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Chapter 1: Auditing: Integral to the Economy

Student: ___________________________________________________________________________
1. The need for assurance services arises because the interests of the users of information may be different from
that of the interests of those responsible for providing information.
True False

2. An audit of financial statements is a form of attestation service.
True False

3. Independence is an attribute necessary to perform assurance services.
True False

4. A bank using ilton !ompany"s financial statements to determine the credit#orthiness of a potential loan to
ilton is a good e$ample of the need for unbiased reporting.
True False

%. Independence is only re&uired for assurance service providers.
True False

'. A !(A automatically &ualifies as an assurance provider in all areas of business.
True False

). Attestation services are a subset of assurance services and always involve a report that goes to a third party.
True False

*. The American Institute of !ertified (ublic Accountants has the primary authority to set auditing standards for
public companies.
True False

+. The audit function is uni&ue because it e$ists to perform services on a ,client, on behalf of shareholders-
directors and other parties.
True False

1.. Auditing is the process of attesting to assertions about economic actions and events.
True False

11. Auditing is the process of verifying the accuracy of the financial statements.
True False

12. Internal auditing only provides assurance services to clients.
True False

13. Auditing primarily e$ists because users need unbiased information on #hich to assess management
performance and make economic decisions.
True False

14. The degree of confidence that users place on management"s financial statements is higher than that placed
on audited financial statements because fe# users have direct kno#ledge of the company"s operations and
management is the most kno#ledgeable about operations.
True False

1%. /.0. nonpublic companies #ill have an audit performed in accordance #ith generally accepted auditing
standards that have been promulgated by the (!A12.
True False

1'. An assertion is a statement about an action- event- condition- or performance over a specified time period.
True False

1). anagement is required to comment on the fairness of the company"s financial presentation. This reduces
the auditor"s legal responsibility for the opinion rendered on the financial statements.
True False

1*. Audited financial statements should be free from all errors and fraud.
True False

1+. Audited financial statements should be presented fairly according to the substance of 3AA(.
True False

2.. Audited financial statements should be presented fairly according to the substance of 3AA0.
True False

21. A plan to converge the /.0. generally accepted auditing standards 43AA05 #ith the International 0tandards
on Auditing 4I0As5 #as developed by the .AI!(A6s Auditing 0tandards 2oard 4A025.
True False

22. Attestation is confined to an audit of client financial statements.
True False

23. An auditor must have a good understanding of the risks associated #ith a client"s industry in order to ensure
that the financial statements reflect the underlying substance of accounting transactions and the economic
effects of such transactions.
True False

24. (ublic !ompany Accounting 1versight 2oard provides the criteria against #hich the auditor measures the
fairness of financial statement presentation for public companies.
True False

2%. 3enerally accepted accounting principles provide the criteria against #hich the auditor measures the
fairness of financial statement presentation.
True False

2'. 2usinesses that use independent auditors do not need the use of internal auditors.
True False

2). !(A certificates for auditors are issued by state boards of accountancy.
True False

2*. Internal auditing is an ob7ective evaluation function established #ithin an organi8ation.
True False

2+. 1perational audits are designed to determine if the company6s financial statements are prepared in
compliance #ith 3AA(.
True False

3.. 3overnmental auditors perform operational and financial statement audits.
True False

31. The internal audit profession adheres e$clusively to standards set by the (ublic !ompany Accounting
1versight 2oard.
True False

32. The e$ecution of solutions to issues brought to light by internal auditors are the responsibility of
management of the organi8ation.
True False

33. 3overnmental audit standards are developed by the (ublic !ompany Accounting 1versight 2oard.
True False

34. The American Institute of !(As sets auditing standards for non9publicly traded companies.
True False

3%. Though often relying on the FA02- the 0:! has authority to establish 3AA( for publicly traded
companies.
True False

3'. The 0:! has authority to establish 3AA( for all business enterprises.
True False

3). The (ublic !ompany Accounting 1versight 2oard #as established by the AI!(A in response to 0ecurities
la#.
True False

3*. Auditors of public companies need not adhere to the re&uirements of statutory or regulatory organi8ations.
True False

3+. ;hen the auditor has no reservations about management6s financial statements- then the report issued is
called a &ualified report.
True False

4.. Auditors need only understand the rules of accounting as the principles are outdated.
True False

41. An audit is a form of an attestation service.
True False

42. An audit and an assurance service both re&uire a report to a third party.
True False

43. The purpose of assurance services is to improve the &uality of the information provided.
True False

44. The internal auditor is a primary provider of assurance services.
True False

4%. The internal auditor is a primary provider of operational audits.
True False

4'. The need for assurance services arises for all of the follo#ing reasons :<!:(T=
A. potential bias in providing information.
2. !loseness bet#een a user and the organi8ation.
!. comple$ity of the processing systems.
>. remoteness bet#een a user and the organi8ation.

4). Independent professional services that are provided on financial or other information that improve the
&uality of decision making are kno#n as
A. internal auditing.
2. financial auditing.
!. assurance services.
>. attestation services.

