Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

Chapter 01 An Introduction to Assurance and Financial Statement Auditing

True / False Questions

1. Independence standards are required for audits of public companies, but not for audits of private companies. rue False

!. "ecision ma#ers demand reliable information that is provided b$ accountants. rue False

%. Information as$mmetr$ seldom occurs. rue False

&. Conflicts of interest often occur bet'een absentee o'ners and managers. rue False

(. Auditing services and attestation services are the same. rue False

). Auditing is a t$pe of attest service. rue False

*. esting all transactions that occurred during the period is cost prohibitive. rue False

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

Multiple Choice Questions

+. ,h$ do auditors generall$ use a sampling approach to evidence gatheringA. Auditors are e.perts and do not need to loo# at much to #no' 'hether the financial statements are correct or not. /. Auditors must balance the cost of the audit 'ith the need for precision. C. Auditors must limit their e.posure to their client to maintain independence. ". he auditor0s relationship 'ith the client is generall$ adversarial, so the auditor 'ill not have access to all of the financial information of the compan$.

1. ,hich of the follo'ing statements best describes a relationship bet'een sample si2e and other elements of auditingA. If materialit$ increases, so 'ill the sample si2e. /. If the desired level of assurance increases, sample si2es can be smaller. C. If materialit$ decreases, sample si2e 'ill need to increase. ". here is no relationship bet'een sample si2e and materialit$ or the desired level of assurance.

10. ,hich of the follo'ing statements about the stud$ of auditing is 34 trueA. he stud$ of auditing can be valuable to future accountants and business decision ma#ers 'hether or not the$ plan to become auditors. /. he stud$ of auditing focuses on learning the anal$tical and logical s#ills necessar$ to evaluate the relevance and reliabilit$ of information. C. he stud$ of auditing focuses on learning the rules, techniques, and computations required to anal$2e financial statements. ". he stud$ of auditing begins 'ith the understanding of a coherent logical frame'or# and techniques useful for gathering and anal$2ing evidence about others0 assertions.

11. he basic purpose of a financial statement audit is to A. "etect fraud. /. 5.amine individual transactions so that the auditor ma$ certif$ as to their validit$. C. 6rovide assurance regarding 'hether the client0s financial statements are fairl$ stated. ". Assure the consistent application of correct accounting procedures.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

1!. Assurance services ma$ improve all of the follo'ing e.cept A. 7elevance. /. Credibilit$. C. 6eriodicit$. ". 7eliabilit$.

1%. 5vidence is reliable if it A. Signals the true state of a management assertion. /. Applies to the period being audited. C. 7elates to the audit assertion being tested. ". Is consistent 'ith management0s assertions.

1&. ,hich of the follo'ing best describes the concept of audit ris#A. he ris# of the auditor being sued because of association 'ith an audit client. /. he ris# that the auditor 'ill provide an unqualified opinion on financial statements that are, in fact, materiall$ misstated. C. he overall ris# that a material misstatement e.ists in the financial statements. ". he ris# that auditors use audit procedures that are inappropriate.

1(. An auditor 'ho accepts an audit engagement and does not possess e.pertise 'ith respect to the business entit$0s industr$, should A. 5ngage financial e.perts familiar 'ith the nature of the business entit$. /. 4btain a #no'ledge of matters that relate to the nature of the entit$0s business. C. 7efer a substantial portion of the audit to another C6A, 'ho 'ill act as the principal auditor. ". First inform management that an unqualified opinion cannot be issued.

1). For publicl$-held companies, 'hich of the follo'ing is integrated into the audit of financial statementsA. /udgetar$ information audit. /. he audit of internal controls. C. Audit of management forecasts. ". Audit of interim financial statements.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

1*. "uring the first phase of an audit, a C6A most li#el$ 'ould A. Identif$ specific internal control activities that are li#el$ to prevent fraud. /. 5valuate the reasonableness of the client0s accounting estimates. C. 5valuate the integrit$ of management. ". Inquire of the client0s attorne$ as to 'hether an$ unrecorded claims are probable or asserted.

1+. In the conte.t of agenc$ theor$, information as$mmetr$ refers to the idea that A. Information can var$ in its reliabilit$. /. Information can var$ in its relevance. C. 8anagement has more information about the entit$0s true financial position than do the absentee o'ners 9i.e. stoc#holders:. ". 8anagement li#el$ 'ill not act in the best interests of the absentee o'ners.

11. ,hich of the follo'ing best describes 'h$ an independent auditor is as#ed to e.press an opinion on the fair presentation of financial statementsA. It is difficult to prepare financial statements that fairl$ present a compan$0s financial position and changes in cash flo's 'ithout the e.pertise of an independent auditor. /. It is management0s responsibilit$ to see# available independent aid in the appraisal of the financial information sho'n in its financial statements. C. he opinion of an independent part$ is needed because a compan$ is not li#el$ to be considered ob;ective 'ith respect to its o'n financial statements. ". It is a customar$ courtes$ that all stoc#holders of a compan$ receive an independent report on management0s ste'ardship in managing the affairs of the business.

!0. ,hich of the follo'ing best describes the fundamental, underl$ing reason for 'h$ there is demand for an independent auditor to report on financial statementsA. A management fraud ma$ e.ist and it is more li#el$ to be detected b$ auditors if the$ are independent. /. "ifferent interests ma$ e.ist bet'een the compan$ preparing the statements and the parties using the statements. C. A misstatement of account balances ma$ e.ist and it is the independent auditor0s responsibilit$ to ensure that financial statements are not misstated. ". A poorl$ designed internal control s$stem ma$ be in place.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!1. ,hich of the follo'ing best describes 'h$ publicl$-traded corporations follo' the practice of having the e.ternal auditor appointed b$ the board of directors or elected b$ the stoc#holdersA. o promote an adversarial relationship bet'een the auditor and the corporation0s management. /. o enhance auditor independence from the management of the corporation. C. o encourage a polic$ of rotation of the independent auditors. ". o give management more leverage over the auditor0s decisions.

