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True / False Questions
1. A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act
2. The primary audit context with which an auditor is concerned is the auditee’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
5. One of the five basic business processes is the warehousing cycle.
6. The IAASB and the ASB collaborated on a replacement for the 10 GAAS standards which include
principles underlying an audit conducted in accordance with generally accepted auditing
7. PCAOB auditing standards must be followed on all financial statement audits performed in the
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
Multiple Choice Questions
11. The Audit Committee consists of
A. Members of management.
B. A subcommittee of the AICPA who establish the SAS.
C. Members of the Board of Directors.
D. Appointed government overseers.
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
A. Conduct the final review of auditors’ work before the auditor’s opinion is issued.
B. Oversee the auditors of public companies in order to protect the interests of investors.
C. Conduct audits of governmental entities.
D. Sanction auditors who fail to follow GAAS.
14. The authoritative body designed to promulgate standards concerning a CPA’s association with
audited financial statements of an entity that is required to file financial statements with the SEC is
A. Financial Accounting Standards Board.
B. General Accounting Office.
C. Public Company Accounting Oversight Board.
D. Auditing Standards Board.
15. The auditor must be independent of the auditee unless
A. The lack of independence does not influence his or her professional judgment.
B. Both parties agree that the independence issue is not a problem.
C. The lack of independence is insignificant.
D. None of the above—the auditor cannot lack independence.
16. Which of the following describes the PCAOB 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?
B. Audit risk.
D. Due care.
17. Which of the following best describes the general character of the three PCAOB generally
accepted auditing standards that are classified as standards of fieldwork?
A. The competence, independence, and professional care of persons performing the audit.
B. Criteria for the content of the auditor’s report on financial statements and related footnote
C. The criteria of audit planning and evidence-gathering.
D. The need to maintain independence in mental attitude in all matters relating to the audit.
18. The first PCAOB general standard requires that the examination of financial statements is to be
performed by a person or persons having adequate technical training and
A. Independence with respect to the financial statements and supplementary disclosures.
B. Exercising professional care as judged by peer reviewers.
C. Proficiency as an auditor which likely has been acquired from previous experience.
D. Objectivity as an auditor as verified by proper supervision.
19. The first PCAOB standard of reporting requires that, “the report shall state whether the financial
statements are presented in accordance with generally accepted accounting principles.” This
A. A statement of fact by the auditor.
B. An opinion by the auditor.
C. An implied measure of fairness.
D. An objective measure of compliance.
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
A. Objective cynicism.
B. Independent differentialism.
C. Professional skepticism.
D. Impartial conservatism.
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
A. The stock exchange officials.
B. The independent auditor.
C. The company’s management.
D. The Securities and Exchange Commission.
22. The primary responsibility for the adequacy of disclosures in the financial statements of a publicly
held company rests with the
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Auditor in charge of the fieldwork.
D. Securities and Exchange Commission.
23. The largest public accounting firms typically are structured as
A. Subchapter S corporations.
B. Professional corporations.
C. Limited liability partnerships.
D. Limited liability corporations.
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?
A. The risk that financial statements are misstated because of fraud.
B. The risk that financial statements are misstated because of error or fraud.
C. Whether management has systems in place to evaluate and effectively manage the entity’s
D. Developing client acceptance and continuance practices that minimize the likelihood of lawsuits
against the auditor.
27. Forensic audits include all of the following except
A. Criminal investigations.
B. Manufacturers’ assertions about product quality.
C. Employee fraud.
D. Management fraud.
28. A typical objective of an operational audit is for the auditor to
A. Determine whether the financial statements present fairly the entity’s operations.
B. Evaluate the feasibility of attaining the entity’s operational objectives.
C. Make recommendations for improving performance.
D. Report on the entity’s relative success in attaining profit maximization.
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
A. Monetary stimulus.
30. External auditors are referred to as “external” because
A. They report to users outside of the audited entity.
B. They are paid by parties outside of the audited entity.
C. They are not employees of the entity being audited.
D. Their offices are not at the entity’s place of business.
31. Which is not an attribute of an external auditor?
B. Auditee advocacy.
D. Concern for the public interest.
32. What is the general character of the work conducted in performing a forensic audit for a
A. Providing assurance that the financial statements are not materially misstated.
B. Detecting or deterring fraudulent activity.
C. Offering an opinion on the reliability of the specific assertions made by management.
D. Identifying the causes of an entity’s financial difficulties.
33. Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
A. Audit firms cannot provide most types of nonaudit services to their public company auditees.
B. Audit firms are required to rotate audit partners off audit engagements every five years for
public company audits.