4*. ;hich one of the follo#ing is not a critical component of assurance services?
A. a process on #hich service is provided
2. an assurance service provider
!. a user #ho derives value
>. a !(A

4+. ;hich one of the follo#ing is not a key attribute needed to perform assurance?
A. sub7ect matter kno#ledge
2. independence
!. established criteria or standards
>. accounting skills

%.. A service that always re&uires that a report is provided to a third party is
A. assurance
2. attestation
!. audit
>. 2oth 2 and !.

%1. ;hich one of the follo#ing is not part of the attest process?
A. gathering evidence about assertions
2. proving the accuracy of the books and records
!. evaluating evidence against ob7ective criteria
>. communicating the conclusions reached

%2. ;hich of the follo#ing are part of the attest process?
A. communicating the conclusions reached to a third party
2. guaranteeing the accuracy of the books and records
!. evaluating evidence against ob7ective criteria
>. A and !
:. 2 and !

%3. ;hich one of the follo#ing is a potential problem #ith management"s communication of financial
information that causes third parties to desire the independent auditor"s assessment of the financial statement
presentation?
A. comple$ity of transactions affecting the financial statements
2. lack of criteria on #hich to base information
!. remoteness of the user from the organi8ation
>. A and !
:. A and 2

%4. /sers of the audit report can reasonably e$pect the audited financial statements to be
A. include complete information and contain all financial disclosures.
2. presented fairly according to the substance of 3AA(.
!. free from all errors.
>. all of the above.
:. none of the above.

%%. ;hich one of the follo#ing is not a management e$pectation for independent auditors?
A. an outside source of e$pertise on accounting matters
2. individuals #ho perform tests and dra# conclusions on assertions
!. a participant in management decision making
>. a provider of a #ritten communication

%'. /sers can reasonably e$pect audited financial statements to be
A. complete and contain all important financial disclosures- be free from material misstatements and be
presented fairly according to 3AA0.
2. complete and contain all important financial disclosures- be free from material misstatements and be
presented fairly according to 3AA(.
!. complete- be accurate and be presented fairly according to 3AA(.
>. complete and contain all important financial disclosures- be free from all misstatements and be presented
fairly according to the substance of 3AA0.

%). Internal auditors may perform all of the follo#ing types of audits except
A. operational audits.
2. compliance audits.
!. computer system audits.
>. all of the above may be performed by internal auditors.

%*. An @integrated auditA includes an audit of
A. the company6s internal controls.
2. the company6s financial statements.
!. the company6s compliance #ith its rules and policies.
>. 2oth A and 2.

%+. ;hich of the follo#ing services is the broadest and most inclusive?
A. Audit
2. Attestation
!. Assurance
>. !ompliance

'.. An e$pectation of the public is that the auditor #ill recogni8e that the primary users of audit assurance are
A. the clients.
2. the (ublic !ompany Accounting 1versight 2oard.
!. members of management.
>. third9party users.

'1. Auditing is important in a free market society because
A. the public re&uires !(As functioning as divisions of regulatory bodies.
2. auditors detect all errors and fraud made by company employees.
!. it provides reliable information based upon #hich to 7udge economic performance.
>. the auditor is an amiable insurance policy for investors.
:. all of the above are true.

'2. Third9party users of the audit report e$pect the auditor to do all of the follo#ing e$cept=
A. to evaluate measurements and disclosures made by management
2. to provide a biased evaluation of the financial statements
!. to determine #hether financial statements are presented in accordance #ith 3AA(
>. to gather sufficient evidence to support their opinion

'3. !(A firms performing public financial statement audits must
A. register #ith the American Institute of !ertified (ublic Accountants.
2. register #ith the Institute of Auditors.
!. register #ith the /.0. 3eneral Accounting 1ffice.
>. register #ith the (ublic !ompany Accounting 1versight 2oard.

'4. The auditor of financial statements must make very difficult interpretations regarding authoritative
literature. Additionally- the auditor must
A. consider #hether the application of a generally accepted accounting principle best portrays the economic
activity of the company.
2. force management to make certain decisions regarding their financial statements.
!. disregard independence in order to find the underlying truth of the evidence.
>. establish ne# criteria by #hich financial statements may be compared.

'%. Besults of the financial statement audit are communicated to users through a4n5
A. financial statement.
2. #ritten management assertion.
!. audit report.
>. none of the above.

''. Assurance services may include #hich of the follo#ing?
A. attesting to financial statements
2. e$amination of the economy and efficiency of governmental operations
!. evaluation of a division"s performance for management
>. ta$ preparation services
:. A- 2- and ! only

'). The criteria against #hich the auditor measures the fairness of financial statement presentation are kno#n
as
A. auditing standards.
2. generally accepted accounting principles.
!. generally accepted accounting standards.
>. governmental accounting principles.

'*. anagement of a company is responsible for
A. hiring the auditor.
2. preparing the financial statements.
!. the audit #orkpapers.
>. independence and obtaining evidence.

