Questions Accounting Independent Audit Answer Key

1-13 An independent audit adds value to the communication of financial information because the audit a. Confirms the exact accuracy of management’s financial representations. b. Lends credibility to the financial statements. c. Guarantees that financial data are fairly presented. d. Assures the readers of financial statements that any fraudulent activity has been corrected. 1-14 Which of the following best describes the reason why an independent auditor is often retained to report on financial statements? a. Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors. b. 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. c. A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor’s work. d. An entity may have a poorly designed internal control system. 1-15 Which of the following best describes relationships among auditing, attest, and assurance services? a. Attest is a type of auditing service. b. Auditing and attest services represent two distinctly different types of services— there is no overlap. c. Auditing is a type of assurance service. d. Assurance is a type of attest service. 1-16 Which of the following statements relating to attest and assurance services is not correct? a. Independence is an important attribute of assurance service providers. b. Assurance services can be performed to improve the quality or context of information for decision makers. c. Financial statement auditing is a form of attest service but it is not an assurance service. d. In performing an attest service, the CPA determines the correspondence of the subject matter (or an assertion about the subject matter) against criteria that are suitable and available to users. 1-17 For what primary purpose does the auditor obtain an understanding of the entity and its environment? a. To determine the audit fee. b. To decide which facts about the entity to include in the audit report. c. To plan the audit and determine the nature, timing, and extent of audit procedures to be performed. d. To limit audit risk to an appropriately high level. 1-18 Which of the following statements best describes the role of materiality in a financial statement audit? a. Materiality refers to the “material” from which audit evidence is developed. b. The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. c. The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather. d. The level of materiality has no bearing on the amount of evidence the auditor must gather. 1-19 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? a. Understanding a client’s system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely. b. Understanding a client’s system of internal control can help the auditor make valuable recommendations to management at the end of the engagement. c. Understanding a client’s system of internal control can help the auditor sell consulting services to the client. d. Understanding a client’s system of internal control is not a required part of the audit process. 1-20 Preliminary engagement activities include a. Understanding the client and the client’s industry. b. Determining audit engagement team requirements. c. Ensuring the independence of the audit team and audit firm. d. All of the above. 1-21 Which of the following statements best describes what is meant by an unqualified audit opinion? a. Issuance of an unqualified auditor’s report 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. b. Issuance of an unqualified auditor’s report 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. c. Issuance of an unqualified auditor’s report 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 agreedupon criteria. d. Issuance of a standard unqualified auditor’s report 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. 1-22 The auditing standards that are used to guide the conduct of the audit are a. Implicitly referred to in the critical audit matters section of the auditor’s standard report. b. Explicitly referred to in the critical audit matters section of the auditor’s standard report. c. Implicitly referred to in the basis for opinion section of the auditor’s standard report. d. Explicitly referred to in the basis for opinion section of the auditor’s standard report. e. Implicitly referred to in the opinion section of the auditor’s standard report. f. Explicitly referred to in the opinion section of the auditor’s standard report. 1-23 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 fairly stated in the auditor’s opinion. Which kind of audit report should the auditor issue under these circumstances? a. Standard unqualified opinion. b. Qualified opinion due to departure from GAAP. c. Adverse opinion. d. No opinion at all. problem 1-24 Greenbloom Garden Centers is a small, privately held corporation that has two stores in Orlando, Florida. The Greenbloom family owns 100 percent of the company’s stock, and family members manage the operations. Sales at the company’s stores have been growing rapidly, and there appears to be a market for the company’s sales concept— providing bulk garden equipment and supplies at low prices. The controller prepares the company’s financial statements, which are not audited. The company has no debt but is considering expanding to other cities in Florida. Such expansion may require long-term borrowings and is likely to reduce the family’s day-to-day involvement in all of the company’s operations. The family does not intend to sell stock in the company. Required: Discuss the factors that may make an audit necessary and potentially valuable for the company. Be sure to consider the concept of information risk. c. As the company expands, the owners will find that an audit could prove to be an additional monitoring activity. d. if long-term financing is required to fund an expansion, an audit might be required by a potential lender. 1-26 John Josephs, an audit manager for Tip, Acanoe & Tylerto, was asked to speak at a dinner meeting of the local Small Business Administration Association. The president of the association has suggested that he talk about the various phases of the audit process to help small business owners better understand what auditors do. John has asked you, his trusted assistant, to prepare an outline for his speech. He suggests that you answer the following: a. List and briefly describe the various phases of an audit. 1. Client acceptance/continuance. The auditor decides to accept a new client or to retain an existing client. 2. Preliminary engagement activities. This phase involves (1) determining the audit engagement team requirements, (2) ensuring the independence of the audit team and audit firm, and (3) establishing an understanding with the client regarding the services to be performed and the other terms of the engagement. 3. Plan the audit. During this phase of the audit, the auditor uses the knowledge of the client to plan the audit and perform preliminary analytical procedures. The purpose of this phase is to plan an effective and efficient audit. 4. Consider and audit internal control. The auditor understands and evaluates the client’s internal controls in order to assess the risk that they will not prevent or detect a material misstatement. In the case of a public company, the auditor will conduct an audit of internal control over financial reporting. 5. Audit business processes and related accounts. The auditor conducts substantive tests, including analytical procedures and the details of the account balances, searching for material misstatements. 6. Complete the audit. The auditor searches for contingent liabilities and subsequent events, and performs a final review of the evidence gathered. 7. Evaluate results and issue the audit report. Based on the collection and evaluation of evidence, the auditor issues a report on whether the financial statements are fairly presented. b. Describe how audit procedures involving tests of controls can provide indirect evidence about whether financial statement account balances are free of material misstatement. As the book explains, if the auditor designs procedures to test whether the entity’s internal control over financial transactions is effective, the auditor can obtain additional indirect information regarding whether the account balances are fairly stated: if controls are effective, then the transactions will probably be captured and summarized properly, which means in turn that the account balances are likely to be free of material misstatement. While it is indirect, evidence about internal control is often a relatively cost-effective form of audit evidence about the fairness of account balances. c. One of the phases involves understanding an entity’s internal control. Why might the members of the association be particularly interested in the work conducted by auditors in this phase of the audit? Auditors develop an understanding of an entity's internal control in order to establish the scope of the audit. However, during the course of this work, the auditor may become aware of weaknesses in the entity's accounting systems. The auditor is required to communicate this information to management. The auditor may also make suggestions on how to correct the weaknesses. The auditor's work on internal control may also have a preventive effect on the behavior of the entity's employees. If the employees know that their work will be audited, they are less likely to commit errors or fraud. Because of the Sarbanes-Oxley Act, internal control is a topic that is front-and-center in the accounting profession.