Internal auditing assurance and consulting services multiple choice questions

Multiple Choice Questions to Answer for Chapter One

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1. Which of the following would be considered an assurance engagement?

Giving an opinion on a prize promoter’s claims about the amount of sweepstakes prizes awarded in the past.

Giving an opinion on the conformity of the financial statements of a university with generally accepted accounting principles.

Giving an opinion on the fair presentation of a newspaper’s circulation data.

Giving assurance about the average drive length achieved by golfers with a client’s golf balls.

All of the above.

2. 1.24

It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that

A potential conflict of interest always exists between the auditor and the management of the enterprise under audit.

In audits of financial statements, the auditor acts exclusively in the capacity of an auditor.

The professional status of the independent auditor imposes commensurate professional obligations.

Financial statements and financial data are verifiable.

3. 1.25

In an attestation engagement, a CPA practitioner is engaged to

Compile a company’s financial forecast based on management’s assumptions without expressing any form of assurance.

Prepare a written report containing a conclusion about the reliability of a management assertion.

Prepare a tax return using information the CPA has not audited or reviewed.

Give expert testimony in court on particular facts in a corporate income tax controversy.

4. 1.26

A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of

Environmental auditing.

Financial auditing.

Compliance auditing.

Operational auditing.

5. 1.27

The primary difference between operational auditing and financial auditing is that in operational auditing

The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards.

The operational auditor is seeking to help management use resources in the most effective manner possible.

The operational auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them.

The operational auditor can use analytical skills and tools that are not necessary in financial auditing.

6. 1.28

According to the AICPA, the purpose of an audit of financial statements is to

Enhance the degree of confidence that intended users can place in the financial statements.

Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the Financial Accounting Standards Board.

Express an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with accounting standards promulgated by the U.S. Securities and Exchange Commission.

Obtain systematic and objective evidence about financial assertions and report the results to interested users.

7. 1.29

Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because

Financial statements are too complex for the bankers to analyze themselves.

They are too far away from company headquarters to perform accounting and auditing themselves.

The consequences of making a bad loan are very undesirable.

They generally see a potential conflict of interest between company managers who want to get loans and the bank’s needs for reliable financial statements.

8. 1.30

The Sarbanes–Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client?

Bookkeeping services.

Internal auditing services.

Valuation services.

All of the above.

9. 1.31

Independent auditors of financial statements perform audits that reduce

Business risks faced by investors.

Information risk faced by investors.

Complexity of financial statements.

Timeliness of financial statements.

10. 1.32

The primary objective of compliance auditing is to

Give an opinion on financial statements.

Develop a basis for a report on internal control.

Perform a study of effective and efficient use of resources.

Determine whether client personnel are following laws, rules, regulations, and policies.

11. 1.33

What requirements are usually necessary to become licensed as a certified public accountant?

Successful completion of the Uniform CPA Examination.

Experience in the accounting field.

Education.

All of the above.

12.

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The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the

Governmental Internal Audit Agency (GIAA).

Central Internal Auditors (CIA).

Securities and Exchange Commission (SEC).

Government Accountability Office (GAO).

13. 1.35

Performance audits usually include [two answers]

Financial audits.

Economy and efficiency audits.

Compliance audits.

Program audits.

14. 1.36

The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about

Completeness.

Existence.

Valuation and allocation.

Rights and obligations.

Occurrence.

15. 1.37

Jones, CPA, is planning the audit of Rhonda’s Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda’s representation in this regard

Is sufficient evidence for Jones to conclude that the completeness assertion is supported for expenses.

Can enable Jones to minimize the work on the gathering of evidence to support Rhonda’s completeness assertion.

Should be disregarded because it is not in writing.

Is not considered a sufficient basis for Jones to conclude that all expenses have been recorded.

16. 1.38

The risk to investors that a company’s financial statements may be materially misleading is called

Client acceptance risk.

Information risk.

Moral hazard.

Business risk.

17. 1.39

When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management assertion?

Cutoff.

Existence.

Valuation and allocation.

Rights and obligations.

Occurrence.

18. 1.40

When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client’s ending inventory balance. This audit procedure provides assurance about which management assertion?

Completeness.

Existence.

Valuation and allocation.

Rights and obligations.

Occurrence.

19.

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When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management’s assertion regarding

Completeness.

Existence.

Valuation and allocation.

Rights and obligations.

Occurrence.

20. 1.42

The Sarbanes–Oxley Act of 2002 generally prohibits public accounting firms from

Acting in a managerial decision-making role for an audit client.

Auditing the firm’s own work on an audit client.