'+. ;hich one of the follo#ing is an e$ample of management e$pectations for independent auditors?
A. An e$pert providing a #ritten communication as the product of the engagement.
2. Individuals #ho perform day9to9day accounting functions on behalf of the company.
!. An active participant in management decision making.
>. An internal source of e$pertise on financial and other matters.

).. ;hich one of the follo#ing is not a provider of assurance services?
A. !(As
2. internal auditors
!. governmental auditors
>. AI!(A

)1. The internal audit profession has emerged and has become active for all of the follo#ing reasons except=
A. management"s need for an ob7ective appraisal of organi8ational or departmental performance
2. increased internal and e$ternal emphasis on effective procedures to detect or prevent fraud
!. compliance #ith 0ection 4.4 of the 0arbanes91$ley Act of 2..2
>. management6s need to delegate the responsibility of the financial statements

)2. ;hich one of the follo#ing statements is not true about internal auditing?
A. Internal auditing is an ob7ective evaluation function.
2. Internal auditing is established #ithin an organi8ation.
!. Internal auditing"s purpose is to provide assurance regarding the company"s compliance #ith stated policies
and procedures.
>. Internal auditing is established as an independent service to regulatory bodies and creditors.

)3. An audit #hich has as its purpose the evaluation of the economy and efficiency #ith #hich resources are
employed is kno#n as a4n5
A. financial audit.
2. compliance audit.
!. operational audit.
>. governmental audit.

)4. The audit committee of the board of directors of a company is responsible for
A. hiring the auditor.
2. preparing the financial statements.
!. the audit #orkpapers.
>. independence and obtaining evidence.

)%. The AI!(A remains a valuable organi8ation because of its continuing involvement in
A. the audit standard setting process.
2. regulation and enforcement of the audit profession.
!. education and administration of the !(A e$am.
>. promulgation of accounting standards.

)'. The ob7ective of an operational audit is to
A. evaluate #hether la#s have been broken by management.
2. evaluate fairness of presentation of financial statements.
!. evaluate compliances #ith company rules and regulations.
>. evaluate the effectiveness and efficiency #ith #hich resources are employed.

)). The primary governing board that performs &uality revie#s on registered !(A firms that audit public
companies is the
A. (!A12
2. 3A1
!. AI!(A
>. FA02

)*. !ongress authori8ed #hich of the follo#ing organi8ations to establish generally accepted accounting
principles for public companies?
A. 0:!
2. A(2
!. AI!(A
>. FA02

)+. The public e$pects auditors to
A. understand and enforce principles that best portray the spirit of FA02 concepts.
2. be neutral to preparers and users of financial information.
!. recogni8e that the public are the primary users of audit services.
>. take more responsibility for the discovery of fraud.
:. all of the above are e$pectations of the public.

*.. !(As are licensed by the
A. (!A12.
2. AI!(A.
!. state"s board of accountancy.
>. state"s society of !(As.

*1. The !ertified Internal Auditor program is administered by the
A. AI!(A.
2. IIA.
!. state"s board of accountancy.
>. state"s society of !(As.

*2. The audit agency for the /. 0. !ongress is the
A. 0:!.
2. 3A1.
!. IIA.
>. AI!(A.

*3. The organi8ation that issued the Internal Control, Integrated Framework #hich serves as the primary
criterion for evaluating the &uality of a company6s internal control system is
A. (!A12
2. !101
!. AI!(A
>. 3A1

*4. Auditing is a systematic process that includes all of the follo#ing e$cept=
A. communicating results to users
2. procuring and evaluating evidence
!. providing important managerial decisions for a client
>. comparing evidence regarding assertions to certain established criteria

*%. As it relates to an audit- materiality is
A. not taken into consideration.
2. related only to the sufficiency of procedures performed.
!. based upon audit fees.
>. determined based upon the importance to a user of the financial statements.

*'. ;hich of the follo#ing is not a component of assurance services?
A. information or a process on #hich the assurance services is provided.
2. report to a third party.
!. a user or a group of users #ho derive value from the service provided.
>. a service provider.

*). ;hich type of auditor may perform a financial statement audit?
A. e$ternal auditor.
2. internal auditor.
!. governmental auditor.
>. 2oth A and !.
:. All of the above.

**. ;hich type of auditor #ould typically perform an operational audit?
A. e$ternal auditor.
2. internal auditor.
!. governmental auditor.
>. 2oth 2 and !.
:. All of the above.

*+. ;hat is the criteria used in an operational audit?
A. 3AA(.
2. effectiveness and efficiency.
!. rules and regulations.
>. company policies.
:. 2oth 2 and !.

+.. ;hat is the criteria used in a compliance audit?
A. 3AA(.
2. effectiveness and efficiency.
!. rules and regulations.
>. company policies.
:. 2oth ! and >.

+1. Attributes of assurance providers
>iscuss the three or more attributes that an assurance professional must possess in order to maintain credibility.
:$plain the importance of these attributes to the assurance process.





+2. Users of financial statements
Identify at least three types of users of financial statements. >escribe their primary use of the financial
statements and ho# the misstatement of those statements might in7ure the user.





+3. Overview of inancial !tatement Audit
>efine auditing and discuss ho# its components fit into an overvie# of a financial statement audit.





