Messier - Auditing and Assurance Services - 7e

Chapter02TheFinancialStatementAuditingEnvironment
1.AseriesofbusinessandrelatedauditingfailuresledtothepassageoftheSarbanesOxleyAct(2002).
TRUE

AACSB:Communications
AICPABB:Legal
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:1
MessierChapter02#1

2.Theprimaryauditcontextwithwhichanauditorisconcernedistheclient'sindustryorbusiness.
TRUE

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:2
MessierChapter02#2

3.Theauditcommitteegenerallyincludesseniorexecutivesoftheorganization.
FALSE

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:3
MessierChapter02#3

Messier - Auditing and Assurance Services - 7e

4.Afinancialstatementauditisgenerallyorganizedbasedonthefivebasicbusinessprocessesorcycles.
TRUE

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:4
MessierChapter02#4

5.Oneofthefivebasicbusinessprocessesisthewarehousingcycle.
FALSE

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:4
MessierChapter02#5

6.Auditproceduresaredesignedtotestmanagementassertions.
TRUE

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:RiskAnalysis
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:5
MessierChapter02#6

7.PCAOBauditingstandardsmustbefollowedonallfinancialstatementauditsperformedintheU.S.
FALSE

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:6
MessierChapter02#7

Messier - Auditing and Assurance Services - 7e

8.AfinancialstatementauditmustbeconductedbasedonGAAP.
FALSE

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:7
MessierChapter02#8

9.Generally,thefinancialstatementsofU.S.companiesmustbepreparedbasedonGAAP.
TRUE

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:7
MessierChapter02#9

10.PCAOBauditingstandardsmustbefollowedonallauditsofpublicCompanies'financialstatements.
TRUE

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:7
MessierChapter02#10

Messier - Auditing and Assurance Services - 7e

11.TheAuditcommitteeconsistsof:
A.Membersofmanagement
B.AsubcommitteeoftheAICPAwhoestablishtheSAS
C.MembersoftheBoardofDirectors
D.Appointedgovernmentoverseers

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:3
MessierChapter02#11

12.Whatorganizationisresponsibleforsettingauditingstandardsforauditsofpubliclytradedcompaniesin
theU.S.?
A.AICPA
B.FASB
C.GASB
D.PCAOB

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:6
MessierChapter02#12

13.ThePublicCompanyAccountingOversightBoard'sroleisto
A.Conductthefinalreviewofauditors'workbeforetheauditor'sopinionisissued
B.Overseetheauditorsofpubliccompaniesinordertoprotecttheinterestsofinvestors
C.Conductauditsofgovernmentalentities
D.SanctionauditorswhofailtofollowGAAS

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:6
MessierChapter02#13

Messier - Auditing and Assurance Services - 7e

14.Theauthoritativebodydesignedtopromulgatestandardsconcerninganaccountant'sassociationwith
auditedfinancialstatementsofanentitythatisrequiredtofilefinancialstatementswiththeSECisthe
A.FinancialAccountingStandardsBoard
B.GeneralAccountingOffice
C.PublicCompaniesAccountingOversightBoard
D.AuditingStandardsBoard

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:6
MessierChapter02#14

15.Theauditormustbeindependentoftheauditclientunless:
A.Thelackofindependencedoesnotinfluencehisorherprofessionaljudgment.
B.Bothpartiesagreethattheindependenceissueisnotaproblem.
C.Thelackofindependenceisinsignificant.
D.Noneoftheabovetheauditorcannotlackindependence.

AACSB:Analytic
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Easy
LearningObjective:7
MessierChapter02#15

16.Whichofthefollowingdescribesthegenerallyacceptedauditingstandardrequiringacriticalreviewofthe
workdoneandthejudgmentexercisedbythoseassistinginanauditateverylevelofsupervision?
A.Proficiency
B.Auditrisk
C.Inspection
D.Duecare

AACSB:Analytic
AICPABB:ResourceManagement
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Easy
LearningObjective:7
MessierChapter02#16

Messier - Auditing and Assurance Services - 7e

17.Whichofthefollowingbestdescribesthegeneralcharacterofthethreegenerallyacceptedauditing
standardsthatareclassifiedasstandardsoffieldwork?
A.Thecompetence,independence,andprofessionalcareofpersonsperformingtheaudit
B.Criteriaforthecontentoftheauditor'sreportonfinancialstatementsandrelatedfootnotedisclosures
C.Thecriteriaofauditplanningandevidencegathering
D.Theneedtomaintainindependenceinmentalattitudeinallmattersrelatingtotheaudit