!!. he definition of auditing refers to auditing as a <s$stematic process of ob;ectivel$ obtaining and evaluating evidence regarding assertions< ,hat is meant b$ <s$stematic process<A. All audits involve obtaining the same evidence. /. All audits involve evaluating evidence in the same manner. C. here should be a 'ell-planned approach for obtaining and evaluating evidence. ". All assertions are equall$ important for all audits.

!%. ,hich of the follo'ing 'ould best be described as an assurance serviceA. 6reparing a report representing a client0s position during an I7S audit. /. ,or#ing 'ith a client to develop a more efficient method of processing financial transactions. C. 4ffering an opinion concerning the accurac$ of statements made on a client0s 'ebsite relating to the client0s online privac$ policies. ". Assisting a client in identif$ing potential sources of capital for potential acquisitions.

!&. ,hich of the follo'ing statements is not true 'ith respect to assurance, attest, and audit servicesA. hese services are applied onl$ to financial statements and financial statement accounts. /. hese services all involve obtaining and evaluating evidence. C. hese services all involve determining the correspondence of some information to a set of criteria. ". hese services all involve issuing a report.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!(. Auditors are most li#el$ to use the most rigorous audit procedures to e.amine A. 7outine transactions. /. 8anagement assertions that are deemed to be of lo' ris#. C. 4nl$ the rights and obligations assertion. ". 8anagement assertions that are deemed to be of high ris#.

!). ,hen obtaining an understanding of the entit$ and its environment, the auditor should obtain an understanding of internal controls primaril$ to A. Identif$ areas of relativel$ high ris# of misstatement and plan the audit accordingl$. /. 6rovide suggestions for improvement to the client. C. Serve as a basis for setting audit ris# and materialit$. ". "ecide 'hether to perform an audit for the client.

!*. ,hich one of the follo'ing statements best describes the concept of materialit$A. 8aterialit$ is determined b$ reference to specific quantitative guidelines established b$ the AIC6A. /. 8aterialit$ depends onl$ on the dollar amount of an item relative to other items in the financial statements. C. 8aterialit$ depends on the nature of an item but not on the dollar amount of the item. ". 8aterialit$ is largel$ a matter of professional ;udgment.

!+. /efore accepting an engagement to audit a ne' client, an auditor is required to A. 8a#e inquiries of the predecessor auditor. /. ell the client 'hether or not the auditor is 'illing to issue a <clean< opinion. C. 6repare a memorandum setting forth the staffing requirements and documenting the preliminar$ audit plan. ". /ecome a member of the client0s board of directors.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!1. An investor is reading the financial statements of the Stan#e$ Corporation and observes that the statements are accompanied b$ an auditor0s unqualified report. From this, the investor ma$ conclude that A. An$ disputes over significant accounting issues have been settled to the auditor0s satisfaction. /. he auditor is satisfied that Stan#e$ 'ill be highl$ profitable in the future. C. he auditor is certain that Stan#e$0s financial statements have been prepared accuratel$ and that all account balances are precisel$ correct. ". he auditor has determined that Stan#e$0s management is not qualified to lead the compan$.

%0. 6reliminar$ engagement activities include A. 5valuating internal controls. /. Assessing audit ris# at the account balance level. C. Setting materialit$. ". 6erforming bac#ground chec#s on top management.

%1. he auditor0s report is generall$ addressed to the A. Chief operating officer. /. Securities and 5.change Commission. C. Stoc#holders of the compan$. ". Chief financial officer.

%!. An auditor 'ould issue an adverse opinion if A. he auditor encounters adverse attitudes to'ard the auditor on the part of client management. /. A qualified opinion cannot be given because the auditor is not qualified to do so. C. An immaterial misstatement is present. ". he statements ta#en as a 'hole do not fairl$ present the financial condition and results of operations of the compan$.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%%. ,hich of the follo'ing is true 'ith respect to the auditor0s reportA. he report indicates that the client0s financial statements 'ere audited in accordance 'ith generall$ accepted accounting standards. /. he report indicates that the client0s financial statements 'ere audited in accordance 'ith applicable auditing standards. C. he report indicates that the client0s financial statements 'ere audited in accordance 'ith the auditor0s best ;udgment. ". he report indicates that the client0s financial statements 'ere audited in accordance 'ith statements issued b$ the FAS/.

%&. ,hich of the follo'ing is not a concept that is included in the scope paragraph of the auditor0s reportA. he conformance of the financial statements 'ith generall$ accepted accounting principles. /. he audit 'as conducted in accordance 'ith applicable auditing standards. C. he audit 'as planned and performed to obtain reasonable, rather than absolute, assurance. ". An audit involves e.amining items on a test 9i.e. sampling: basis.

Short Answer Questions

%(. 4n a high level, the accounting processes of a business consist of internal controls, individual transactions, and account balances. Required A. "escribe the relationship bet'een internal controls, individual transactions, and account balances. /. "iscuss ho' evidence regarding each of these three areas can help an auditor determine if the financial statements are fairl$ stated.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%). Sall$ hompson0s compan$, Sall$0s Shoes, is a successful shoe retail business 'ith one store. Sall$ 'ould li#e to e.pand to t'o locations, but the ban# has as#ed for an independent audit before it 'ill provide financing. Sall$ hires her brother-in-la', =eorge hompson, to perform the audit. =eorge has e.perience in auditing non-profit organi2ations and he decides to perform the audit the same 'a$ as his other audits. After completing all the steps of the audit process, =eorge issues an unqualified opinion indicating that he is certain that the compan$0s financial statements contain no misstatements. Comment on an$ potential problems 'ith =eorge0s audit of Sall$0s Shoes.