+4. "rofessional and regulatory organi#ations
Identify at least four professional or regulatory organi8ations. :$plain ho# and #hy they assist andCor monitor
the audit and assurance profession.





+%. Internal and external auditors
!ompare and contrast the #ork of an internal and an independent e$ternal auditor.





+'. Ob$ectives of different audit types
!ompare and contrast the ob7ectives of financial- compliance- operational and governmental audits. Include in
your ans#er #ho performs each type of audit.





+). %egulatory and professional bodies
;rite the full name of the follo#ing regulatory and professional acronyms and describe the function of each
entity=
(!A12
AI!(A
0:!
IIA
FA02





+*. %e&uirements of auditors in public accounting
Becent landscape changes in accounting and auditing developed from corporate fraud and- arguably- auditor
failure. In order to continually lead and adapt to the dynamics of regulation- principles based accounting
practices and auditing standards- #hat types of skills and traits are auditors re&uired to possess?





++. 'he need for assurance services
Identify three reasons for the rise of assurance services.





1... Attestation versus assurance
>istinguish bet#een attestation services and assurance services.





!hapter 1= Auditing= Integral to the :conomy Dey

1. The need for assurance services arises because the interests of the users of information may be different from
that of the interests of those responsible for providing information.
'%UE

2. An audit of financial statements is a form of attestation service.
'%UE

3. Independence is an attribute necessary to perform assurance services.
'%UE

4. A bank using ilton !ompany"s financial statements to determine the credit#orthiness of a potential loan to
ilton is a good e$ample of the need for unbiased reporting.
'%UE

%. Independence is only re&uired for assurance service providers.
'%UE

'. A !(A automatically &ualifies as an assurance provider in all areas of business.
A(!E

). Attestation services are a subset of assurance services and always involve a report that goes to a third party.
'%UE

*. The American Institute of !ertified (ublic Accountants has the primary authority to set auditing standards for
public companies.
A(!E

+. The audit function is uni&ue because it e$ists to perform services on a ,client, on behalf of shareholders-
directors and other parties.
'%UE

1.. Auditing is the process of attesting to assertions about economic actions and events.
'%UE

11. Auditing is the process of verifying the accuracy of the financial statements.
A(!E

12. Internal auditing only provides assurance services to clients.
A(!E

13. Auditing primarily e$ists because users need unbiased information on #hich to assess management
performance and make economic decisions.
'%UE

14. The degree of confidence that users place on management"s financial statements is higher than that placed
on audited financial statements because fe# users have direct kno#ledge of the company"s operations and
management is the most kno#ledgeable about operations.
A(!E

1%. /.0. nonpublic companies #ill have an audit performed in accordance #ith generally accepted auditing
standards that have been promulgated by the (!A12.
A(!E

1'. An assertion is a statement about an action- event- condition- or performance over a specified time period.
'%UE

1). anagement is required to comment on the fairness of the company"s financial presentation. This reduces
the auditor"s legal responsibility for the opinion rendered on the financial statements.
A(!E

1*. Audited financial statements should be free from all errors and fraud.
A(!E

1+. Audited financial statements should be presented fairly according to the substance of 3AA(.
'%UE

2.. Audited financial statements should be presented fairly according to the substance of 3AA0.
A(!E

21. A plan to converge the /.0. generally accepted auditing standards 43AA05 #ith the International 0tandards
on Auditing 4I0As5 #as developed by the .AI!(A6s Auditing 0tandards 2oard 4A025.
'%UE

22. Attestation is confined to an audit of client financial statements.
A(!E

23. An auditor must have a good understanding of the risks associated #ith a client"s industry in order to ensure
that the financial statements reflect the underlying substance of accounting transactions and the economic
effects of such transactions.
'%UE

24. (ublic !ompany Accounting 1versight 2oard provides the criteria against #hich the auditor measures the
fairness of financial statement presentation for public companies.
A(!E

2%. 3enerally accepted accounting principles provide the criteria against #hich the auditor measures the
fairness of financial statement presentation.
'%UE

2'. 2usinesses that use independent auditors do not need the use of internal auditors.
A(!E

2). !(A certificates for auditors are issued by state boards of accountancy.
'%UE

2*. Internal auditing is an ob7ective evaluation function established #ithin an organi8ation.
'%UE

2+. 1perational audits are designed to determine if the company6s financial statements are prepared in
compliance #ith 3AA(.
A(!E

3.. 3overnmental auditors perform operational and financial statement audits.
'%UE

31. The internal audit profession adheres e$clusively to standards set by the (ublic !ompany Accounting
1versight 2oard.
A(!E

32. The e$ecution of solutions to issues brought to light by internal auditors are the responsibility of
management of the organi8ation.
'%UE

33. 3overnmental audit standards are developed by the (ublic !ompany Accounting 1versight 2oard.
A(!E

34. The American Institute of !(As sets auditing standards for non9publicly traded companies.
'%UE

3%. Though often relying on the FA02- the 0:! has authority to establish 3AA( for publicly traded
companies.
'%UE

