Test Bank Auditing: A Practical Approach, 4th Edition by Moroney, Campbell, Hamilton

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Chapter 1: Introduction and overview of audit and assurance True/False 1. The nature of audit procedures refers to the reliance on evidence provided by the client and its management. *a. True ... b. False General Feedback: Correct answer: a Learning Objective 1.2 ~ Discriminate between different types of assurance services 2. A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform. *a. True b. False General Feedback: Correct answer: a Learning Objective 1.2 ~ Discriminate between different types of assurance services 3. An operational audit is an example of a compliance audit. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.2 ~ Discriminate between different types of assurance services 4. The most common types of assurance engagements are financial report audits, confirmation audits, performance audits, comprehensive audits and assurance on corporate social responsibility (CSR) disclosures. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.2 ~ Discriminate between different types of assurance services 5. An assurance engagement is performed by an auditor or consultant to enhance the reliability of the subject matter. *a. True b. False General Feedback: Correct answer: a Learning Objective 1.2 ~ Discriminate between different types of assurance services 6. An audit of a financial report by the contracted auditors will give absolute assurance that the financial reports give a true and fair view of the financial performance of the entity. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.3 ~ Discriminate between different levels of assurance 7. An audit engagement is performed by an Auditor to provide reasonable assurance that the financial report gives a true and fair view of the business activities for the period. *a. True b. False General Feedback: Correct answer: a Learning Objective 1.3 ~ Discriminate between different levels of assurance 8. A no assurance engagement is of little use as no assurance is given to the client. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.3 ~ Discriminate between different levels of assurance 9. An auditor can provide a reasonable level of assurance on information other than historical financial information. *a. True b. False General Feedback: Correct answer: a Learning Objective 1.3 ~ Discriminate between different levels of assurance 10. A negative expression of opinion is only given when there is a disagreement with management and the auditor. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.3 ~ Discriminate between different levels of assurance 11. A reasonable level of assurance is the highest level of assurance that an auditor can provide. *a. True b. False General Feedback: Correct answer: a Learning Objective 1.3 ~ Discriminate between different levels of assurance 12. All modified audit reports are qualified audit opinions. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.4 ~ Categorise different audit opinions 13. It is the auditor's responsibility to prepare the financial statements. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.5 ~ Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 14. Insurance hypothesis is a means whereby the investor can guarantee the success of their investment. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.6 ~ Justify the demand for audit and assurance services 15. Only current investors (not potential investors) are considered to be users of the financial statements. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.6 ~ Justify the demand for audit and assurance services 16. The International Auditing and Assurance Standards Board (IAASB) is not responsible for the redrafting of International Auditing Standards (ISAs) to Australian Auditing Standards (ASAs). *a. True b. False General Feedback: Correct answer: a Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 17. You must complete further study after a bachelor's degree to become a member of the CAANZ, CPA Australia or the IPA. *a. True b. False General Feedback: Correct answer: a Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 18. The expectation gap is caused by unrealistic user expectations such as the auditor providing a moderate level of assurance. a. True *b. False General Feedback: Correct answer: b Learning Objective 1.8 ~ Categorise the audit expectation gap Multiple-choice questions 19. An example of the three parties in an assurance engagement would be: *a. audit client, supplier, auditor. b. audit client, employee, customer. c. auditor, general public, employees. d. auditor, shareholder, general public. General Feedback: Correct answer: a Learning Objective 1.1 ~ Describe an assurance engagement 20. An assurance engagement can be defined as a. an engagement of an expert to direct the entity on subject matter. *b. an engagement to enhance the reliability of the subject matter. c. an audit to determine the validity of the subject matter. d. an engagement to determine a true and fair view of the entities course of actions. General Feedback: Correct answer: b Learning Objective 1.1 ~ Describe an assurance engagement 21. Which of the following is not true about Corporate Social Responsibility assurance? a. disclosures include environmental, employee and social reporting. b. includes both financial and non-financial information. c. reporting is voluntary and is becoming more widespread. *d. is required to be performed by an auditor. General Feedback: Correct answer: d Learning Objective 1.2 ~ Discriminate between different types of assurance services 22. A limitation of an audit is caused by a. the need for the audit to be conducted within a reasonable period of time and at a reasonable cost. b. the nature of audit procedures. c. the nature of financial reporting. *d. all of the above. General Feedback: Correct answer: d Learning Objective 1.2 ~ Discriminate between different types of assurance services 23. Which of the following would be an example of a reasonable assurance engagement? a. the reporting of procedures performed by the auditor as agreed by the client. *b. the audit of annual financial statements. c. the review of annual financial statements. d. all of the above. General Feedback: Correct answer: b Learning Objective 1.3 ~ Discriminate between the different levels of assurance 24. When auditors are engaged in work where no assurance is provided this means; *a. Assurance is not provided as the client determines the nature, timing and extent of the evidence that is gathered and will determine their own outcome. b. The auditors found anomalies in the financial information and no assurance will be given until further testing is conducted. c. That the review indicates adverse finding and the auditors are not prepared to give an assurance that the information