AACSB:Analytic
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Easy
LearningObjective:10
LearningObjective:7
MessierChapter02#17

18.Thefirstgeneralstandardrequiresthattheexaminationoffinancialstatementsistobeperformedbya
personorpersonshavingadequatetechnicaltrainingand
A.Independencewithrespecttothefinancialstatementsandsupplementarydisclosures
B.Exercisingprofessionalcareasjudgedbypeerreviewers
C.Proficiencyasanauditorwhichlikelyhasbeenacquiredfrompreviousexperience
D.Objectivityasanauditorasverifiedbypropersupervision

AACSB:Analytic
AICPABB:ResourceManagement
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:10
LearningObjective:7
MessierChapter02#18

Messier - Auditing and Assurance Services - 7e

19.Thefirststandardofreportingrequiresthat,"thereportshallstatewhetherthefinancialstatementsare
presentedinaccordancewithgenerallyacceptedaccountingprinciples."Thispassagerequires
A.Astatementoffactbytheauditor
B.Anopinionbytheauditor
C.Animpliedmeasureoffairness
D.Anobjectivemeasureofcompliance

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:7
MessierChapter02#19

20.Becauseoftheriskofmaterialmisstatement,anauditoffinancialstatementsinaccordancewithgenerally
acceptedauditingstandardsshouldbeplannedandperformedwithanattitudeof
A.Objectivecynicism
B.Independentdifferentialism
C.Professionalskepticism
D.Impartialconservatism

AACSB:Analytic
AICPABB:Legal
AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Easy
LearningObjective:10
LearningObjective:11
MessierChapter02#20

Messier - Auditing and Assurance Services - 7e

21.Theaccuracyofinformationincludedinfootnotesaccompanyingtheauditedfinancialstatementsissuedby
acompanywhosesharesaretradedonastockexchangeistheprimaryresponsibilityof
A.Thestockexchangeofficials
B.Theindependentauditor
C.Thecompany'smanagement
D.TheSecuritiesandExchangeCommission

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:11
MessierChapter02#21

22.Theprimaryresponsibilityfortheadequacyofdisclosuresinthefinancialstatementsofapubliclyheld
companyrestswiththe
A.Partnerassignedtotheauditengagement
B.Managementofthecompany
C.Auditorinchargeofthefieldwork
D.SecuritiesandExchangeCommission

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:11
MessierChapter02#22

23.Thelargestpublicaccountingfirmstypicallyarestructuredas
A.SubchapterScorporations
B.Professionalcorporations
C.Limitedliabilitypartnerships
D.Limitedliabilitycorporations

AACSB:Communications
AICPABB:Legal
AICPAFN:Research
Blooms:Knowledge
Difficulty:Easy
LearningObjective:12
MessierChapter02#23

Messier - Auditing and Assurance Services - 7e

24.Typically,anexternalauditorfirstgetssupervisoryexperienceatwhatlevelofauthority?
A.Associate
B.Senior
C.Manager
D.Partner

AACSB:Communications
AICPABB:ResourceManagement
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:12
MessierChapter02#24

25.An"incharge"auditortypicallyholdstherankof
A.Associate
B.Senior
C.Manager
D.Partner

AACSB:Communications
AICPABB:ResourceManagement
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:12
MessierChapter02#25

26.Whichofthefollowingbestdescribestheconceptofriskassessmentonwhichauditorscanprovide
independentassurance?
A.Theriskthatfinancialstatementsaremisstatedbecauseoffraud
B.Theriskthatfinancialstatementsaremisstatedbecauseoferrororfraud
C.Whethermanagementhassystemsinplacetoevaluateandeffectivelymanagetheentity'sbusinessrisks
D.Developingclientacceptanceandcontinuancepracticesthatminimizethelikelihoodoflawsuitsagainstthe
auditor

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Easy
LearningObjective:13
MessierChapter02#26

Messier - Auditing and Assurance Services - 7e

27.Forensicauditsincludeallofthefollowingexcept
A.Criminalinvestigations
B.Manufacturers'assertionsaboutproductquality
C.Employeefraud
D.Managementfraud

AACSB:Communications
AICPABB:Industry
AICPAFN:LeveragingTechnology
Blooms:Application
Difficulty:Easy
LearningObjective:13
LearningObjective:14
MessierChapter02#27

