Chap 1 Test Bank
Chap 1 Test Bank
Chap 1 Test Bank
eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
Chapter 1
An Introduction to Auditing
TRUE/FALSE
1. [LO 1] CPAs who perform financial statement audits of public companies are responsible
for the accuracy of the clients financial statements.
4. [LO 1] When there is a material misstatement in the financial statements, the auditor
requires management of the company to correct the financial statements so the auditor
can issue an audit report.
5. [LO 2] If management has presented the actual economic events and situation according
to the accounting standards, then there is a high degree of correspondence between the
underlying evidence and the resulting financial statements.
7. [LO 2] The PCAOB was formed to meet one of the requirements in the Sarbanes-Oxley
Act of 2002.
8. [LO 2] Auditors consider and examine ICFR for all of the same reasons, whether they are
auditing a public or a nonpublic company.
9. [LO 3] Currently, the primary authoritative body that regulates individual CPAs is the
Congress of the United States.
10. [LO 3] The Sarbanes-Oxley Act limits the amount of non-attest services that auditors may
perform for public companies they audit.
11. [LO 5] The Audit Committee of the Board of Directors performs the audit and reports the
results to shareholders and the Board of Directors.
12. [LO 3] In an ideal situation, internal auditors report to the Audit Committee.
1
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
13. [LO 3] The PCAOB jointly sets audit standards with the AICPA for publicly traded firms.
14. [LO 4] If a nonpublic company uses IFRS to prepare its financial statements, it cannot
receive an unqualified opinion when audited using the AICPA Statements on Auditing
Standards.
15. [LO 4] The SEC is responsible for setting standards for not-for-profit organizations.
16. [LO 5] CPAs who audit public companies may only perform attest services.
18. [App.] The organization of a typical CPA firm is similar to that of a corporation.
19. [App.] Salaried partners of a CPA firm are compensated based on a share in the firms
profit.
20. [App.] The types of business structures used by CPA firms are designed to make the
professionals who own the firms responsible for providing high quality services.
2
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
22. [LO 1] Which of the following best describes the conclusions an auditor makes in an
integrated audit that results in an audit report that is unqualified?
a. The financial statements are fair according to GAAP.
b. The financial statements are free of material misstatement based on U.S. GAAP and
managements report on internal control over financial reporting states that there are no material
weaknesses.
c. The financial statements and internal control over financial reporting are materially correct.
d. The financial statements are free of material misstatement based on U.S. GAAP and based on
the audit, the auditor agrees with managements report that internal control over financial
reporting is effective and does not have any material weaknesses.
24. [LO 1] Who is responsible for the design and operation of ICFR?
a. The auditor.
b. The companys management.
c. Both a and b.
d. None of the above.
25. [LO 1] The audit report states that the audit provides:
a. a guarantee of quality.
b. complete assurance that the financial statements are free from misstatements.
c. absolute assurance that the internal control environment is operating effectively.
d. None of the above.
3
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
27. [LO 1] A clean audit report states that:
a. there are no errors in the financial statements.
b. the internal control environment is operating well.
c. the auditors evaluated evidence.
d. All of the above.
4
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
c. declarations made by the auditor.
d. Both a and b.
36. [LO 2] Which of the following would not be considered audit evidence?
a. Invoices received by the company and retained on the companys IT system in electronic form.
b. The electronic work paper program package used by the auditor to produce the electronic
work papers.
c. Hard copy minutes of the Board of Directors and Audit Committee meetings.
d. Electronic images of the front and back of checks that the company has written.
39. [LO 2] Auditors communicate audit results to users concerning a companys financial
statements by:
a. issuing a report on the effectiveness of ICFR.
b. issuing the financial statements.
c. issuing a report about the financial statements.
d. None of the above.
41. [LO 2] Which body regulates the audits of nonpublic companies in the United States?
a. PCAOB
b. AICPA
c. IFRS
d. SEC
42. [LO 2] Which functions do audit reports serve for the capital markets?
a. Enhance confidence in financial statements.
b. Provide guarantees regarding the quality of investments.
c. Provide assurance that financial statements and managements reports on internal control over
financial reporting provide reliable information.
d. Both a and c
43. [LO 2] Shareholders use audit reports to monitor management performance. An example of
an item that an audit report does NOT provide is:
a. Reasonable assurance on reported information that might be used to provide justification for
managements performance-based compensation.
b. Access to foreign markets.
c. An indication of whether or not a company has major problems in its internal control over
financial reporting.
d. Feedback on any ICFR material weaknesses that management may choose to use to improve
operational or financial efficiency.
