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Chapter 02 The Financial Statement Auditing Environment   True / False Questions 1

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Chapter 02

The Financial Statement Auditing Environment
 
True / False Questions

1. A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002). 
 

2. The primary audit context with which an auditor is concerned is the client's industry or business. 
 

3. The audit committee generally includes senior executives of the organization.
 

4. A financial statement audit is generally organized based on the five basic business processes or cycles. 
 

5. One of the five basic business processes is the warehousing cycle. 
 

6. Audit procedures are designed to test management assertions.
 

7. PCAOB auditing standards must be followed on all financial statement audits performed in the U.S. 
 

8. A financial statement audit must be conducted based on GAAP. 
 

9. Generally, the financial statements of U.S. companies must be prepared based on GAAP. 
 

10. PCAOB auditing standards must be followed on all audits of public Companies' financial statements. 
 

11. The Audit committee consists of: 
 

12. What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.? 
13. The Public Company Accounting Oversight Board's role is to 
 

14. The authoritative body designed to promulgate standards concerning an accountant's association with audited financial statements of an entity that is required to file financial statements with the SEC is the 
 

15. The auditor must be independent of the audit client unless: 
16. Which of the following describes the generally accepted auditing standard requiring a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision? 
17. Which of the following best describes the general character of the three generally accepted auditing standards that are classified as standards of fieldwork? 
 

18. The first general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and 


 19. The first standard of reporting requires that, "the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles." This passage requires 
 

20. Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of 

 21. The accuracy of information included in footnotes accompanying the audited financial statements issued by a company whose shares are traded on a stock exchange is the primary responsibility of 
 

22. The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the 
 

23. The largest public accounting firms typically are structured as 
 

24. Typically, an external auditor first gets supervisory experience at what level of authority? 
 

25. An "in-charge" auditor typically holds the rank of 
 

26. Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance? 
 

27. Forensic audits include all of the following except 
 

 

28. A typical objective of an operational audit is for the auditor to 
 

29. Governmental auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and 

 30. External auditors are referred to as "external" because 
 

31. Which is not an attribute of an external auditor? 
 

 

32. What is the general character of the work conducted in performing a forensic audit for a company? 
 

 

33. Which of the following is NOT a requirement of the Sarbanes-Oxley Act? 
 

34. A CPA is most likely to refer to one or more of the three general auditing standards in determining 
 

 

35. Who bears ultimate responsibility for the financial statements? 

 

36. The three general standards are concerned with: 
 

 

37. The first general standard recognizes that regardless of how capable an individual may be in other fields, the individual cannot meet the requirements of the auditing standards without the proper 

 

38. The main difference between SAS and AU is: 
39. The AICPA's Statements on Auditing Standards can be described as 
40. With regard to detecting fraud, auditing standards require auditors to 
 

41. The objective of the second Standard of Reporting is to provide assurance that 
42. An internal auditor is likely to be more concerned with _________________ than the external auditor. 
 

43. Which of the following is not included in the broad category of assurance services? 
 

44. Which of the following is not explicitly a part of the IIA's definition of internal auditing? 
 

45. Which of the following statements regarding the PCAOB is incorrect? 
 

46. Due professional care requires 
47. Which of the following best describes the role of corporate governance? 
  

48. The four standards of reporting are concerned with all of the following except: 
 

49. Which of the following best describes what is meant by generally accepted auditing standards? 
 

50. The fourth standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements. The overall purpose of the fourth standard of reporting is to require that reports 
51. The three standards of fieldwork are concerned with: 
 

52. The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent 
53. Which assertions may be tested for the "account balances" category of management assertions? 
54. Which assertions may be tested for the "transactions and events" category of management assertions? 
55. Which assertions may be tested for the "presentation and disclosure" category of management assertions? 
 

56. You are the owner of a small grocery store, Corner Marketplace. Explain the five process categories and how they apply to your business. 

 57. Name two account balance management assertions pertaining to inventory and explain why they are considered in an audit. 

 58. Define corporate governance, the board of directors, and the audit committee and explain how they relate to each other. 

 

59. Describe the organizations involved in standard setting for auditors and what their respective roles are in setting current auditing standards. 

 60. What are the three general auditing standards found within the 10 GAAS (NOT the three main categories of GAAS) and why is each important? 

 61. Jane Goodperson performed an audit on the Quagmire Corporation and issued an unqualified opinion. Jane performed the audit with due professional care and in accordance with generally accepted auditing standards. Two months after the report is issued, Jane discovers on the news that the CEO of Quagmire, Johnny Best had been stealing small amounts of inventory. The amount, however, is immaterial compared to the overall inventory of the corporation. Jane soon receives a call from Quagmire's CFO, Mark Beastly. Mark wants Jane to refund her audit fees. Mark thinks Jane did not properly perform the audit, as she did not discover this fraud. Further, he feels that now Quagmire's financial statements are not fairly stated because of Jane. How should Jane respond to this claim? 

 62. Mike has just graduated from State University with a bachelor's degree in accounting. He would like to pursue a career in auditing. What options does Mike have? Describe three auditing career options, including a description of the organization Mike would work for. 

 

63. With respect to an entity's financial statements, describe both the responsibility of management and of the auditor. 

 64. What auditing standards are used to conduct an audit for a privately-held corporation? What auditing standards are used to conduct an audit for a publicly held-and-traded corporation? What organization is responsible for setting each of these sets of standards? 

 

65. There are several types of audit services that are provided by auditors. Identify and define three of these types of audits. 

 

66. For private companies, accounting firms are prohibited from providing
 

67. With respect to ethics, the rights-based approach
 

 68. With respect to ethics, the utilitarian theory
 

69.  With respect to ethics, the justice-based approach
 

70. In auditing a privately held entity, an auditor must follow the professional standards established by all of the following except:
71. What is meant by the Code of Professional Conduct's definition of "holding out"?
72. A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice
73. A violation of the profession's ethical standards would most likely have occurred when a CPA