28.Atypicalobjectiveofanoperationalauditisfortheauditorto
A.Determinewhetherthefinancialstatementspresentfairlytheentity'soperations
B.Evaluatethefeasibilityofattainingtheentity'soperationalobjectives
C.Makerecommendationsforimprovingperformance
D.Reportontheentity'srelativesuccessinattainingprofitmaximization

AACSB:Communications
AICPABB:Industry
AICPAFN:LeveragingTechnology
Blooms:Knowledge
Difficulty:Easy
LearningObjective:13
LearningObjective:14
MessierChapter02#28

29.Governmentalauditingoftenextendsbeyondexaminationsleadingtotheexpressionofanopiniononthe
fairnessoffinancialpresentationandincludesauditsofefficiency,effectiveness,and
A.Monetarystimulus
B.Evaluation
C.Accuracy
D.Compliance

AACSB:Communications
AICPABB:Industry
AICPAFN:LeveragingTechnology
Blooms:Knowledge
Difficulty:Easy
LearningObjective:13
LearningObjective:14
MessierChapter02#29

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Messier - Auditing and Assurance Services - 7e

30.Externalauditorsarereferredtoas"external"because
A.Theyreporttousersoutsideoftheauditedentity
B.Theyarepaidbypartiesoutsideoftheauditedentity
C.Theyarenotemployeesoftheentitybeingaudited
D.Theirofficesarenotattheentity'splaceofbusiness

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Easy
LearningObjective:14
MessierChapter02#30

31.Whichisnotanattributeofanexternalauditor?
A.Independence
B.Clientadvocacy
C.Objectivity
D.Concernforthepublicinterest

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:14
MessierChapter02#31

32.Whatisthegeneralcharacteroftheworkconductedinperformingaforensicauditforacompany?
A.Providingassurancethatthefinancialstatementsarenotmateriallymisstated
B.Detectingordeterringfraudulentactivity
C.Offeringanopiniononthereliabilityofthespecificassertionsmadebymanagement
D.Identifyingthecausesofanentity'sfinancialdifficulties

AACSB:Communications
AICPABB:Industry
AICPAFN:LeveragingTechnology
Blooms:Comprehension
Difficulty:Easy
LearningObjective:14
MessierChapter02#32

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Messier - Auditing and Assurance Services - 7e

33.WhichofthefollowingisNOTarequirementoftheSarbanesOxleyAct?
A.Auditfirmscannotprovidemosttypesofnonauditservicestotheirpubliccompanyauditclients
B.Auditfirmsarerequiredtorotateauditpartnersoffauditengagementseveryfiveyearsforpubliccompany
audits
C.FirmsthatauditpubliccompaniesaresubjecttoinspectionbythePCAOB
D.Acertainnumberofhours,whichisbasedonthesizeofthecompanybeingaudited,mustbespentoneach
auditengagement

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:1
LearningObjective:15
MessierChapter02#33

34.ACPAismostlikelytorefertooneormoreofthethreegeneralauditingstandardsindetermining
A.ThenatureoftheCPA'sreportqualification
B.ThescopeoftheCPA'sauditingprocedures
C.Requirementsforthereviewoftheentityanditsenvironment
D.WhethertheCPAshouldundertakeanauditengagement

AACSB:Communications
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Moderate
LearningObjective:2
LearningObjective:7
MessierChapter02#34

35.Whobearsultimateresponsibilityforthefinancialstatements?
A.Managementoftheorganization,equallywiththeexternalauditorthatauditsthestatements.
B.Managementandtheshareholdersoftheorganization.
C.Theexternalauditorthatauditsthestatements.
D.Managementoftheorganization.

AACSB:Analytic
AICPABB:Legal
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:11
MessierChapter02#35

12

Messier - Auditing and Assurance Services - 7e

36.Thethreegeneralstandardsareconcernedwith:
A.Adequatetrainingandproficiencyoftheauditor,properplanningandsupervision,anddueprofessionalcare.
B.Adequatetrainingandindependence.
C.Dueprofessionalcare.
D.Bothbandc.