%*. 5.plain the relationship bet'een audit, attest and assurance services.

%+. "efine <information as$mmetr$< and discuss it in the conte.t of the financial mar#ets. Include in $our discussion ho' information as$mmetr$ is reduced.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%1. he te.tboo# presented the concept of auditing through an analog$ that involved bu$ing a house and hiring a house inspector. 3ame three desirable qualities of a house inspector or an auditor and discuss ho' those qualities appl$ to an auditor and 'h$ those qualities are important for an auditor to possess.

&0. "iscuss an overvie' of the financial statement audit process using the terms <assertion,< <evidence,< and <report.<

&1. >ou are a ne' emplo$ee at the accounting firm 8urra$ ? 8urra$, C6As. /efore $ou are assigned to $our first audit, $our supervisor tests $our #no'ledge and as#s $ou to e.plain the term <scope< in the conte.t of a financial statement audit. Required@ A. 6rovide a definition of scope. /. "escribe 'hat influences an auditor0s determination of scope.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&!. ,h$ must an auditor assess materialit$-

&%. >ou are a ne' staff auditor and $ou are auditing a client0s inventor$ account. /riefl$ describe one 'a$ $ou might obtain direct evidence and one 'a$ $ou might obtain indirect evidence that the inventor$ account balance is fairl$ stated.

&&. 3ame and discuss the seven phases of the audit process.

&(. A standard, unqualified auditor0s report contains three paragraphs, plus a fourth e.planator$ paragraph in some circumstances. 6rovide a brief 9one sentence: description for each paragraph.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&). 5.plain the relationship bet'een sample si2e, materialit$, and desired level of assurance.

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

Chapter 01 An Introduction to Assurance and Financial Statement Auditing Ans'er Ae$

True / False Questions

1. Independence standards are required for audits of public companies, but not for audits of private companies. FA!S"

AACSB: Communication AICPA BB: Legal AICPA FN: Decision Making Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &% 'n(erstan( )*y stu(ying au(iting can be $aluable to you an( )*y it is (ifferent from stu(ying accounting+ ,o-ic: ,*e Stu(y of Au(iting

!. "ecision ma#ers demand reliable information that is provided b$ accountants. TR#"

AACSB: Communication AICPA BB: In(ustry AICPA FN: Decision Making Blooms: 'n(erstan( Difficulty: !asy Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ ,o-ic: ,*e Deman( for Au(iting an( Assurance

%. Information as$mmetr$ seldom occurs. FA!S"

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ ,o-ic: ,*e Deman( for Au(iting an( Assurance

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&. Conflicts of interest often occur bet'een absentee o'ners and managers. TR#"

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ ,o-ic: ,*e Deman( for Au(iting an( Assurance

(. Auditing services and attestation services are the same. FA!S"

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: 'n(erstan( Difficulty: !asy Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

). Auditing is a t$pe of attest service. TR#"

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: 'n(erstan( Difficulty: !asy Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ Learning "b#ecti$e: % &%3 4no) t*e basic (efinition of a financial statement au(it+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

*. esting all transactions that occurred during the period is cost prohibitive. TR#"

AACSB: Communication AICPA BB: Critical ,*inking AICPA FN: Decision Making Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%5 'n(erstan( )*y on most au(it engagements an au(itor tests only a sam-le of transactions t*at occurre(+ ,o-ic: Sam-ling: Inferences Base( on Limite( "bser$ations

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

Multiple Choice Questions

+. ,h$ do auditors generall$ use a sampling approach to evidence gatheringA. Auditors are e.perts and do not need to loo# at much to #no' 'hether the financial statements are correct or not. $% Auditors must balance the cost of the audit 'ith the need for precision. C. Auditors must limit their e.posure to their client to maintain independence. ". he auditor0s relationship 'ith the client is generall$ adversarial, so the auditor 'ill not have access to all of the financial information of the compan$.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Decision Making Blooms: 'n(erstan( Difficulty: !asy Learning "b#ecti$e: % &%5 'n(erstan( )*y on most au(it engagements an au(itor tests only a sam-le of transactions t*at occurre(+ ,o-ic: Sam-ling: Inferences Base( on Limite( "bser$ations

1. ,hich of the follo'ing statements best describes a relationship bet'een sample si2e and other elements of auditingA. If materialit$ increases, so 'ill the sample si2e. /. If the desired level of assurance increases, sample si2es can be smaller. C% If materialit$ decreases, sample si2e 'ill need to increase. ". here is no relationship bet'een sample si2e and materialit$ or the desired level of assurance.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Risk Analysis Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%5 'n(erstan( )*y on most au(it engagements an au(itor tests only a sam-le of transactions t*at occurre(+ ,o-ic: Sam-ling: Inferences Base( on Limite( "bser$ations

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

10. ,hich of the follo'ing statements about the stud$ of auditing is 34 trueA. he stud$ of auditing can be valuable to future accountants and business decision ma#ers 'hether or not the$ plan to become auditors. /. he stud$ of auditing focuses on learning the anal$tical and logical s#ills necessar$ to evaluate the relevance and reliabilit$ of information. C% he stud$ of auditing focuses on learning the rules, techniques, and computations required to anal$2e financial statements. ". he stud$ of auditing begins 'ith the understanding of a coherent logical frame'or# and techniques useful for gathering and anal$2ing evidence about others0 assertions.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Decision Making Blooms: Analy6e Difficulty: . Me(ium Learning "b#ecti$e: % &% 'n(erstan( )*y stu(ying au(iting can be $aluable to you an( )*y it is (ifferent from stu(ying accounting+ ,o-ic: ,*e Stu(y of Au(iting

11. he basic purpose of a financial statement audit is to A. "etect fraud. /. 5.amine individual transactions so that the auditor ma$ certif$ as to their validit$. C% 6rovide assurance regarding 'hether the client0s financial statements are fairl$ stated. ". Assure the consistent application of correct accounting procedures.

