Multiple Choice
1. An independent audit aids in the communication of economic data 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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 agreed- upon 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.

10. The auditing standards used to guide the conduct of the audit are
a. Implicitly referred to in the opening paragraph of the auditor’s standard report.
b. Explicitly referred to in the opening paragraph of the auditor’s standard report.
c. Implicitly referred to in the scope paragraph of the auditor’s standard report.
d. Explicitly referred to in the scope paragraph of the auditor’s standard report.
e. Implicitly referred to in the opinion paragraph of the auditor’s standard report.
f. Explicitly referred to in the opinion paragraph of the auditor’s standard report.

11. 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 it 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 would an auditor most likely issue under these circumstances?
a. Standard unqualified opinion.
b. Qualified opinion due to departure from GAAP.
c. Adverse opinion.
d. No opinion at all.