Providing tax consulting to an audit client without audit committee approval.

All of the above.

21. 1.43

Substantial equivalency refers to

An auditor’s tendency not to believe management’s assertions without sufficient corroboration.

Providing consulting work for another firm’s audit client in exchange for the other firm’s providing consulting services to one of your clients.

The waiving of certification exam parts for an individual holding an equivalent certification from another professional organization.

Permitting a CPA to practice in another state without having to obtain a license in that state.

22. 1.44

Which of the following best describes the relationship between auditing and attestation engagements?

Auditing is a subset of attestation engagements that focuses on the certification of financial statements.

Attestation is a subset of auditing that provides lower assurance than that provided by an audit engagement.

Auditing is a subset of attestation engagements that focuses on providing clients with advice and decision support.

Attestation is a subset of auditing that improves the quality of information or its context for decision makers.

23. 1.45

During an audit of a company’s cash balance on a company with operations in only one country, the auditor is most concerned with which management assertion?

Existence.

Rights and obligations.

Valuation or allocation.

Occurrence.

24. 1.46

When auditing an investment in another company, an auditor most likely would seek to conduct which audit procedure to help satisfy the valuation assertion?

Inspect the stock certificates evidencing the investment.

Examine the audited financial statements of the investee company.

Review the broker’s advice or canceled check for the investment’s acquisition.

Obtain market quotations from The Wall Street Journal or another independent source.

25.

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Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management’s assertion of

Presentation and disclosure.

Completeness.

Rights and obligations.

Existence.

26. 1.48

Which of the following audit procedures probably would provide the most reliable evidence related to the entity’s assertion of rights and obligations for the inventory account?

Trace test counts noted during physical count to the summarization of quantities.

Inspect agreements for evidence of inventory held on consignment.

Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.

Inspect the open purchase order file for significant commitments to consider for disclosure.

27.

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In auditing the accrued liabilities account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of

Existence or occurrence.

Completeness.

Presentation and disclosure.

Valuation or allocation.

28. 1.50

Which of the following best describes the focus of the following engagements?

Auditing Engagement Attestation Engagement Assurance Engagement Consulting Services Engagement

a. Any information Financial statements Advice and decision support Financial information

b. Financial information Advice and decision support Financial statements Any information

c. Advice and decision support Any information Financial information Financial statements

d. Financial statements Financial information Any information Advice and decision support

29. 1.51

Which of the following is a reason to obtain professional certification?

Certification provides credibility that an individual is technically competent.

Certification often is a necessary condition for advancement and promotion within a professional services firm.

Obtaining certification is often monetarily rewarded by an individual’s employer.

All of the above.

30. 1.52

During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management’s assertion of

Existence or occurrence.

Completeness.

Valuation or allocation.

Presentation and disclosure.

31. 1.53

When auditing the accounts receivable account on the balance sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of

Existence.

Completeness.

Presentation and disclosure.

Rights and obligations.

32. 1.54

An auditor selected items for test counts from the client’s warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most likely provided evidence concerning management’s assertion of

Rights and obligations.

Completeness.

Existence.

Valuation.

33. 1.55

An auditor’s purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management’s assertion about

Rights and obligations.

Existence.

Presentation and disclosure.

Valuation.

EXERCISES AND PROBLEMS

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Audit, Attestation, and Assurance Services. Following is a list of various professional services. Identify each by its apparent characteristics as audit engagement, attestation engagement, or assurance engagement. Because audits are a subset of attestation engagements, which are a subset of assurance engagements, choose the most specific description. In other words, if you believe the engagement is an audit engagement, select only audit engagement rather than checking all three. Similarly, the choice of assurance engagement for an audit, while technically correct, would not be the best choice.

Audit Engagement Attestation Engagement Assurance Engagement

Real estate demand studies

Ballot for awards show

Utility rates applications

Newspaper circulation audits

Third-party reimbursement maximization

Annual financial report to stockholders

Rental property operation review

Examinations of financial forecasts and projections

Customer satisfaction surveys

Compliance with contractual requirements

Benchmarking/best practices

Evaluation of investment management policies

Information systems security reviews

Productivity statistics

Internal audit strategic review

Financial statements submitted to a bank loan officer

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Controller as Auditor. The chairman of the board of Hughes Corporation proposed that the board hire as controller a CPA who had been the manager of the team that conducted Hughes Corporation’s audit engagement. The chairman thought that hiring this person would make the annual audit unnecessary and would consequently result in saving the professional fee paid to the auditors. The chairman proposed to give this new controller a full staff to conduct such investigations of accounting and operating data as necessary. Evaluate this proposal.

