To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Multiple-Choice Questions easy c Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called: a finance b auditing c accounting d economics easy c In the audit of historical financial statements, which of the following accounting bases is the most common? a Regulatory accounting principles b Cash basis of accounting c Generally accepted accounting principles d Liquidation basis of accounting easy b Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n): a accounting and bookkeeping service b attestation service c assurance service d tax service easy a Three common types of attestation services are: a audits, reviews, and “other” attestation services b audits, verifications, and “other” attestation services c reviews, verifications, and “other” attestation services d audits, reviews, and verifications (SOX) easy d The organization that is responsible for providing oversight for auditors of public companies is called the a Auditing Standards Board b American Institute of Certified Public Accountants c Public Oversight Board d Public Company Accounting Oversight Board (SOX) easy c The Sarbanes-Oxley Act applies to which of the following companies? a All companies b Privately held companies c Public companies d All public companies and privately held companies with assets greater than $500 million medium d Providing quantitative information that management and others can use to make decisions is the function of: a management information systems b auditing c finance d accounting Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com medium d An audit of historical financial statements most commonly includes the: a balance sheet, the income statement, and the statement of cash flows b income statement, the statement of cash flows, and the statement of net working capital c statement of cash flows, the balance sheet, and the retained earnings statement d balance sheet, the income statement, and the statement of cash flows medium c The _ rate may be defined as approximately the rate a bank could earn by investing in U.S treasury notes for the same length as the length of a business loan a nominal b stated c risk-free d prevailing 10 medium b The use of the Certified Public Accountant title is regulated by: a the federal government b state law through a licensing department or agency of each state c the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees d the Securities and Exchange Commission 11 medium c An operational audit has as one of its objectives to: a determine whether the financial statements fairly present the entity’s operations b evaluate the feasibility of attaining the entity’s operational objectives c make recommendations for improving performance d report on the entity’s relative success in attaining profit maximization 12 medium d An audit of historical financial statements is most often performed to determine whether the: a organization is operating efficiently and effectively b entity is following specific procedures or rules set down by some higher authority c management team is fulfilling its fiduciary responsibilities to shareholders d none of these choices 13 medium a An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit? a Operational audit b Compliance audit c Financial statement audit d Production audit 14 medium b An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n): a audit of financial statements b compliance audit c operational audit d production audit 15 medium d Which of the following is a type of audit evidence? a Oral responses to the auditor from employees of the company under audit b Written communications from company employees or outsiders c Observations made by an auditor d Evidence may take any of the above forms Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16 medium a Which of the following services provides the lowest level of assurance on a financial statement? a A review b An audit c Neither service provides assurance on financial statements d Each service provides the same level of assurance on financial statements 17 medium c The three requirements for becoming a CPA include all but which of the following? a Uniform CPA examination requirement b Educational requirements c Character requirements d Experience requirement 18 medium a In “auditing” financial accounting data, the primary concern is with: a determining whether recorded information properly reflects the economic events that occurred during the accounting period b determining if fraud has occurred c determining if taxable income has been calculated correctly d analyzing the financial information to be sure that it complies with government requirements 19 medium d Financial statement users often receive unreliable financial information from companies Which of the following is not a common reason for this? a Complex business transactions b Large amounts of data c Lack of firsthand knowledge about the business d Each of these choices is a common reason for unreliable financial information 20 challenging d Which of the following is not a Trust Services principle as defined by the AICPA or CICA? a Online privacy b Availability c Processing integrity d Operational integrity 21 challenging c Which one of the following is more difficult to evaluate objectively? a Presentation of financial statements in accordance with generally accepted accounting principles b Compliance with government regulations c Efficiency and effectiveness of operations d All three of the above are equally difficult 22 (SOX) challenging c The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company? a Reviews of quarterly financial statements b Preparation of corporate tax returns c Most consulting services d Tax services 23 challenging a Which of the following audits can be regarded as