Advanced Auditing Exam Questions
Course Introduction
This course offers an in-depth exploration of the principles and practices of advanced auditing, building upon foundational auditing concepts. Students will examine complex auditing topics such as group audits, the use of computer-assisted audit techniques, forensic auditing, risk assessment, and advanced internal control evaluations. The course also covers recent developments in auditing standards, ethical challenges, fraud detection, and the impact of technology on the audit process. Through case studies and practical exercises, students will develop their analytical skills and professional judgment, preparing them for leadership roles in audit engagements and for adapting to a rapidly changing regulatory environment.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by Alvin A. Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) In the audit of historical financial statements by PA firms, the criteria used are
A) generally accepted auditing standards.
B) generally accepted accounting principles.
C) regulations of the Canada Revenue Agency.
D) regulations of the provincial securities commissions.
Answer: B
Q2) A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a(n)
A) audit of financial statements.
B) compliance audit.
C) operational audit.
D) production audit.
Answer: C
Q3) A reason for a nonprofit organization to be audited is to
A) comply with the laws requiring them to be audited.
B) meet requirements of lenders or funding sources.
C) have a professional accountant perform their bookkeeping.
D) ensure that their financial statements do not contain errors.
Answer: B
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) What is one of the ways that the Canadian Auditing Standards (CASs) make management directly responsible for an organization's financial statements?
A) all listed company management must certify the accuracy of the evidence provided
B) management must provide evidence to support financial statement data
C) management must implement and carry out development of high-quality internal controls
D) companies must use internal auditors to assess the quality of the financial statements
Answer: B
Q2) For a CPA working as a sole practitioner or working in a small public accounting office, the provincial practice inspectors will likely come to review audit files
A) every three years.
B) every five years.
C) every year.
D) never: files are not reviewed in person.
Answer: A
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Page 4
Chapter 3: Legal Liability
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Sample Questions
Q1) Fabio recently sold his restaurant for $650 000, the value of the net assets as reported on the balance sheet. After the sale, Fabio realized that he could've sold the restaurant for as much as $950 000 as the fair value of the assets was $300 000 higher than what was reported on the balance sheet. Fabio is suing the auditors for his loss. The auditor's best defence is
A) absence of a misstatement.
B) lack of duty.
C) no damages.
D) absence of causal connection.
Answer: A
Q2) Which of the following lawsuits resulted in a decision that shareholders could not sue the auditors for the loss in the value of their shares?
A) Haig v. Bamford et al.(1976)
B) Hercules Management Ltd. v. Ernst & Young (1997)
C) Ultramers Corporation v. Touche (1931)
D) United States v. Anderson (2002)
Answer: B
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Page 5
Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Which one of the following situations is a violation of the professional rules of conduct? PA
A) looked the other way when he noticed that one of his firm's accounting staff accepted money from client management.
B) resigned so that he could accept a position on the Board of Directors at a major client. C) prepared personal and corporate tax returns for a client and all of its executive officers.
D) placed an advertisement in the local paper indicating that she conducted audit engagements for five major insurance companies.
Q2) What are the common judgement traps and how can they be avoided?
Q3) PAs are members of a professional association that can impose sanctions for violations of the professional code of conduct. What is an example of a severe penalty that can be imposed by a professional association?
A) publication of information about the offence in a newsletter
B) requirement of the completion of training courses
C) requirement to have another peer review conducted within one year
D) expulsion from the professional association
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering either one.
D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
Q2) The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead A) a prudent user.
B) management.
C) the reader.
D) investors.
Q3) A financial statement audit typically consists of three sections. Identify the three sections and discuss the major activities performed by the auditor in each section.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) In addition to direct impacts on the financial statements, the auditor also needs to consider indirect effects. An assessment of client objectives and strategies can reveal issues that could lower income or cause contingent liabilities. Which of the following could cause lost sales, increases in warranty expenses, and product liability claims?
A) poor product quality
B) excessive advertising
C) ineffective projections
D) inaccurate budgets
Q2) Organizations with a good control environment are able to document their positive "tone at the top" with a clear code of ethics. How would the auditor include the presence of such a code of ethics in the risk assessment process?
A) increase inherent risks associated with violations of laws and regulations
B) lower inherent risks associated with violations of laws and regulations
C) increase control risks associated with violations of laws and regulations
D) lower control risks associated with violations of laws and regulations
Q3) Knowledge of the client's industry and external environment can be obtained in different ways. Discuss some of the ways that this knowledge can be obtained.
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Chapter 7: Materiality and Risk
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Sample Questions
Q1) Audit risk is a measure of
A) the auditor's assessment of the likelihood that a material misstatement might occur in the first place.
B) the probability that the financial statements contain errors.
C) how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed.
D) the probability that errors in the financial statements that were not detected by the internal controls of the firm are not detected by the auditor.
