Test Bank for Auditing Assurance Services

Test Bank for Auditing & Assurance Services A Systematic Approach, 12e William Messier (Answers at the end of each chapter) Chapter 1 1) Why do auditors often use a sampling approach to evidence gathering?

• Auditors are experts and do not need to look at much to know whether the financial

statements are correct or not.

• Auditors must balance the cost of the audit with the need for precision and for some

types of evidence, computer data analytic approaches can’t be used.

• Auditors must limit their exposure to their auditee to maintain independence.
• The auditor's relationship with the auditee is generally adversarial, so the auditor will

not have access to all of the financial information of the company.

2) Which of the following statements best describes a relationship between sample size and other elements of auditing?

• If materiality increases, so will the sample size.
• If the desired level of assurance increases, sample sizes can be smaller.
• If materiality decreases, sample size will need to increase.
• There is no relationship between sample size and materiality or the desired level of

assurance.

3) Which of the following statements about the study of auditing is NOT true?

• The study of auditing can be valuable to future accountants and business decision

makers whether or not they plan to become auditors.

• The study of auditing focuses on learning the analytical and logical skills necessary to

evaluate the relevance and reliability of information.

• The study of auditing focuses on learning the rules, techniques, and computations

required to analyze financial statements for making investment recommendations.

• The study of auditing begins with the understanding of a coherent logical framework

and techniques useful for gathering and analyzing evidence about others’ assertions.

• / 4

4) The basic definition of auditing essentially indicates that, overall, auditing is a process to:

• detect fraud.
• examine individual transactions so that the auditor may certify as to their validity.
• objectively obtain and evaluate evidence regarding assertions made by another party.
• assure the consistent application of correct accounting procedures.

5) Assurance services may improve all of the following except:

• relevance.
• credibility.
• periodicity.
• reliability.

6) Evidence is reliable if it:

• signals the true state of a management assertion.
• applies to the period being audited.
• relates to the audit assertion being tested.
• is sufficient to justify a conclusion.

7) Which of the following best describes the concept of audit risk?

• The risk of the auditor being sued because of association with an auditee.
• The risk that the auditor will provide an inappropriate opinion on financial statements

that are, in fact, materially misstated.

• The overall risk that a material misstatement exists in the financial statements.
• The risk that auditors use audit procedures that are inappropriate.

8) An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity’s industry at that point, should: 2 / 4

• engage financial experts familiar with the nature of the business entity.
• obtain a knowledge of matters that relate to the nature of the entity’s business and the

industry in which it operates.

• refer a substantial portion of the audit to another CPA, who will act as the principal

auditor.

• first inform management that an unqualified opinion cannot be issued.

9) For publicly-held companies, which of the following is integrated with the audit of financial statements?

• budgetary information audit
• the audit of internal controls
• audit of management forecasts
• audit of interim financial statements

10) During the first phase of an audit, a CPA most likely would:

• identify specific internal control activities that are likely to prevent fraud.
• evaluate the reasonableness of the company’s accounting estimates.
• evaluate the integrity of management.
• inquire of the company's attorney as to whether any unrecorded claims are probable or

asserted.

11) In the context of agency theory, information asymmetry refers to the idea that:

• information can vary in its reliability.
• information can vary in its relevance.
• management has more information about the entity’s true financial results and position

than do the absentee owners (i.e. stockholders).

• management likely will not act in the best interests of the absentee owners.
• / 4

12) Which of the following best describes why an independent auditor is engaged to express an opinion on the fair presentation of financial statements?

• It is difficult to prepare financial statements that fairly present a company’s financial

position and changes in cash flows without the expertise of an independent auditor.

• It is management’s responsibility to seek available independent aid in the appraisal of

the financial information shown in its financial statements.

• The opinion of an independent party is needed because a company is not likely to be

considered objective with respect to its own financial statements.

• It is a customary courtesy that all stockholders of a company receive an independent

report on management’s stewardship in managing the affairs of the business.

13) 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 management fraud may exist and it is more likely to be detected by auditors if they

are independent.

• Different interests may exist between the company preparing the statements and the

parties using the statements.

• A misstatement of account balances may exist and it is the independent auditor’s

responsibility to ensure that financial statements are not misstated.

• A poorly designed internal control system may be in place.

14) Which of the following best describes why publicly-traded companies follow the practice of having the external auditor appointed by the audit committee and ratified by the stockholders?

• to promote an adversarial relationship between the auditor and the corporation’s

management

• to comply with requirements set forth by the Sarbanes-Oxley Act of 2002 and to

enhance auditor independence from the management of the corporation

• to encourage a policy of rotation of the independent auditors
• to give management more leverage over the auditor’s decisions
• / 4