AACSB: Communication AICPA BB: Critical ,*inking AICPA FN: Re-orting Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ Learning "b#ecti$e: % &%3 4no) t*e basic (efinition of a financial statement au(it+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

1!. Assurance services ma$ improve all of the follo'ing e.cept A. 7elevance. /. Credibilit$. C% 6eriodicit$. ". 7eliabilit$.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

1%. 5vidence is reliable if it A% Signals the true state of a management assertion. /. Applies to the period being audited. C. 7elates to the audit assertion being tested. ". Is consistent 'ith management0s assertions.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Measurement Blooms: 'n(erstan( Difficulty: !asy Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it

1&. ,hich of the follo'ing best describes the concept of audit ris#A. he ris# of the auditor being sued because of association 'ith an audit client. $% he ris# that the auditor 'ill provide an unqualified opinion on financial statements that are, in fact, materiall$ misstated. C. he overall ris# that a material misstatement e.ists in the financial statements. ". he ris# that auditors use audit procedures that are inappropriate.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Risk Analysis Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

1(. An auditor 'ho accepts an audit engagement and does not possess e.pertise 'ith respect to the business entit$0s industr$, should A. 5ngage financial e.perts familiar 'ith the nature of the business entit$. $% 4btain a #no'ledge of matters that relate to the nature of the entit$0s business. C. 7efer a substantial portion of the audit to another C6A, 'ho 'ill act as the principal auditor. ". First inform management that an unqualified opinion cannot be issued.

AACSB: !t*ics AICPA BB: In(ustry AICPA FN: Decision Making Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ Learning "b#ecti$e: % & % 'n(erstan( )*y au(iting (eman(s logic1 reasoning1 an( resourcefulness+ ,o-ic: Logic2 Reason2 an( Resourcefulness ,o-ic: ,*e Au(it Process

1). For publicl$-held companies, 'hich of the follo'ing is integrated into the audit of financial statementsA. /udgetar$ information audit. $% he audit of internal controls. C. Audit of management forecasts. ". Audit of interim financial statements.

AACSB: Communication AICPA BB: Legal AICPA FN: Re-orting Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

1*. "uring the first phase of an audit, a C6A most li#el$ 'ould A. Identif$ specific internal control activities that are li#el$ to prevent fraud. /. 5valuate the reasonableness of the client0s accounting estimates. C% 5valuate the integrit$ of management. ". Inquire of the client0s attorne$ as to 'hether an$ unrecorded claims are probable or asserted.

AACSB: Communication AICPA BB: Resource Management AICPA FN: Decision Making Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

1+. In the conte.t of agenc$ theor$, information as$mmetr$ refers to the idea that A. Information can var$ in its reliabilit$. /. Information can var$ in its relevance. C% 8anagement has more information about the entit$0s true financial position than do the absentee o'ners 9i.e. stoc#holders:. ". 8anagement li#el$ 'ill not act in the best interests of the absentee o'ners.

AACSB: Communication AICPA BB: Critical ,*inking AICPA FN: Risk Analysis Blooms: 'n(erstan( Difficulty: !asy Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ Learning "b#ecti$e: % &%9 'n(erstan( intuiti$ely t*e (eman( for au(iting an( t*e (esire( c*aracteristics of au(itors an( au(it ser$ices t*roug* an analogy to a *ouse ins-ector an( a *ouse ins-ection ser$ice+ ,o-ic: An Assurance Analogy ,o-ic: ,*e Deman( for Au(iting an( Assurance

11. ,hich of the follo'ing best describes 'h$ an independent auditor is as#ed to e.press an opinion on the fair presentation of financial statementsA. It is difficult to prepare financial statements that fairl$ present a compan$0s financial position and changes in cash flo's 'ithout the e.pertise of an independent auditor. /. It is management0s responsibilit$ to see# available independent aid in the appraisal of the financial information sho'n in its financial statements. C% he opinion of an independent part$ is needed because a compan$ is not li#el$ to be considered ob;ective 'ith respect to its o'n financial statements. ". It is a customar$ courtes$ that all stoc#holders of a compan$ receive an independent report on management0s ste'ardship in managing the affairs of the business.

AACSB: Reflecti$e ,*inking AICPA BB: Critical ,*inking AICPA FN: Re-orting Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ Learning "b#ecti$e: % &%9 'n(erstan( intuiti$ely t*e (eman( for au(iting an( t*e (esire( c*aracteristics of au(itors an( au(it ser$ices t*roug* an analogy to a *ouse ins-ector an( a *ouse ins-ection ser$ice+ ,o-ic: An Assurance Analogy ,o-ic: ,*e Deman( for Au(iting an( Assurance

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!0. ,hich of the follo'ing best describes the fundamental, underl$ing reason for 'h$ there is demand for an independent auditor to report on financial statementsA. A management fraud ma$ e.ist and it is more li#el$ to be detected b$ auditors if the$ are independent. $% "ifferent interests ma$ e.ist bet'een the compan$ preparing the statements and the parties using the statements. C. A misstatement of account balances ma$ e.ist and it is the independent auditor0s responsibilit$ to ensure that financial statements are not misstated. ". A poorl$ designed internal control s$stem ma$ be in place.

