Auditing and Assurance Services, 15e (Arens) Chapter 1 The Demand for Audit and Other Assurance Services
Learning Objective 1-1 1) The Sarbanes-Oxley Act applies to which of the following companies? A) All companies ) !rivately hel" companies #) !$blic companies %) All p$blic companies an" privately hel" companies with assets greater than &'(( million Answer # Terms Sarbanes-Oxle Sarban es-Oxley y Act %iff *asy Objective LO 1-1 AA#S +eflective thin,ing thin,ing s,ills s,ills Topic SO .) /hich of the following is consi"ere" a$"it evi"ence? A) Oral statements /ritten A$"itor ma"e by management #omm$nications Observation 0 ) Oral statements ma"e by management
/ritten #omm$nications 0
A$"itor Observation 0
/ritten #omm$nications 0
A$"itor Observation 0
/ritten #omm$nications
A$"itor Observation 0
#) Oral statements ma"e by management 0 %) Oral statements ma"e by management
Answer # Terms A$"it evi"ence %iff 2o"erate Objective LO 1-1 AA#S +eflective thin,ing thin,ing s,ills s,ills
1
3) *vi"ence is paramo$nt to a$"it an" attestation engagements4 List the fo$r basic types of a$"it evi"ence4 Answer The fo$r types of a$"it an" attestation evi"ence incl$"e 14 *lectronic an" "oc$mentary "ata abo$t transactions .4 /ritten an" electronic comm$nications with o$tsi"ers 34 Observations by the a$"itor 54 Oral testimony of the a$"itee 6client) Terms asic types of a$"it evi"ence %iff *asy Objective LO 1-1 AA#S +eflective thin,ing s,ills 5) The criteria by which an a$"itor eval$ates the information $n"er a$"it may vary with the information being a$"ite"4 A) Tr$e ) 7alse Answer A Terms #riteria which an a$"itor eval$ates information %iff *asy Objective LO 1-1 AA#S +eflective thin,ing s,ills ') The criteria $se" by an external a$"itor to eval$ate p$blishe" financial statements are ,nown as generally accepte" a$"iting stan"ar"s4 A) Tr$e ) 7alse Answer Terms #riteria $se" by external a$"itor to eval$ate p$blishe" financial statements %iff *asy Objective LO 1-1 AA#S +eflective thin,ing s,ills 8) The Sarbanes-Oxley Act establishes stan"ar"s relate" to the a$"its of privately hel" companies4 A) Tr$e ) 7alse Answer Terms Sarbanes-Oxley Act %iff *asy Objective LO 1-1 AA#S +eflective thin,ing s,ills Topic SO
.
9) The Sarbanes-Oxley Act is wi"ely viewe" as having $shere" in sweeping changes to a$"iting an" financial reporting4 A) Tr$e ) 7alse Answer A Terms Sarbanes-Oxley Act %iff *asy Objective LO 1-1 AA#S +eflective thin,ing s,ills Topic SO :) An a$"itor m$st be competent an" have an in"epen"ent mental attit$"e4 A) Tr$e ) 7alse Answer A Terms #ompetence an" in"epen"ent mental attit$"e %iff *asy Objective LO 1-1 AA#S +eflective thin,ing s,ills Learning Objective 1-. 1) +ecor"ing; classifying; an" s$mmari
3
3) =n >a$"iting> financial acco$nting "ata; the primary concern is with A) "etermining whether recor"e" information properly reflects the economic even ts that occ$rre" "$ring the acco$nting perio"4 ) "etermining if fra$" has occ$rre"4 #) "etermining if taxable income has been calc$late" correctly4 %) analy
5
Learning Objective 1-3 1) BBBBBBBB ris, reflects the possibility that the information $pon which the b$siness "ecision was ma"e was inacc$rate4 A) #lient acceptance ) =nformation #) $siness %) #ontrol Answer Terms +is, that reflects the possibility that information $pon which b$siness ris, "ecision was ma"e %iff 2o"erate Objective LO 1-3 AA#S +eflective thin,ing s,ills Learning Objective 1-5 1) A correct relationship among the a$"itor; the client; an" the external $sers is A) management of a p$blic company hires the in"epen"ent a$"itor4 ) the a$"it committee of a private company hires the in"epen"ent a$"itor4 #) the client provi"es capital to the external $sers4 %) the external $sers can rely $pon the a$"itor@s report to re"$ce information ris,4 Answer % Terms +elationships among a$"itor; client; an" external $sers %iff 2o"erate Objective LO 1-5 AA#S +eflective thin,ing s,ills .) The most common way for $sers to obtain reliable information is to A) have an internal a$"it4 ) have an in"epen"ent a$"it4 #) verify all information in"ivi"$ally4 %) verify the information with management4 Answer Terms +e"$cing information ris, %iff 2o"erate Objective LO 1-5 AA#S +eflective thin,ing s,ills
'
