For publicly listed companies, the auditor also issues which of the following reports in addition to a report containing the auditor's opinion?

a report on INTERNAL CONTROL over financial reporting

The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the

company MANAGEMENT

If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or

Issue an adverse opinion YES Issue a qualified opinion YES

In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of

the Securities Exchange Act of 1934

Which of the following statements is true of a public company's financial statements?

Sarbanes-Oxley requires BOTH the CEO and CFO to certify the financial statements.

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to

management

Management is not responsible for which of the following?

ISSUING their own opinion on the fairness of the financial statements

The auditor's best defense when material misstatements are not uncovered is to have conducted the audit

in ACCORDANCE with generally accepted auditing standards.

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?

Auditors believe that REASONABLE assurance is sufficient in the vast majority of cases.

Which of the following statements is the most correct regarding errors and fraud?

An error is UNINTENTIONAL, whereas fraud is INTENTIONAL.

When an auditor believes that an illegal act may have occurred, the auditor should first

OBTAIN an understanding of the nature and circumstances of the act.

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected.

MATERIAL to the financial statements

Fraudulent financial reporting is most likely to be committed by whom?

company MANAGEMENT

Which of the following would most likely be deemed a direct effect illegal act?

violation of federal INCOME TAX laws

The concept of reasonable assurance indicates that the auditor is

not a guarantor of the CORRECTNESS of the financial statements.

Which of the following is the auditor least likely to do when aware of an illegal act?

contact the local LAW ENFORCEMENT officials regarding potential criminal wrongdoing

An auditor discovers that the company's bookkeeper unintentionally made a mistake in calculating the amount of the quarterly sales. This is an example of

an ERROR

An auditor has a duty to

provide REASONABLE assurance that material misstatements will be detected.

If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct,

audits would not be ECONOMICALLY practical.

When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor

should INQUIRE OF MANAGEMENT about whether the entity is in compliance with such laws and regulations.

Which of the following statements is usually true?

An item is considered material if it would likely have CHANGED or influenced the decisions of a reasonable person using the statements.

Auditing standards make ________ distinction(s) between the auditor's responsibilities for searching for errors and fraud.

no

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is

greater for management fraud because of management's ability to OVERRIDE existing internal controls.

Misappropriation of assets

causes harm to STOCKHOLDERS because the assets are no longer available to their rightful owners.

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility

EQUALLY on discovering errors and employee fraud.

If there is collusion among management, the chance a normal audit would uncover such acts is

very LOW

When the auditor becomes aware of or suspects noncompliance with laws and regulations,

A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit. B) the auditor should discuss the matter with management at a level above those suspected of the noncompliance. C) the auditor should obtain additional information to evaluate the possible effects on the financial statements. (all of the above)

When the auditor identifies or suspects noncompliance with laws and regulations, the auditor

may DISCLAIM an opinion on the basis of scope limitations if he or she is precluded by management from obtaining sufficient appropriate evidence.

When an auditor knows that an illegal act has occurred, he or she must

consider the EFFECTS on the financial statements, including the adequacy of disclosure.

Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?

The auditor's responsibility will depend on whether the laws or regulations are expected to have a DIRECT impact on the financial statements.

Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?

Generally, the auditor is under NO OBLIGATION to notify parties other than personnel within the client's organization.

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?

The auditor is required to provide REASONABLE assurance that the financial statements are free of both material errors and fraud.

When reporting identified or suspected noncompliance,

the auditor should COMMUNICATE all material noncompliance matters to those charged with governance.

Another term for misappropriation of assets is

EMPLOYEE fraud.

The provisions of many laws and regulations affect the financial statements

ONLY indirectly

If a client has violated federal tax laws,

and the amount is SIGNIFICANT, the auditor should communicate with those charged with governance.

In which of the following situations were the financial statements not misstated?

Assets were taken, but the ASSET MISAPPROPRIATION was discovered and appropriately disclosed in the financial statements.

Discuss the differences between errors, frauds, and illegal acts. Give an example of each.

-errors are unintentional misstatements of the financial statements ex: a mathematical mistake when footing the columns in the sales journal -frauds are intentional misstatements ex: the creation of fictitious accounts receivable -Illegal acts are violations of laws or government regulations, other than frauds ex: dumping of toxic waste in violation of the federal environmental protection laws

Discuss the actions an auditor should take when an illegal act is identified or suspected.

