Chapter 1 Preparatory Multiple Choice

Chapter 1 Preparatory Multiple Choice

1-3 Which of the following are the responsibilities of the external auditor in auditing financial statements? D

1. When the auditor has no reservations about management’s financial statements or internal controls, the auditor will issue an unqualified audit opinion. (T/F) True
2. The sole responsibility of management with regard to financial reporting involves preparing and presenting financial statements in accordance with the applicable financial reporting framework. (T/F)
3. False

a. Maintaining internal controls and preparing financial reports.

b. Providing internal assurance on internal control and financial reports.

c. Providing internal oversight of the reporting process.

d. Providing independent assurance on the financial statements.

1-4 Which of the following factors does not create a demand for external audit services? B

a. Potential bias by management in providing information.

b. Requirements of the state boards of accountancy.

c. Complexity of the accounting processing systems.

d. Remoteness between a user and the organization.

1-5 Audit quality is achieved when the audit is performed in accordance with GAAS and when it provides reasonable assurance that the financial statements have been presented in accordance with GAAP and are not materially misstated due to errors or fraud. (T/F) True

1-6 One of the key drivers of audit quality is the gross margin achieved by the audit firm and the ability of the engagement partner to maintain those margins over the duration of the audit engagement. (T/F) False

1-7 Audit quality involves which of the following? A

a. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.

b. Performing an audit in accordance with GAAP to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAS and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.

c. Performing an audit in accordance with GAAS to provide absolute assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.

d. Performing an audit in accordance with GAAS to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements contain no misstatements due to errors or fraud.

1-8 Which of the following factors is not a driver of audit quality as discussed by the FRC? B

a. Audit firm culture.

b. Skills and personal qualities of client management.

c. Reliability and usefulness of audit reporting.

d. Factors outside the control of auditors

1-9 The AICPA’s principles of professional conduct articulate auditors’ responsibilities and their requirements to act in the public interest, to act with integrity and objectivity, to be objective and independent, to exercise due care, and to perform an appropriate scope of services. (T/F) True

1-10Per the AICPA’s Code, independence would be impaired if his or her immediate family member were employed by the audit client in any capacity or personnel level. (T/F) False

1-11 Which of the following is not a threat to auditor independence? D

a. Self-review threat.

b. Advocacy threat.

c. Adverse interest threat.

d. Regulatory interest threat.

1-12 Which of the following statements is false? C

a. An auditor in public practice shall be independent in the performance of professional services.

b. In performing audit services, the auditor shall maintain objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate his or her judgment to others.

c. In performing audit services, the auditor may accept only contingent fees for publicly traded audit clients.

d. An auditor in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive.

1-13 Utilitarian theory holds that what is ethical is the action that achieves the greatest good for the most important people. (T/F) False

1-14 In rights theory, the highest-order rights are those granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. (T/F) False

1-15 Which of the following statements related to rights theory is false? D

a. The highest-order rights include the rights to life, autonomy, and human dignity.

b. Second-order rights include rights granted by the government, such as civil rights and legal rights.

c. Third-order rights include social rights, such as the right to higher education, to good health care, and to earning a living.

d. Fourth-order rights include one’s essential interests or personal tastes.

1-16 Utilitarianism does not require which of the following actions when a person considers how to resolve an ethical dilemma? C

a. Identification of the potential problem and courses of action.

b. Identification of the potential direct or indirect impact of actions on each affected party who has an interest in the outcome.

c. Identification of the motivation of the person facing the ethical dilemma.

d. Assessment of the desirability of each action for each affected party

1-17 Existing clients for which the audit firm provided services in the preceding period are evaluated by the audit firm and by the individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period. The process by which this evaluation occurs is called the client continuance decision. (T/F) True

1-18 Audit firms may discontinue serving a client because the client does not fit the profile or growth strategy of the audit firm. (T/F) True

1-19 With regard to client acceptance/continuance decisions, which of the following is false? B

a. Client acceptance/continuance decisions are one part of the audit firm’s overall portfolio management activities.

b. The primary driver of the client acceptance/continuance decision is the level of audit fees that the audit firm can charge the client.

c. One can view an individual audit client as analogous to an individual stock in an investment portfolio.

d. Audit firms are not required to provide audit services for all organizations requesting an audit.

1-20 Which of the following factors is not an example of a risk relevant to the client continuance decision? D

a. Client entity characteristics.

b. Independence risk factors.

c. Third-party/due diligence risk factors.

d. Advocacy threat.