generally being a compliance audit? a IRS agents’ examinations of taxpayer returns b GAO auditor’s evaluation of the computer operations of governmental units c An internal auditor’s review of a company’s payroll authorization procedures d A CPA firm’s audit of the local school district 24 challenging Which of the following can be significantly affected by an audit? a Business risk Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com b b c d Information risk The risk-free interest rate Inherent risk 25 challenging d The trait that distinguishes auditors from accountants is the: a auditor’s ability to interpret accounting principles generally accepted in the United States b auditor’s education beyond the Bachelor’s degree c auditor’s ability to interpret FASB Statements d auditor’s accumulation and interpretation of evidence related to a company’s financial statements 26 challenging b Attestation services on information technology include WebTrust services and SysTrust services Which of the following statements most accurately describes SysTrust services? a SysTrust services provide assurance on business processes, transaction integrity and information processes b SysTrust services provide assurance on system reliability in critical areas such as security and data integrity c ysTrust services provide assurance on internal control over financial reporting d SysTrust services provide assurance as to whether accounting personnel are following procedures prescribed by the company controller Essay Questions 27 easy Discuss the three primary requirements for becoming a CPA Answer: The three primary requirements for becoming a CPA are: Educational requirement An undergraduate degree with a major in accounting is required Most states now require 150 semester hours for licensure and some states require 150 semester hours before taking the CPA exam Uniform CPA examination requirement This is a four-part exam with components on auditing and attestation, financial accounting and reporting, regulation, and business environment and concepts Experience requirement The experience requirement varies from state to state with some states requiring no experience, while other states require up to two years of audit experience 28 easy Two types of attestation services provided by CPA firms are audits and reviews Discuss the similarities and differences between these two types of attestation services Which type provides the least assurance? Answer: Two primary types of attestation services are: audits of historical financial statements and reviews of historical financial statements While both services involve the accumulation and evaluation of evidence regarding assertions made by management in the company’s financial statements, a review involves a less extensive examination and provides a lower level of assurance about the client’s financial statements than an audit Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 29 medium Discuss the differences and similarities between the roles of accountants and auditors What additional expertise must an auditor possess beyond that of an accountant? Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making To this, accountants must have a sound understanding of the principles and rules that provide the basis for preparing the financial information In addition, accountants are responsible for developing systems to ensure that the entity’s economic events are properly recorded on a timely basis and at a reasonable cost The role of auditors is to determine whether the financial information prepared by accountants properly reflects the economic events that occurred To this, the auditor must not only understand the principles and rules that provide the basis for preparing financial information, but must also possess expertise in the accumulation and evaluation of audit evidence It is this latter expertise that distinguishes auditors from accountants 30 medium Discuss the similarities and differences between financial statement audits, operational audits, and compliance audits Give an example of each type Answer: Financial statement audits, operational audits, and compliance audits are similar in that each type of audit involves accumulating and evaluating evidence about information to ascertain and report on the degree of correspondence between the information and established criteria The differences between each type of audit are the information being examined and the criteria used to evaluate the information An example of a financial statement audit would be the annual audit of IBM Corporation, in which the external auditors examine IBM’s financial statements to determine the degree of correspondence between those financial statements and generally accepted accounting principles An example of an operational audit would be an internal auditor’s evaluation of whether the company’s computerized payroll-processing system is operating efficiently and effectively An example of a compliance audit would be an IRS auditor’s examination of an entity’s federal tax return to determine the degree of compliance with the Internal Revenue Code 31 medium Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors Answer: The roles of all four types of auditors are similar in that they involve the accumulation and evaluation of evidence about information to ascertain and report on the degree of correspondence between the information and established criteria The differences in their roles center around the information audited and the criteria used to evaluate that information Independent auditors primarily audit companies’ financial statements GAO auditors’ primary responsibility is to perform the audit function for Congress IRS auditors are responsible for the enforcement of federal tax laws Internal auditors primarily perform