AACSB:Communications
AICPABB:Legal
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:7
MessierChapter02#36

37.Thefirstgeneralstandardrecognizesthatregardlessofhowcapableanindividualmaybeinotherfields,the
individualcannotmeettherequirementsoftheauditingstandardswithouttheproper
A.Businessandfinancecourses
B.Qualitycontrolandpeerreview
C.Educationandexperienceinauditing
D.Supervisionandreviewskills

AACSB:Diversity
AICPABB:Marketing
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:7
MessierChapter02#37

38.ThemaindifferencebetweenSASandAUis:
A.TheyarethesameexceptthatSASareorganizedchronologicallyandtheAUareorganizedbytopicalarea.
B.SASareissuedbytheASBandAUareissuedbythePCAOB.
C.SASareissuedbythePCAOBandAUareissuedbytheASB.
D.SASdefineminimumstandardsofperformanceforauditorswhileAUdefinefinancialaccountingprinciples
thatmustbefollowedaccordingtoGAAP.

AACSB:Communications
AICPABB:ResourceManagement
AICPAFN:DecisionMaking
Blooms:Analysis
Difficulty:Moderate
LearningObjective:8
MessierChapter02#38

13

Messier - Auditing and Assurance Services - 7e

39.TheAICPA'sStatementsonAuditingStandardscanbedescribedas
A.Providingveryspecificguidanceaboutthespecificactivitiesanauditormustperformoneachengagement
B.Similartofinancialaccountingstandardsinthattheyaredevelopedbythegovernment
C.Definingtheminimumstandardsofperformanceforanauditor
D.Providingassurancethatanauditorwillnotissueanincorrectopinion

AACSB:Communications
AICPABB:Legal
AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:8
MessierChapter02#39

40.Withregardtodetectingfraud,auditingstandardsrequireauditorsto
A.Performproceduresdesignedtodetectallinstancesoffraudthatmightaffectthefinancialstatements
B.Providereasonableassurancethatthefinancialstatementsarenotmateriallymisstatedbecauseoffraud
C.Issueanunqualifiedopiniononlywhentheauditorissatisfiedthatnoinstancesoffraudhaveoccurred
D.Designtheauditprogramtomeetfinancialstatementusers'expectationsconcerningfraud

AACSB:Communications
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:11
MessierChapter02#40

41.TheobjectiveofthesecondStandardofReportingistoprovideassurancethat
A.Therearenovariationsintheformatandpresentationoffinancialstatements
B.Substantiallydifferenttransactionsandeventsarenotaccountedforonanidenticalbasis
C.Theauditorisconsultedbeforematerialchangesaremadeintheapplicationofaccountingprinciples
D.Thecomparabilityoffinancialstatementsbetweenperiodsisnotmateriallyaffectedbychangesin
accountingprinciplesthatarenotdisclosed

AACSB:Analytic
AICPABB:Legal
AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:7
MessierChapter02#41

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Messier - Auditing and Assurance Services - 7e

42.Aninternalauditorislikelytobemoreconcernedwith_________________thantheexternalauditor.
A.Internaladministrativeprocedures
B.Costaccountingprocedures
C.Theefficiencyofoperations
D.Internalcontrol

AACSB:Analytic
AICPABB:Industry
AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Moderate
LearningObjective:13
LearningObjective:14
MessierChapter02#42

43.Whichofthefollowingisnotincludedinthebroadcategoryofassuranceservices?
A.operationalaudit
B.reportingoninternalcontrol
C.accountingorreviewservices
D.evaluationoftheclient'sriskmanagementframework

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Application
Difficulty:Moderate
LearningObjective:13
MessierChapter02#43

44.WhichofthefollowingisnotexplicitlyapartoftheIIA'sdefinitionofinternalauditing?
A.Internalauditingisanobjectiveassuranceactivity
B.Internalauditingisaconsultingactivity
C.Internalauditingshouldhelpanorganizationaccomplishitsobjectives
D.Internalauditorsshouldhelpexternalauditorscompletetheannualfinancialstatementaudit

AACSB:Communications
AICPABB:Industry
AICPAFN:Research
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:14
MessierChapter02#44

15

Messier - Auditing and Assurance Services - 7e

45.WhichofthefollowingstatementsregardingthePCAOBisincorrect?
A.Itisapublicsector,nonprofitcorporation
B.ItisoverseenbytheSEC
C.Itsetsstandardsforpubliccompanyaudits
D.IthasdelegatedallofitsstandardsettingauthoritytotheAICPA

AACSB:Communications
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:15
MessierChapter02#45

46.Dueprofessionalcarerequires
A.Auditorstoplanandperformtheirdutieswiththeskillandcarethatiscommonlyexpectedofaccounting
professionals
B.Theexaminationofallavailablecorroboratingevidence
C.Theexerciseoferrorfreejudgment
D.Astudyandreviewofinternalcontrolsthatincludestestsofcontrols

AACSB:Ethics
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:2
LearningObjective:7
MessierChapter02#46

47.Whichofthefollowingbestdescribestheroleofcorporategovernance?
A.Managementdecideswhichaccountingprinciplesarethemostappropriate.
B.Shareholdersvotetodecidewhoshouldbemembersoftheboardofdirectors.
C.Holdingthemanagementteamaccountabletoshareholdersandotherconstituentsfortheutilizationofthe
entity'sresources.
D.Managementofteniscompensatedbasedonthecompany'sprofitability.