44. [LO 2] Auditors consider internal control during the audit of a nonpublic company:
a. For all the same purposes as on an audit of a public company.
b. To identify areas of risk and help to plan the financial statement audit.
c. To help to plan the financial statement audit and issue an opinion on effectiveness.
d. Only if they are sure it will be helpful when performing the financial statement audit.
46. [LO 3] Who is responsible for oversight of the integrated audit function?
a. Shareholders.
b. Officers of the company.
c. The audit committee.
d. None of the above.
47. [LO 3] Which of the following individuals could be a member of the Audit Committee?
6
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
a. A member of the companys Board of Directors.
b. A member of the PCAOB.
c. An audit partner of the CPA firm who performs the annual audit.
d. None of the above.
50. [LO 4] Regarding the PCAOB, which of the following is INCORRECT? The PCAOB:
a. Is responsible for oversight of audit firms engaged in the audit of public companies.
b. Issues standards that govern audits of public companies.
c. Is a not-for-profit entity.
d. Has authority that is equal in power to the SEC.
57. [App.] A CPA firm engaged in the audit of public companies must:
a. Have at least 5 partners.
b. Have multiple offices across the U.S.
c. Hire and train competent personnel.
d. All of the above.
59. [App.] To which of the following would AICPA attest standards not apply?
a. SSARs.
b. Elder care.
c. Loans under TALF.
d. Internal control for a nonpublic company.
8
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
a. Shares in all of the work for the firm.
b. Is compensated by sharing in the profits of the firm.
c. Has partner responsibility for work performed.
d. All of the above.
9
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
MATCHING
63. Match the task corresponding to the correct answer by placing the number next to the correct
description.
1. Auditor
2. Client/firm
3. PCAOB
4. AICPA
5. Audit Committee of the Board of Directors
TASK
(a) Prepare the financial statements.
(b) Design and implement the ICFR.
(c) Make assertions.
(d) Produce audit standards for non-public companies.
(e) Produce audit standards for public companies.
(f) Evaluate evidence.
(g) Gather evidence.
(h) Propose adjustments to the financial statements intended to correct errors identified
during the audit.
(i) Inspect the work of audit firms engaged in the audit of public companies.
(j) Appoint the auditors.
64. Place one or more of the following terms on the line for each phrase below. You may use
each term more than once or not at all.
F. Evidence Q. Fraud
G. AS R. Operational auditing
K. Errors V. COSO
_____1. A subset of the Board of Directors that, for a public company, has direct responsibility
for hiring, compensation and oversight of the external auditor.
_____4. Using client information in engagements related to fraud, business valuation and legal
disputes.
_____8. Entity that has produced one of the frameworks of internal control over financial
reporting that is used by management and auditors.
_____9. The set of audit standards that must be followed when auditing public companies.
____10. An example is the activities required by the federal government for loans associated
with the Term Asset-Backed Securities Loan Facility (TALF).
11
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
SHORT ANSWER
65. Mary Ellen Dillon is deciding between two different job offers, one from a regional CPA firm
engaged in the audit of public clients and the other from a regional accounting firm who assists
smaller clients with their accounting and tax work and who also performs non-public company
audits. The salary is identical and Mary Ellen has come to you for advice. Provide the advantages
as well as disadvantages to working for each type of firm.
Disadvantage: Disadvantage:
66. Go to the PCAOB web site (www.pcaob.org). Find the inspection reports from the PCAOB
on the work of CPA firms; choose one of the Big Four and one firm other than one of the Big
Four.
(a) Identify the firms report you selected. What do the reports you selected state?
(b) What recommendations do they make?
(c) If you were the managing partner of the CPA firm that was inspected, based on
the PCAOBs observations would you feel that your firm had done an adequate
job performing the public company audits reported on? Justify your answer.
(d) Would you want investors and/or clients to read the report? Why or why not?
12
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
21. (1-21,LO 2) Why do you have to be a good accountant in order to be a good auditor?