AACSB: Reflecti$e ,*inking AICPA BB: Critical ,*inking AICPA FN: Re-orting Blooms: Analy6e Difficulty: . Me(ium Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ ,o-ic: ,*e Deman( for Au(iting an( Assurance

!1. ,hich of the follo'ing best describes 'h$ publicl$-traded corporations follo' the practice of having the e.ternal auditor appointed b$ the board of directors or elected b$ the stoc#holdersA. o promote an adversarial relationship bet'een the auditor and the corporation0s management. $% o enhance auditor independence from the management of the corporation. C. o encourage a polic$ of rotation of the independent auditors. ". o give management more leverage over the auditor0s decisions.

AACSB: !t*ics AICPA BB: Legal AICPA FN: Risk Analysis Blooms: Analy6e Difficulty: . Me(ium Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ ,o-ic: ,*e Deman( for Au(iting an( Assurance

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!!. he definition of auditing refers to auditing as a <s$stematic process of ob;ectivel$ obtaining and evaluating evidence regarding assertions< ,hat is meant b$ <s$stematic process<A. All audits involve obtaining the same evidence. /. All audits involve evaluating evidence in the same manner. C% here should be a 'ell-planned approach for obtaining and evaluating evidence. ". All assertions are equall$ important for all audits.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Decision Making Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ Learning "b#ecti$e: % &%3 4no) t*e basic (efinition of a financial statement au(it+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

!%. ,hich of the follo'ing 'ould best be described as an assurance serviceA. 6reparing a report representing a client0s position during an I7S audit. /. ,or#ing 'ith a client to develop a more efficient method of processing financial transactions. C% 4ffering an opinion concerning the accurac$ of statements made on a client0s 'ebsite relating to the client0s online privac$ policies. ". Assisting a client in identif$ing potential sources of capital for potential acquisitions.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Decision Making Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!&. ,hich of the follo'ing statements is not true 'ith respect to assurance, attest, and audit servicesA% hese services are applied onl$ to financial statements and financial statement accounts. /. hese services all involve obtaining and evaluating evidence. C. hese services all involve determining the correspondence of some information to a set of criteria. ". hese services all involve issuing a report.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Decision Making Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

!(. Auditors are most li#el$ to use the most rigorous audit procedures to e.amine A. 7outine transactions. /. 8anagement assertions that are deemed to be of lo' ris#. C. 4nl$ the rights and obligations assertion. &% 8anagement assertions that are deemed to be of high ris#.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Risk Analysis Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!). ,hen obtaining an understanding of the entit$ and its environment, the auditor should obtain an understanding of internal controls primaril$ to A% Identif$ areas of relativel$ high ris# of misstatement and plan the audit accordingl$. /. 6rovide suggestions for improvement to the client. C. Serve as a basis for setting audit ris# and materialit$. ". "ecide 'hether to perform an audit for the client.

AACSB: Analytic AICPA BB: In(ustry AICPA FN: Risk Analysis Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it ,o-ic: ,*e Au(it Process

!*. ,hich one of the follo'ing statements best describes the concept of materialit$A. 8aterialit$ is determined b$ reference to specific quantitative guidelines established b$ the AIC6A. /. 8aterialit$ depends onl$ on the dollar amount of an item relative to other items in the financial statements. C. 8aterialit$ depends on the nature of an item but not on the dollar amount of the item. &% 8aterialit$ is largel$ a matter of professional ;udgment.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Measurement Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

!+. /efore accepting an engagement to audit a ne' client, an auditor is required to A% 8a#e inquiries of the predecessor auditor. /. ell the client 'hether or not the auditor is 'illing to issue a <clean< opinion. C. 6repare a memorandum setting forth the staffing requirements and documenting the preliminar$ audit plan. ". /ecome a member of the client0s board of directors.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Decision Making Blooms: Remember Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

!1. An investor is reading the financial statements of the Stan#e$ Corporation and observes that the statements are accompanied b$ an auditor0s unqualified report. From this, the investor ma$ conclude that A% An$ disputes over significant accounting issues have been settled to the auditor0s satisfaction. /. he auditor is satisfied that Stan#e$ 'ill be highl$ profitable in the future. C. he auditor is certain that Stan#e$0s financial statements have been prepared accuratel$ and that all account balances are precisel$ correct. ". he auditor has determined that Stan#e$0s management is not qualified to lead the compan$.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ Learning "b#ecti$e: % &%: 4no) )*at an au(it re-ort is an( t*e nature of an un;ualifie( re-ort+ ,o-ic: !$aluate Results an( Issue Au(it Re-ort ,o-ic: ,*e Au(it Process

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%0. 6reliminar$ engagement activities include A. 5valuating internal controls. /. Assessing audit ris# at the account balance level. C. Setting materialit$. &% 6erforming bac#ground chec#s on top management.

AACSB: Analytic AICPA BB: Resource Management AICPA FN: Decision Making Blooms: Remember Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

%1. he auditor0s report is generall$ addressed to the A. Chief operating officer. /. Securities and 5.change Commission. C% Stoc#holders of the compan$. ". Chief financial officer.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%: 4no) )*at an au(it re-ort is an( t*e nature of an un;ualifie( re-ort+ ,o-ic: !$aluate Results an( Issue Au(it Re-ort

%!. An auditor 'ould issue an adverse opinion if A. he auditor encounters adverse attitudes to'ard the auditor on the part of client management. /. A qualified opinion cannot be given because the auditor is not qualified to do so. C. An immaterial misstatement is present. &% he statements ta#en as a 'hole do not fairl$ present the financial condition and results of operations of the compan$.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%: 4no) )*at an au(it re-ort is an( t*e nature of an un;ualifie( re-ort+ ,o-ic: !$aluate Results an( Issue Au(it Re-ort

