Test Bank for Auditing A Practical Approach With Data Analytics,

1 Test Bank for Auditing A Practical Approach With Data Analytics, 2e Raymond Johnson, Laura Davis Wiley, Robyn Moroney

Auditing, 2e (Johnson) Chapter 1 Introduction and Overview of Audit and Assurance

1) GAAP and IFRS are examples of applicable financial reporting framework.

Answer: TRUE

Explanation: The applicable financial reporting framework refers to the set of standards used in preparing the historical financial statements, such as GAAP, IFRS or a Federal Income Tax Basis of Accounting.

Diff: 1

LO: 1

Bloom: Knowledge

Min: 1

AACSB: Communication

AICPA: AC: Reporting

2) Review of financial forecasts falls under attestation services.

Answer: TRUE

Explanation: Attestation services (under the umbrella of assurance services) include review of historical financial statements, review of financial forecasts, and examination of internal control.

Diff: 1

LO: 1

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: AC: Measurement Analysis and Interpretation

3) Within a U.S. context, the applicable financial reporting framework is typically Generally Accepted Accounting Principles (GAAP).

Answer: TRUE

Explanation: Within a U.S. context, the applicable financial reporting framework is typically generally accepted accounting principles (GAAP).

Diff: 1

LO: 2

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: AC: Measurement Analysis and Interpretation

• / 4

2 4) Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit.

Answer: TRUE

Explanation: Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit, but often other interested users, such as a bank or lender, may request that a private company provide audited financial statements.

Diff: 1

LO: 2

Bloom: Knowledge

Min: 1

AACSB: Analytic

AICPA: AC: Reporting

5) One of the reasons there is a demand for financial statement audits is that users of financial statements often lack accounting and legal knowledge to fully understand complex accounting and disclosure choices.

Answer: TRUE

Explanation: Financial statements are complex, the amounts are often affected by significant estimates, and the disclosures often require significant knowledge and experience to evaluate.Most financial statement users do not have the accounting and legal knowledge to assess the reasonableness of complex accounting and disclosure choices being made by the company.

Diff: 1

LO: 3

Bloom: Comprehension

Min: 1

AACSB: Analytic

AICPA: PC: Communication

6) In financial accounting, the balance sheet is a statement of financial position.

Answer: TRUE

Explanation: In financial accounting, the financial statements include the balance sheet (statement of financial position), income statement (statement of comprehensive income), statement of cash flows, statement of changes in equity and accompanying notes.

Diff: 1

LO: 3

Bloom: Knowledge

Min: 1

AACSB: Analytic

AICPA: PC: Communication

• / 4

3 7) Business valuation falls within the purview of non-assurance services.

Answer: TRUE

Explanation: Many of these accounting firms provide non-assurance (or non-audit) services as well as assurance services. These non-assurance services include management consulting, business valuation, mergers and acquisitions, insolvency, tax and accounting services.

Diff: 1

LO: 4

Bloom: Knowledge

Min: 1

AACSB: Analytic

AICPA: AC: Measurement Analysis and Interpretation

8) Securities Exchange Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company's financial statements.

Answer: TRUE

Explanation: The Securities Exchange Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company's financial statements.

Diff: 1

LO: 5

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: BC: Governance Perspective

9) The Securities Act of 1933 enhances annual financial disclosures for public companies and placed more emphasis on corporate responsibility.

Answer: FALSE

Explanation: The Securities Act of 1933 regulates the disclosure of financial information in a company's initial public offering of stock and requires that the financial information be audited.

Diff: 1

LO: 5

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: BC: Governance Perspective

10) Neither client characteristics nor actions of the auditor affect the audit risk.

Answer: FALSE

Explanation: Audit risk is affected by client characteristics as well as actions of the auditor.

Diff: 1

LO: 6

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: AC: Reporting

• / 4

4 11) Materiality is a relative concept, and it differs from company to company and from year to year for a given company.

Answer: TRUE

Explanation: Materiality is a relative concept, and it differs from company to company and from year to year for a given company. Auditors design an audit to provide reasonable assurance that the financial statements are free of material misstatement. However, auditors do not design an audit to look for immaterial misstatements because they would not influence a financial statement user.

Diff: 1

LO: 6

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: AC: Reporting

12) When auditors determine that the financial statements of a public company are presented fairly in accordance with the applicable financial reporting framework, they issue a type of report that PCAOB standards call "the standard clean report."

Answer: FALSE

Explanation: If auditors have determined the financial statements are presented fairly in accordance with the applicable financial reporting framework, they issue the standard unqualified report. The PCAOB standards use the term "unqualified" report.

Diff: 1

LO: 6

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: AC: Reporting

13) In an unqualified audit report on the financial statements of a public company, the concluding statement of the Basis for Opinion paragraph mentions reasonable basis for the audit firm's opinion.

Answer: TRUE

Explanation: The basis for opinion paragraph explains, in brief terms, the process of conducting an audit. It mentions the concept of reasonable assurance about whether the financial statements are free of material misstatement. It includes an explicit statement that PCAOB audit standards were followed because the audit pertains to a public company. The scope paragraph also includes a brief discussion of the professional judgments made during the audit. Finally, it concludes with a statement that the audit firm believes that its audit provides a reasonable basis for its opinion.

Diff: 1

LO: 6

Bloom: Knowledge

Min: 1

AACSB: Ethics

AICPA: AC: Reporting

• / 4