Auditing Study Guide

An independent audit adds value to the communication of financial information because the audit

• Lends credibility to the financial statements

• Confirms the exact accuracy of management's financial representations

• guarantees that financial data are fairly presented

• Assures the readers of financial statements that any fraudulent activity has been corrected

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements?

• Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

• 1. An entity may have a poorly designed internal control system.

• 1. Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors.

• 1. A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor's work.

For what primary purpose does the auditor obtain an understanding of the entity and its environment?

• To limit audit risk to an appropriately high level

• To determine the audit fee

• To plan the audit and determine the nature, timing, and extent of audit procedures to be performed

• To decide which facts about the entity to include in the audit report

Which of the following statements best describes how materiality is related to audit evidence in a financial statement audit?

• The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

• The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

• Materiality refers to the material from which audit evidence is developed.

• The level of materiality has no bearing on the amount of evidence the auditor must gather.

Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting?

• Understanding a clients system of internal control can help the auditor make valuable recommendations to management at the end of the engagement.

• Understanding a clients system of internal control is not a required part of the audit process.

• Understanding a clients system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.

• Understanding a clients system of internal control can help the auditor sell consulting services to the client.

Preliminary engagement activities include

• Understanding the client and the clients industry

• determining the audit engagement team requirements

• ensuring the independence of the audit team and audit firm

• all of these

Which of the following statements best describes what is meant by an unqualified audit opinion?

• An unqualified auditor's opinion indicates that the auditor is expressing different opinions on each of the basic financial statements regarding whether the client's financial statements are fairly presented in accordance with agreed-upon criteria.

• 1. An unqualified auditor's opinion indicates that the auditor is not qualified to express an opinion that the client's financial statements are fairly presented in accordance with agreed-upon criteria.

• 1. An unqualified auditor's opinion indicates that in the auditor's opinion the client's financial statements are not fairly enough presented in accordance with agreed-upon criteria to qualify for a clean opinion.

• 1. An unqualified auditor's opinion indicates that in the auditor's opinion the client's financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases.

The auditing standards that are used to guide the conduct of the audit are

• implicitly referred to in the basis for opinion section of the auditors standard report

• Explicitly referred to in the basis for opinion section of the auditors standard report

• explicitly referred to in the critical audit matters section of the auditors standard report

• explicitly refered to in the opinions section of the auditors standard report

• implicitly referred to in the critical audit matters section of the auditors standard report

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are presented fairly in the auditor’s opinion. Which kind of audit report should the auditor issue under these circumstances?

• No opinion at all

• Adverse opinion

• Qualified opinion due to departure from GAAP

• Standard unqualified opinion

The ___ is (are) responsible for the financial statements.

1. 1. Management

2. 2. Auditors

3. 3. AICPA

4. 4. Commitee