1. Obtain an understanding of the nature and circumstances of the act 2. Communicate with those charged with governance matters involving noncompliance with laws and regulations that came to the auditor's attention during the course of the audit 3. Identify whether a responsibility exists to report the identified or suspected noncompliance to parties outside the entity, such as regulatory authorities 4. If the noncompliance has a material effect and has not been adequately reflected in the financial statements, the auditor should express a qualified or adverse opinion

Discuss three reasons why auditors are responsible for "reasonable" but not "absolute" assurance.

1. Most audit evidence results from testing a sample of a population. 2. Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events. 3. Fraudulently prepared financial statements are often very difficult for the auditor to detect, especially when there is collusion among management.

An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and

a CRITICAL ASSESSMENT of the audit evidence.

Which of the following is an accurate statement about professional skepticism?

Professional skepticism involves a CRITICAL ASSESSMENT of the evidence.

One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others.

autonomy

A questioning mindset

means the auditor should approach the audit with a "TRUST BUT VERIFY" mental outlook.

One of the characteristics of professional skepticism is ________, which is a desire to investigate beyond the obvious.

a SEARCH for knowledge

________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions.

self-esteem

An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should

plan and perform the engagement with an attitude of PROFESSIONAL SKEPTICISM.

Which of the following is not a characteristic of skepticism found in academic research on this subject?

depending upon OTHERS to decide for oneself

Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism. List and briefly describe each of these characteristics.

1. Questioning mindset — a disposition to inquiry with some sense of doubt 2. Suspension of judgment — withholding judgment until appropriate evidence is obtained 3. Search for knowledge — a desire to investigate beyond the obvious, with a desire to corroborate 4. Interpersonal understanding— recognition that people's motivations and perceptions can lead them to provide biased or misleading information 5. Autonomy — the self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others 6. Self-esteem — the self-confidence to resist persuasion and to challenge assumptions or conclusions.

The starting point to effective professional judgment begins with

identifying and defining the ISSUE

Which of the following is not a step in the professional judgment process?

determine the type of audit OPINION

________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value.

anchoring

When the auditor considers whether he or she understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he or she is performing which step in the professional judgment process?

performing the analysis and identifying potential ALTERNATIVES

When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will

articulate in written form the RATIONALE of their judgment.

Auditors should be alert for potential judgment tendencies, traps, and biases that may impact their decision-making process. Identify and define four of these judgment tendencies. Then, for each judgment tendency, suggest a way to avoid or mitigate the tendency.

1. Confirmation: the tendency to put more weight on information that is consistent with initial beliefs or preferences 2. Overconfidence: the tendency to overestimate one's own abilities to perform tasks or to make accurate assessments of risks or other judgments and decisions 3. Anchoring: the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from the initial value 4. Availability: the tendency to consider information that is easily retrievable or what's easily accessible as being more likely or more relevant

Why does the auditor divide the financial statements into smaller segments?

Using the cycle approach makes the audit more MANAGEABLE.

Why does the auditor divide the financial statements into segments around the financial statement cycles?

The approach aids in the ASSIGNMENT of tasks to different members of the audit team.

The most important general ledger account included in and affecting several cycles is the

CASH account

When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that

A) the transactions are related to financing a company rather than to its operations. B) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively. (Both A and B are correct)

In describing the cycle approach to segmenting an audit, which of the following statements is not true?

The "INVENTORY and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

The cycle approach to auditing

TIES to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.

Which balance sheet accounts are included in the payroll and personnel cycle?

accrued payroll, cash in bank, and accrued payroll taxes

Auditors generally use a financial statement cycle approach when performing a financial statement audit. Describe the transaction flow, using specific examples, from journals to financial statements that produce financial statements.

General ledger and subsidiary ledgers to General ledger trial balance to financial statements

sales returns and allowances

sales and collection cycle

capital stock

capital acquisition and repayment cycle

buildings

acquisition and payment cycle

notes payable

capital acquisition and repayment cycle

salaries and commissions

payroll and personnel cycle

cost of goods sold

inventory and warehousing cycle

trade of accounts receivable

sales and collection cycle

rent

acquisition and payment cycle

Auditors have found that generally the most efficient and effective way to conduct audits is to

obtain some COMBINATION of assurance for each class of transactions and for the ending balance in the related accounts.

The term audit objective refers to all of the following except for

CYCLE-RELATED audit objectives

Which of the following is not one of the AICPA categories of assertions?

assertions about financial statements and correspondence to GAAP

If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the

CLASSIFICATION assertion

International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements?

assertions about the QUALITY of source documents used to prepare the financial statements

Management assertions are

directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.

Management makes the following assertions about account balances:

existence, completeness, VALUATION AND ALLOCATION, and rights and obligations.

Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion.

accuracy and valuation

Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"?

completeness

Which of the following management assertions is not associated with classes of transactions and events?

rights and obligations

With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance.

presentation and disclosure

Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective.

presentation and disclosure

Briefly explain each management assertion related to classes of transactions and events for the period under audit.

• Occurrence • Completeness • Accuracy • Classification • Cutoff

Briefly explain each management assertion related to account balances at period end.

• Existence. • Completeness. • Valuation and allocation. • Rights and obligations.

Briefly explain each management assertion related to presentation and disclosure.

• Occurrence and rights and obligations. • Completeness. • Accuracy and valuation. • Classification and understandability.

Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?

The GENERAL audit objectives are applicable to every class of transactions.

The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She or he is gathering evidence about which transaction-related audit objective?

accuracy

The posting and summarization audit objective are the auditor's counterpart to management's assertion of

accuracy

________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions).

Occurrence; completeness

Vouch recorded sales from the sales journal to the file of bills of lading.

occurrence; occurrence

Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in recording sales transactions.

timing; cutoff

Account for the sequence of prenumbered bills of lading and sales invoices.

completeness; completeness

Trace from a sample of prelistings of cash receipts to the cash receipts journal, testing for names, amounts, and dates.

completeness/accuracy; completeness/accuracy

Examine customer order forms for credit approval by the credit manager.

occurrence; occurrence

Foot the purchases journal and trace the totals to the related general ledger accounts.

posting and summarization; accuracy

Recompute the cash discounts taken by the client.

accuracy; accuracy

Compare dates on cancelled checks with the bank cancellation date.

timing; cutoff

Trace from a sample of cancelled checks to the cash disbursements journal.

completeness; completeness

Examine supporting documentation for a sample of transactions for authorized payee and amount and to determine services or goods were received.

occurrence; occurrence

In testing for cutoff, the objective is to determine

whether transactions are recorded in the CORRECT accounting period.

The detail tie-in objective is not concerned that the details in the account balance

are properly disclosed in accordance with GAAP.

The detail tie-in is part of the ________ assertion for account balances.

valuation and allocation

The classification balance-related audit objective

involves determining if items included on a client's listing are included in the CORRECT general ledger accounts.

Balance-related audit objectives

provide a FRAMEWORK to help the auditor accumulate sufficient appropriate evidence related to account balances.

Which of the following statements is not true?

Balance-related audit objectives are applied to BOTH beginning and ending balances in balance sheet accounts.

Obtain an aged listing of accounts receivable. For a sample of individual customers on the listing, agree the customer's name, amount, and other information with the corresponding information in the accounts receivable master file.

detail tie-in; valuation and allocation

Examine details of sales for five days before and five days after year-end to determine whether sales have been recorded in the proper period.

cutoff; valuation and allocation

Assess the reasonableness of the balance in the allowance for doubtful accounts.

realizable value; valuation and allocation

Inquire as to whether any accounts receivable have been factored or sold during the period.

rights and obligations; rights and obligations

Inquire as to whether there are any receivables from related parties.

classification; valuation and allocation

The procedures used to test the effectiveness of the internal controls are known as

tests of controls

Which of the following statements is not correct?

Gathering evidence and minimizing costs are EQUALLY important considerations that affect the approach the auditor selects.

Two overriding considerations affect the many ways an auditor can accumulate evidence: 1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. 2. Cost of accumulating evidence should be minimized. In evaluating these considerations

the first is more important than the second.

If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor

can significantly REDUCE other substantive tests.

After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on

the auditor's PROFESSIONAL JUDGMENT.

Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n)

test of DETAILS of balances.

________ are used as evidence to provide assurance about an account balance.

Substantive ANALYTICAL procedures

List the four phases of a financial statement audit.

1. plan and design an audit approach based on risk assessment procedures 2. perform tests of controls and substantive tests of transactions 3. perform substantive analytical procedures and tests of details of balances 4. complete the audit and issue an audit report

an intentional misstatement of the financial statements

fraud

a set of six audit objectives the auditor must meet, including timing, posting and summarization, and accuracy

transaction-related audit objectives

implied or expressed representations made by the client about classes of transactions, account balances and disclosures in the financial statements

management assertions

audit procedures testing for monetary misstatements to determine whether the balance-related audit objectives have been satisfied for each significant account balance

tests of details of balances

a set of nine audit objectives the auditor must meet, including completeness, detail tie-in, and rights and obligations

balance-related audit objectives

audit procedures designed to test the effectiveness of control policies and procedures

tests of controls

use of comparisons and relationships to assess whether account balances or other data appears reasonable

analytical procedures