operational and compliance audits for their employing company Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 32 (SOX) medium What is an engagement to attest on internal control over financial reporting? Answer: Section 404 of the Sarbanes-Oxley Act requires public companies to report management’s assessment of the effectiveness of internal control over financial reporting The Act further requires auditors to attest to the effectiveness of internal control over financial reporting This evaluation, which is integrated with the audit of financial statements, provides forward-looking information, because effective internal controls reduce the likelihood of future misstatements in the financial statements 33 challenging To an audit, it is necessary for information to be in a verifiable form and some criteria by which the auditor can evaluate the information (A) What information and criteria would an independent CPA firm use when auditing a company’s historical financial statements? (B) What information and criteria would an Internal Revenue Service auditor use when auditing that same company’s tax return? (C) What information and criteria would an internal auditor use when performing an operational audit to evaluate whether the company’s computerized payroll processing system is operating efficiently and effectively? Answer: (A) The information used by a CPA firm in a financial statement audit is the financial information in the company’s financial statements The most commonly used criteria are accounting principles generally accepted in the United States (B) The information used by an IRS auditor is the financial information in the company’s federal tax return The criteria are the internal revenue code and interpretations (C) The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month The criteria would consist of company standards for departmental efficiency and effectiveness 34 challenging Explain what is meant by information risk, and discuss the four causes of this risk Answer: Information risk is the possibility that information upon which a business decision is made is inaccurate Four causes of information risk are: remoteness of information, biases and motives of the provider, voluminous data, and complex exchange transactions 35 challenging Attestation services fall into five categories What are these categories? Answer: The five categories of attestation services include: audits of historical financial statements, attestation on internal control over financial reporting, reviews of historical financial statements, attestation services on information technology, and other attestation services that may be applied to a broad range of subject matter Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 36 challenging Discuss four factors that are likely to significantly reduce information risk in the next five to ten years Answer: Four factors that are likely to significantly reduce information risk in the next five to ten years are: technological advances, more companies will go on-line, reducing the risk of investors obtaining outdated information, new accounting and auditing standards, and auditors will find more efficient and effective audit techniques Other Objective Answer Format Questions 37 easy a The criteria by which an auditor evaluates the information under audit may vary with the information being audited a True b False 38 easy b The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards a True b False 39 (SOX) easy b The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies a True b False 40 (SOX) easy a The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting a True b False 41 easy b Only companies that file annual statements with the Securities and Exchange Commission are required to have an annual external audit a True b False 42 easy b The financial statements most commonly audited by external auditors are the balance sheet, the income statement, and the statement of changes in retained earnings a True b False 43 medium b The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles a True b False 44 medium a Results of compliance audits are typically reported to someone within the organizational unit being audited rather than to a broad spectrum of outside users a True b False Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 45 medium b The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts a True b False 46 medium b CPA firms are never allowed to provide bookkeeping services for audit clients a True b False 47 (SOX) medium a Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting a True b False 48 (SOX) challenging b The Sarbanes-Oxley Act requires a company’s chairman of the board of directors, CEO, and CFO to certify the company’s financial statements a True b False 49 (SOX) challenging b The criterion that is most likely to be used as a framework in evaluating a company’s internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act is the Enterprise Risk Management framework a True b False 50 challenging a Most public companies’ audited financial statements are available on the SEC’s EDGAR database a True b False Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Multiple-Choice Questions easy a Which one of the following is not one of the three General Standards? a Proper planning and supervision b Independence of mental attitude c Adequate training and proficiency d Due professional care easy b Which one of the following is not a Field Work Standard? a Adequate planning and supervision b Due professional care c Understand the entity and its environment including internal control d Sufficient appropriate audit evidence easy b The General Standards stress the importance of: a evidence accumulation b personal qualities the auditor should possess c communicating the auditor’s findings