3'. The 0:! has authority to establish 3AA( for all business enterprises.
A(!E

3). The (ublic !ompany Accounting 1versight 2oard #as established by the AI!(A in response to 0ecurities
la#.
A(!E

3*. Auditors of public companies need not adhere to the re&uirements of statutory or regulatory organi8ations.
A(!E

3+. ;hen the auditor has no reservations about management6s financial statements- then the report issued is
called a &ualified report.
A(!E

4.. Auditors need only understand the rules of accounting as the principles are outdated.
A(!E

41. An audit is a form of an attestation service.
'%UE

42. An audit and an assurance service both re&uire a report to a third party.
A(!E

43. The purpose of assurance services is to improve the &uality of the information provided.
'%UE

44. The internal auditor is a primary provider of assurance services.
'%UE

4%. The internal auditor is a primary provider of operational audits.
'%UE

4'. The need for assurance services arises for all of the follo#ing reasons :<!:(T=
A. potential bias in providing information.
)* !loseness bet#een a user and the organi8ation.
!. comple$ity of the processing systems.
>. remoteness bet#een a user and the organi8ation.

4). Independent professional services that are provided on financial or other information that improve the
&uality of decision making are kno#n as
A. internal auditing.
2. financial auditing.
C* assurance services.
>. attestation services.

4*. ;hich one of the follo#ing is not a critical component of assurance services?
A. a process on #hich service is provided
2. an assurance service provider
!. a user #ho derives value
+* a !(A

4+. ;hich one of the follo#ing is not a key attribute needed to perform assurance?
A. sub7ect matter kno#ledge
2. independence
!. established criteria or standards
+* accounting skills

%.. A service that always re&uires that a report is provided to a third party is
A. assurance
2. attestation
!. audit
+* 2oth 2 and !.

%1. ;hich one of the follo#ing is not part of the attest process?
A. gathering evidence about assertions
)* proving the accuracy of the books and records
!. evaluating evidence against ob7ective criteria
>. communicating the conclusions reached

%2. ;hich of the follo#ing are part of the attest process?
A. communicating the conclusions reached to a third party
2. guaranteeing the accuracy of the books and records
!. evaluating evidence against ob7ective criteria
+* A and !
:. 2 and !

%3. ;hich one of the follo#ing is a potential problem #ith management"s communication of financial
information that causes third parties to desire the independent auditor"s assessment of the financial statement
presentation?
A. comple$ity of transactions affecting the financial statements
2. lack of criteria on #hich to base information
!. remoteness of the user from the organi8ation
+* A and !
:. A and 2

%4. /sers of the audit report can reasonably e$pect the audited financial statements to be
A. include complete information and contain all financial disclosures.
)* presented fairly according to the substance of 3AA(.
!. free from all errors.
>. all of the above.
:. none of the above.

%%. ;hich one of the follo#ing is not a management e$pectation for independent auditors?
A. an outside source of e$pertise on accounting matters
2. individuals #ho perform tests and dra# conclusions on assertions
C* a participant in management decision making
>. a provider of a #ritten communication

%'. /sers can reasonably e$pect audited financial statements to be
A. complete and contain all important financial disclosures- be free from material misstatements and be
presented fairly according to 3AA0.
)* complete and contain all important financial disclosures- be free from material misstatements and be
presented fairly according to 3AA(.
!. complete- be accurate and be presented fairly according to 3AA(.
>. complete and contain all important financial disclosures- be free from all misstatements and be presented
fairly according to the substance of 3AA0.

%). Internal auditors may perform all of the follo#ing types of audits except
A. operational audits.
2. compliance audits.
!. computer system audits.
+* all of the above may be performed by internal auditors.

%*. An @integrated auditA includes an audit of
A. the company6s internal controls.
2. the company6s financial statements.
!. the company6s compliance #ith its rules and policies.
+* 2oth A and 2.

%+. ;hich of the follo#ing services is the broadest and most inclusive?
A. Audit
2. Attestation
C* Assurance
>. !ompliance

'.. An e$pectation of the public is that the auditor #ill recogni8e that the primary users of audit assurance are
A. the clients.
2. the (ublic !ompany Accounting 1versight 2oard.
!. members of management.
+* third9party users.

'1. Auditing is important in a free market society because
A. the public re&uires !(As functioning as divisions of regulatory bodies.
2. auditors detect all errors and fraud made by company employees.
C* it provides reliable information based upon #hich to 7udge economic performance.
>. the auditor is an amiable insurance policy for investors.
:. all of the above are true.

'2. Third9party users of the audit report e$pect the auditor to do all of the follo#ing e$cept=
A. to evaluate measurements and disclosures made by management
)* to provide a biased evaluation of the financial statements
!. to determine #hether financial statements are presented in accordance #ith 3AA(
>. to gather sufficient evidence to support their opinion

'3. !(A firms performing public financial statement audits must
A. register #ith the American Institute of !ertified (ublic Accountants.
2. register #ith the Institute of Auditors.
!. register #ith the /.0. 3eneral Accounting 1ffice.
+* register #ith the (ublic !ompany Accounting 1versight 2oard.