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%%. ,hich of the follo'ing is true 'ith respect to the auditor0s reportA. he report indicates that the client0s financial statements 'ere audited in accordance 'ith generall$ accepted accounting standards. $% he report indicates that the client0s financial statements 'ere audited in accordance 'ith applicable auditing standards. C. he report indicates that the client0s financial statements 'ere audited in accordance 'ith the auditor0s best ;udgment. ". he report indicates that the client0s financial statements 'ere audited in accordance 'ith statements issued b$ the FAS/.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%: 4no) )*at an au(it re-ort is an( t*e nature of an un;ualifie( re-ort+ ,o-ic: !$aluate Results an( Issue Au(it Re-ort

%&. ,hich of the follo'ing is not a concept that is included in the scope paragraph of the auditor0s reportA% he conformance of the financial statements 'ith generall$ accepted accounting principles. /. he audit 'as conducted in accordance 'ith applicable auditing standards. C. he audit 'as planned and performed to obtain reasonable, rather than absolute, assurance. ". An audit involves e.amining items on a test 9i.e. sampling: basis.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: Remember Difficulty: . Me(ium Learning "b#ecti$e: % &%: 4no) )*at an au(it re-ort is an( t*e nature of an un;ualifie( re-ort+ ,o-ic: !$aluate Results an( Issue Au(it Re-ort

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

Short Answer Questions

%(. 4n a high level, the accounting processes of a business consist of internal controls, individual transactions, and account balances. Required A. "escribe the relationship bet'een internal controls, individual transactions, and account balances. /. "iscuss ho' evidence regarding each of these three areas can help an auditor determine if the financial statements are fairl$ stated. A. A compan$ implements internal controls as a safeguard to ensure appropriate capturing and recording of individual transactions, 'hich are then collected into ending account balances. 5nding account balances are then used to prepare the financial statements. he auditor e.presses an opinion on the financial statements, 'hich are made up of ending account balances and disclosures. /. he auditor can obtain evidence from all three steps of the accounting process. For instance, an auditor can directl$ test the account balance 9e.g., b$ e.amining a ban# statement reconciliation:. his evidence is usuall$ the highest-qualit$ but costliest evidence. Alternativel$, the auditor can obtain indirect information b$ testing the individual transactions that ma#e up an account balance. If transactions are handled properl$, this provides indirect evidence that the ending balances are more li#el$ to be fairl$ stated. he least direct method of obtaining evidence is to evaluate and test the compan$0s internal controls, 'hich are implemented to ensure that transactions are handled properl$. If a client0s s$stem of internal control is effective, transactions are more li#el$ to be handled properl$, and thus the ending balances ma#ing up a set of financial statements are more li#el$ to be fairl$ stated. Auditors usuall$ collect evidence relating to all three areas@ internal control, transactions, and ending balances.

AACSB: Communication AICPA BB: Critical ,*inking AICPA FN: Decision Making Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it ,o-ic: ,*e Au(it Process

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%). Sall$ hompson0s compan$, Sall$0s Shoes, is a successful shoe retail business 'ith one store. Sall$ 'ould li#e to e.pand to t'o locations, but the ban# has as#ed for an independent audit before it 'ill provide financing. Sall$ hires her brother-in-la', =eorge hompson, to perform the audit. =eorge has e.perience in auditing non-profit organi2ations and he decides to perform the audit the same 'a$ as his other audits. After completing all the steps of the audit process, =eorge issues an unqualified opinion indicating that he is certain that the compan$0s financial statements contain no misstatements. Comment on an$ potential problems 'ith =eorge0s audit of Sall$0s Shoes. 'ossi(le solutions@ Independence@ /ecause =eorge is Sall$0s brother-in-la', he is not considered independent. his presents a problem, both in the perceived value of the audit and in the actual ob;ectivit$ of the audit. hat is, =eorge ma$ be intentionall$ or unintentionall$ biased to'ards Sall$0s Shoes rather than its creditors. his 'ould also violate professional standards. Competence@ =eorge0s competence in this audit is also questionable. ,hile =eorge has e.perience in auditing, he has no e.perience or #no'ledge of retail stores or even for-profit organi2ations. o successfull$ perform an audit, =eorge 'ould need to obtain an understanding of the industr$. 4ne audit should not be performed e.actl$ the same as another Brather, audits should be tailored to the specific circumstances and ris#s. 4ther@ An unqualified audit opinion provides onl$ reasonable assurance, not certaint$ or <absolute< assurance. It also provides assurance onl$ 'ith respect to the fairness of the financial statements <in all material respects<C it does not provide assurance 'ith respect to all misstatements, onl$ material ones.

AACSB: !t*ics AICPA BB: Legal AICPA FN: Risk Analysis Blooms: Analy6e Difficulty: 9 <ar( Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ Learning "b#ecti$e: % &%9 'n(erstan( intuiti$ely t*e (eman( for au(iting an( t*e (esire( c*aracteristics of au(itors an( au(it ser$ices t*roug* an analogy to a *ouse ins-ector an( a *ouse ins-ection ser$ice+ Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: An Assurance Analogy ,o-ic: ,*e Au(it Process ,o-ic: ,*e Deman( for Au(iting an( Assurance

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%*. 5.plain the relationship bet'een audit, attest and assurance services. All three services entail the evaluation of evidence to determine the correspondence of some information to a set of criteria and the issuance of a report to indicate the degree of correspondence. Assurance services are independent professional services that improve the qualit$ of information or its conte.t, for decision ma#ers. 3ote that assurance services cover both nonfinancial and financial information. Assurance services can capture information, improve its qualit$, and enhance its usefulness for decision ma#ers. he e.tended reach of this definition allo's professionals to report not onl$ on the reliabilit$ and credibilit$ of information but also on the relevance and timeliness of that information. Attestation is a t$pe of assurance. Attest services occur 'hen a practitioner is engaged to issue or does issue a report on sub;ect matter or an assertion about sub;ect matter that is the responsibilit$ of another part$. he practitioner is able to add reliabilit$ and credibilit$ to information be$ond traditional financial information. 5.amples of attest services include financial forecasts and reports on internal control. Auditing is a speciali2ed form of an attest service. Auditing is a s$stematic process of 91: ob;ectivel$ maintaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence bet'een those assertions and established criteria and 9!: communicating results to interested users. 5.amples of audit services include compliance auditing and audits of financial statements.