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Management Assertions. Complete the following chart indicating the corresponding Auditing Standards Board assertions and whether the assertion relates to transactions, balances, or disclosures.

PCAOB Assertion Corresponding ASB Assertion Nature of Assertion

Existence or Occurrence

Rights and Obligations

Completeness

Valuation and Allocation

Presentation and Disclosure

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Management Assertions. Your audit manager has asked you to explain the PCAOB assertions by using an account on the balance sheet at your audit client. For the accounts receivable account, please define each of the PCAOB assertions, using the accounts receivable account as a way to illustrate each assertion.

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Operational Auditing. Bigdeal Corporation manufactures paper and paper products and is trying to decide whether to purchase Smalltek Company. Smalltek has developed a process for manufacturing boxes that can replace containers that use fluorocarbons for expelling a liquid product. The price may be as high as $45 million. Bigdeal prefers to buy Smalltek and integrate its products while leaving the Smalltek management in charge of day-to-day operations. A major consideration is the efficiency and effectiveness of Smalltek’s operations. Bigdeal wants to obtain a report on the operational efficiency and effectiveness of the Smalltek sales, production, and research and development departments.

Required:

Who can Bigdeal engage to produce the report resulting from this operational audit? Several possibilities exist. Are there any particular advantages or disadvantages in choosing from among them?

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Auditor as Guarantor. Your neighbor, Loot Starkin, invited you to lunch yesterday. Sure enough, it was no “free lunch” because Loot wanted to discuss the annual report of Dodge Corporation. He owns Dodge stock and just received the annual report. Loot says, “Our auditors prepared the audited financial statements and gave an unqualified opinion, so my investment must be safe.”

Required:

What misconceptions does Loot Starkin seem to have about the auditor’s role with respect to Dodge Corporation?

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Identification of Audits and Auditors. Audits may be characterized as (a) financial statement audits, (b) compliance audits, (c) economy and efficiency audits, and (d) program results audits. The work can be done by independent (external) auditors, internal auditors, or governmental auditors (including IRS auditors and federal bank examiners). Following is a list of the purposes or products of various audit engagements:

Type of Audit Type of Auditor

1. Analyze proprietary schools’ spending to train students for low-demand occupations.

2. Determine whether an advertising agency’s financial statements are fairly presented in conformity with GAAP.

3. Study the effectiveness of the Department of Defense’s expendable launch vehicle program.

4. Compare costs of municipal garbage pickup services to comparable services subcontracted to a private business.

5. Investigate financing terms of tax shelter partnerships.

6. Study a private aircraft manufacturer’s test pilot performance in reporting on the results of test flights.

7. Conduct periodic examinations by the U.S. Comptroller of Currency of a national bank for solvency.

8. Evaluate the promptness of materials inspection in a manufacturer’s receiving department.

9. Report on the need for the states to consider reporting requirements for chemical use data.

10. Render a public report on the assumptions and compilation of a revenue forecast by a sports stadium/racetrack complex.

Required:

For each of the engagements listed, indicate (1) the type of audit (financial statement, compliance, economy and efficiency, or program results) and (2) the type of auditors you would expect to be involved.

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Financial Assertions and Audit Objectives. You are engaged to examine the financial statements of Spillane Company for the year ended December 31. Assume that on November 1, Spillane borrowed $500,000 from Second National Bank to finance plant expansion. The long-term note agreement provided for the annual payment of principal and interest over five years. The existing plant was pledged as security for the loan. Due to the unexpected difficulties in acquiring the building site, the plant expansion did not begin on time. To use the borrowed funds, management decided to invest in stocks and bonds and on November 16, invested the $500,000 in publicly traded securities.

Required:

Develop specific assertions (audit objectives) related to securities (assets) based on management’s five (PCAOB) general assertions.

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Internet Exercise: Professional Certification. Each state has unique rules for certification concerning education, work experience, and residency. Visit the website for your state board of accountancy and download a list of the requirements for becoming a CPA in your state. Although not all of the state boards of accountancy have websites, you can find those of most states by accessing the National Association of State Boards of Accountancy at its website (www.nasba.org).

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Internet Exercise: Professional Certification. Visit the website of the Institute of Internal Auditors (www.theiia.org), the Institute of Management Accountants (www.imanet.org), the Association of Certified Fraud Examiners (www.acfe.com), or the Information Systems Audit and Control Association (www.isaca.org). Review the information regarding the certifications available. Does the organization explain the benefits of having its certification? What topics are covered on the certification exam? What are the minimum requirements to take the exam? What additional experience is required to receive the certification?