'4. The auditor of financial statements must make very difficult interpretations regarding authoritative
literature. Additionally- the auditor must
A* consider #hether the application of a generally accepted accounting principle best portrays the economic
activity of the company.
2. force management to make certain decisions regarding their financial statements.
!. disregard independence in order to find the underlying truth of the evidence.
>. establish ne# criteria by #hich financial statements may be compared.

'%. Besults of the financial statement audit are communicated to users through a4n5
A. financial statement.
2. #ritten management assertion.
C* audit report.
>. none of the above.

''. Assurance services may include #hich of the follo#ing?
A. attesting to financial statements
2. e$amination of the economy and efficiency of governmental operations
!. evaluation of a division"s performance for management
>. ta$ preparation services
E* A- 2- and ! only

'). The criteria against #hich the auditor measures the fairness of financial statement presentation are kno#n
as
A. auditing standards.
)* generally accepted accounting principles.
!. generally accepted accounting standards.
>. governmental accounting principles.

'*. anagement of a company is responsible for
A. hiring the auditor.
)* preparing the financial statements.
!. the audit #orkpapers.
>. independence and obtaining evidence.

'+. ;hich one of the follo#ing is an e$ample of management e$pectations for independent auditors?
A* An e$pert providing a #ritten communication as the product of the engagement.
2. Individuals #ho perform day9to9day accounting functions on behalf of the company.
!. An active participant in management decision making.
>. An internal source of e$pertise on financial and other matters.

).. ;hich one of the follo#ing is not a provider of assurance services?
A. !(As
2. internal auditors
!. governmental auditors
+* AI!(A

)1. The internal audit profession has emerged and has become active for all of the follo#ing reasons except=
A. management"s need for an ob7ective appraisal of organi8ational or departmental performance
2. increased internal and e$ternal emphasis on effective procedures to detect or prevent fraud
!. compliance #ith 0ection 4.4 of the 0arbanes91$ley Act of 2..2
+* management6s need to delegate the responsibility of the financial statements

)2. ;hich one of the follo#ing statements is not true about internal auditing?
A. Internal auditing is an ob7ective evaluation function.
2. Internal auditing is established #ithin an organi8ation.
!. Internal auditing"s purpose is to provide assurance regarding the company"s compliance #ith stated policies
and procedures.
+* Internal auditing is established as an independent service to regulatory bodies and creditors.

)3. An audit #hich has as its purpose the evaluation of the economy and efficiency #ith #hich resources are
employed is kno#n as a4n5
A. financial audit.
2. compliance audit.
C* operational audit.
>. governmental audit.

)4. The audit committee of the board of directors of a company is responsible for
A* hiring the auditor.
2. preparing the financial statements.
!. the audit #orkpapers.
>. independence and obtaining evidence.

)%. The AI!(A remains a valuable organi8ation because of its continuing involvement in
A. the audit standard setting process.
2. regulation and enforcement of the audit profession.
C* education and administration of the !(A e$am.
>. promulgation of accounting standards.

)'. The ob7ective of an operational audit is to
A. evaluate #hether la#s have been broken by management.
2. evaluate fairness of presentation of financial statements.
!. evaluate compliances #ith company rules and regulations.
+* evaluate the effectiveness and efficiency #ith #hich resources are employed.

)). The primary governing board that performs &uality revie#s on registered !(A firms that audit public
companies is the
A* (!A12
2. 3A1
!. AI!(A
>. FA02

)*. !ongress authori8ed #hich of the follo#ing organi8ations to establish generally accepted accounting
principles for public companies?
A* 0:!
2. A(2
!. AI!(A
>. FA02

)+. The public e$pects auditors to
A. understand and enforce principles that best portray the spirit of FA02 concepts.
2. be neutral to preparers and users of financial information.
!. recogni8e that the public are the primary users of audit services.
>. take more responsibility for the discovery of fraud.
E* all of the above are e$pectations of the public.

*.. !(As are licensed by the
A. (!A12.
2. AI!(A.
C* state"s board of accountancy.
>. state"s society of !(As.

*1. The !ertified Internal Auditor program is administered by the
A. AI!(A.
)* IIA.
!. state"s board of accountancy.
>. state"s society of !(As.

*2. The audit agency for the /. 0. !ongress is the
A. 0:!.
)* 3A1.
!. IIA.
>. AI!(A.

*3. The organi8ation that issued the Internal Control, Integrated Framework #hich serves as the primary
criterion for evaluating the &uality of a company6s internal control system is
A. (!A12
)* !101
!. AI!(A
>. 3A1

*4. Auditing is a systematic process that includes all of the follo#ing e$cept=
A. communicating results to users
2. procuring and evaluating evidence
C* providing important managerial decisions for a client
>. comparing evidence regarding assertions to certain established criteria

*%. As it relates to an audit- materiality is
A. not taken into consideration.
2. related only to the sufficiency of procedures performed.
!. based upon audit fees.
+* determined based upon the importance to a user of the financial statements.