Q2) When external users place heavy reliance on the financial statements it is appropriate that
A) audit risk be increased.
B) inherent risk be decreased.
C) inherent risk be increased.
D) audit risk be decreased.
Q3) Further possible misstatement considers
A) possible presence of management fraud.
B) possible lack of knowledge of the audit team.
C) imprecision in the sampling process.
D) imprecision in the audit procedures.
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) The control environment consists of actions, policies, and procedures that
A) reflect the overall attitudes of top management, the directors, and the owners of an entity about control and its importance.
B) govern access to particular applications, such as how employees use passwords to change master file payroll rates.
C) are recorded on the web site (for example, access policies to data).
D) help implement the ethical attitudes at the organization, such as a computer usage policy.
Q2) The board of directors is essential for effective corporate governance because it has ultimate responsibility to
A) make sure management implements proper internal control and financial reporting processes.
B) assist management in the preparation of the financial statements.
C) test internal controls and ensure they are working properly.
D) provide a report to the auditor confirming that internal controls are working properly.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) The PA is having a discussion with his client about the outcome of several lawsuits that are presently in progress. The client has requested that the comments during the discussion be removed from the audit file. The client would like the only documentation in the audit file to be the legal letter from the client and brief comments regarding the auditor's judgments with respect to the quality of disclosure in the financial statements. The client is concerned that
A) only high-quality audit working papers be included in the working paper files.
B) auditors may breach confidentiality and disclose information about the client.
C) the auditor's working paper files may be subpoenaed by the courts.
D) the audit firm does not have adequate quality control procedures.
Q2) Observation is an important audit technique where the auditor can use sight, hearing, touch, and smell. Observation needs to be used together with other audit techniques because
A) employees will often perform their procedures consistently over time.
B) it is a high-cost technique that is rarely used by auditors.
C) it is a point-in-time technique limited to the time of the observation.
D) auditors may not accurately observe and interpret what is happening.
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Page 11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Last year the materiality for the client was $590 000. This year it is $400 000. All things being equal, how will this change in materiality affect the extent of tests of details?
A) increase
B) decrease
C) no effect as the tests of controls will be increased
D) no effect as the tests of controls will be decreased
Q2) You are conducting the audit of a medium-sized company that has a chief accountant and three employees. Segregation of duties is excellent, with jobs allocated to provide maximum levels of controls. Segregation is supported by accounting software with user identification and passwords that limit functions to the appropriate jobs. Required:
A) What type of audit approach would you recommend? Why?
B) How would your answer change if the accounting department was organized on a job-sharing basis so that all employees did some of every task to keep the work more interesting? Why?
Q3) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) The auditor is going to select a sample that is a statistical probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest. The auditor is using what type of sampling?
A) attribute sampling
B) discovery sampling
C) monetary unit sampling
D) variable estimation sampling
Q2) Which of the following statements is a valid criticism of the use of non-statistical sampling methods?
A) Many audit tests, such as footing of journals, must be performed outside a statistical sampling context.
B) The cost of performing random selection or testing often exceeds the benefits.
C) Nonstatistical sampling does not differ substantially from statistical sampling methods.
D) It can be difficult to remain unbiased in the selection of items.
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Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) When errors are found, a common and standard assumption in practice is to assume
A) a 100% assumption for all errors.
B) that the actual sample errors are representative of the population errors.
C) that the population errors are larger than the sample errors.
D) that the population errors are smaller than the sample errors.
Q2) There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective?
A) avoiding recording of returns and allowances for the year
B) recording subsequent period sales as current period sales
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue
Q3) A) State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective.
B) Discuss what is meant by proof of cash receipts and explain its purpose.
Q4) Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.
Q5) State the five specific balance-related audit objectives as applied to accounts receivable.
Page 14
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The internal control objective to determine that "existing acquisition transactions are recorded" describes the objective of A) occurrence. B) classification. C) completeness. D) accuracy.
Q2) State each of the five specific transaction-related audit objectives for acquisitions and, for each objective, describe one common test of transactions.
Q3) Describe the three types of tests that need to be performed by the auditor when auditing a client's data conversion process.
Q4) Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.
Q5) The most important objectives for amortization expense are valuation and A) accuracy. B) classification. C) cutoff.
D) understandability.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) If the auditor is appointed after the year-end of the client, the auditor
A) should qualify the audit opinion for the inventory balance and cost of sales.
B) could attend a current perpetual inventory count and roll backward with the records. C) should do an inventory count as soon as he is appointed.
D) will inquire with management about the inventory count performed at year-end.
Q2) The test of details of balance procedure that requires the auditor to account for unused inventory tag numbers to make sure none have been omitted is an attempt to satisfy the objective of A) allocation.
B) existence.
C) completeness.
D) accuracy.
Q3) Receipt of ordered materials by the receiving department will generate the completion of a form called the A) receiving report.