to the reader d general supervision of the audit easy a The generally accepted auditing standard that requires “Adequate technical training and proficiency” is normally interpreted as requiring the auditor to have: a formal education in auditing and accounting b worked for an entity similar to the entity being audited c independence in mental attitude d a graduate degree in a business field (SOX) easy d Members of the Public Company Accounting Oversight Board are appointed and overseen by: a the U.S Congress b the American Institute of Certified Public Accountants c the Auditing Standards Board d the Securities and Exchange Commission easy b Statements on Auditing Standards provide auditors of privately held companies with guidance regarding the conduct of financial statement audits a fairly extensive b some limited c practically no d specific and detailed Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com easy c Which of the following statements most accurately captures the intent of the standards of field work? a Field work standards are primarily concerned with personal attributes necessary during the conduct of the audit b Field work standards provide extensive guidance regarding the conduct of an audit c Field work standards are primarily directed at the auditor’s planning, understanding of internal control, and evidence accumulation d Field work standards are primarily concerned with the conduct of substantive testing as opposed to testing of internal controls (SOX) easy c Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for establishing auditing standards? a Securities and Exchange Commission b Public Company Accounting Oversight Board c Auditing Standards Board d National Association of Accounting (SOX) medium b Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit: a both private and public companies b public companies only c private companies, public companies, and nonprofit entities d private companies only 10 medium b Which of the following is the least likely form of business for a CPA firm? a General partnership b General corporation c Limited liability company d Limited liability partnership 11 medium a The Statements on Auditing Standards issued by the Auditing Standards Board: a are interpretations of generally accepted auditing standards b are the equivalent of laws for audit practitioners c must be followed in all situations d are optional guidelines which an auditor may choose to follow or not follow when conducting an audit 12 medium a An auditor need not abide by a particular auditing standard if the auditor believes that: a the issue in question is immaterial in amount b more expertise is needed to fulfill the requirement c the requirement of the standard has not been addressed by the PCAOB d any of the above three are correct 13 (SOX) medium b The Public Company Accounting Oversight Board does not: a perform inspections of the quality controls at audit firms that audit public companies b establish auditing standards that must be followed by CPAs on all audits c oversee auditors of public companies d perform any of the above functions 14 medium b The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the: a Form S-1 b Form 8-K c Form 10-K d Form 10-Q Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com relevant agreement must be indicated and described If the specified element, account, or item is presented on a basis that is not in conformity with generally accepted accounting principles or another comprehensive basis of accounting, a paragraph that restricts the distribution of the report to those within the entity and the parties to the contract or agreement must be added Other Objective Answer Format Questions 83 medium Match the type of engagement (a-g) with the source of authoritative support for that engagement provided below (1-7) Sources may be used more than once (or not at all) a b c d e f g Auditing standards Accounting and review service standards Auditing standards and governmental auditing standards Attestation standards Governmental auditing standards No standards have been set for these engagements Standards of the Public Company Accounting Oversight Board b Compilation of financial statements prepared in accordance with GAAP for a nonpublic company d Attestation of forecasted financial statements f Operational auditing g Review financial statements prepared in accordance with GAAP for a public company a Audits of financial statements for a nonpublic entity prepared in accordance with GAAP c Governmental auditing a Limited assurance engagements other than audits, reviews, or compilations of historical financial statements prepared in accordance with GAAP 84 easy b Review reports are normally dated as of the client’s balance sheet date a True b False 85 easy b SSARS are issued by the SEC a True b False 86 easy a A primary concern in reporting on a comprehensive basis is to make sure that the statements clearly indicate that they are prepared on a basis other than GAAP a True b False 87 easy b SSAEs are issued by the PCAOB a True b False 88 A nonaudit engagement in which the accountant undertakes to present, in the form of financial Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com easy b statements, information that is the representation of management, without undertaking to express any assurance on the statements is called a review engagement a True b False 89 easy b CPAs must be independent to issue a compilation report a True b False 90 easy a CPAs must be independent to issue a review report a True b False 91 medium a When an auditor issues an opinion on additional information accompanying the financial statements, materiality is the same as that used in forming an opinion on the basic financial statements a True b False 92 medium b WebTrust services are performed