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Hard
LearningObjective:3
MessierChapter02#47

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Messier - Auditing and Assurance Services - 7e

48.Thefourstandardsofreportingareconcernedwithallofthefollowingexcept:
A.ThepresentationofthefinancialstatementsbasedonGAAS.
B.ThepresentationofthefinancialstatementsbasedonGAAP.
C.Whetherprinciplesareconsistentlyapplied,whetherallinformativedisclosureshavebeenmadeandthe
degreeofresponsibilitytheauditoristaking.
D.Thedegreeofresponsibilitytheauditoristaking.

AACSB:Analytic
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:7
MessierChapter02#48

49.Whichofthefollowingbestdescribeswhatismeantbygenerallyacceptedauditingstandards?
A.Auditassertionsgenerallydeterminedonauditengagements
B.Actstobeperformedbytheauditor
C.Standardsofqualityfortheauditor'sperformance
D.Procedurestobeusedtogatherevidencetosupportfinancialstatements

AACSB:Analytic
AICPABB:Legal
AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Hard
LearningObjective:7
MessierChapter02#49

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Messier - Auditing and Assurance Services - 7e

50.Thefourthstandardofreportingrequiresanauditortorenderareportwheneveranauditor'snameis
associatedwithfinancialstatements.Theoverallpurposeofthefourthstandardofreportingistorequirethat
reports
A.Statethattheexaminationoffinancialstatementshasbeenconductedinaccordancewithgenerallyaccepted
auditingstandards
B.Indicatethecharacteroftheauditor'sexaminationandthedegreeofresponsibilityassumedbytheauditor
C.Implythattheauditorisindependentinfactaswellasinappearancewithrespecttothefinancialstatements
underexamination
D.Expresswhethertheaccountingprinciplesusedinpreparingthefinancialstatementshavebeenapplied
consistentlyintheperiodunderexamination

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Hard
LearningObjective:7
MessierChapter02#50

51.Thethreestandardsoffieldworkareconcernedwith:
A.Planningandsupervisionandunderstandingtheclient'sinternalcontrolsystem.
B.Choosingevidencewithdueprofessionalcare.
C.Adequatetrainingtounderstandtheclient'sinternalcontrolssystem.
D.Ensuringconsistencyinfinancialstatementsforperiodspresented.

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Hard
LearningObjective:7
MessierChapter02#51

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Messier - Auditing and Assurance Services - 7e

52.Thefourthreportingstandardrequirestheauditor'sreporttocontaineitheranexpressionofopinion
regardingthefinancialstatementstakenasawholeoranassertiontotheeffectthatanopinioncannotbe
expressed.Theobjectiveofthefourthstandardistoprevent
A.Anauditorfromreportingononebasicfinancialstatementandnottheothers
B.Anauditorfromexpressingdifferentopinionsoneachofthebasicfinancialstatements
C.Managementfromreducingitsfinalresponsibilityforthebasicfinancialstatements
D.Misinterpretationsregardingthedegreeofresponsibilitytheauditorisassuming

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Hard
LearningObjective:7
MessierChapter02#52

53.Whichassertionsmaybetestedforthe"accountbalances"categoryofmanagementassertions?
A.Existence,accuracy,rightsandobligations,completeness
B.Existence,rightsandobligations,completeness,valuationandallocation
C.Occurrence,rightsandobligations,completeness,valuationandallocation
D.Occurrence,accuracy,rightsandobligations,completeness

AACSB:Communications
AICPABB:Legal
AICPAFN:RiskAnalysis
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:5
MessierChapter02#53

54.Whichassertionsmaybetestedforthe"transactionsandevents"categoryofmanagementassertions?
A.Existence,completeness,rightsandobligations,accuracy,cutoffandclassification
B.Occurrence,completeness,rightsandobligations,accuracy,cutoffandclassification
C.Occurrence,completeness,authorization,accuracy,cutoffandclassification
D.Existence,rightsandobligations,accuracy,authorization,andcompleteness

