ACT 441 EXAM 1 QUESTIONS AND VERIFIED
ANSWERS
Independent Auditing - Answers - A discipline that provides assurance regarding the
results of accounting and other functional operations and data.
Information asymmetry - Answers - Refers to an imbalance of information between
stockholders and the management of the company.
Which of the following best describes the primary reason an independent auditor reports
on financial statements?
A. To give stockholders some assurance that any fraudulent activities will be detected.
B. To identify a poorly designed internal control structure that may produce unreliable
financial statements.
C. To provide expertise to management, which may not be totally knowledgeable of
prevailing GAAP.
D. To add credibility, where appropriate, since management may not be perceived as
objective with respect to its own financial statements. - Answers - D
Financial statement users' demand for assurance is similar to that of a potential home
buyer who hires a home inspector in that
A. The buyer [or user] pays directly for this assurance in both situations.
B. There are often information asymmetry and conflicts of interest.
C. The cost of obtaining information is not relevant.
D. Independence is not relevant in either situation. - Answers - B
The fact that errors and/or omissions in certain relatively insignificant account balances
would not affect an auditor's decision when reporting on the financial statements as a
whole relates most closely to which major audit concept?
A. Materiality
B. Audit risk.
,C. Management assertions.
D. Reasonable assurance. - Answers - A
Audit evidence...
A. May only be gathered from parties external to the auditee to be reliable.
B. May only be gathered from the auditee to be reliable since they are the most
knowledgeable source of information.
C. May only be gathered from computerized sources to avoid human error.
D. Can be gathered from many sources and is not limited to the underlying accounting
data. - Answers - D
Audit risk...
A. Can be completely eliminated through appropriate sampling of transactions.
B. Is the risk that a "clean" opinion will be issued when, in reality, the financial
statements are materially misstated.
C. Is what creates the demand for an audit.
D. Is the risk that a company may hire an incompetent auditor. - Answers - B
The examination of all of an entity's transactions would make an audit very costly. Thus,
auditors rely heavily on sampling as a way to obtain evidence. Which of the following
would result in a smaller sample?
A. A decrease in the materiality level.
B. A decrease in the desired level of assurance.
C. An assessment that the account being audited is high risk.
D. An increase in the desired level of assurance. - Answers - B
Which of the following audit phases would generally be conducted before all of the
others listed below?
,A. Auditing business processes and related accounts.
B. Evaluation of audit evidence.
C. Gaining an understanding of the auditee's industry.
D. Consideration of internal control systems. - Answers - C
The most favorable type of audit opinion for an entity to receive is
A. Qualified.
B. Unqualified.
C. Full assurance.
D. Exceptional. - Answers - B
Which of the following provides the best definition of audit evidence?
A. All information available to the auditor regarding the client, as long as it was not
provided by the client.
B. Client information which is admissible in court under state or federal law.
C. The underlying accounting data and any additional information available to the
auditor, whether originating from the client or externally. - Answers - C
Which of the following best describes the relationship between evidence and the
management assertions?
A. Audit evidence helps the auditor determine whether management's assertions are
being met.
B. Audit evidence provides 50% of assurance necessary to support the audit report.
C. Audit evidence is of limited value in most financial statement audits.
D. Audit evidence helps the client prove that the auditor's assertions are being met. -
Answers - A
What are the two key characteristics of audit evidence that an auditor must consider
when evaluating it?
A. relevance and reliability
B. completeness and quantity
C. origination and timing - Answers - A
, An independent audit adds value to the communication of financial information 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. - Answers - B
Which of the following best describes the reason why an independent auditor is often
retained to report on financial statements?
A. An entity may have a poorly designed internal control system.
B. A misstatement of account balances may exist, and all misstatements are generally
corrected as a result of the independent auditor's work.
C. Management fraud may exist, and it is more likely to be detected by independent
auditors than by internal auditors.
D. 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. - Answers - D
For what primary purpose does the auditor obtain an understanding of the entity and its
environment?
A. to determine the audit fee
B. to limit audit risk to an appropriately high level
C. to plan the audit and determine the nature, timing, and extent of audit procedures to
be performed
D. to decide which facts about the entity to include in the audit report - Answers - C
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 sell consulting
services to the client.