gives a true and fair view. d. No assurance is provided as the client will determine the outcome once the auditors have gathered the correct data. General Feedback: Correct answer: a Learning Objective 1.3 ~ Discriminate between the different levels of assurance 25. In a review engagement, which of the following is least likely to occur during the engagement? a. enquiries with management and other personnel. b. analytical procedures. c. review of the internal controls of the entity. *d. substantive audit procedures. General Feedback: Correct answer: d Learning Objective 1.3 ~ Discriminate between the different levels of assurance 26. The wording of a negative expression of opinion generally states that: a. there is something wrong with the subject matter. b. there is nothing wrong with the subject matter. c. there is something that has come to the auditor's attention that would lead them to believe that the information being assured is not true and fair. *d. there is nothing that has come to the auditor's attention that would lead them to believe that the information being assured is not true and fair. General Feedback: Correct answer: d Learning Objective 1.4 ~ Categorise different audit opinions 27. The following can be said about an emphasis of matter: a. it cannot be used when expressing an audit opinion about pervasive misstatements. b. it is only used in unqualified audit opinions. c. it is included when the auditor's opinion has changed and the auditor wants to bring the users' attention to a particular matter. *d. it is included when the auditor's opinion has not changed and the auditor wants to bring the users' attention to a particular matter. General Feedback: Correct answer: d Learning Objective 1.4 ~ Categorise different audit opinions 28. Which of the following is not a type of opinion? *a. modified opinion. b. qualified opinion. c. disclaimer of opinion. d. adverse opinion. General Feedback: Correct answer: a Learning Objective 1.4 ~ Categorise different audit opinions 29. An example of an unmodified audit opinion is: *a. unqualified audit opinion with an emphasis of matter. b. adverse audit opinion. c. qualified audit opinion. d. none of the above. General Feedback: Correct answer: a Learning Objective 1.4 ~ Categorise different audit opinions 30. Which of the following is not true in relation to comparability? a. Users are able to assess performance of the entity over time and with other entities. b. Users are able to identify trends that may influence their perception of how well the entity is doing. c. Users are able to identify changes in accounting policies and make appropriate adjustments. *d. all of the above are correct. General Feedback: Correct answer: d Learning Objective 1.5 ~ Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 31. In addition to the preparation of financial statements, it is also the responsibility of those charged with governance to: a. select and apply appropriate accounting policies and making reasonable accounting estimates. b. establish and maintain internal controls that are effective in preventing and detecting material misstatements. c. identify the financial reporting framework to be used in the preparation and presentation of their financial report. *d. all of the above. General Feedback: Correct answer: d Learning Objective 1.5 ~ Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 32. Professional scepticism does not involve: a. being suspicious when evidence contradicts documents held by their client or enquiries made of client personnel. b. seeking independent evidence to corroborate information provided by their client. *c. the professional requirement that all management representations be substantiated with supporting documentation. d. none of the above. General Feedback: Correct answer: c Learning Objective 1.5 ~ Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 33. Under CLERP 9, which of the following is not a specific disclosures required in the directors' report? a. if the directors are satisfied that auditor independence has not been impacted by the provision of non-audit services, a statement of the directors' reasons for being satisfied. b. details of the amount paid or payable to the company's auditor for non-audit services (each non-audit service must be listed separately along with the amount paid or payable for that service). c. a statement whether the directors are satisfied that the provision of non-audit services by the auditor impacts the auditor's independence. *d. disclosure of material transactions between auditor and entity during the period under audit. General Feedback: Correct answer: d Learning Objective 1.5 ~ Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 34. The largest accounting firms in Australia are known collectively as the a. 'Big-6' *b. 'Big-4' c. 'Big-3' d. 'Big-5' General Feedback: Correct answer: b Learning Objective 1.5 ~ Discriminate between the different role of the preparer and the auditor, and discuss the different firms that provide assurance services 35. Which of the following is incorrect? A government can be considered to be a user of the general purpose financial reports because: a. it can determine whether certain regulations have been complied with. *b. it is the basis for the calculation of taxes owed to the government. c. to assess the entity so that it can provide the entity with grants that will benefit society. d. to gain a better understanding of the entity's activities. General Feedback: Correct answer: b Learning Objective 1.6 ~ Justify the demand for audit and assurance services 36. Suppliers as a user of the financial statements would least consider which of the following aspects of the financial statements: a. profitability of the entity. b. solvency of the entity. c. corporate social responsibility of the entity. *d. return on investment of the entity. General Feedback: Correct answer: d Learning Objective 1.6 ~ Justify the demand for audit and assurance services 37. Insurance hypothesis tells us that: a. investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail. *b. investors will demand that financial reports be audited as a way of insuring against some of their loss should their investment fail. c. the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements. d. investors cannot insure themselves against loss when investing in an entity. General Feedback: Correct answer: b Learning Objective 1.6 ~ Justify the demand for audit and assurance services 38. Agency theory can be described as the theory of: *a. the relationship between the owner and the management of the business when the owner is not the manager of the business. b. when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party's work. c. hiring an agency to review the work of the management, in this case it is the auditor. d. none of the above. General Feedback: Correct