AACSB: Analytic AICPA BB: In(ustry AICPA FN: Decision Making Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%0 'n(erstan( t*e relations*i-s among au(iting1 attestation1 an( assurance ser$ices+ ,o-ic: Au(iting2 Attest2 an( Assurance Ser$ices Define(

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%+. "efine <information as$mmetr$< and discuss it in the conte.t of the financial mar#ets. Include in $our discussion ho' information as$mmetr$ is reduced. In the conte.t of financial mar#ets, information as$mmetr$ is the concept that the compan$0s management generall$ has more information about the true financial position and results of operations of the entit$ than the absentee o'ner does. ,hile management of a public compan$ 'or#s as an agent for the stoc#holders, a conflict of interest is apparent because both sides see# to ma.imi2e their self interest. his leads to a ris# that the manager 'ill not al'a$s act in the best interest of the o'ner. herefore, the o'ners attempt to protect themselves through monitoring. Audits provide reasonable assurance that the information presented b$ management is fairl$ stated. he o'ners are attempting to reduce information as$mmetr$ b$ see#ing out reliable compan$ information.

AACSB: Communication AICPA BB: Critical ,*inking AICPA FN: Risk Analysis Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%. Be able to e/-lain )*y t*ere is a (eman( for au(iting an( assurance+ ,o-ic: ,*e Deman( for Au(iting an( Assurance

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

%1. he te.tboo# presented the concept of auditing through an analog$ that involved bu$ing a house and hiring a house inspector. 3ame three desirable qualities of a house inspector or an auditor and discuss ho' those qualities appl$ to an auditor and 'h$ those qualities are important for an auditor to possess. 'ossi(le solutions@ A house inspector should be competent, 'hich means he should possess the required training, e.pertise, and e.perience to evaluate the propert$ for sale. An auditor should also be competent. An auditor must #no' the acceptable methods to perform an audit and report an opinion. Furthermore, the auditor should have or obtain #no'ledge of the specific industr$ involved in the audit so she can appropriatel$ ad;ust the timing, nature, and e.tent of auditing procedures. A house inspector should be ob;ective. De should have no reason to side 'ith the sellerC he is independent of the seller0s influence. In the same 'a$, an auditor should be independent of management0s influence. Financial statement audits differ from house inspections in that auditing fees are paid for b$ the seller instead of the bu$er. /ecause of this, an auditor needs to maintain independence in fact and appearance to decrease bias to'ards the compan$0s management and garner public confidence for the findings. A house inspector should be honestC he should conduct himself 'ith integrit$ and share all findings 'ith the bu$er. If an auditor discovers a material misstatement, she is required to report the findings to management. If nothing is done to rectif$ the situation and the auditor feels the financial statements are not fairl$ presented, she cannot issue an unqualified report. A house inspector should be s#eptical. De 'ill not simpl$ ta#e the seller0s assertions at face value. De 'ill conduct his o'n anal$sis and testing. An auditor, in comparison, should al'a$s e.ercise professional s#epticism. An auditor gathers her o'n evidence to determine the validit$ of management0s assertions. A house inspector should be responsible andEor liable. De should stand behind his assessment 'ith a guarantee andEor be sub;ect to litigation if he fails to act 'ith due care. An auditor should al'a$s act 'ith due care. ,hen a firm issues a report, the report is signed 'ith the firm0s name to signif$ the firm0s responsibilit$ for performing the audit.

AACSB: Communication AICPA BB: Marketing AICPA FN: Decision Making Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%9 'n(erstan( intuiti$ely t*e (eman( for au(iting an( t*e (esire( c*aracteristics of au(itors an( au(it ser$ices t*roug* an analogy to a *ouse ins-ector an( a *ouse ins-ection ser$ice+ ,o-ic: An Assurance Analogy

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&0. "iscuss an overvie' of the financial statement audit process using the terms <assertion,< <evidence,< and <report.< he auditor gathers evidence about the business transactions that have occurred 9economic activit$ and events: and about management 9the preparer of the statements:. he auditor uses this evidence to compare the assertions contained in the financial statements to the criteria chosen b$ the user. he auditor0s report communicates to the user the degree of correspondence bet'een the assertions and the criteria.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

&1. >ou are a ne' emplo$ee at the accounting firm 8urra$ ? 8urra$, C6As. /efore $ou are assigned to $our first audit, $our supervisor tests $our #no'ledge and as#s $ou to e.plain the term <scope< in the conte.t of a financial statement audit. Required@ A. 6rovide a definition of scope. /. "escribe 'hat influences an auditor0s determination of scope. A. he scope of an audit is the t$pe and amount of audit 'or# to be performed. /. he auditor0s assessments of ris# and materialit$ influence the scope of the audit. For instance, if an auditor sets a lo'er materialit$ amount or 'ould li#e to substantiall$ reduce audit ris#, the scope of the audit 'ould be increased. In establishing the scope of an audit, the auditor must ma#e decisions about the nature, e.tent, and timing of evidence to be gathered in order to evaluate management0s assertions.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Measurement Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&!. ,h$ must an auditor assess materialit$An auditor must assess materialit$ because to find all misstatements 'ould not be costefficient or even feasible. o search for all misstatements, the auditor 'ould need to e.amine ever$ transaction. In addition, relativel$ minor misstatements ma$ not matter to users. For this reason, 'hen planning and performing an audit the auditor focuses on misstatements that 'ould affect the users0 decisions 9i.e. material misstatements:.