22. (1-22, LO 3) Auditors cannot change the financial statements. Explain the influence
the auditor has on managements decisions regarding financial statement presentation.
Also, explain your perception of the possible tension created by any power struggle
inherent in the managementauditor relationship. How do you think auditors should
respond when management wants the companys financial statements to be presented
in a certain way but the auditor disagrees?
23. (1-23,LO 2) How do the capital markets and economy benefit as a result of all
publicly-traded companies having an independent audit?
26. (1-26, LO 3) Why does having audited financial statements bring down a companys
cost of capital?
28. (1-28,LO 2]) Javier is an experienced, second-year staff accountant at a midsized CPA
firm who has only worked on audits of large, private companies. His firm recently
13
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
won a proposal for the year-end audit of a small, publicly-traded company. Javiers
evaluations have indicated that he is a hard worker and value-added team player. The
audit partner tells the human resources scheduler to assign Javier to the audit team of
the new public company engagement. Javier finds out that his first task is to work on
the audit of the internal controls over financial reporting (ICFR). Javier is excited
because he knows that gaining experience on a public client is a good opportunity.
However, he has only per-formed financial statement audits and is apprehensive about
his lack of experience.
Required: How can Javier apply the components of the formal definition of auditing
to the audit of ICFR?
29. (1-37, LO 3) You are a newly hired associate auditor for Praxo & Hanks, CPAs, a
professional services firm that provides financial audits, integrated audits, and tax
work for a variety of private and public company clients in the mid-Atlantic region of
the U.S. Your first week with the firm was spent in a training program for audit staff,
which was led by two of the firms audit managers. The first day of the training
program focused on understanding the responsibilities of auditors and the nature and
objectives of the services provided to audit clients. Answer the following based on
what you should have learned in the first day of training.
14
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
15
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
SOLUTIONS
TRUE/FALSE
1. F
2. T
3. T
4. F
5. T
6. T
7. T
8. F
9. F
10. T
11. F
12. T
13. F
14. F
15. F
16. F
17. T
18. F
19. F
20. T
MULTIPLE-CHOICE
21. d
22. c
23. c
24. b
25. d
26. c
27. c
28. b
29. d
30. d
31. c
32. b
33. d
34. d
35. a
36. b
37. d
38. d
16
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
39. c
40. c
41. b
42. d
43. b
44. b
45. b
46. c
47. a
48. c
49. d
50. d
51. d
52. a
53. d
54. c
55. c
56. b
57. c
58. d
59. a
60. d
61. c
62. b
MATCHING
63.
(a) 2
(b) 2
(c) 2
(d) 4
(e) 3
(f) 1
(g) 1
(h) 1
(i) 3
(j) 5
64.
1. c
2. d, e
3. f
4. h
5. b
6. r
17
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
7. k, q
8. v
9. g
10. t
18
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
SHORT ANSWER
65.
Regional, Public Company Clients: Regional, Non-public Company Clients:
Advantage: Advantage:
Exposure to public companies Exposure to privately held companies
Exposure to financial statements audits Exposure to financial statement audits
Exposure to ICFR audits Exposure to tax and write up work
Disadvantage: Disadvantage:
Will get to work with nonpublic companies Lack of exposure to public companies, and
but wont see tax and write up work the things that go with that, like SEC filings
19
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
1-21. In order to be a good auditor, you must also be a good accountant. To be an effective
auditor, one must thoroughly understand the accounts and processes to be audited. Auditors need
a deep understanding of financial accounting.
1-22. The auditor expresses an opinion on the financial statement presentation in the auditors
report. If there is a serious disagreement between management and the auditor with respect to
whether the financial statements are a fair representation of the companys economic situation
and activities, the auditor is required to render a qualified or adverse opinion in his report.
Management usually needs a clean and unqualified opinion and failing to obtain one is
disastrous. Because the auditor is hired and paid by management, the auditor management
relationship is fraught with potential conflicts of interest. There is also enormous legal liability
for the auditor. There are many risks involved in auditing.
Because financial reporting requires the exercise of much judgment, reasonable persons often
disagree on issues of presentation. Successful auditors must persuade their clients to present the
financial statements in the proper manner. The auditors professional knowledge, experience, and
demeanor are necessary to manage expectations, avoid problems, and defuse tensions before they
become conflicts.