ANSWERS
Independent Auditing - Answers - A discipline that provides assurance regarding the
results of accounting and other functional operations and data.
Information asymmetry - Answers - Refers to an imbalance of information between
stockholders and the management of the company.
Which of the following best describes the primary reason an independent auditor reports
on financial statements?
A. To give stockholders some assurance that any fraudulent activities will be detected.
B. To identify a poorly designed internal control structure that may produce unreliable
financial statements.
C. To provide expertise to management, which may not be totally knowledgeable of
prevailing GAAP.
D. To add credibility, where appropriate, since management may not be perceived as
objective with respect to its own financial statements. - Answers - D
Financial statement users' demand for assurance is similar to that of a potential home
buyer who hires a home inspector in that
A. The buyer [or user] pays directly for this assurance in both situations.
B. There are often information asymmetry and conflicts of interest.
C. The cost of obtaining information is not relevant.
D. Independence is not relevant in either situation. - Answers - B
The fact that errors and/or omissions in certain relatively insignificant account balances
would not affect an auditor's decision when reporting on the financial statements as a
whole relates most closely to which major audit concept?
A. Materiality
B. Audit risk.
,C. Management assertions.
D. Reasonable assurance. - Answers - A
Audit evidence...
A. May only be gathered from parties external to the auditee to be reliable.
B. May only be gathered from the auditee to be reliable since they are the most
knowledgeable source of information.
C. May only be gathered from computerized sources to avoid human error.
D. Can be gathered from many sources and is not limited to the underlying accounting
data. - Answers - D
Audit risk...
A. Can be completely eliminated through appropriate sampling of transactions.
B. Is the risk that a "clean" opinion will be issued when, in reality, the financial
statements are materially misstated.
C. Is what creates the demand for an audit.
D. Is the risk that a company may hire an incompetent auditor. - Answers - B
The examination of all of an entity's transactions would make an audit very costly. Thus,
auditors rely heavily on sampling as a way to obtain evidence. Which of the following
would result in a smaller sample?
A. A decrease in the materiality level.
B. A decrease in the desired level of assurance.
C. An assessment that the account being audited is high risk.
D. An increase in the desired level of assurance. - Answers - B
Which of the following audit phases would generally be conducted before all of the
others listed below?
,A. Auditing business processes and related accounts.
B. Evaluation of audit evidence.
C. Gaining an understanding of the auditee's industry.
D. Consideration of internal control systems. - Answers - C
The most favorable type of audit opinion for an entity to receive is
A. Qualified.
B. Unqualified.
C. Full assurance.
D. Exceptional. - Answers - B
Which of the following provides the best definition of audit evidence?
A. All information available to the auditor regarding the client, as long as it was not
provided by the client.
B. Client information which is admissible in court under state or federal law.
C. The underlying accounting data and any additional information available to the
auditor, whether originating from the client or externally. - Answers - C
Which of the following best describes the relationship between evidence and the
management assertions?
A. Audit evidence helps the auditor determine whether management's assertions are
being met.
B. Audit evidence provides 50% of assurance necessary to support the audit report.
C. Audit evidence is of limited value in most financial statement audits.
D. Audit evidence helps the client prove that the auditor's assertions are being met. -
Answers - A
What are the two key characteristics of audit evidence that an auditor must consider
when evaluating it?
A. relevance and reliability
B. completeness and quantity
C. origination and timing - Answers - A
, An independent audit adds value to the communication of financial information 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. - Answers - B
Which of the following best describes the reason why an independent auditor is often
retained to report on financial statements?
A. An entity may have a poorly designed internal control system.
B. A misstatement of account balances may exist, and all misstatements are generally
corrected as a result of the independent auditor's work.
C. Management fraud may exist, and it is more likely to be detected by independent
auditors than by internal auditors.
D. 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. - Answers - D
For what primary purpose does the auditor obtain an understanding of the entity and its
environment?
A. to determine the audit fee
B. to limit audit risk to an appropriately high level
C. to plan the audit and determine the nature, timing, and extent of audit procedures to
be performed
D. to decide which facts about the entity to include in the audit report - Answers - C
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 sell consulting
services to the client.