AACSB: Analytic AICPA BB: Critical ,*inking AICPA FN: Risk Analysis Blooms: A--ly Difficulty: . Me(ium Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ Learning "b#ecti$e: % &%5 'n(erstan( )*y on most au(it engagements an au(itor tests only a sam-le of transactions t*at occurre(+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it ,o-ic: Sam-ling: Inferences Base( on Limite( "bser$ations

&%. >ou are a ne' staff auditor and $ou are auditing a client0s inventor$ account. /riefl$ describe one 'a$ $ou might obtain direct evidence and one 'a$ $ou might obtain indirect evidence that the inventor$ account balance is fairl$ stated. Student answers will )ar*% The +ollowing answer pro)ides an e,ample@ o obtain direct evidence, an auditor can ph$sicall$ e.amine and count the items included in the ending balance of the inventor$ account. o obtain indirect evidence, an auditor can e.amine invoices from suppliers relating to purchases of inventor$ or could test 'hether the internal controls over the inventor$ process 'ere 'or#ing properl$.

AACSB: Analytic AICPA BB: In(ustry AICPA FN: Decision Making Blooms: A--ly Difficulty: 9 <ar( Learning "b#ecti$e: % &%7 'n(erstan( at a basic le$el t*ree fun(amental conce-ts t*at un(erlie financial statement au(iting+ ,o-ic: Fun(amental Conce-ts in Con(ucting a Financial Statement Au(it

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&&. 3ame and discuss the seven phases of the audit process. 1. Client acceptanceEcontinuance@ o minimi2e the li#elihood that an auditor 'ill be associated 'ith clients 'ho lac# integrit$, prospective auditors are required to confer 'ith the predecessor auditor and frequentl$ conduct bac#ground chec#s on top management. !. 6reliminar$ engagement activities@ 6reliminar$ engagement activities include 91: determining the audit engagement team requirementsC 9!: ensuring the independence of the audit team and audit firmC and 9%: establishing an understanding 'ith the client regarding the services to be performed and the other terms of the engagement. %. 6lan the audit@ he audit team must ma#e a preliminar$ assessment of materialit$ and relevant ris#s. ,ith those determinations, the audit team can assess ris# relating to the li#elihood of material misstatements in the financial statements. /ased on these assessments, the auditor then prepares a 'ritten audit plan that sets forth, in reasonable detail, the nature, e.tent, and timing of the audit 'or#. &. Consider and audit internal control@ he auditor gains an understanding of internal control to determine its effectiveness at achieving reliabilit$ of financial reporting. (. Audit business processes and related accounts@ he auditor determines and performs individual audit procedures directed to'ard specific assertions in the account balance that are li#el$ to be misstated. ). Complete the audit@ he auditor evaluates the sufficienc$ of the evidence gathered, assesses the possibilit$ of contingent liabilities, and searches for an$ events subsequent to the balance sheet date that ma$ impact the financial statements. *. 5valuate results and issue audit report@ he auditor reaches a conclusion as to 'hether or not the financial statements are fairl$ stated. If the uncorrected misstatements incorporated into the financial statements do not cause the statements to be materiall$ misstated, the auditor issues an unqualified report.

AACSB: Communication AICPA BB: Resource Management AICPA FN: Decision Making Blooms: Remember Difficulty: . Me(ium Learning "b#ecti$e: % &%8 Be able to (escribe t*e basic financial statement au(iting -rocess an( t*e -*ases in )*ic* an au(it is carrie( out+ ,o-ic: ,*e Au(it Process

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Chapter 01 - An Introduction to Assurance and Financial Statement Auditing

&(. A standard, unqualified auditor0s report contains three paragraphs, plus a fourth e.planator$ paragraph in some circumstances. 6rovide a brief 9one sentence: description for each paragraph. he intro(uctory paragraph indicates 'hich financial statements are covered b$ the report, that the statements are the responsibilit$ of management, and that the auditor has a responsibilit$ to e.press an opinion. he sco-e paragraph communicates to the users, in ver$ general terms, 'hat an audit entails and ho' the audit 'as conducted 9in accordance 'ith the applicable auditing standardsBusuall$ either the standards of the 6CA4/ or =AAS:. he o-inion paragraph indicates the auditor0s opinion as to 'hether the financial statements are fairl$ presented in accordance 'ith the criteria against 'hich the$ 'ere audited, =AA6. An e/-lanatory paragraph is used to bring matters of importance to the reader0s attention. For e.ample, in an audit of a public compan$, the auditor0s report on a client0s financial statements 'ill contain an e.planator$ paragraph referring the reader to the auditor0s report on the audit of internal control over financial reporting.

AACSB: Communication AICPA BB: In(ustry AICPA FN: Re-orting Blooms: Remember Difficulty: !asy Learning "b#ecti$e: % &%: 4no) )*at an au(it re-ort is an( t*e nature of an un;ualifie( re-ort+ ,o-ic: !$aluate Results an( Issue Au(it Re-ort

&). 5.plain the relationship bet'een sample si2e, materialit$, and desired level of assurance. he si2e of a sample is influenced b$ the materialit$ and the desired level of assurance for the account or assertion being e.amined. here is an inverse relationship bet'een sample si2e and materialit$ 9i.e., if materialit$ increases then sample si2e decreases: and a direct relationship bet'een sample si2e and the desired level of assurance 9i.e., if the desired level of assurance increases then sample si2e increases:.

AACSB: Analytic AICPA BB: In(ustry AICPA FN: Decision Making Blooms: 'n(erstan( Difficulty: . Me(ium Learning "b#ecti$e: % &%5 'n(erstan( )*y on most au(it engagements an au(itor tests only a sam-le of transactions t*at occurre(+ ,o-ic: Sam-ling: Inferences Base( on Limite( "bser$ations

1-%)