1-23. Investors who have confidence in the information are more likely to participate in the
worlds capital markets. This participation allows our capital markets and our economy to grow.
Independent audits are a necessary component of information transparency and reliability. After
all, the integrity of financial reporting is the foundation upon which our public markets are built.
1-24. If management knows their financial statements will be audited and that any significant
errors or improprieties will be discovered, they should be motivated to make sure the financial
statements are fairly stated before they release them.
1-25. By skewing the information to one side or the other, neutrality is lost and the value and
transparency of the reports is diminished. Although each of the three categories of beneficiaries
has different views about the usefulness and value of financial reports, there are significant
interrelationships among the various constituents. It is important for management to exercise
discretion in choosing the best accounting methods and reporting techniques to serve the
company as a whole, not favoring one constituency over the other.
1-26. The decreased risk of incorrect financial information tends to decrease a companys cost of
capital because the pool of informed investors willing to invest is increased when audited
financial statements are available.
20
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
SOLUTIONS TO PROBLEMS FROM THE TEXTBOOK
1-27
a. The objective of an audit is to produce an opinion regarding the fairness of the financial
statements. As a result of this opinion, Goldberg Corporation and its constituents receive a
variety of benefits from the audit. The company has access to the public markets to raise capital.
The Board of Directors receives value in discharging its fiduciary responsibilities to
shareholders. Even if all the small mistakes are not found, management benefits from knowing
that an objective party has looked at the company, its operations and reports and that the
companys information is a valid basis for making decisions. If the companys operations can be
more efficient or effective the audit process likely will result in recommendations for changes.
b. The main concept appropriate for explaining why the auditor missed a $5,000 fraud is
materiality. In all but the smallest companies $5,000 is not material to the financial statements
and the auditors likely set the materiality of transactions, etc., higher than that dollar amount.
Consequently, the $5,000 fraud is likely to be missed. In a company the size of Goldberg
Corporation, $5,000 is not material.
1-28
Javiers experience in financial statement audits will help him learn and understand the audit of
ICFR.
Javier should not be anxious concerning the ICFR audit as the procedures are similar to that of
a financial statement audit. The offer to join the engagement team represents a great learning
experience for Javier and an opportunity to advance his career.
1-37
a. Management makes assertions about economic events and actions that affect the company,
claiming that those events and actions are properly communicated through the financial
21
Full file at http://testbanksolution.eu/Test-Bank-for-Auditing-and-Assurance-Services-Understanding-the-
Integrated-Audit,-1st-edition-by-Karen-L.-Hooks-9780470571309
statements. Management also makes assertions about the effectiveness of internal controls
underlying the companys financial reporting processes. On the other hand, the auditors
report is an independent assessment of managements assertions. Auditors must be able to
evaluate managements assertions in order to prove or disprove them. If the auditor is
comfortable with the assertions set forth by management, a clean audit report will be issued.
b. The audit process focuses on objectively obtaining and evaluating evidence about
management assertions. Auditors determine what information is necessary to properly
account for an economic event or action, then they investigate the matter by evaluating
relevant evidence to determine whether managements assertions are being met. Auditors
must collect evidence from such sources as company documents and records,
observations and inquiries, etc. The evidence collected must relate specifically to
managements assertions about the financial statement elements and internal controls.
1-33
Required:
a. While AH Family was not subject to any mandatory audits as a privately held
corporation, it will now be subject to an Integrated Audit including an audit of the
financial statements and an auditor of Internal Controls over Financial Reporting (ICFR).
b. JH Family as a privately held corporation was subject to a audits governed by the AICPA.
If JH Family chooses to go public, it will be subject to integrated audits under the Public
Company Accounting Oversight Board (PCAOB), which is ultimately regulated by the
Securities and Exchange Commission (SEC).
(i) The costs of a required Internal Audit department required by the Sarbanes-
Oxley Act of 2002
(ii) The costs of an Integrated Audit which will add an audit of ICFR on top of the
audit of the financial statements
(iii) The costs of Reviews over 10Q quarterly reports required by the SEC
(iv) The costs of hiring an audit firm with global capabilities to audit the new
locations in Europe and Asia
22