3) *xplain what is meant by information ris,; an" list the fo$r ca$ses of this ris,4 Answer =nformation ris, reflects the possibility that the information $pon which the b$siness ris, "ecision was ma"e was inacc$rate4 7o$r ca$ses of information ris, are C remoteness of information; C biases an" motives of the provi"er; C vol$mino$s "ata; an" C complex exchange transactions4 Terms =nformation ris, "efinition an" ca$ses %iff *asy Objective LO 1-3 an" LO 1-5 AA#S +eflective thin,ing s,ills Learning Objective 1-' 1) =n the a$"it of historical financial statements; what acco$nting criteria is most common? A) +eg$latory acco$nting principles ) Applicable international acco$nting stan"ar"s #) Applicable 4S4 acco$nting stan"ar"s %) an" # *) All of the above Answer % Terms 2ost common acco$nting criteria %iff *asy Objective LO 1-' AA#S +eflective thin,ing s,ills .) Any service that re$ires a #!A firm to iss$e a report abo$t the reliability of an assertion that is ma"e by another party is a6n) A) acco$nting an" boo,,eeping service4 ) attestation service4 #) ass$rance service4 %) tax service4 Answer Terms Strengthen internal controls over acco$nting for materials $se" in pro"$ction %iff *asy Objective LO 1-' AA#S +eflective thin,ing s,ills
8
3) Three common types of attestation services are A) a$"its of historical financial statements; reviews of historical financial statements; an" a$"its of internal control over financial reporting4 ) a$"its of historical financial information; verifications of historical financial information; an" attestations regar"ing internal controls4 #) reviews of historical financial information; verifications of f$t$re financial information; an" attestations regar"ing internal controls4 %) a$"its of historical financial information; reviews of controls relate" to investments; an" verifications of historical financial information4 Answer A Terms Types of attestation services %iff *asy Objective LO 1-' AA#S +eflective thin,ing s,ills 5) /hich of the following services provi"es the lowest level of ass$rance on a financial statement? A) A review ) An a$"it #) either service provi"es ass$rance on financial statements4 %) *ach service provi"es the same level of ass$rance on financial statements4 Answer A Terms Service provi"es lowest level of ass$rance on a financial statement %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills ') /hich of the following is not a SysTrust Services principle as "efine" by the A=#!A? A) Online privacy ) Availability #) !rocessing integrity %) Operational integrity Answer % Terms SysTr$st Services principles "efine" by A=#!A %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills
9
8) The Sarbanes-Oxley Act prohibits a #!A firm that a$"its a p$blic company from provi"ing which of the following types of services to that company? A) +eviews of $arterly financial statements ) !reparation of corporate tax ret$rns #) 2ost cons$lting services %) Tax services Answer # Terms Sarbanes-Oxley Act %iff #hallenging Objective LO 1-' AA#S +eflective thin,ing s,ills Topic SO 9) Attestation services on information technology incl$"e WebTrust services an" SysTrust services4 /hich of the following statements most acc$rately "escribes SysTrust services? A) SysTrust services provi"e ass$rance on b$siness processes; transaction integrity an" information processes4 ) SysTrust services provi"e ass$rance on system reliability in critical areas s$ch as sec$rity an" "ata integrity4 #) SysTrust services provi"e ass$rance on internal control over financial reporting4 %) SysTrust services provi"e ass$rance as to whether acco$nting personnel are following proce"$res prescribe" by the company controller4 Answer Terms Attestation services on information technologyD /ebTr$st an" Systr$st services %iff #hallenging Objective LO 1-' AA#S +eflective thin,ing s,ills :) Two types of attestation services provi"e" by #!A firms are a$"its an" reviews4 %isc$ss the similarities an" "ifferences between these two types of attestation services4 /hich type provi"es the least ass$rance? Answer =n both the review an" a$"it of the historical financial statements; management asserts that the statements are fairly state" in accor"ance with acco$nting stan"ar"s4 The #!A provi"es a lower level of ass$rance for reviews of financial statements compare" to the high level for a$"its; therefore less evi"ence is nee"e"4 A review is often a"e$ate to meet financial statement $sers@ nee"s4 =t can be provi"e" by a #!A firm at a m$ch lower fee than an a$"it beca$se less evi"ence is nee"e"4 An a$"it is the most common ass$rance service provi"e" by #!A firms4 !$blicly tra"e" companies in the 4S4 are re$ire" to have a$"its $n"er the fe"eral sec$rities acts4 2any nonp$blic companies have a review to limit a$"itor fees4 Terms Attestation servicesD A$"its an" reviews of historical financial statements %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills
:
E) /hat is an engagement to attest on internal control over financial reporting? Answer 7or an a$"it of internal control over financial reporting; management asserts that internal controls have been "evelope" an" implemente" following well establishe" criteria4 Section 5(5 of the Sarbanes-Oxley Act re$ires p$blic companies to report management@s assessment of the effectiveness of internal control over financial reporting4 The Act also re$ires a$"itors for larger p$blic companies to attest to the effectiveness of internal control over financial reporting4 This eval$ation; which is integrate" with the a$"it of financial statements; increases $ser confi"ence abo$t f$t$re financial reporting; beca$se effective internal controls re"$ce the li,elihoo" of f$t$re misstatements in the financial statements4 Terms *ngagement to attest on internal control over financial reporting %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills Topic SO 1() /hat are the five categories of attestation services? Answer The five categories of attestation services incl$"e C A$"it of historical financial statements C A$"it of internal control over financial reporting C +eview of historical financial statements C Attestation services on information technology C Other attestation services that may be applie" to a broa" range of s$bject matter Terms #ategories of attestation services %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills 11) /hat is a WebTrust engagement? /hat is a SysTrust engagement? Fow "o they "iffer? Answer WebTrust is a service provi"e" by a #!A where the #!A provi"es ass$rance that the /eb Site owner has met establishe" criteria relate" to b$siness practices; transaction integrity; an" information processes4 SysTrust is a service provi"e" by a #!A to eval$ate an" test a system reliability in areas s$ch as sec$rity an" "ata integrity4 There are five principles that m$st be a""resse" on a SysTrust engagement sec$rity; availability; processing integrity; online privacy; an" confi"entiality4 WebTrust is primarily "esigne" to provi"e ass$rance to thir" party $sers of a /eb site4 SysTrust provi"es ass$rance to management; the boar" of "irectors or thir" parties abo$t the reliability of information systems $se" to generate real-time information4 Terms /ebTr$st an" SysTr$st engagements %iff #hallenging Objective LO 1-' AA#S +eflective thin,ing s,ills
E
1.) #!A firms are never allowe" to provi"e boo,,eeping services for clients4 A) Tr$e ) 7alse Answer Terms #!A services provi"e" to clients %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills 13) Section 5(5 of the Sarbanes-Oxley Act re$ires p$blic companies to have an external a$"itor attest to their internal control over financial reporting4 A) Tr$e ) 7alse Answer A Terms Section 5(5 of the Sarbanes-Oxley Act %iff 2o"erate Objective LO 1-' AA#S +eflective thin,ing s,ills Topic SO 15) 2ost p$blic companies@ a$"ite" financial statements are available on the S*#@s *%GA+ "atabase4 A) Tr$e ) 7alse Answer A Terms !$blic companies@ a$"ite" financial statements S*#@s *%GA+ "atabase %iff #hallenging Objective LO 1-' AA#S +eflective thin,ing s,ills Learning Objective 1-8 1) One objective of an operational a$"it is to A) "etermine whether the financial statements fairly present the entity@s operations4 ) "etermine if the a$"itee is in compliance with GAA!4 #) ma,e recommen"ations for improving performance4 %) report on the entity@s relative s$ccess in attaining profit maximi
1(
.) An examination of part of an organi
8) /hich of the following are re$ire" to have a written report regar"ing the assertion of another party? A) 7inancial Statement Operational #ompliance Attestation Ass$rance A$"it A$"it A$"it *ngagement *ngagement 0 0 0 0 0 ) 7inancial Statement A$"it 0
Operational A$"it 0
#ompliance A$"it 0
Attestation *ngagement 0
Ass$rance *ngagement
Operational A$"it 0
#ompliance A$"it 0
Attestation *ngagement
Ass$rance *ngagement
Operational A$"it
#ompliance A$"it
Attestation *ngagement 0
Ass$rance *ngagement 0
#) 7inancial Statement A$"it 0 %) 7inancial Statement A$"it
Answer Terms +e$ire" to have a written report %iff #hallenging Objective LO 1-8 AA#S +eflective thin,ing s,ills
1.