under the direction of the SSARS a True b False 93 medium a Systrust services are performed under the direction of the SSAEs a True b False 94 medium b A financial statement review conducted in compliance with SSARS includes obtaining an understanding of internal control a True b False 95 medium a Statements on Standards for Accounting and Review Services (SSARS) govern the CPA’s association with unaudited financial statements of nonpublic (private) companies, but not public companies a True b False 96 medium b CPAs can issue a WebTrust opinion only on all five Trust Services principles a True b False 97 medium a When performing a review (SSARS review) of financial statements, the accountant is required to obtain a letter of representation from management a True b False 98 medium b The use of negative assurance is appropriate in audit reports a True b False 99 medium b The use of positive assurance is appropriate in review reports a True b False 100 medium When performing compilation services, the accountant is not required to obtain an understanding of the client’s internal control Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com a a b 101 medium a A CPA firm can issue a compilation report even if it is not independent with respect to the client a True b False 102 (Public) medium a When performing a review of interim information for a public company, the accountant ordinarily does not perform tests of the accounting records, independent confirmations, or physical examinations a True b False 103 medium a When issuing a debt compliance letter, the auditor’s opinion should be in the form of a negative assurance a True b False 104 medium b Of the three types of attestation engagements, examination engagements provide a higher level of assurance than agreed-upon procedures engagements but less than review engagements a True b False Arens/Elder/Beasley True False To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 105 medium a Examination attestation engagements result in a conclusion that is in a positive form, whereas review attestation engagements result in a conclusion in the form of a negative assurance a True b False 106 medium a Current professional standards prohibit accountants from performing engagements to review forecasts or projections a True b False 107 medium a The accountant’s report on the examination of prospective financial statements should include a caveat that the prospective results may not be achieved a True b False 108 challenging a Auditors should provide debt compliance letters only for clients for whom the auditor has done an audit of the overall financial statements a True b False Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 26 Multiple-Choice Questions easy b The IIA Code of Ethics is based on all but which of the following ethical principles? a Integrity b Independence c Competency d Confidentiality easy c Statements on Internal Auditing Standards are issued by the: a AICPA b SEC c Internal Auditing Standards Boards d Auditing Standards Boards easy c Internal auditors are responsible to: a the board of directors b management c both a and b d neither a nor b easy a Which of the following is not a similarity between external and internal auditors? a Both must be independent of the company b Both must be competent c Both use similar methodologies in performing their work d Both consider risk and materiality in their work easy d External auditors consider internal auditors effective if they are: a independent of the operating units being evaluated b competent and well trained c have performed relevant audit tests of the internal controls and financial statements d all of the above easy d Auditing standards _ external auditors to use the internal auditors for direct assistance on the audit a discourage b prohibit c encourage d permit easy b The primary source of authoritative literature for doing government audits is the: a Purple Book b Yellow Book c Green Book d Red Book Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com easy c a When a state or local government agency receives federal financial assistance, it is subject to the audit requirements of: a b c d Yellow Book Yes No Yes Yes Single Audit Act Yes No Yes No OMB Circular A-133 No Yes Yes No easy c Which of the following is not one of the broad categories of operational audits? a Functional audits b Organizational audits c Single Audit Act audits d Special assignment audits 10 easy d Which of the following groups could not be involved in an operational audit? a CPA firms b Internal auditors c Government auditors d None of the above answers is correct; that is, all of the above could be involved 11 easy b The IIA’s professional practice framework (including its code of ethics and International Standards for the Professional Practice of Internal Auditing) is commonly referred to as the: a Blue Book b Red Book c Green Book d Yellow Book 12 easy b The professional organization which is responsible for providing guidance for internal auditors is the: a APA b IIA c ABA d AIA 13 easy d The financial auditing standards of the Yellow Book are the 10 GAAS of the AICPA a the same as b quite different from c incompatible with d consistent with 14 easy b Which of the following is not one of the three phases in an operational audit? a Planning b Training and supervising employees c Evidence accumulation and evaluation d Reporting and follow-up 15 medium a The correct title of the Yellow Book is: a Government Auditing Standards b IIA Practice Standards c Statement of Responsibilities of Internal Auditing d Statement of Standards on Accounting and Review Services 16 medium The Yellow Book recognizes that, because of the sensitivity of government activities and their public accountability, in government audits the thresholds of acceptable audit