B) materials requisition.
C) bill of lading.
D) inventory acquisition summary.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) The auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing, as a part of the auditor's responsibility for A) understanding internal controls.
B) doing tests of controls.
C) doing analytical procedures.
D) doing tests of balances.
Q2) "Existing payroll transactions are recorded" is the control objective of A) authorization.
B) completeness.
C) existence.
D) accuracy.
Q3) In auditing the imprest payroll account, which of the following procedures will take the least amount of auditor time?
A) tests of controls
B) risk analysis and obtaining an understanding of controls
C) analytical procedures
D) tests of details of balances
Q4) Discuss the two most common ways in which employees can defraud a company in the payroll area.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Tests of details for notes payable interest expense and accrued interest can frequently be eliminated when
A) tests of controls are conducted over authorization and recording procedures.
B) notes are issued by a person independent of the accounting department.
C) the notes payable schedule indicates that all notes have been repaid.
D) results of analytical review are favourable.
Q2) Which of the following audit procedures assists the auditor with testing for completeness?
A) Analyze interest expense to uncover a payment to a creditor who is not included in the notes payable schedule.
B) Examine notes to determine whether the company has obligations for payment.
C) Examine duplicate copies of notes to determine whether notes were dated on or before the balance sheet date.
D) Examine the dates on duplicate copies of notes to determine whether all or part of the notes are non-current liabilities.
Q3) Describe the three objectives of the auditor's examination of owners' equity.
Q4) Discuss the overall objectives of the audit of notes payable.
Q5) Describe the risks of error and fraud in the debt or equity accounts.
Q6) Discuss the four key controls over notes payable.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) When examining the bank reconciliation for the imprest payroll account, it is normal for the only reconciling item to be
A) outstanding cheques.
B) direct deposits from customers.
C) outstanding deposits.
D) corrections to payroll amounts.
Q2) Under what circumstances would an auditor prepare a proof of cash?
A) When the client has material internal control weaknesses in cash.
B) When control risk is set at minimum.
C) When inherent risk in cash is considered to be low.
D) When an enterprise resource system is in use for processing of cash transactions.
Q3) Which of the following statements best describes the position of cash on the balance sheet at most organizations that utilize effective cash management practices?
A) Cash is usually immaterial.
B) Cash is usually highly material.
C) Cash is usually dispersed among many different accounts.
D) Cash is usually affected by many different capital asset accounts.
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Chapter 18: Completing the Audit
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Q1) The primary objective of analytical procedures used in the final review stage of an audit is to
A) obtain evidence from details tested to corroborate particular assertions.
B) identify areas that represent specific risks relevant to the audit.
C) assist the auditor in looking for potential material misstatements.
D) satisfy doubts when questions arise about a client's ability to continue operations.
Q2) State three types of information that should be included in a standard letter of inquiry of a client's law firms.
Q3) You sent a legal letter to a lawyer who had invoiced your client. The lawyer replied that "his practice consists of conducting real estate closings, and so he could not respond to the letter." What impact does this have on the financial statement audit?
A) There is no impact upon the financial statement audit.
B) The audit opinion will need to be qualified.
C) The auditor will need to provide a denial of opinion.
D) Additional information is needed by reference to legal invoices from this lawyer.
Q4) List four specific matters that should be included in a client representation letter.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) The ASPE (Accounting Standards for Private Enterprises) financial reporting framework normally requires the auditor to report using the corresponding figures approach. This means that the auditor reports on
A) the current year's financial statements.
B) both periods under audit: the current and prior year.
C) three years: the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
Q2) The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that everything, with the exception of the missing statement, is presented fairly. As a result, the auditor would likely issue
A) a qualified opinion.
B) an unqualified opinion.
C) a disclaimer of opinion.
D) either an unqualified or qualified opinion.
Q3) Analyze the "Auditor Responsibility Section" of the standard Independent Auditor's Report. Explain the intended purpose of the sentences in this section.
Q4) Discuss how materiality affects audit reporting decisions.
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Page 21
Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) As part of the conduct of a review engagement, which of the following would be a typical procedure used for the assessment of the ending accounts receivable balance?
A) circularization of positive confirmations to all balances exceeding materiality
B) comparison of the age of the accounts receivable to the prior year
C) use of negative confirmations on all large balances
D) detailed examination of all accounts over 120 days to assess the bad debt allowance
Q2) Which of the following matters would be addressed in a report on the results of applying specified auditing procedures to financial information other than financial statements?
A) an opinion with respect to the quality of the information examined
B) explanations of the differences between audits, reviews, and special engagements
C) the factual results of the procedures
D) provision of negative assurance with respect to the accounts examined
Q3) Define "attestation engagements."
Q4) Identify the reporting standards for compilation engagements.
Q5) Define "assurance engagements."
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