Audit - exam 1

One purpose of an audit is to enhance the degree of confidence that users can place in

the financial statements.

• True

• False

The Sarbanes-Oxley Act was written, in part, to respond to ethical lapses in the

business, accounting, and auditing environment in the late 1990’s and early 2000’s.

• True

• False

An example of fraudulent financial reporting is the treasurer’s diversion of hundreds

of thousands of dollars for personal use.

• True

• FALSE (this is misappropriation of assets)

The spear tackle move that Terry Tate consistently uses in the in-class video best

corresponds to the control activities component of the COSO framework.

• True

• False

Answer explanation

While Terry Tate, in general, better corresponds to the monitoring component or the control 

environment, the spear tackle move is a specific activity (i.e., control activity).

Reperformance is often used to obtain an understanding of internal controls. EXAM

• True

• False

Answer explanation

Reperformance is used to test the operating effectiveness of controls, which we would 

not be doing until after obtaining an understanding of internal controls.

Which of the following are among the five underlying principles of an effective control environment
as developed by COSO? EXAM

• Control Risk

• Control Emphasis

• Control Activities

• Control Manager

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 the company headquarters to perform accounting and auditing themselves

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

• None of the above

 In some ways, Financial Statement Reviews are similar to Audits.
In which of the following do these two differ?

• Subject matter

•  Party responsible for the subject matter

• Criteria used to evaluate subject matter

• All of the above

•  None of the above

Answer explanation

These two differ in the type of assurance provided. Audits provide positive
assurance that the financial statements are OK. Reviews provide only negative
assurance that nothing came to the auditor’s attention as being wrong.

One reason that an auditor considers the client’s human resource policies and
procedures is to

• Assess inherent risk in the payroll cycle.

• Provide advice to the client on hiring, retention, and payment of employees.

• Evaluate the efficiency with which the related departments perform their assigned
  tasks.

• Evaluate the effectiveness of the client’s system of internal control with
  respect to a component of the COSO framework.

Answer explanation

We have not yet talked about inherent risk, but policies and procedures are controls and therefore relate to control risk, making A incorrect. An auditors objective is to evaluate, not advise, making B incorrect. C is incorrect because auditors are not concerned with efficiency. From an auditor’s perspective, management is allowed to be as inefficient as they want as long as they get the financial statements right (and pay their audit fees on time).

Which of the following must an auditor do in an audit? EXAM

• Understand the economic activity portrayed in the financial statements.

• Force management to make operational decisions that will improve the
  company’s financial performance.

• Disregard independence in order to find the underlying truth of the evidence.

• Establish new criteria by which financial statements may be compared.

• None of the above

Answer explanation

A. Auditors are required to do this. As a practical matter, auditors cannot plan or perform an audit effectively without understanding the client and its business. B is incorrect because auditors cannot force management to do anything – and because auditors are not responsible for management’s operational decisions. C is incorrect because independence is always paramount – and the statement is otherwise illogical. D is incorrect because auditors must use established criteria (e.g., GAAP) rather than making up their own criteria