AC 432 Exam 1 (AL Ch. 1-5,7,15) Questions
With Complete Answers
Q1.1:
Which statement below best describes the relationships between assurance, attestation,
and audit?
A: Attestation is a type of assurance service.
B: Attestation services include both audit and assurance services.
C: Assurance is a type of attestation service.
D: Attestation services are a type of audit service. - ANSWER A: Attestation is a type of
assurance service.
Q 1.2:
When a CPA is hired to report on the integrity of financial statements, which may include
financial forecasts or reports on financial reporting processes, it is considered a(an)
A: integrity review.
B: audit service.
C: attestation service.
D: assurance service. - ANSWER C: attestation service.
Q 1.3:
An engagement performed by a practitioner to provide limited assurance that financial
,statements need no material modifications is BEST described as a (an)
A: review engagement.
B: audit engagement.
C: compilation engagement.
D: assurance engagement. - ANSWER A: review engagement.
Q 1.4:
All of the following are limitations of an audit EXCEPT
A: Auditors may not have access to all relevant information.
B: Samples are representative of all items available for testing.
C: Judgment is often required when arriving at accounting estimates or determining
accounting methods.
D: Fraud perpetrators often conceal evidence. - ANSWER B: Samples are representative
of all items available for testing.
Q 1.5:
Aarav is an employee of HLC Building, Co. He is currently evaluating and improving risk
management for the construction division. Which type of audit is Aarav most likely
working on?
A: Compliance audit
B: Financial statement audit
C: Operational audit
D: Internal audit - ANSWER D: Internal audit
,Q 1.6:
Which of the following statements is true regarding the concept of materiality?
A: Auditors must focus on finding all misstatements in financial statements.
B: Materiality is always based on quantitative factors, not qualitative factors.
C: A lower level of materiality assessed by the auditor, means a smaller likelihood that a
misstatement may potentially impact or change the decision-making process.
D: Materiality refers to the content of any audit evidence gathered. - ANSWER C: A lower
level of materiality assessed by the auditor, means a smaller likelihood that a
misstatement may potentially impact or change the decision-making process.
Q 1.7:
Merriwether Corp. is seeking a line of credit for its operations and the bank has
requested audited financial statements. The bank wants to hire an independent auditor
to conduct the audit, but Merriwether's CFO knows a local accountant that she would
like to use. Which of the following describes the best reasoning in selecting the right
individual?
A: An independent auditor will be certain to conduct an audit that is in Merriwether's
best interests.
B: An auditor will be most interested in helping Merriwether get the loan they are
requesting.
C: An auditor has the training and detailed knowledge to understand technical
accounting and disclosure issues necessary to evaluate Merriwether's financial
statements.
D: The local accountant is familiar with the company and the area and is in the best
, position to fairly assess Merriwether's financial statements. - ANSWER C: An auditor has
the training and detailed knowledge to understand technical accounting and disclosure
issues necessary to evaluate Merriwether's financial statements.
Q 1.8:
Patrick Brown is concerned that management at his largest customer is under immense
pressure to meet operating goals. Patrick has requested that his largest customer
provide him with audited financial statements to help assess their creditworthiness.
Which of the following sources of demand for audit and assurance services is Patrick is
most likely concerned with?
A: Reliability
B: Complexity
C: Competing incentives
D: Remoteness - ANSWER C: Competing incentives
Q 1.9:
Li Na is concerned about the significant and unusual estimates used by one of her
lending clients. Li has requested that her client provide her with audited financial
statements to help assess their creditworthiness. Which of the following sources of
demand for audit and assurance services is Li most likely concerned with?
A: Reliability
B: Complexity
C: Competing incentives
D: Remoteness - ANSWER B: Complexity
With Complete Answers
Q1.1:
Which statement below best describes the relationships between assurance, attestation,
and audit?
A: Attestation is a type of assurance service.
B: Attestation services include both audit and assurance services.
C: Assurance is a type of attestation service.
D: Attestation services are a type of audit service. - ANSWER A: Attestation is a type of
assurance service.
Q 1.2:
When a CPA is hired to report on the integrity of financial statements, which may include
financial forecasts or reports on financial reporting processes, it is considered a(an)
A: integrity review.
B: audit service.
C: attestation service.
D: assurance service. - ANSWER C: attestation service.
Q 1.3:
An engagement performed by a practitioner to provide limited assurance that financial
,statements need no material modifications is BEST described as a (an)
A: review engagement.
B: audit engagement.
C: compilation engagement.
D: assurance engagement. - ANSWER A: review engagement.
Q 1.4:
All of the following are limitations of an audit EXCEPT
A: Auditors may not have access to all relevant information.
B: Samples are representative of all items available for testing.
C: Judgment is often required when arriving at accounting estimates or determining
accounting methods.
D: Fraud perpetrators often conceal evidence. - ANSWER B: Samples are representative
of all items available for testing.
Q 1.5:
Aarav is an employee of HLC Building, Co. He is currently evaluating and improving risk
management for the construction division. Which type of audit is Aarav most likely
working on?
A: Compliance audit
B: Financial statement audit
C: Operational audit
D: Internal audit - ANSWER D: Internal audit
,Q 1.6:
Which of the following statements is true regarding the concept of materiality?
A: Auditors must focus on finding all misstatements in financial statements.
B: Materiality is always based on quantitative factors, not qualitative factors.
C: A lower level of materiality assessed by the auditor, means a smaller likelihood that a
misstatement may potentially impact or change the decision-making process.
D: Materiality refers to the content of any audit evidence gathered. - ANSWER C: A lower
level of materiality assessed by the auditor, means a smaller likelihood that a
misstatement may potentially impact or change the decision-making process.
Q 1.7:
Merriwether Corp. is seeking a line of credit for its operations and the bank has
requested audited financial statements. The bank wants to hire an independent auditor
to conduct the audit, but Merriwether's CFO knows a local accountant that she would
like to use. Which of the following describes the best reasoning in selecting the right
individual?
A: An independent auditor will be certain to conduct an audit that is in Merriwether's
best interests.
B: An auditor will be most interested in helping Merriwether get the loan they are
requesting.
C: An auditor has the training and detailed knowledge to understand technical
accounting and disclosure issues necessary to evaluate Merriwether's financial
statements.
D: The local accountant is familiar with the company and the area and is in the best
, position to fairly assess Merriwether's financial statements. - ANSWER C: An auditor has
the training and detailed knowledge to understand technical accounting and disclosure
issues necessary to evaluate Merriwether's financial statements.
Q 1.8:
Patrick Brown is concerned that management at his largest customer is under immense
pressure to meet operating goals. Patrick has requested that his largest customer
provide him with audited financial statements to help assess their creditworthiness.
Which of the following sources of demand for audit and assurance services is Patrick is
most likely concerned with?
A: Reliability
B: Complexity
C: Competing incentives
D: Remoteness - ANSWER C: Competing incentives
Q 1.9:
Li Na is concerned about the significant and unusual estimates used by one of her
lending clients. Li has requested that her client provide her with audited financial
statements to help assess their creditworthiness. Which of the following sources of
demand for audit and assurance services is Li most likely concerned with?
A: Reliability
B: Complexity
C: Competing incentives
D: Remoteness - ANSWER B: Complexity