*'. ;hich of the follo#ing is not a component of assurance services?
A. information or a process on #hich the assurance services is provided.
)* report to a third party.
!. a user or a group of users #ho derive value from the service provided.
>. a service provider.

*). ;hich type of auditor may perform a financial statement audit?
A. e$ternal auditor.
2. internal auditor.
!. governmental auditor.
+* 2oth A and !.
:. All of the above.

**. ;hich type of auditor #ould typically perform an operational audit?
A. e$ternal auditor.
2. internal auditor.
!. governmental auditor.
+* 2oth 2 and !.
:. All of the above.

*+. ;hat is the criteria used in an operational audit?
A. 3AA(.
)* effectiveness and efficiency.
!. rules and regulations.
>. company policies.
:. 2oth 2 and !.

+.. ;hat is the criteria used in a compliance audit?
A. 3AA(.
2. effectiveness and efficiency.
!. rules and regulations.
>. company policies.
E* 2oth ! and >.

+1. Attributes of assurance providers
>iscuss the three or more attributes that an assurance professional must possess in order to maintain credibility.
:$plain the importance of these attributes to the assurance process.
15 0ub7ect atter Dno#ledge 9 The assurance provider must be an e$pert in the area of service provided. :$pertise in a comple$ body
of kno#ledge sets the assurance professional apart from others.
25 Independence 9 The assurance provider must be unbiased- free from conflict of interest- ob7ective and independent of the company
receiving assurance services. This allo#s the professional to remain neutral and free from influence by parties #ith a vested interest
in the outcome of assurance services.
35 Agreed /pon !riteria 9 !lear criteria must be available for the assurance provider to measure ob7ectives and results against. In a
financial statement assurance engagement- the criteria are represented by 3enerally Accepted Accounting (rinciples.
45 (rocess :$pertise 9 :vidence is obtained and evaluated during the course of an assurance engagement. (rofessionals providing these
services must be able to dra# accurate conclusions based upon the results of testing competent- sufficient evidence obtained.

+2. Users of financial statements
Identify at least three types of users of financial statements. >escribe their primary use of the financial
statements and ho# the misstatement of those statements might in7ure the user.
/sers of audited financial statements may include=
E anagement may utili8e the audit report to determine #hether the financial statements are presented in accordance #ith 3AA(-
#hether the firm is availing itself of appropriate internal controls- and as a means of evaluating employee performance.
isstatement of the financial statements #ould cause the client to make erroneous decisions about financial position- internal
controls and employee re#ards and punishments.
E A financial institution that is asked to make a loan uses the financial statement to 7udge the credit #orthiness of the borro#er.
isstatements in the financial statements lead to errors in lending that 7eopardi8e the assets of the bank and depositors.
E A vendor #ho is asked to grant credit uses the statements and faces in7ury in a manner similar to the financial institution.
E A third9party stockholder uses the financial statements to determine if the investment #ill provide the returns consistent #ith the
needs of the investor. isstatements of the financial statements #ill lead to different results or possible loss of the investment.
E 1thers= (otential stockholders- ta$ing authorities- regulatory agencies- labor unions- employees- bondholders- court system-
retirement plans- or retired employees

+3. Overview of inancial !tatement Audit
>efine auditing and discuss ho# its components fit into an overvie# of a financial statement audit.
Financial statement auditing has been defined as a @systematic process of actively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the degree of correspondence
bet#een those assertions and established criteria and communicating the results to interested users.A

+4. "rofessional and regulatory organi#ations
Identify at least four professional or regulatory organi8ations. :$plain ho# and #hy they assist andCor monitor
the audit and assurance profession.
"CAO) is the primary governing regulatory body of auditors of public company financial statements. It #as
established by the !ongress as a result of the 0arbanes91$ley Act of 2..2. It sets auditing standards for audits
of public companies- re&uires registration of !(A firms auditing public companies and performs &uality revie#s
of registered firms.
AIC"A ;ith the establishment of the (!A12- the role of the AI!(A has diminished. embership in the
organi8ation is voluntary. The AI!(A establishes standards for other attestation services- accounting and revie#
services- consulting and ta$ services. It organi8es continuing education programs and administers the /niform
!(A :$amination.
!tate )oards of Accountancy license !(As and are charged #ith regulating the profession at the state level.
!EC has been granted authority to establish 3AA( for publicly traded companies. Its primary mission is to
protect the investing publicF it has oversight of the (!A12.
The ,AO is responsible for setting forth auditing standards for governmental agencies.
The IIA is a voluntary organi8ation that administers the !ertified Internal Auditor program and issues standards
for the practice of internal audit.

+%. Internal and external auditors
!ompare and contrast the #ork of an internal and an independent e$ternal auditor.
The independent e$ternal auditor is engaged to perform an audit of the financial statements for the purpose of
e$pressing a professional opinion thereon. The internal auditor is an employee of the company #ho provides an
active appraisal function #ithin an organi8ation to evaluate its activities as a service to the audit committee or
board of directors. The #ork of e$ternal and internal auditors is often very similar in form- but the purpose and
uses of the #ork are different. 2oth groups conform to professional standards that are in many #ays similar.
1ften times- the internal and e$ternal auditors #ork together in identifying potential solutions to problems
identified.

