Chapter 1 - Multiple Choice Questions
1. Why do auditors generally use a sampling approach to evidence gathering? A. Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. B. Auditors must balance the cost of the audit with the need for precision. C. Auditors must limit their exposure to their client to maintain independence. D. The auditor's relationship with the client is generally adversarial, so the auditor will not have access to all of the financial information of the company.
2. Which of the following statements best describes a relationship between sample size and other elements of auditing? A. If materiality increases, so will the sample size.
B. If the desired level of assurance increases, sample sizes can be smaller. C. If materiality decreases, sample size will need to increase. D. There is no relationship between sample size and materiality or the desired level of assurance.
3. Which of the following statements about the study of auditing is NOT true? A. The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors. B. The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information. C. The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements. D. The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions.
4. The basic purpose of a financial statement audit is to A. Detect fraud.
B. Examine individual transactions so that the auditor may certify as to their validity. C. Provide assurance regarding whether the client's financial statements are fairly stated. D. Assure the consistent application of correct accounting procedures.
5. Assurance services may improve all of the following except A. Relevance.
6. Evidence is reliable if it
A. Signals the true state of a management assertion.
B. Applies to the period being audited.
C. Relates to the audit assertion being tested.
D. Is consistent with management's assertions.
7. Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an audit client. B. The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated. C. The overall risk that a material misstatement exists in the financial statements. D. The risk that auditors use audit procedures that are inappropriate.
8. An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA, who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued.
9. For publicly-held companies, which of the following is integrated into the audit of financial statements? A. Budgetary information audit.
B. The audit of internal controls.
C. Audit of management forecasts.
D. Audit of interim financial statements.
10. During the first phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud. B. Evaluate the reasonableness of the client's accounting estimates. C. Evaluate the integrity of management.
D. Inquire of the client's attorney as to whether any unrecorded claims are probable or asserted.
11. In the context of agency theory, information asymmetry refers to the idea that A. Information can vary in its reliability....
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