Objectives

1. Describe auditing. 2. Distinguish between auditing and accounting. 3. Explain the importance of auditing in reducing

information risk. 4. List the causes of information risk, and explain how

this risk may be reduced. 5. Describe assurance services and distinguish audit

services from other assurance and nonassurance services provided by CPAs.

6. Differentiate the three main types of audits.

7. Identify the primary types of auditors. 8. Describe the requirements for becoming a CPA.

True or False 1. Auditing is the recording, classifying, and summarizing of

economic events for the purpose of providing financial information for decision making. True False

2. Evidence is defined as any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria. True False

3. Accounting is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. True False

4. An operational audit is a review of an organization's operating procedures for the purpose of evaluating efficiency and effectiveness. True

False

5. The provisions of the Sarbanes-Oxley Act apply to all public companies and certain select privately-held companies. True False

6. The possibility that a company will not be able to repay a loan because of economic or business conditions is known as business risk. True False

7. Section 404 of the Sarbanes-Oxley Act requires a company’s management and its independent auditors to report on the effectiveness of internal control over financial reporting. True False

8. All for-profit business entities are required to have an annual audit of their financial statements. True False

9. To perform an audit, information must be available in a verifiable form and at least two sets of standards must be used to evaluate the information. True False

10. A review of historical financial statements provides less assurance than an audit of historical financial statements. True False

Multiple Choices 1. Evidence is defined as any information used by the

auditor to determine whether the quantifiable information being audited is stated in accordance with the established criteria. Evidence takes many different forms, including. oral testimony of the auditee (client). written communication with outsiders. observations by the auditor. all of the above.

2. The auditor must. be qualified to understand the criteria used.

be competent to know the types and amount of evidence

to accumulate. have an independent mental attitude. possess a, b, and c.

3. Because external auditors are paid fees by their clients, external auditors. are absolutely independent and may conduct audits. may be sufficiently independent to conduct audits. are never considered to be independent. must receive approval of the Securities and Exchange

Commission before conducting audits.

4. In all cases, audit reports must be signed by the individual who performed the audit

procedures. certify the accuracy of the quantitative information which

was audited. inform readers of the degree of correspondence between

the quantifiable information and the established criteria. communicate the auditor's findings to the general public.

5. The General Accounting Office reports to and is solely responsible to: the AICPA.

the SEC. the various governmental agencies that contract with the

GAO for services. the US Congress.

6. The possibility that a company will not be able to repay a loan because of economic or business conditions is known as business risk? Audit. Review. Information verification. Each of the above provides the same level of assurance.

7. Which of the following is an example of an operational audit? IBM Corporation's tax returns are examined by Internal

Revenue Service auditors. The efficiency and effectiveness of the Food and Drug

Administration's computer systems are evaluated by GAO auditors.

GTE corporation's internal auditors examine whether

GTE's employees have been following the company's established payroll authorization procedures.

Ace Hardware Corporation's annual financial statements

are audited by an independent CPA firm..

8. Which of the following is a cause of information risk? Voluminous data. Biases and motives of the provider of information. Remoteness of information. Each of the above is a cause of information risk.

9. The Sarbanes-Oxley Act establishes that management must assess the effectiveness of

internal control over financial reporting and provides criteria for the assessment.

that auditors must assess the effectiveness of internal

control over financial reporting and provides criteria for the assessment.

that management must assess the effectiveness of

internal control over financial reporting and provides no

criteria for the assessment. that management and auditors must assess the

effectiveness of internal control over financial reporting and provides criteria for the assessment.

10. Which of the following financial statements is least likely to be included in an independent audit of financial statements? Statement of financial position. Income statement. The statement of cash flows. Each of the above is equally likely to be included.