AACSB:Communications
AICPABB:Legal
AICPAFN:RiskAnalysis
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:5
MessierChapter02#54

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Messier - Auditing and Assurance Services - 7e

55.Whichassertionsmaybetestedforthe"presentationanddisclosure"categoryofmanagementassertions?
A.Existence,rightsandobligations,cutoffandclassification,completeness,accuracyandvaluation
B.Occurrence,rightsandobligations,existence,accuracyandvaluation,cutoffandclassification
C.Occurrence,completeness,classificationandunderstandability,cutoffandclassification
D.Occurrence,rightsandobligations,completeness,classificationandunderstandability,accuracyand
valuation

AACSB:Communications
AICPABB:Legal
AICPAFN:RiskAnalysis
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:5
MessierChapter02#55

56.Youaretheownerofasmallgrocerystore,CornerMarketplace.Explainthefiveprocesscategoriesand
howtheyapplytoyourbusiness.
Financing:Thefinancingprocessinvolvesloansorshareholdercapitalfinancingforassetssuchasland,
buildings,andequipment.CornerMarketplacemayhaveabankloanorleaseforitsstore.Itmayalsohave
solicitedothermeansoffinancing,suchasadditionalownerfunds.
Purchasing:Businessesacquiregoodsandservicestosupportthesaleoftheirowngoodsorservicesthrough
thepurchasingprocess.CornerMarketplacewouldpurchasefoodinventorytoselltocustomers.Itmightalso
needtopurchasedisplaycases,freezers,etc.tostoreanddisplaytheinventory.
HumanResourceManagement:Businessorganizationshirepersonneltoperformvariousfunctionsin
accordancewiththeenterprise'smissionandstrategy.CornerMarketplaceshouldhaveestablishedpoliciesfor
hiring,training,evaluating,counseling,promoting,compensating,andterminatingemployees.
InventoryManagement:Agrocerystorewouldhavesignificantinventorytomanage,whichitaccomplishesas
partoftheinventorymanagementprocess.Thestorewouldneedtoallocatepropercoststoinventoryandwould
needtoaccountforproduce,etc.thatisexpired.
Revenue:CornerMarketplacewouldgeneraterevenuethroughsalesoffoodtocustomersandwouldcollectthe
proceedsofthosesales.Typically,asmallgrocerystorewouldnothaveaccountsreceivablesfromcustomers,
ascustomerswouldpayimmediately.However,therevenuecycleincludescashreceiptsandcreditcard
transactions.

AACSB:Analytic
AICPABB:Industry
AICPAFN:Measurement
Blooms:Application
Difficulty:Hard
LearningObjective:3
LearningObjective:4
MessierChapter02#56

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Messier - Auditing and Assurance Services - 7e

57.Nametwoaccountbalancemanagementassertionspertainingtoinventoryandexplainwhytheyare
consideredinanaudit.
Answersshouldincludetwoofthefollowing:
Existence:Acompanyhasanincentivetooverstateinventorytoimprovetheappearanceofitsbalancesheet.
Auditorscanperformprocedures,suchasphysicalexamination,totestthatthecompany'sstatedliabilities
actuallyexist.
Rights:Auditorsalsoneedtoensurethatthecompanyhasrightstoitsstatedinventory.Forinstance,acompany
maybestoringcustomergoodsorholdinggoodsonconsignment;inthesecases,thecompanydoesnotactually
holdtherightstothegoods.
Valuation:Acompanyhasanincentivetoovervalueitsinventory.Again,thisimprovestheappearanceofthe
balancesheet.Auditorsshouldunderstandthepossibilitythatsomemerchandisemaybeobsolete,maynotbe
valuedatthemarketcostormayincludeimproperlyallocatedcosts.
Completeness:Acompany'sinventorymaynotbeproperlystatedduetoinappropriateexclusionofinventory
items.Theinventorymaynotincludeeverythingthatshouldhavebeenrecorded.Thiseventmayoccurwith
faultyinternalcontrols,soauditorsshouldbeawareofthispossibility.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Application
Difficulty:Moderate
LearningObjective:5
MessierChapter02#57

