statistically quantified within a specified level of confidence.
A)True
B)False
Q2) Classical variables sampling uses normal distribution theory to evaluate the characteristics of a population based on sample data.
A)True
B)False
Q3) For monetary-unit sampling,a sampling interval of 400 means that
A) Every 400<sup>th</sup> item in the account will be selected in the sample.
B) The average size of items in the account is 400.
C) Every 400<sup>th</sup> dollar in the account will be included in the sample.
D) The average misstatement in sample items is $400.
Q4) The size of the upper limit on misstatement is largely dependent on the sample size,which is inversely related to the desired confidence level.
A)True
B)False
Q5) What is one advantage and one disadvantage of classical variables sampling?
Page 11
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) In the confirmation of accounts receivable,the auditor would most likely
A) Randomly select a representative sample of accounts for confirmation.
B) Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
C) Require confirmation of all receivables from agencies of the federal government.
D) Require that confirmation requests be sent within one month of the fiscal year-end.
Q2) At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor?
A) Granting of credit.
B) Shipment of goods.
C) Determination of discounts.
D) Selling of goods for cash.
Q3) The return of vendor purchases is a part of the revenue process.
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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81 Flashcards
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Sample Questions
Q1) An examination of the balance in the accounts payable account is ordinarily not designed to
A) Determine that the amounts represent obligations of the company.
B) Verify that accounts payable were properly authorized.
C) Ascertain the reasonableness of recorded liabilities.
D) Determine that all existing liabilities at the balance sheet date have been recorded.
Q2) An entity's internal control requires that for every check request there be an approved voucher,supported by a prenumbered purchase order and a prenumbered receiving report.To determine whether checks are being issued for unauthorized expenditures,an auditor most likely would select items for testing from the population of all
A) Purchase orders.
B) Canceled checks.
C) Receiving reports.
D) Approved vouchers.
Q3) The auditor can often obtain sufficient appropriate evidence in the audit of a tax provision without the use of a specialist.However,several situations may indicate a need for the auditor to involve a tax specialist.Identify three of these situations.
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Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) Proper segregation of duties is critical for the human resource management process.
A)True
B)False
Q2) Inherent risk associated with officer compensation is frequently set high because officers have motive and opportunity to take advantage of their high-ranking offices in the form of excessive compensation.
A)True
B)False
Q3) Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?
A) Human resource.
B) Treasurer.
C) Controller.
D) Payroll.
Q4) There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers.
A)True
B)False
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Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Sample Questions
Q1) The "cradle-to-grave" cycle for inventory begins when goods are purchased and stored and ends when the finished goods are shipped to customers.
A)True
B)False
Q2) For each of the following,state whether it is a test of details of account balances or a test of details of disclosures.Then note for which assertion the test provides evidence.
1.Inspect loan agreements under which an entity's inventories are pledged.
2.Review inventory compilation for proper classification among raw materials,work in process and finished goods.
3.Observe the count of physical inventory.
4.Trace test counts and tag control information to the inventory compilation.
5.Inquire of management about issues related to LIFO liquidations.
6.Review book-to-physical adjustments for possible misstatements.
Q3) Inventory should be valued using the lower-of-cost-or-market rule.
A)True
B)False
Q4) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
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Sample Questions
Q1) Which of the following is the best evidence of real estate ownership at the balance sheet date?
A) Title insurance policy.
B) A duplicate of the original deed held in the client's safe.
C) Paid real estate tax bills.
D) Closing statements.
Q2) Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property,plant,and equipment are not understated?
A) Depreciation expense.
B) Accounts payable.
C) Cash.
D) Repairs and maintenance expense.
Q3) If an entity has few capital asset purchases,it will generally not have a formal control system over such transactions.
A)True
B)False
Page 16
Q4) Prepaid expenses provide economic benefit for longer than a year.
A)True
B)False
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Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
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Sample Questions
Q1) An audit program for the examination of the retained earnings account should include a step that requires verification of the
A) Gain or loss resulting from disposition of treasury shares.
B) Market value used to charge retained earnings to account for a two-for-one stock split.
C) Authorization for both cash and stock dividends.
D) Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
Q2) Three types of transactions usually occur in stockholders' equity: issuance of stock,repurchase of stock,and payment of dividends.
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) Notes receivable is a common type of long-term financing.
A)True
B)False
Page 18
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor.
A)True
B)False
Q2) Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A) A bank lockbox system.
B) Prenumbered remittance advices.
C) Monthly bank reconciliations.
D) Daily deposit of cash receipts.
Q3) A company holds bearer bonds as a short-term investment.Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the
A) Chief Accountant.
B) Internal Auditor.
C) Cashier.
D) Treasurer.
Q4) What should an auditor look for when testing for proper classification of securities?
Page 19
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) 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.
Q2) State the two primary purposes of the client letter of representation.
Q3) After field work audit procedures are completed,a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the working papers.This second review usually focuses on
A) The audit report, financial statements, and footnotes for consistency.
B) Irregularities involving the client's management and its employees.
C) The materiality of the adjusting entries proposed by the audit staff.
D) The communication of internal control weaknesses to those charged with governance.
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?
A) The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B) The financial statements fail to disclose information that is required by generally accepted accounting principles.
C) The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D) Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
Q2) A basic assumption that underlies financial reporting is that an entity will continue as a going concern.
A)True
B)False
Q3) An auditor must disclaim an opinion when the auditor lacks independence.
A)True
B)False
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21
Chapter 19: Professional Conduct,Independence,and Quality Control
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Sample Questions
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 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.
Q3) The SEC's rules with respect to services provided by auditors are predicated on three basic principles of auditor objectivity and independence.What are the three basic principles?
Q4) For private companies,accounting firms are prohibited from providing A) Outsourced internal audit services.
B) Audit services.
C) Review services.
D) None of the above.
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Q5) When can a CPA disclose confidential information without the client's consent?
Chapter 20: Legal Liability
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Sample Questions
Q1) Common law requires the auditor perform professional services with due care.
A)True
B)False
Q2) Ritz Corporation wished to acquire the stock of Stale,Inc.In conjunction with its plan of acquisition,Ritz hired Fein,CPA,to audit the financial statements of Stale.Based on the audited financial statements and Fein's unqualified opinion,Ritz acquired Stale.Within 6 months,it was discovered that the inventory of Stale had been overstated by $500,000.Ritz commenced an action against Fein.Ritz believes that Fein failed to exercise the knowledge,skill,and judgment commonly possessed by CPAs in the locality,but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth.Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated.Which of the following two causes of action would provide Ritz with proper bases upon which Ritz would most likely prevail?
A) Negligence and breach of contract.
B) Negligence and gross negligence.
C) Negligence and fraud.
D) Gross negligence and breach of contract.
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Page 23
Chapter 21: Assurance,Attestation,and Internal Auditing Services
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Q1) Independence is one of the general standards for attestation engagements.
A)True
B)False
Q2) An entity's WebTrust seal is managed by
A) The CPA who performed the service.
B) The AICPA.
C) A third-party service organization.
D) The entity receiving the seal.
Q3) IIA Standards include
A) Practice advisories.
B) Code of Ethics.
C) Interpretations.
D) Both A and B.
Q4) A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain
A) A statement of limitations on the use of the report.
B) An opinion about whether management's assertion is fairly stated.
C) Negative assurance that control risk has not been assessed.
D) An acknowledgement of responsibility for the sufficiency of the procedures.
Q5) Explain each of the three PrimePlus Services typically offered by practitioners.
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