answer: a Learning Objective 1.6 ~ Justify the demand for audit and assurance services 39. Which of the following is correct? The Accounting Professional Ethical Standards Board (APESB): a. issue technical standards to the members of the CAANZ, CPA Australia and IPA. *b. standards are required to be complied with by members of each of CAANZ, CPA and IPA. c. have not approved any standards that are required by law. d. follows pronouncements issued by the International Accountants Ethics Standards Board (IAESB). General Feedback: Correct answer: b Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 40. The objective of the Financial Reporting Council does not include: a. to monitor and report regularly on matters concerning auditor independence. b. to oversee the process used for setting accounting and auditing standards. c. to ensure that auditing standards provide guidance to help auditors form an opinion on compliance with the Corporations Act. *d. to be involved in the technical issues around the standard-setting process. General Feedback: Correct answer: d Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 41. Which of the following regulators do not impact on the audit process? *a. Auditing Professional and Ethical Standards Board (APESB). b. Institute of Public Accountants (IPA). c. Australian Securities and Investments Commission (ASIC). d. all of the above have an impact on the audit process. General Feedback: Correct answer: a Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 41. Which of the following regulators do not impact on the audit process? *a. Auditing Professional and Ethical Standards Board (APESB). b. Institute of Public Accountants (IPA). c. Australian Securities and Investments Commission (ASIC). d. all of the above have an impact on the audit process. General Feedback: Correct answer: a Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 43. Which of the following is incorrect? The Australian Securities and Investments Commission (ASIC) *a. requires all auditors' financial statements to be independently audited annually. b. conducts regular inspections of audit firms and audit files. c. enforces independence requirements for auditors. d. provides a whistleblowing facility for the reporting of contraventions of the Corporations Act. General Feedback: Correct answer: a Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 44. Auditor rotation in CLERP 9 states that an auditor cannot perform a significant role in the audit of a client in more than a. two out of seven years. b. six out of seven years. *c. five out of seven years. d. two out of five years. General Feedback: Correct answer: c Learning Objective 1.7 ~ Compare the different regulators and regulations surrounding the assurance process 45. The expectation gap can be reduced by: a. assurance providers reporting accurately the level of assurance being provided. b. enhanced reporting to explain what processes have been followed in arriving at an audit or a review opinion. c. auditors performing their duties properly. *d. all of the above. General Feedback: Correct answer: d Learning Objective 1.8 ~ Categorise the audit expectation gap 46. The expectation gap is caused by: a. unrealistic auditor expectations. *b. unrealistic user expectations. c. realistic auditor expectations. d. realistic user expectations. General Feedback: Correct answer: b Learning Objective 1.8 ~ Categorise the audit expectation gap Short answer questions 47. The main assurance service the general public are familiar with are financial report audits. Briefly describe the other services that an auditor can provide. Correct Answer: A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform. Performance audits are concerned with the economy, efficiency and effectiveness of an organisation's activities. A comprehensive audit may encompass elements of a financial report audit, a compliance audit and a performance audit. Internal audits provide assurance about various aspects of an organisation's activities. Internal audits activities are often concerned with evaluating and improving risk management, internal control procedures and elements of the governance process. Corporate social reporting disclosures include environmental, employee and social reporting. Learning Objective 1.2 ~ Discriminate between different types of assurance services. 48. Outline the reasons for the demand for assurance services. Correct Answer: Remoteness - As most users do not have access to the entity under review, this makes it difficult to determine whether the information contained in the report is a fair presentation of the entity and its activities for the relevant period. Complexity - Most financial report users do not have the accounting and legal knowledge to enable them to assess the complex accounting and disclosure choices being made by the entity. Competing incentives - management may have their own incentives to present the information in a particular light which may help them achieve their own objectives. This may introduce bias in what is being presented. Reliability - As the information is being depended upon to make important decisions, it is important that the information being presented is reliable. Learning Objective 1.6 ~ Justify the demand for audit and assurance services. 49. How is the expectation gap caused and how can the effects of the expectation gap be reduced? Correct Answer: In particular, the gap is caused by unrealistic user expectations such as: the auditor is providing complete assurance. the auditor is guaranteeing the future viability of the entity. an unmodified (clean) audit opinion is an indicator of complete accuracy. the auditor will definitely find any fraud. the auditor has checked all transactions. The expectation gap can be reduced by: auditors performing their duties appropriately, complying with auditing standards and meeting the minimum standards of performance that should be expected of all auditors; independent reviews of audits to ensure that auditing standards have been applied correctly; auditing standards being reviewed and updated on a regular basis to enhance the work being done by auditors; education of the public. enhanced reporting to explain what processes have been followed in arriving at an audit (reasonable assurance) or a review (limited assurance) opinion; and assurance providers reporting accurately the level of assurance being provided (reasonable, limited or none). Learning Objective 1.8 ~ Categorise the audit expectation gap. Essay questions 50. There have been a number of highprofile corporate collapses in the past two decades both in Australia and overseas. What role does society expect from auditors in ensuring this does not happen? What can auditors do to manage this expectation? Correct Answer: Guided by instructor [Show More]

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