Auditing Chapter 1

Which factor creates a need for an independent auditor’s assessment of financial statement presentation?

• Complexity of transactions

• Lack of criteria

• Remoteness of users

• Both Complex and Remote

Answer explanation

Transactions are often complex and users are remote from the entity, so independent auditors provide assurance.

What may users reasonably expect from audited financial statements?

• Complete with many important disclosures

• Fairly presented according to the substance of GAAP

• Free from all errors

• All of the above

Answer explanation

Reasonable assurance means “fair presentation” according to GAAP, not perfection or complete absence of errors.

To conduct an audit, what must an auditor do?

• Comply with relevant ethical standards

• Exercise perfect judgment

• Obtain absolute assurance

• All of the above

Answer explanation

Ethical compliance is mandatory; absolute assurance and perfection are not achievable.

What is the first phase in an audit?

• Client acceptance/continuance

• Understanding the client

• Understanding internal controls

• Testing account balances

How is the audit report referred to when the auditor has no reservations about management’s financial statements?

• Unqualified report

• Qualified report

• Adverse report

• Integrated report

Why is auditing important in a free-market society?

• Auditors act as arms of regulators

• Auditors detect all errors/fraud

• Audits provide reliable information to judge performance

• Auditors are an insurance policy

Which document communicates the conclusions of the financial statement audit?

• Financial statements

• Written management assertions

• The audit report

• None of the above

Who is responsible for internal controls within an organization?

• Internal auditor

• External auditor

• Management

• PCAOB

Primary objective of the independent auditor’s report on financial statements?

• Report all fraud

• Assist board in evaluating management

• Attest to credit-worthiness

• Give credibility to management’s statements

Which is not part of the systematic process called auditing?

• Communicating results

• Procuring/evaluating evidence

• Assisting management in designing controls

• Comparing evidence to criteria