+'. Ob$ectives of different audit types
!ompare and contrast the ob7ectives of financial- compliance- operational and governmental audits. Include in
your ans#er #ho performs each type of audit.
Financial audits performed by independent !(As have as their aim the e$pression of a professional opinion as
to the overall fairness of the statements in all material respects and as to the presentation of these statements in
accordance #ith 3AA(. :$ternal auditors and governmental auditors may perform themF because of lack of
independence- the internal auditor can only assist the e$ternal auditor in the performance of an audit of their
financial statements.
!ompliance audits are a systematic process to determine #hether or not an entity"s activities are carried out in
accordance #ith standards or policies promulgated by management or regulatory agencies- e.g.- rules- la#s or
regulations. All three types of auditors- e$ternal- internal and governmental- perform compliance audits
regularly.
1perational audits are systematic appraisals of an entity"s operations to determine #hether an organi8ation"s
operations are being carried out in an efficient manner. The criteria used depends very much on the abilities and
kno#ledge of the auditor in 7udging the efficiency and effectiveness of operations and methods to improve
them. All three types of auditors may perform them- i.e.- e$ternal - internal and governmental- though
operational audits are most closely associated #ith internal and governmental auditors.
3overnmental audits are usually performed by employees of the government and they usually encompass all
three types of audits 7ust mentioned. The ma7or difference is the governmental orientation. 1perational audits
for effectiveness and efficiency may be performed- as #ell as financial audits for compliance #ith governmental
3AA(- and compliance audits #ith la#s- rules and regulations.

+). %egulatory and professional bodies
;rite the full name of the follo#ing regulatory and professional acronyms and describe the function of each
entity=
(!A12
AI!(A
0:!
IIA
FA02
"CAO) is the primary governing regulatory body of auditors of public company financial statements. It #as
established by the !ongress as a result of the 0arbanes91$ley Act of 2..2. It sets auditing standards for audits
of public companies- re&uires registration of !(A firms auditing public companies and performs &uality revie#s
of registered firms. The (!A12 is overseen by the 0:!.
AIC"A ;ith the establishment of the (!A12- the role of the AI!(A has diminished. embership in the
organi8ation is voluntary. The AI!(A establishes standards for other attestation services- accounting and revie#
services- consulting and ta$ services. It organi8es continuing education programs and administers the /niform
!(A :$amination.
!ecurities and Exchange Commission !ongress established the 0:! to regulate the capital market system and
establish 3AA( for publicly traded companies. The 0:! delegated the standard setting authority to the FA02
but revie#s and suggests standards #hen necessary. The 0:! oversees the responsibilities of the (!A12.
Institute of Internal Auditors The IIA issues standards and interpretations of standards for internal auditing. It
also administers the /niform !IA :$amination and the certified internal auditor program to establish the
benchmark measure of competence for the internal auditing profession.
inancial Accounting !tandards )oard The FA02 is charged #ith issuing authoritative accounting
pronouncements.

+*. %e&uirements of auditors in public accounting
Becent landscape changes in accounting and auditing developed from corporate fraud and- arguably- auditor
failure. In order to continually lead and adapt to the dynamics of regulation- principles based accounting
practices and auditing standards- #hat types of skills and traits are auditors re&uired to possess?
In addition to integrity- ethics and independence- auditors must possess an inherent ability to understand the
client. This pertains not only to the manner in #hich the company operates- but the industry in #hich the client
participates. The auditor must be able to use sound professional 7udgment and skepticism to perceive issues and
propose solutions. An auditor must understand the environment in #hich a client does business. The
surrounding economic- cultural and political aspects of a company are all vital to the auditor"s understanding of
risks.
An auditor must be able to interpret a comple$ body of kno#ledge- apply audit procedures and measure
assertions against the criteria of generally accepted accounting principles. Bisks must be ade&uately considered
for the audit and the client so that the audit firm may reduce e$posure in the marketplace.
Information technology used by clients must also be understood by the auditor so that internal control-
prevention and detection of misstatements and the audit trail might be assessed. 0imilarly- the auditor must use
soft#are to perform an audit efficiently and ade&uately.

++. 'he need for assurance services
Identify three reasons for the rise of assurance services.
Three potential reasons for the rise of assurance services are=
1. The party #ho provides information may bias that information to convey a better impression than the real circumstances merit.
2. Bemoteness bet#een an information user and the organi8ation.
3. The comple$ity of transactions- information or processing systems may make it difficult to determine a proper presentation #ithout
an independent revie#.
4. There is a need to minimi8e financial surprises. aterial errors and fraud must be found and corrected prior to the release of audited
financial statements.

1... Attestation versus assurance
>istinguish bet#een attestation services and assurance services.
Attestation services are a subset of the broader spectrum of assurance services. Attestation services al#ays
involve evaluation of an assertion by one party to a third party. Assurance services do not need to involve a
report- nor do they need to involve a third party.