58.Definecorporategovernance,theboardofdirectors,andtheauditcommitteeandexplainhowtheyrelateto
eachother.
Corporategovernanceisallthepeople,processes,andactivitiesinplacetohelpensureproperstewardshipover
anentity'sassets.
Theboardofdirectorsisthebodyprimarilyresponsibleformanagementoversightincorporations.
Theauditcommitteeoverseesinternalandexternalauditworkdoneforanentity.
Theboardofdirectorsplaysapartinensuringpropercorporategovernancebyholdingmanagementresponsible
fortheusageoftheentity'sassets.Theauditcommitteeismadeupofmembersoftheboardofdirectors.The
auditcommitteeenhancescorporategovernancebyholdingmanagementaccountablefortheiractivitiesthrough
auditsoftheirwork.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:3
MessierChapter02#58

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Messier - Auditing and Assurance Services - 7e

59.Describetheorganizationsinvolvedinstandardsettingforauditorsandwhattheirrespectiverolesarein
settingcurrentauditingstandards.
MostauditingstandardsweredevelopedbytheAccountingStandardsBoard(ASB).Atthattime,theprofession
wasselfregulated.However,theSarbanesOxleyActof2002transferredtheauthoritytosetauditingstandards
forpubliccompanyauditstothePublicCompanyAccountingOversightBoard(PCAOB),whichisoverseenby
theSecuritiesandExchangeCommission(SEC).However,thePCAOBadoptedtheASB'sauditingstandards
onaninterimbasis.CPAsmuststillabidebytheAICPA'sCodeofProfessionalConductatalltimes.Theymust
alsofollowauditingstandardssetbytheASBwhenperformingauditsofprivatecompaniesandotherentities
thatarenotpubliccompanies.

AACSB:Ethics
AICPABB:Legal
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Hard
LearningObjective:1
LearningObjective:15
LearningObjective:6
MessierChapter02#59

60.Whatarethethreegeneralauditingstandardsfoundwithinthe10GAAS(NOTthethreemaincategoriesof
GAAS)andwhyiseachimportant?
Thefirststandardstatesthatanauditormusthaveadequatetrainingandproficiencyasanauditor.Thisis
gainedthroughformaleducation,continuingeducationprograms,andexperience.Thisongoingtrainingis
necessarysoauditorscanstayuptodatewithcurrentdevelopmentsintheindustry.
Thesecondstandardrequiresthattheauditormaintainanattitudeofindependenceonanengagement.Auditors
mustbeindependentinfactandinappearancetoprotecttheprofession'simageofobjectivity.
Thethirdstandardfocusesondueprofessionalcare,whichmeansthattheauditorplansandperformshisorher
dutieswithadegreeofskillcommonlypossessedbyothersintheprofession.Itisimportantthatanyonewho
practicesasaCPAisabletoofferacertainlevelofservice.

AACSB:Communications
AICPABB:Legal
AICPAFN:Measurement
Blooms:Application
Difficulty:Easy
LearningObjective:7
MessierChapter02#60

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Messier - Auditing and Assurance Services - 7e

61.JaneGoodpersonperformedanauditontheQuagmireCorporationandissuedanunqualifiedopinion.Jane
performedtheauditwithdueprofessionalcareandinaccordancewithgenerallyacceptedauditingstandards.
Twomonthsafterthereportisissued,JanediscoversonthenewsthattheCEOofQuagmire,JohnnyBesthad
beenstealingsmallamountsofinventory.Theamount,however,isimmaterialcomparedtotheoverall
inventoryofthecorporation.JanesoonreceivesacallfromQuagmire'sCFO,MarkBeastly.MarkwantsJaneto
refundherauditfees.MarkthinksJanedidnotproperlyperformtheaudit,asshedidnotdiscoverthisfraud.
Further,hefeelsthatnowQuagmire'sfinancialstatementsarenotfairlystatedbecauseofJane.Howshould
Janerespondtothisclaim?
JaneshouldtellMarkthatherresponsibilitywastoplanandperformtheaudittoobtainreasonableassurance
aboutwhetherthefinancialstatementsarefreeofmaterialmisstatement,whethercausedbyerrororfraud.She
hadnoresponsibilitytoplanandperformtheaudittoobtainreasonableassurancethatmisstatements,whether
causedbyerrorsorfraudthatarenotmaterialtothefinancialstatementswillbedetected.Quagmire's
management,notJane,hasresponsibilityforthefinancialstatements.Infact,becauseoftheSarbanesOxley
Actof2002,Markhadtotakeexplicitresponsibilityforthefinancialstatementsby"certifying"thatheasCFO
isresponsibleforestablishingandmaintaininginternalcontrolandthatthefinancialstatementsfairlypresent
theentity'sfinancialconditionsandoperations.Thisstatementisprobablystilltrue,sincetheamountstolenwas
immaterial.