9) %isc$ss the similarities an" "ifferences between financial statement a$"its; operational a$"its; an" compliance a$"its4 Give an example of each type4 Answer 7inancial statement a$"its; operational a$"its; an" compliance a$"its are similar in that each type of a$"it involves acc$m$lating an" eval$ating evi"ence abo$t information to ascertain an" report on the "egree of correspon"ence between the information an" establishe" criteria an"Hor proce"$res; r$les; or reg$lations4 The "ifferences between each type of a$"it are the information being examine" an" the criteria $se" to eval$ate the information4 An operational a$"it eval$ates the efficiency an" effectiveness of any part of an organi
13
:) To perform an a$"it; it is necessary for the information to be in a verifiable form an" there m$st be some criteria by which the a$"itor can eval$ate the information4 %etail the information an" criteria that wo$l" be $se" when 6A) an in"epen"ent #!A firm a$"its a company@s historical financial statements4 6) an =nternal +even$e Service a$"itor a$"its that same company@s tax ret$rn4 6#) an internal a$"itor performs an operational a$"it to eval$ate whether the company@s comp$teri
15
Learning Objective 1-9 1) 2atch the engagement "escribe" to the 6A) type of a$"it an" 6) a$"itor that wo$l" perform the engagement4 *ach engagement will have an answer from List-A an" List-4 An answer can be $se" once; more than once; or not at all4 List A - Type of Audit: a4 7inancial Statement b4 #ompliance c4 Operational
List B - Type of Auditor: "4 =nternal e4 *xternal f4 Government g4 =+S
*ngagement 14 *val$ate a company@s payroll processing for economy4 .4 *val$ateH"etermine if ban, covenants are being met4 34 *val$ate financial statements that are to be s$bmitte" to a ban,4 54 *val$ate the promptness of materials inspection in a man$fact$rer@s receiving "epartment4 '4 %etermine if 2e"icare reimb$rsements are in accor"ance with the Fealthcare 7inancing A"ministration 6F#7A)4 84 %etermine if the tax ret$rn of a m$ltinational corporation is in accor"ance with the tax co"e4 94 %etermine if a p$blic school is properly applying their reimb$rsement for the payment-in-,in" program4 :4 %etermine the effectiveness of a %epartment of %efense project4 Answer 14 c; " .4 b; " 34 a; e 54 c; " '4 b; f 84 b; g 94 b; e :4 c; f Terms 7inancial statement a$"itD #ompliance a$"itD Operational a$"itD Types of a$"itors %iff #hallenging Objective LO 1-8 an" LO 1-9 AA#S Analytic s,ills
1'
.) %isc$ss the similarities an" "ifferences between the roles of in"epen"ent a$"itors; GAO a$"itors; internal reven$e agents; an" internal a$"itors4 Answer The roles of all fo$r types of a$"itors are similar in that they involve the acc$m$lation an" eval$ation of evi"ence abo$t information to ascertain an" report on the "egree of correspon"ence between the information an" establishe" criteria4 The "ifferences in their roles center aro$n" the information a$"ite" an" the criteria $se" to eval$ate that information4 =n"epen"ent a$"itors primarily a$"it companies@ financial statements4 GAO a$"itors@ primary responsibility is to perform the a$"it f$nction for #ongress4 =+S a$"itors are responsible for the enforcement of fe"eral tax laws4 =nternal a$"itors primarily perform operational an" compliance a$"its for their employing company4 Terms +oles of in"epen"ent a$"itors; GAO a$"itors; internal reven$e agents an" internal a$"itors %iff 2o"erate Objective LO 1-9 AA#S +eflective thin,ing s,ills 3) The primary role of the nite" States General Acco$nting Office is the enforcement of the fe"eral tax laws as "efine" by #ongress an" interprete" by the co$rts4 A) Tr$e ) 7alse Answer Terms !rimary role of nite" States General Acco$nting Office %iff 2o"erate Objective LO 1-9 AA#S +eflective thin,ing s,ills Learning Objective 1-: 1) The three re$irements for becoming a #!A incl$"e all b$t which of the following? A) niform #!A examination re$irement ) *"$cational re$irements #) #haracter re$irements %) *xperience re$irement Answer # Terms +e$irements for becoming a #!A %iff 2o"erate Objective LO 1-: AA#S +eflective thin,ing s,ills
18
.) The $se of the #ertifie" !$blic Acco$ntant title is reg$late" by A) the fe"eral government4 ) state law thro$gh a licensing "epartment or agency of each state4 #) the American =nstit$te of #ertifie" !$blic Acco$ntants thro$gh the licensing "epartments of the tax an" a$"iting committees4 %) the Sec$rities an" *xchange #ommission4 Answer Terms #ertifie" !$blic Acco$ntant title %iff 2o"erate Objective LO 1-: AA#S +eflective thin,ing s,ills 3) List an" "isc$ss the three primary re$irements to become a #!A4 Answer The three primary re$irements for becoming a #!A are C Educational requirement 4 An $n"ergra"$ate "egree or a gra"$ate "egree with a major in acco$nting is re$ire"4 2ost states now re$ire 1'( semester ho$rs for licens$re an" some states re$ire 1'( semester ho$rs before ta,ing the #!A exam4 C Uniform CPA examination requirement 4 This is a fo$r-part; comp$ter-base" examination with components on a$"iting an" attestation; financial acco$nting an" reporting; reg$lation; an" b$siness environment an" concepts4 Some states also re$ire a separate ethics re$irement4 C Experience requirement 4 The experience re$irement varies from state to state with some states re$iring no experience; while other states re$ire $p to two years of a$"it experience4 Terms !rimary re$irements to become #!A %iff *asy Objective LO 1-: AA#S +eflective thin,ing s,ills
19
