Multiple Choice Questions
1. In determining the primary responsibility of the external auditor for the audit of a company’s financial statements, the auditor owes primary allegiance to
a. The management of the company being audited because the auditor is hired and paid by management.
b. The audit committee of the company being audited because that committee is responsible for coordinating and reviewing all audit activities within the company.
c. Stockholders, creditors, and the investing public.
d. The SEC because it determines accounting principles and auditor responsibility.
2. Which of the following would not represent one of the primary problems that create the demand for independent audits of a company’s financial statements?
a. Management bias in preparing financial statements.
b. The downsizing of business and financial markets.
c. The complexity of transactions affecting financial statements.
d. The remoteness of the user from the organization and thus the inability of the user to directly obtain financial information from the company.
3. Which of the following is not one of the rationales used by Congress in developing the requirement for companies to report on the quality of their internal control processes over financial reporting?
a. Better internal control puts management in a position to make better financial decisions.
b. Many of the corporate failures took place in companies with inadequate internal controls.
c. In some of the largest frauds, e.g., WorldCom, management had the ability to override the internal control system.
d. Investors rely on a flow of financial information throughout the year. That information will be more reliable if internal control is more reliable.
4. Which of the following statements is true regarding the provision of assurance services?
I. The third party who receives the assurance generally pays for the assurance received.
II. Assurance services always involve a report by one person to a third party on which an independent organization provides assurance.
III. Assurance services can be provided either on information or on processes.
a. I and III
b. II only
c. III only
d. I, II, and III
5. Which is not a properly worded assertion that would be tested by the auditor in an integrated audit of internal controls and financial statements?
a. The financial statements are fairly presented.
b. Internal control operates effectively as judged by the COSO internal control criteria.
c. Inventory is fairly presented at the lower of cost or market as determined by GAAP.
d. The financial statements are presented fairly in accordance with the principles established by the International Accounting Standards Board.
6. Internal auditing is viewed as an integral part of all of the following organizational functions except:
a. Risk management
b. Governance
c. Control
d. Operations
7. Which of the following statements are correct regarding the setting of auditing standards in the United States?
a. The AICPA is responsible for the setting of audit standards for audits of non-public entities.
b. The GAO is responsible for setting audit standards for audits of governmental entities.
c. The PCAOB is responsible for setting audit standards for audits of public companies.
d. All of the above.
8. Which of the following statements are correct? As a result of the Sarbanes-Oxley Act of 2002,
a. Public companies must report on the quality of their internal controls over financial reporting.
b. CPA firms cannot provide consulting services to any public company.
c. CPA firms can provide tax services only to non-public companies.
d. Accounting standards are set by the PCAOB.
e. All of the above.