AACSB:Communications
AICPABB:Legal
AICPAFN:RiskAnalysis
Blooms:Application
Difficulty:Moderate
LearningObjective:11
MessierChapter02#61

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Messier - Auditing and Assurance Services - 7e

62.MikehasjustgraduatedfromStateUniversitywithabachelor'sdegreeinaccounting.Hewouldliketo
pursueacareerinauditing.WhatoptionsdoesMikehave?Describethreeauditingcareeroptions,includinga
descriptionoftheorganizationMikewouldworkfor.
Answercouldincludeanythreeofthefollowing:
External:Mikecouldbecomeanexternalauditor.HewouldworkforaCPAfirmprovidingindependentaudits
tononpublicorpubliccompanies.MikewouldneedtopasstheUniformCPAExaminationmonitoredbythe
AmericanInstituteofCertifiedPublicAccountants.Hisstatemayhaveotherrequirements,suchas150credit
hoursandexperience.
Internal:Mikecouldalsobeaninternalauditor.Hewouldbedirectlyemployedbytheentityonwhichheis
performingaudits.Internalauditorsmayconductfinancial,internalcontrol,compliance,operational,and
forensicauditswithintheirorganization.InternalauditorsaresupportedbytheInstituteofInternalAuditors.
Governmental:AnotheroptionforMikeisgovernmentalauditing.Thisisessentiallyaformofinternalauditing
andMikecouldbeemployedbyfederal(suchastheGovernmentAccountabilityOfficeortheInternalRevenue
Service),state,orlocalagencies.
Forensic:Mikecouldalsobeaforensicauditor.Forensicauditorsareemployedbycorporations,government
agencies,publicaccountingfirms,andconsultingandinvestigativeservicesfirms.Theyaretrainedindetecting,
investigating,anddeterringfraudandwhitecollarcrimeandaresupportedbytheAssociationofCertified
FraudExaminers.

AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:14
MessierChapter02#62

63.Withrespecttoanentity'sfinancialstatements,describeboththeresponsibilityofmanagementandofthe
auditor.
Thefinancialstatementsaretheresponsibilityofmanagement.Theauditor'sresponsibilityistoexpressan
opiniononthefinancialstatementsbasedontheaudit.

AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Comprehension
Difficulty:Easy
LearningObjective:11
MessierChapter02#63

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Messier - Auditing and Assurance Services - 7e

64.Whatauditingstandardsareusedtoconductanauditforaprivatelyheldcorporation?Whatauditing
standardsareusedtoconductanauditforapubliclyheldandtradedcorporation?Whatorganizationis
responsibleforsettingeachofthesesetsofstandards?
AuditingstandardsdevelopedbytheAuditingStandardsBoardareusedtoconductanauditforaprivatelyheld
corporationorotherentitiesthatarenotpubliccompanies.Thisincludesthetengenerallyacceptedauditing
standards(GAAS)andtheStatementsonAuditingStandards(SAS).Auditingstandardsdevelopedbythe
PublicCompanyAccountingOversightBoard(PCAOB)mustbeusedtoconductanauditforapubliclyheld
andtradedcorporation.ThesestandardsincludeallthoseissuedbytheASBuntil2003andanynewstandards
issuedbythePCAOBafterthatpoint.

AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:6
MessierChapter02#64

65.Thereareseveraltypesofauditservicesthatareprovidedbyauditors.Identifyanddefinethreeofthese
typesofaudits.
Answershouldincludeanythreeofthefollowing:
FinancialStatementAudit:Auditorstestthetransactions,balances,anddisclosuresinasetoffinancial
statementstodetermineiftheyaremateriallycorrect.
InternalControlAudit:Auditorstesttheinternalcontrolsofacompanytodeterminewhetherthecontrolsystem
isfunctioningeffectively(i.e.preventing,detecting,andcorrectingmisstatementsinthefinancialstatements).
ComplianceAudit:Auditorstesttheextenttowhichrules,policies,laws,covenants,orgovernmentregulations
arefollowedbytheentity.
OperationalAudit:Auditorsreviewpartorallofanorganization'sactivitiestoevaluatewhetherresourcesare
beingusedeffectivelyandefficiently.Theauditorassessestheentity'sperformance,identifiesareasfor
improvement,anddevelopsrecommendations.
ForensicAudit:Auditorsconductforensicauditstodetectordeterfraudulentactivities.

AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:13
MessierChapter02#65

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