risk and tolerable Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com b misstatement compared to an audit of a commercial enterprise may be: a equal b lower c higher d indeterminable 17 medium b The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of: a $1,000,000 or more b $500,000 or more c $300,000 or more d $100,000 or more 18 medium b An audit conducted in accordance with the Yellow Book must include an audit report that states the audit was performed in accordance with: a GAAS b GAGAS c GASA d SAS 19 medium d An audit designed to evaluate the efficiency and effectiveness of an organization or some part of an organization would not be called a(n): a performance audit b management audit c operational audit d compliance audit 20 medium c Which of the following is not one of the major differences between financial and operational auditing? a The financial audit is oriented to the past, but an operational audit concerns performance for the future b The financial audit report is distributed to many readers, but the operational audit report goes to a few managers c Financial audits deal with the information on the financial statements, but operational audits are concerned with the information in the ledgers d Financial audits are limited to matters that directly affect the financial statements, but operational audits cover any aspect of efficiency and effectiveness 21 medium d Before an operational audit for effectiveness can be performed, there must be: a a financial audit by an independent auditor b a financial audit by an internal auditor c a review performed by either an independent or an internal auditor d specific criteria developed to define effectiveness 22 medium d Auditors involved in planning, performing, or reporting on audits under GAGAS must complete hours of continuing professional education in each two-year period a 20 b 40 c 60 d 80 23 medium b Which of the following statements regarding types of operational audits is false? a A functional audit has the advantage of permitting specialization by auditors b An advantage of functional auditing is its ability to evaluate interrelated functions c The emphasis in an organizational audit is on how efficiently and effectively functions Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com d interact Special operational auditing assignments arise at the request of management 24 medium b The two most important qualities for an operational auditor are: a personality and appearance b independence and competence c competence and technical training d academic background and sufficient experience 25 medium a Which of the following is not a difference between operational auditing and financial auditing? a Both must be CPAs b Operational audit reports are usually of a restricted distribution while financial audit reports are widely distributed c Operational audits often cover non-financial issues while financial audits not d None of the above is a difference 26 medium c A typical objective of an operational audit is to determine whether an entity’s: a internal control is adequately operating as designed b financial statements present fairly the results of operations c specific operating units are functioning efficiently and effectively b operational information is in accordance with generally accepted government auditing standards 27 Which of the following can affect the independence of operational auditors? medium d a b c d Responsibilities Yes No No Yes Reporting Structure No No Yes Yes 28 challenging d Which is not a purpose of an economy and efficiency audit? a Whether the entity is acquiring, protecting, and using resources economically and efficiently b The causes of inefficiencies and uneconomical practices c Whether the entity has complied with laws and regulations concerning matters of economy and efficiency d Each of the above is a purpose 29 challenging d A(n) _ audit emphasizes how efficiently and effectively functions interact a operational b compliance c financial d organizational 30 challenging b Which of the following is not a purpose of a program audit as performed by government auditors? a Determination of the extent to which the desired results established by the legislature are being achieved b Determination of the causes of inefficiencies in sponsored programs c Determination of the effectiveness of organizations, programs and activities d Determination as to whether the entity has complied with laws and regulations applicable to the program Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 31 challenging c What distinguishes internal control evaluation and testing for financial and operational auditing? a Purpose of the work b Scope of the work c Both a and b d Neither a nor b 32 challenging c Of the many hours of continuing professional education required every two years, how many must be in subjects related to the government environment and government auditing for auditors involved in planning, performing and reporting on audits under GAGAS? a hours b 16 hours c 24 hours d 32 hours 33 Challenging b To be effective, an internal audit department must report to: Operating departments Yes No Yes No a b c d 34 challenging d The accounting department Yes No No Yes External financial statement auditors must obtain evidence regarding what attributes of an internal audit department if the external auditors intend to rely on the internal auditor’s work? a b c d Independence from the Audit Committee Yes No Yes No Competence Yes No No Yes Essay Questions 35 easy What organization establishes auditing standards for internal auditors and what are those standards commonly called? Answer: Auditing standards for internal auditors are established by the Internal Auditing Standards Board They are commonly known as the “Red Book.” 36 medium What are several