C. Firms that audit public companies are subject to inspection by the PCAOB.
D. A certain number of hours, which is based on the size of the company being audited, must be
spent on each audit engagement.
34. A CPA is most likely to refer to one or more of the three PCAOB general auditing standards in
A. The nature of the CPA’s report qualification.
B. The scope of the CPA’s auditing procedures.
C. Requirements for the review of the entity and its environment.
D. Whether the CPA should undertake an audit engagement.
35. Who bears ultimate responsibility for the financial statements?
A. Management of the organization, equally with the external auditor that audits the statements.
B. Management and the shareholders of the organization.
C. The external auditor that audits the statements.
D. Management of the organization.
36. The three PCAOB general standards are concerned with
A. Adequate training and proficiency of the auditor, proper planning and supervision, and due
B. Adequate training and independence.
C. Due professional care.
D. Independence, adequate training and due professional care.
37. The first PCAOB 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
A. Business and finance courses.
B. Quality control and peer review.
C. Education and experience in auditing.
D. Supervision and review skills.
38. The main difference between SAS and AU is
A. They are the same except that SAS are organized chronologically and the AU are organized by
B. SAS are issued by the ASB and AU are issued by the PCAOB.
C. SAS are issued by the PCAOB and AU are issued by the ASB.
D. SAS define minimum standards of performance for auditors while AU define financial
accounting principles that must be followed according to GAAP.
39. The AICPA’s Statements on Auditing Standards can be described as
A. Providing very specific guidance about the specific activities an auditor must perform on each
B. Similar to financial accounting standards in that they are developed by the government.
C. Defining the minimum standards of performance for an auditor.
D. Providing assurance that an auditor will not issue an incorrect opinion.
40. Due professional care requires auditors to
A. Obtain independent, third party (non-auditee) documentation as evidence for all information
presented in the financial statements.
B. Exercise professional skepticism during the audit.
C. Disregard any evidence generated by the auditee during the audit.
D. Find every error contained in the financial statements prepared by management.
41. The objective of the second PCAOB Standard of Reporting is to provide assurance that
A. There are no variations in the format and presentation of financial statements.
B. Substantially different transactions and events are not accounted for on an identical basis.
C. The auditor is consulted before material changes are made in the application of accounting
D. The comparability of financial statements between periods is not materially affected by changes
in accounting principles that are not disclosed.
42. An internal auditor is likely to be more concerned with _________________ than the external
A. Internal administrative procedures.
B. Cost accounting procedures.
C. The efficiency of operations.
D. Internal control.
43. Which of the following is not included in the broad category of assurance services?
A. Operational audit.
B. Reporting on internal control.
C. Accounting or review services.
D. Evaluation of the auditee’s risk management framework.
44. Which of the following is not explicitly a part of the IIA’s definition of internal auditing?
A. Internal auditing is an objective assurance activity.
B. Internal auditing is a consulting activity.
C. Internal auditing should help an organization accomplish its objectives.
D. Internal auditors should help external auditors complete the annual financial statement audit.
45. Which of the following statements regarding the PCAOB is incorrect?
A. It is a public-sector, nonprofit corporation.
B. It is overseen by the SEC.
C. It sets standards for public company audits.
D. It has delegated all of its standard-setting authority to the AICPA.
46. Due professional care requires
A. Auditors to plan and perform their duties with the skill and care that is commonly expected of
B. The examination of all available corroborating evidence.
C. The exercise of error-free judgment.
D. A study and review of internal controls that includes tests of controls.
47. Which of the following best describes the role of corporate governance?
A. Management decides which accounting principles are the most appropriate.
B. Shareholders vote to decide who should be members of the board of directors.
C. Holding the management team accountable to shareholders and other constituents for the
utilization of the entity’s resources.
D. Management often is compensated based on the company’s profitability.
48. The four PCAOB standards of reporting are concerned with all of the following except
A. The presentation of the financial statements based on GAAS.
B. The presentation of the financial statements based on GAAP.
C. Whether principles are consistently applied, whether all informative disclosures have been
made, and the degree of responsibility the auditor is taking.
D. The degree of responsibility the auditor is taking.