similarities between internal and external auditors? Answer: Both must be competent as auditors and remain objective in performing their work and reporting their results Both follow a similar methodology in performing their audits, including planning and performing tests of controls and substantive tests Both consider risk and materiality in deciding the extent of their tests and evaluating results However, their decisions about materiality and risks may differ, because external users may have different needs than management or the board Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 37 medium External auditors typically consider internal auditors effective if they meet three criteria What are these criteria? Answer: External auditors typically consider internal auditors effective if they are: Independent of the operating units being evaluated Competent and well-trained Have performed relevant audit tests of the internal controls and financial statements 38 medium How the risk and materiality thresholds change in a government audit compared to a financial statement audit of a public company? Answer: The Yellow Book recognizes that in government audits the thresholds of acceptable audit risk and materiality may be lower than in an audit of a commercial enterprise This is because of the sensitivity of government activities and their public accountability 39 medium Discuss each of the three phases of an operational audit Answer: Planning In the planning phase, the auditor must determine the scope of the engagement, staff the engagement, obtain background information about the organizational unit, understand internal control, and decide on the appropriate evidence to accumulate Evidence accumulation and evaluation In operational auditing, it is common to use documentation, client inquiry, and observation extensively, while confirmation and reperformance are used less extensively for most operational audits than for financial audits Reporting and follow-up The audit report is tailored to address the scope of the audit, findings, and recommendations and is typically sent only to management When recommendations are made to management, follow-up is done to determine whether the recommended changes were made, and if not, why 40 medium The Institute of Internal Auditors has established Ethical Principles for its members List each of the principles Answer: The IIA’s ethical principles are: Integrity Objectivity Confidentiality Competency 41 medium Define internal auditing Answer: According to the IIA: “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations It Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” 42 medium Discuss three major differences between operational and financial auditing Answer: Purpose of the audit Financial auditing emphasizes whether historical information was correctly recorded, whereas operational auditing emphasizes effectiveness and efficiency Distribution of the reports For financial auditing, the report typically goes to many users of financial statements, such as stockholders and bankers, whereas operational audit reports are intended primarily for management Inclusion of nonfinancial areas in operational auditing Operational audits cover any aspect of efficiency and effectiveness in an organization, whereas financial audits are limited to matters that directly affect the fairness of financial statement presentations 43 medium Discuss each of the three broad categories (types) of operational audits Answer: Functional A functional audit deals with auditing one or more functions (e.g., purchasing) in an organization Organizational An organizational audit deals with an entire organizational unit, such as a department, branch, or subsidiary Special assignments Special assignments audits arise at the request of management when there is a need to investigate a particular area, such as investigating the possibility of fraud in a division, or determining the cause of an ineffective EDP system 44 medium Operational auditing is the review of an organization for efficiency and effectiveness Discuss what is meant by the terms “effectiveness” and “efficiency.” Answer: Effectiveness refers to the degree to which the organization’s objectives and goals are accomplished Efficiency refers to the degree to which costs are reduced without reducing effectiveness 45 challenging Audit tests as required by the Single Audit Act must meet several specific objectives One objective is to determine “whether the amounts reported as expenditures were for allowable services.” Identify three other specific objectives Answer: Whether the records show that those who received services or benefits were eligible to receive them Whether matching requirements, levels of effort, and earmarking limitations were met Whether federal financial reports and claims for advances and reimbursements contain information that is supported by the books and records from which the basic financial statements have been prepared Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Whether amounts claimed or used for matching were determined in accordance with OMB Circular A-87 and OMB Circular A-102 46 challenging The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the AICPA There are, however, important additions/modifications in the Yellow Book For example, the Yellow Book recognizes that materiality and risk are lower due to the nature of the government enterprise Discuss the other additions/modifications Answer: Quality control Auditors of government entities must have an appropriate system of internal quality control and participate in an external quality control review program Compliance auditing The audit should be designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements Reporting The report on financial statements must describe the scope of the auditors’ testing of compliance with laws and regulations and internal controls and present the results of those tests, or refer to a separate report containing that information 47 challenging In addition to an opinion on whether the financial statements are in accordance with GAAP, identify four other reports required by the OMB Circular A-133 Answer: The following reports are required: An opinion as to whether the schedule of federal awards is presented fairly in all material respects in relation to the financial statements as a whole A report on internal control related to the financial statements and major programs A report on compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements This report can be combined with the report on internal control A schedule of findings and questioned costs Other Objective Answer Format Questions 48 medium Match seven of the terms (a-o) with the descriptions/definitions provided below (1-7): a b c d e f g h i j k l m n Arens/Elder/Beasley Compliance audit Economy and efficiency audit Effectiveness Efficiency Functional audit Government Auditing Standards Government audit Institute of Internal Auditors Operational auditing Organizational audit Program audit Single Audit Act Special assignment IIA Practice Standards To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com o Statements on Internal Auditing Standards f The official title of the Yellow Book m A management request for an operational audit for a specific purpose, such as investigating the possibility of fraud in a division or making recommendations for reducing the cost of a manufactured product b A government audit to determine whether an entity is acquiring, protecting, and using its resources economically and efficiently and whether the entity has complied with laws and regulations concerning such matters c The degree to which the organization’s objectives are accomplished i The review of an organization for efficiency and effectiveness l Federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies o Statements issued by the Internal Auditing Standards Board of the IIA to provide authoritative interpretation of the IIA Practice Standards 49 easy b Independence is a fundamental ethical principle for internal auditors a True b False 50 easy b Current professional auditing standards prohibit external auditors from using internal auditors for direct assistance on external audits a True b False 51 easy b Current professional auditing standards require external auditors to use internal auditors for direct assistance on external audits a True b False 52 easy a The objectives of internal auditors are considerably broader than the objectives of external auditors a True b False 53 easy a For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management a True b False 54 easy a Integrity is one of the IIA’s ethical principles a True b False 55 easy b Operational audits are primarily geared toward compliance a True b False 56 easy Effectiveness refers to the degree to which costs are reduced without reducing efficiency a True Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com b b 57 easy a Efficiency refers to the degree to which costs are reduced without reducing effectiveness a True b False 58 easy b Internal auditing standards are included in the Yellow Book a True b False 59 easy a Government auditing standards are included in the Yellow Book a True b False 60 easy a Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is concerned with whether the goals are achieved with a minimum use of resources a True b False 61 easy b Operational audits may be performed by internal auditors and government auditors, but not by external auditors a True b False Benchmarking is one source of evaluation criteria for completing an operational audit a True b False 62 easy a False 63 easy a The two most important qualities for an internal auditor to possess are independence and competence a True b False 64 easy b Program audits are primarily focused on inefficient uses of federal funds in sponsored programs a True b False 65 easy a The formal name of the Yellow Book is Government Auditing Standards a True b False 66 medium a Professional guidelines for performing internal audits for companies are not as well-defined as for external audits a True b False 67 medium b To help them remain independent of the operations they audit, internal auditors should report directly to the controller a True b False 68 medium a An operational auditor may use “engineered standards” as evaluation criteria a True b False 69 The Internal Auditing Standards Board issues Statements on Internal Auditing Standards Arens/Elder/Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com medium a a b 70 medium a Operational audits are often categorized as functional, organizational, or special assignments a True b False 71 medium b Internal auditors should have the authority to require implementation of suggestions for improvement a True b False 72 medium b The “Red Book” specifies all auditing standards issued by the U.S General Accounting Office a True b False 73 challenging a One disadvantage of functional auditing is the failure to evaluate interrelated functions a True b False Arens/Elder/Beasley True False ... audit of the local school district 24 challenging Which of the following can be significantly affected by an audit? a Business risk Arens/ Elder/ Beasley To download more slides, ebook, solutions... False Arens/ Elder/ Beasley To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 45 medium b The primary role of the United States General Accounting Office... d The AICPA Code of Professional Conduct 30 The SEC requirements of greatest interest to CPAs are set forth in the SEC’s: Arens/ Elder/ Beasley To download more slides, ebook, solutions and test